California decision raises legal stakes for Microsoft

Microsoft lawyers are trying to decide as they prepare to combat a stinging defeat in a California court yesterday.

San Francisco Superior Court Judge Stuart R. Pollak cleared the first group of the more than 130 private lawsuits pending against Microsoft to go to trial.

Pollak's decision to certify 27 cases as "class action" raises the stakes substantially, with several million people now open to collect damages against Microsoft for allegedly overcharging as much as $40 for every copy of Windows 95 and 98 sold in the state.

"It certainly ups the stakes in the federal matter, because it means the outcome in the federal case goes beyond whatever remedies the federal plaintiffs get," said Bill Kovacic, a law professor with George Washington University School of Law. "It increases the urgency for Microsoft to get a significant reversal in their antitrust trial."

So far, Microsoft has knocked off cases in seven states--Hawaii, Iowa, Kentucky, Nevada, Oregon, Rhode Island and Texas--using a technicality. But that precedent does not apply in California, making private lawsuits there the first to be potentially tried on their merits.

The stature of lawyers on the plaintiffs' side, the handicap of arguing the case in state vs. federal court and California's pro-consumer laws all make for Microsoft's toughest legal brawl since its landmark antitrust case began in May 1998, say antitrust experts.

"This is bad for Microsoft. They had seven straight victories and now a loss in California, (and) the number of PCs sold there is tremendous," said Bob Lande, an antitrust professor at the University of Baltimore Law School.

But the odds still favor Redmond, Wash.-based Microsoft. Plaintiff attorneys face an uphill battle proving damages, and all the private suits are bound to the outcome of Microsoft's government case. If the antitrust ruling against Microsoft is overturned, the majority will simply disappear.

"If Microsoft wins on appeal, it rattles the foundation of all these class-action suits," said Hillard Sterling, an antitrust attorney with Gordon & Glickson in Chicago.

Lawyers started filing the bulk of the private suits, which allege Microsoft overcharged consumers for Windows 95 and 98, after U.S. District Judge Thomas Penfield Jackson issued his stinging "findings of fact" declaring Microsoft a predatory monopoly.

More than 130 cases are pending against Microsoft, with those in San Francisco and Baltimore--where more than half the cases reside--garnering the most attention. A motion hearing scheduled for Oct. 13 could determine whether the bulk of the 63 cases consolidated in the Maryland court are thrown out on the same technicality that terminated seven others.

Microsoft had argued against class-action certification, arguing that the consumers had little in common.

"There are so many issues with every single purchase," Microsoft spokesman Jim Cullinan said. "Every individual who is using Windows...How much did their computer cost? How much do we charge them, or did CompUSA charge them? Did they get special services or a special monitor with that?"

But Pollak didn't buy that argument.

"Having the court certify the class and approve it means the court has given us its blessing that this is a proper class action, that it should go forward, and we should get our day in court," said Eugene Crew, a partner with Townsend, Townsend & Crew in San Francisco. "And if we should prevail, Microsoft will have to disgorge that which was unlawfully obtained from consumers."

On the battlefront
Crew's firm leads a coalition of lawyers responsible for the class-action suits pending in California.

Fort Worth, Texas-based Gravity in February 1999 filed the first private suit against Microsoft based on the government antitrust case. The suit, filed in a Washington, D.C., federal court, also named Compaq Computer, Dell Computer and Packard Bell NEC, alleging they profited from Microsoft's anti-competitive behavior. Crew at the same time filed a similar complaint in California state court in San Francisco, targeting Microsoft solely.

"In a class-action suit, there are only two major events," Crew said. "One is class certification, whether or not the class is going to be approved by the court. Secondly is the trial itself."

He likened yesterday's class certification to the battle at Normandy. "We're not there yet, but we're awfully close. That's how I view case certification, like landing on Normandy."

But unlike the Allied victors, Crew and his fellow attorneys face a potentially fiercer fight and one they are handicapped to lose. The California case's biggest problem--shared by all others--is the uncertain outcome of Microsoft's larger legal battle with the government. If Microsoft prevails on appeal, most of the cases are finished.

"If the main government case is overturned by the Supreme Court, then the main plaintiffs would have to go back and prove liability," Lande said. "As a practical matter, they would have to redo the government's case, only without (lead attorney) David Boies, and do a better job than the government did."

Right now, litigants can use much of Jackson's findings of fact to prove their cases and have access to documents and other materials Microsoft turned over to the government during the discovery phase of the trial.

In June, Microsoft provided Baltimore and California plaintiffs with all the documents given to the government in the larger antitrust case. Starting in September, Microsoft is scheduled to provide the California plaintiffs additional documents on a regular basis.

The discovery phase in the California case concludes next June, with the trial tentatively scheduled to begin in March 2002.

How much is due?
The other challenge facing all plaintiffs is assessing damages. During the government's antitrust trial, the Justice Department introduced evidence suggesting Microsoft overcharged consumers as much as $40 for every copy of Windows sold. But Jackson's findings and subsequent ruling offer plaintiffs little in the way of determining damages, Kovacic said.

"The private plaintiffs, unlike the government, are always going to face the challenge of trying to prove the amount of harm and come up with a convincing methodology for calculating damages," he explained. "That will always be a separate hurdle they face, regardless of the outcome of the federal prosecution."

Crew, who is working his first class-action suit, agreed this is a tough area to overcome. "It's daunting, but it's not impossible," he said. "That's why we have experts."

Microsoft faces its own challenges, some of which the company may have brought upon itself. After the first round of court filings, many in state court, Microsoft successfully moved for the bulk to be removed to federal court, "which is a more favorable venue," Kovacic said.

In California, Microsoft missed the statute period for filing for the case to be moved to federal court.

With class-certification complete in California, legal experts are watching Baltimore closely. In August, Microsoft asked U.S. District Judge J. Frederick Motz to dismiss 63 cases there based on the 1977 Supreme Court case known as Illinois Brick. The ruling established a precedent that only direct purchasers of a product can sue an antitrust violator.

This prevents most consumers from suing Microsoft in federal and most state courts because they purchased Windows from PC manufacturers or retailers and not directly from the software giant. One state allowing indirect purchasers to sue is California.

Even if Motz accepts Microsoft's motion, some of the 63 cases may survive, as more than 25 were removed from state to federal court.

"The removal to federal court does not shed the applicable states' law," Sterling said. "So some of these lawsuits will survive, because some states have rejected the Illinois Brick decision."