Microsoft defends DOS licensing

The practice of charging computer makers based on the number of machines they sold--whether or not they came shipped with MS-DOS--was perfectly legal, the company says.

3 min read
SALT LAKE CITY--Microsoft's former practice of charging computer makers based on the number of machines they sold--whether or not they came shipped with MS-DOS--was perfectly legal and should be dropped from an antitrust lawsuit claiming the software giant illegally froze a competing operating system out of the market, attorneys argued today.

At a hearing here, Microsoft attorney Richard Klapper said the practice, known as per-processor licensing, passed antitrust muster because it did not "substantially foreclose" marketing channels for DR-DOS, an operating system that competed head on with MS-DOS in the late 1980s and early 1990s. Caldera, which bought the rights to DR-DOS in 1996, is seeking damages of $1.6 billion in the lawsuit.

"There's no evidence that [DR-DOS] was actually foreclosed," Klapper, an attorney with Microsoft's outside firm of Sullivan & Cromwell, told the court. "Caldera can't get around the fact that people did choose other alternatives."

But Caldera attorney Stephen Susman said Microsoft's own documents, as well as testimony from computer sellers or OEMs, contradicted those claims.

"Microsoft itself viewed per-processor licenses as an effective means of foreclosing [DR-DOS] accounts," Susman, a name partner at Susman & Godfrey, told U.S. District Judge Dee Benson.

The Caldera attorney referred to a Microsoft report that showed the company's use of per-processor licenses accelerated in 1992 and 1993, when DR-DOS posed its biggest threat to MS-DOS, and then receded after DR-DOS was taken off the market in late 1994.

Today's proceeding was not the first time that per-processor licensing has been under attack in federal court. The Justice Department took aim at the practice in 1994, alleging that it made it economically unfeasible for manufacturers to use any competing software since they already were paying Microsoft a royalty for every computer sold. Microsoft agreed to curb the practice when it later settled the charges.

The timeline presented by Susman did not go unnoticed by Judge Benson.

"Why wouldn't that theory alone, beyond everything else we've heard today, support a section 2 [antitrust] case?" Benson asked.

"Under case law, as long as we offered choices, which we clearly did, and as long as we did not foreclose" channels, there is no violation, Klapper replied.

Today's hearing was the second of five scheduled to argue nine separate Microsoft motions seeking to have various parts of the case dismissed. If Microsoft's motions for summary judgement are not granted, the case is scheduled to go to trial before a jury in January.

Susman referred to other evidence, including testimony from an executive at Vobis Microcomputer, a large PC manufacturer in Germany, who said his company was "economically very disadvantaged" if it chose an alternative to the per-processor arrangement. Whereas Microsoft charged as little as $9.50 per unit on a per-processor basis, fees were $20 when based only on the number of DOS units sold.

Susman also pointed to an email in which a Microsoft employee wrote: "Another [DR-DOS] prospect bites the dust with a per-processor DOS agreement" after the company won a contract with Opus, a manufacturer based in the United Kingdom.

But Microsoft maintains that the practice was legal because there were other licensing alternatives and because it did not completely shut out competitors from the market. The contracts were limited to two- and three-year terms, Klapper said, were not signed by a significant number of manufacturers, and did not apply to retail channels such as resellers and computer stores.

Microsoft associate general counsel Tom Burt said after the hearing that it went well "because Caldera had no answer to the case law that says our licensing strategies are legal. It's Caldera's burden to prove it has evidence to go to the jury showing substantial foreclosure."

But Benson appeared to remain skeptical of the practice after Klapper told him it was not standard among software makers.

"It would seem that your case is stronger if I could be persuaded this was common in the industry," Benson replied. "If it's not standard in the industry, how can a monopolist get away with it?"