Pomerantz v. Microsoft Corp.

Decision Date09 May 2002
Docket NumberNo. 01CA0458.,01CA0458.
PartiesBenjamin J. POMERANTZ, M.D., on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. MICROSOFT CORPORATION, a Washington corporation, Defendant-Appellee.
CourtColorado Court of Appeals

Pendleton, Friedberg, Wilson & Hennessey, P.C., Alan C. Friedberg, Susan M. Hargleroad, Michelle Rene Kestler, Denver, Colorado, for Plaintiff-Appellant.

Davis Graham & Stubbs LLP, Gale T. Miller, Michael J. Gallagher, John Allen Francis, Denver, Colorado; Sullivan & Cromwell, David B. Tulchin, Joseph E. Neuhaus, New York, New York, for Defendant-Appellee.

Opinion by Judge TAUBMAN.

Plaintiff, Benjamin J. Pomerantz, M.D., appeals the judgment dismissing his complaint against defendant, Microsoft Corporation, for violation of the Colorado Antitrust Act of 1992, § 6-4-101, et seq., C.R.S. 2001(Act), by allegedly overcharging for its Windows 98 operating system. We affirm.

I. Facts and Procedural History

Microsoft is a corporation, organized under the laws of the state of Washington, that primarily focuses on developing and licensing computer software. In 1985, Microsoft began marketing its Windows operating system for Intel-based personal computers. When Pomerantz and plaintiff Douglas E. Papish filed this action, Windows 98 was the most current version of the operating system then in use.

Microsoft distributed Windows 98 through original equipment manufacturers (OEMs), who preinstalled the operating system on personal computers, and through software retailers who sold CD ROMs containing the software. However, Microsoft does not sell its software to OEMs, retailers, or consumers. Rather, the company licenses the use of its software to consumers through an end user license agreement (EULA) and to OEMs and retailers through a similar licensing agreement. The EULA prohibits end users from copying, modifying, or transferring the software, and it sets out the scope of Microsoft's warranty of the product.

Sometime in 1998, Pomerantz purchased a CD ROM, for approximately $89, that contained Windows 98, and Papish purchased an Intel-based personal computer on which the OEM had preinstalled the Windows 98 operating system. As a precondition to their first use of Windows 98, Pomerantz and Papish were required to accept Microsoft's EULA.

In March 2000, Pomerantz and Papish filed their second amended complaint on behalf of a class of Colorado consumers claiming that Microsoft had monopolized the market for Intel-based operating systems and, as a result, Microsoft had overcharged them for the Windows 98 operating system.

This lawsuit is one of many similar lawsuits filed in state and federal courts alleging that Microsoft has monopolized the market for operating systems for Intel-based personal computers and that it has maintained that monopoly by anticompetitive and unreasonable exclusionary conduct. In their class action complaint, Pomerantz and Papish alleged that Microsoft, by virtue of its anticompetitive conduct, had (1) participated in and facilitated a contract, combination, or conspiracy illegally restricting trade and commerce in violation of § 6-4-104, C.R.S.2001, and (2) attempted to monopolize, combine, and conspire to monopolize and had, in fact, monopolized that market for operating systems for Intel-based personal computers in trade and commerce, in violation of § 6-4-105, C.R.S.2001. Finally, Pomerantz and Papish alleged that EULAs between Microsoft and them were void contracts pursuant to § 6-4-121, C.R.S.2001.

Pomerantz and Papish sought damages for the difference between the monopoly price of Windows 98 and the price for which Windows 98 could have been sold in a competitive market; treble damages pursuant to § 6-4-114, C.R.S.2001; a refund of all payments made upon, under, or pursuant to the purchase of Windows 98 and the EULA; expert and attorney fees; and costs. They sought relief for themselves and a class of similarly situated Colorado consumers.

Before the trial court determined whether this case should be certified as a class action, Microsoft moved to dismiss, contending that the complaint failed to state a claim under the Act. The trial court granted the motion, concluding that Pomerantz and Papish lacked standing to pursue their antitrust claims because they were indirect purchasers under Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), and that their other claims were without merit.

Only Pomerantz has elected to pursue this appeal.

II. Rule of Necessity

Initially we note, as we disclosed to counsel at oral argument, that each judge on this court uses the Windows 98 operating system or a more current version of the software. To the extent that there may be a conflict of interest, we conclude that the rule of necessity requires us to proceed. See Office of State Court Adm'r v. Background Info. Servs., Inc., 994 P.2d 420, 426 (Colo. 1999)

(the rule of necessity provides that it may become necessary for the judges of a court to hear a case in which they may have an interest where no one else can take their place); Model Code of Judicial Conduct Canon 3(E)(1) (1990) (commentary states, "Rule of necessity may override the rule of disqualification.").

III. Standard of Review

In evaluating a motion to dismiss for failure to state a claim, the material allegations in the complaint are deemed admitted. A trial court should grant the motion only if it appears that the plaintiff would not be entitled to any relief under the facts pleaded. Upon review, an appellate court is in the same position as the trial court. Davidson v. Dill, 180 Colo. 123, 503 P.2d 157 (1972).

IV. Standing Under the Act

The principal issue in this case is whether the trial court correctly concluded that the indirect purchaser rule announced in Illinois Brick Co. v. Illinois, supra,

applies to this case, and, if so, whether Pomerantz lacks standing to proceed. We agree with the trial court's resolution of this issue.

A. Elements of Standing

Pomerantz asserts that the trial court erred when it dismissed his complaint because, either as an indirect purchaser or as a direct end user licensee, he has standing under § 6-4-114(1), C.R.S.2001, of the Act, to bring this suit against Microsoft. We disagree.

The question of standing is really an inquiry into whether the statutory provision on which the claim rests can properly be understood as granting persons in the plaintiff's position a right to judicial relief. Stifflear v. Bristol-Myers Squibb Co., 931 P.2d 471, 473 (Colo.App.1996). Resolution of the standing issue involves two considerations: (1) whether the party seeking judicial relief has suffered an injury in fact, and (2) whether the injury is to a legally protected interest as contemplated by statutory or constitutional provisions. If the plaintiff has not suffered such an injury, standing does not exist, and the case must be dismissed. Wimberly v. Ettenberg, 194 Colo. 163, 570 P.2d 535 (1977).

The critical inquiry for our purposes is whether Pomerantz asserted injury to an interest legally protected or cognizable under the Act. See Stifflear v. Bristol-Myers Squibb Co., supra.

B. Does Illinois Brick Apply in this Case?

Pomerantz contends that the trial court erred in concluding that the Illinois Brick indirect purchaser rule applies in this case. Specifically, he argues that because members of the putative class are licensees of Microsoft and Windows 98 was not sold to them, but rather only licensed, the lack of a sale takes this case outside of the purview of Illinois Brick. We are not persuaded.

Illinois Brick established the indirect purchaser rule. There, the state of Illinois brought suit against concrete block manufacturers, alleging price fixing in violation of § 4 of the Clayton Act, 15 U.S.C. § 15. The Supreme Court concluded that the state was an indirect purchaser because it did not buy concrete block directly from the manufacturers. Rather, the manufacturers had sold their concrete block to masonry contractors who performed masonry work on buildings that the state had purchased from general contractors. The Court held that a party who does not purchase a product directly from an alleged antitrust violator cannot sue to recover treble damages for an illegal overcharge under § 4 of the Clayton Act. See Illinois Brick, supra, 431 U.S. at 729,

97 S.Ct. at 2066,

52 L.Ed.2d at 715 (it is the direct overcharged purchaser, and not others in the chain of distribution, who has been injured within the meaning of the Clayton Act, regardless of any amount that purchaser may have passed on to its customers).

The Court reasoned that allowing recovery by an indirect purchaser would create a risk of double liability for antitrust violators because the direct purchaser would still be able to recover the full amount of the overcharge from the antitrust violator. Illinois Brick, supra, 431 U.S. at 730-31,97 S.Ct. at 2067,52 L.Ed.2d at 715-16. Additionally, the Court expressed concern about the difficulty of tracing overcharges passed on to remote end purchasers and the complexity of massive multiparty lawsuits, with burdensome and complex issues of proof involving many levels of distribution, including large classes of consumers remote from the antitrust violator. Illinois Brick, supra, 431 U.S. at 740,97 S.Ct. at 2071-72,52 L.Ed.2d at 721. In so ruling, the Court extended the precedent established in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968), which prohibited defensive use of the pass-on theory, and concluded that one rule applies equally to defendants and plaintiffs.

In Stifflear, a division of this court applied Illinois Brick and held that indirect purchasers do not have standing under the 1957 Colorado Antitrust Act to bring claims for money damages or injunctive relief based on alleged overcharges by manufacturers or wholesalers in violation of Colorado's...

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