Kloth v. Microsoft Corp.

Decision Date18 April 2006
Docket NumberNo. 04-2566.,04-2566.
Citation444 F.3d 312
PartiesLinda Dameron KLOTH; Blaine Cox; Debra Cunningham; Eric Ferrell; Elizabeth Strickland; Rene Gonzalez; Clay Tyler; Peter Haklar; Eric S. Lazarus; Harold A. Phillips; Paul L. Howard; Thomas McCaleb; Vicki McCaleb; James Woods; Leyton T. Brown; Gale Ruffin; Jay S. Quigley; John W. Redmann; John Glase; Bruce Wright; Evangelos Kritikos; Walter Lorell; Renaldo Veltri; Johanna M. McWhinney; Jodi Marks; Judd Goodman, Plaintiffs-Appellants, and Precision Billing Services, Incorporated; MSC Systems, Incorporated; O'Sullivan, Hicks & Patton; Ryan D. Reynolds; Eleaders, Incorporated; KBS-Net, SA; Silverware, Limited; Data Unit Ag; Datacrown, Limited, On Behalf of Themselves and All Others Similarly Situated; Wayne Mims; Gravity, Incorporated; 403 West Loop 820 N; To The Rescue Comprehensive Computer Services; D's Pet Supplies, Incorporated; David Bach; The Rubbright Group; James M. Burt; Reclaim Center, Incorporated; Steven Nielsen; Raymond Pryor; Seastrom Associates Ltd; Chris Campbell; Denise Davenport; Sara Cheeseman; Ronald Rodjenski; Harold Phillips; Matthew W. O'Neill; Robert Weinke; Idy Klein; David Jaffee; Avi Mandel; South Dakota Association of Plumbing, Heating and Cooling Contractors; Johnnie Moon; Robert Lee Colebank; Bryan K. Manson; Fred Luce; Edward Michael O'Brien; Golf O'Brien Company; Cynthia M. Aikens; Clair Falgoust; Carlton Falgoust; Manual Knight; Webster T. Knight; James Rudasil; Aubrey Bernard; Geraldine Guice; William Brand Pryor; Pacific Coast Systems; Teri Gordon; Michael Shevekov; Martin Hagan; Elham Shirzai; Dawn Brandt; Donald J. Gianni; Mario Traffichini; John F. Siegenthaler; Caren M. McCall; Larry A. Penix; Pryce M. Haynes, II; John K. Heidlage; Ryan D. Reynolds; Daniel C. Ray; GTI System Integrators; Tziri Fine; Derek M. Prentice; Kurt C. Carter; James T. Brems; Tim Appelgate; Julie Tinkham; Steven Master; Thomas Infante; Turner Corporation; John A. Supernovich; Marlene K. Supernovich; Sherwood; Automatik Design, Incorporated; State of West Virginia, ex rel. Darrell V. McGraw, Jr., Attorney General; Netscape Communications Corporation; Sun Microsystems; BE Incorporated; Burst.com, Incorporated; Ivax Corporation; Keith Cooper; Conway, Mackenzie & Dunleavy, PC; Christine Barton; Rhoda Henning; Karen Green; Renae Lucas; John Roby; John Does 1-50; Michael Lewis; Henry Mascagni; Hayley J. Gardner; Steve Grubb; Linda Stewart; Murline Addington; Travis D. McHann, Jr.; Billy Lewis; Booker T. Bailey, Jr.; James Pigg; Angela Brinkley; Delanious Harried; Gertrude Green; Camelia Calvert; Mary Wyatt; Emma Walton; Hetha Green; Realnetworks, Incorporated; Pradeep Sujan; Carl C. Conrad; Paul A. Dieter; Franklin L. Dejulius; Kevin Huddell; Gary Leach, Plaintiffs, v. MICROSOFT CORPORATION, Defendant-Appellee.
CourtU.S. Court of Appeals — Fourth Circuit

Christopher Lovell, Lovell Stewart Halebian, L.L.P., New York, New York, for Appellants. David Bruce Tulchin, Sullivan & Cromwell, New York, New York, for Appellee.


Gary S. Jacobson, Lovell Stewart Halebian, L.L.P., New York, New York, for Appellants. G. Stewart Webb, Venable, L.L.P., Baltimore, Maryland; Richard J. Wallis, Steven J. Aeschbacher, Microsoft Corporation, Redmond, Washington; Joseph E. Neuhaus, Richard C. Pepperman, II, Sharon L. Nelles, Sullivan & Cromwell, L.L.P., New York, New York; Charles B. Casper, Montgomery, McCracken, Walker & Rhoads, L.L.P., Philadelphia, Pennsylvania, for Appellee.

Before WIDENER, NIEMEYER, and GREGORY, Circuit Judges.

Affirmed by published opinion. Judge NIEMEYER wrote the opinion, in which Judge WIDENER and Judge GREGORY joined.


NIEMEYER, Circuit Judge:

This appeal, a part of the multidistrict class action antitrust litigation brought against Microsoft Corporation by 39 purchasers of Microsoft's operating system software and applications software, presents the question whether 26 indirect purchasers have stated a claim upon which relief can be granted. See Fed.R.Civ.P. 12(b)(6). The district court granted Microsoft's motion to dismiss their claims, concluding that because these 26 plaintiffs did not buy software directly from Microsoft, they were indirect purchasers who were barred from seeking recovery for illegal pass-through overcharges under the principles of Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). The court also found that they lacked standing to seek recovery for certain types of injury because the alleged injury did not constitute "antitrust injury," was speculative, or was generalized and not specific to the plaintiffs. The court dismissed the plaintiffs' equitable claims under the doctrine of laches.

For the reasons that follow, we affirm.


In the aftermath of the United States' suit against Microsoft, in which Microsoft was found to have maintained an illegal monopoly in the worldwide market for licensing Intel-compatible PC operating systems, see United States v. Microsoft Corp., 253 F.3d 34 (D.C.Cir.2001), numerous class action suits were filed against Microsoft in courts across the country. On April 25, 2000, the Judicial Panel on Multidistrict Litigation transferred the cases that were pending in federal district courts to the District of Maryland, pursuant to 28 U.S.C. § 1407. Thereafter, 39 plaintiffs filed a superseding consolidated amended complaint, seeking damages and equitable relief under the Clayton and Sherman Acts. See 15 U.S.C. §§ 2, 15, 26.

In their 66-page consolidated amended complaint, the plaintiffs allege that beginning in the late 1980s, when Microsoft's market share in the United States for operating system software was 95 percent, Microsoft engaged in a series of predatory acts that were designed to, and did, eliminate competition and prevent entry into the operating system software market. They allege that since 1994, when Digital Research, Inc. and IBM were eliminated as meaningful competitors, Microsoft has had no significant competitor in the operating systems software market. They assert that Microsoft used this monopoly power to raise prices and to leverage its power into other markets, including markets for applications software such as word processing, spreadsheet, and office suite software, with the result that Microsoft has dominated these applications software markets since the mid-1990s, achieving market shares approaching 90 percent. Thus, for the time periods material to the complaint, the plaintiffs contend that Microsoft has had monopoly power in four product markets:

(1) The licensing of Intel-compatible personal computer operating systems software; (2) the licensing of Intel-compatible personal computer word processing applications software; (3) the licensing of Intel-compatible personal computer spreadsheet applications software; and (4) the licensing of Intel-compatible personal computer office suite applications software.

The plaintiffs allege that Microsoft maintained and advanced its monopoly power by refusing to sell its software to manufacturers, retailers, and consumers. Instead, they allege, Microsoft employed a two-tier licensing system. It used one type of license for transactions with "original equipment manufacturers" ("OEMs"), allowing them to preinstall software on personal computers, which they in turn sold to consumers or "end-users." The plaintiffs claim that Microsoft was able to require OEMs to accept the terms of Microsoft's licensing agreement, forcing the OEMs to preinstall Microsoft operating systems on personal computers they sell and to act as Microsoft's agents in offering a second type of license, called "end-user license agreements" ("EULAs"), for acceptance or rejection by consumers under terms dictated by Microsoft. To use Microsoft software, the end-users were required to agree to the EULAs, which provided, among other things, a Microsoft-funded refund to the end-user if the end-user declined to enter into the EULA. The EULAs imposed significant restrictions on use of the software by the licensee, giving Microsoft remedies against the end-user for breach of the license agreement. The complaint alleges in a similar manner that Microsoft dictated the terms and conditions under which distributors and retailers were able to sell EULAs.

The plaintiffs claim that under this two-tier licensing regime, most consumers did not purchase software licenses directly from Microsoft. Rather, they bought computers from OEMs or retailers with preinstalled software that incorporated Microsoft's offer to issue the end-user a license agreement. The 26 plaintiffs who have appealed here are typical of those who purchased computers from OEMs or retailers with preinstalled software.

The plaintiffs allege that Microsoft's exclusionary and restrictive practices caused them injury by charging them "supra-competitive" prices for operating systems software and applications software, by denying them the benefit of new and superior technologies, and by preventing them from reselling Microsoft software products. They also claim that by integrating its Internet Explorer web browser with its operating system, Microsoft deprived them of alternative Internet search engines, degraded the performance of their computers, and made their computers more susceptible to security breaches. In short, they allege that as end-users, they paid "supra-competitive" prices for software and were deprived of the benefits of competition including, but not limited to, technological innovation, market choice, product variety, and substitutable supply. They request equitable relief, treble damages, attorneys fees, and costs.

In response to the plaintiffs' complaint, Microsoft filed a motion to dismiss plaintiffs' money-damages claims under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. By order dated January...

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