Gravity Inc v. Microsoft Corp

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

MARK H. DICKSON, 

Plaintiff-Appellant,

and

CAREY D. EBERT, Trustee in

Bankruptcy for Gravity, Inc.,

Trustee-Appellant,

and

403 WEST LOOP 820 N,  No. 01-2458

Plaintiff,

v.

MICROSOFT CORPORATION; COMPAQ

COMPUTER CORPORATION; DELL

COMPUTER; PACKARD BELL NEC,

INCORPORATED,

Defendants-Appellees.



Appeal from the United States District Court

for the District of Maryland, at Baltimore.

J. Frederick Motz, District Judge.

(CA-00-1247-JFM)

Argued: June 5, 2002

Decided: October 28, 2002

Before WILLIAMS and GREGORY, Circuit Judges, and

James H. MICHAEL, Jr., Senior United States District Judge

for the Western District of Virginia, sitting by designation.

2 DICKSON v. MICROSOFT CORPORATION

Affirmed by published opinion. Judge Williams wrote the majority

opinion, in which Senior Judge Michael joined. Judge Gregory wrote

a dissenting opinion.

COUNSEL

ARGUED: Michael K. Kellogg, KELLOGG, HUBER, HANSEN,

TODD & EVANS, P.L.L.C., Washington, D.C., for Appellants.

David Bruce Tulchin, SULLIVAN & CROMWELL, New York, New

York; Paul M. Smith, JENNER & BLOCK, L.L.C., Washington,

D.C., for Appellees. ON BRIEF: Mark C. Hansen, Steven F. Benz,

Scott K. Attaway, KELLOGG, HUBER, HANSEN, TODD &

EVANS, P.L.L.C., Washington, D.C.; R. Stephen Berry, J. Daniel

Leftwich, Gregory Baruch, BERRY & LEFTWICH, Washington,

D.C.; Nelson Roach, NIX, PATTERSON & ROACH, Daingerfield,

Texas, for Appellants. Daryl A. Libow, Joseph J. Matelis, SULLI-

VAN & CROMWELL, New York, New York; Thomas W. Burt,

Richard J. Wallis, Steven J. Aeschbacher, MICROSOFT CORPORA-

TION, Redmond, Washington; Michael F. Brockmeyer, PIPER,

MARBURY, RUDNICK & WOLFE, L.L.P., Baltimore, Maryland;

Charles B. Casper, MONTGOMERY, MCCRACKEN, WALKER &

RHOADS, L.L.P., Philadelphia, Pennsylvania; Steve W. Berman,

HAGENS BERMAN, L.L.P., Seattle, Washington, for Appellee

Microsoft. Susan R. Podolsky, JENNER & BLOCK, L.L.C., Wash-

ington, D.C.; Jerold S. Solovy, Barbara S. Steiner, JENNER &

BLOCK, L.L.C., Chicago, Illinois; Samuel R. Miller, FOLGER,

LEVIN & KAHN, L.L.P., San Francisco, California, for Appellee

Dell; William D. Coston, Martin L. Saad, VENABLE, BAETJER,

HOWARD & CIVILETTI, L.L.P., Washington, D.C., for Appellee

Compaq; G. Brian Busey, MORRISON & FOERSTER, L.L.P.,

McLean, Virginia; Penelope A. Preovolos, MORRISON & FOER-

STER, San Francisco, California, for Appellee Packard Bell.

OPINION

WILLIAMS, Circuit Judge:

Mark H. Dickson and Carey D. Ebert, trustee in bankruptcy for

Gravity, Inc., (collectively, Gravity) appeal the district court’s dis-

DICKSON v. MICROSOFT CORPORATION 3

missal under Federal Rule of Civil Procedure 12(b)(6) of Gravity’s

consumer class action claims against Microsoft Corporation and three

original equipment manufacturers (OEMs) — Compaq Computer

Corporation (Compaq), Dell Computer Corporation (Dell), and PB

Electronics, Inc. (PB) (collectively, the OEM Defendants) — in the

United States District Court for the District of Maryland. For the rea-

sons set forth below, we affirm.

I.

In February 1999, Gravity filed this action in the United States Dis-

trict Court for the District of Columbia, alleging a "hub-and-spoke"

conspiracy between Microsoft and the OEM Defendants to restrain

trade, in violation of § 1 of the Sherman Act, and a conspiracy to

maintain Microsoft’s alleged monopolies1 in the sale of operating sys-

tems,2 word processing, and spreadsheet software, in violation of § 2

of the Sherman Act.3 The proposed class action consists of two sepa-

rate classes. The first class is composed of "United States purchasers,

between October 20, 1993 and the present, of Microsoft Windows or

MS-DOS operating software . . . installed and sold with personal

computers compatible with Intel x86/Pentium architecture purchased

directly from Compaq, Dell, or [PB]." (J.A. at 103.) The second class

is composed of "United States purchasers, between October 20, 1993

and the present, of Microsoft word processing software and/or Micro-

soft spreadsheet software installed and sold with personal computers

1

The Supreme Court defines monopoly power as "the power to control

prices or exclude competition." United States v. E.I. du Pont de Nemours

& Co., 351 U.S. 377, 391 (1956). "More precisely, a firm is a monopolist

if it can profitably raise prices substantially above the competitive level."

United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir. 2001) (cit-

ing 2A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 501,

at 85 (1995)). As the D.C. Circuit noted, "merely possessing monopoly

power is not itself an antitrust violation," but "it is a necessary element

of a [Section 2] monopolization charge." Id.

2

Operating systems function as platforms for software applications,

such as word processing and spreadsheet programs.

3

Gravity also asserted a class action claim against Microsoft individu-

ally for monopolization of case management and litigation support soft-

ware, but Gravity has voluntarily dismissed this claim with prejudice.

4 DICKSON v. MICROSOFT CORPORATION

compatible with Intel x86/Pentium architecture purchased directly

from Compaq, Dell, or [PB]." (J.A. at 103.)

Gravity alleges that the OEM Defendants and Microsoft violated

the Sherman Act by entering into licensing agreements with the fol-

lowing anticompetitive provisions: (1) a prohibition against removing

icons, folders, or Start menu entries from the Windows desktop; (2)

a prohibition against modifying the initial Windows boot sequence;

(3) the integration of Internet Explorer (IE), Microsoft’s Internet

browser software, and other application software with Microsoft’s

operating software; and (4) the inclusion of long-term distribution

contracts, exclusive dealing distribution arrangements, and per-

processor license fees.4

In exchange for agreeing to these provisions, the OEM Defendants

allegedly received various benefits, including discounts on software

and "greater cooperation from Microsoft in product development."

Gravity, Inc. v. Microsoft Corp., 127 F. Supp. 2d 728, 732 n.5 (D.

Md. 2001); see also United States v. Microsoft Corp., 84 F. Supp. 2d

9, 42 (D.D.C. 1999) (stating that Compaq and several other OEMs

enjoyed "early access to Windows source code"). Gravity also alleges

that the agreements benefitted the OEM Defendants by allowing them

to sell more computer hardware than they would have sold if the rele-

vant software markets were competitive and by ensuring that the

OEM Defendants would not be undercut by rivals offering either

comparable hardware with lower-priced software or comparable hard-

ware without software.

Gravity claims that the restrictive licensing agreements were predi-

cated, at least in part, on the perceived threat from emerging "middle-

ware" platforms. Gravity’s theory is that middleware platforms

feasibly could replace most operating software functions by allowing

developers to write programs interfacing with middleware rather than

4

Per-processor license fees are royalties that Microsoft requires the

OEM Defendants to pay for personal computers that are sold pursuant to

the licensing agreement containing a "particular microprocessor type."

United States v. Microsoft Corp, CIV. A. 94-1564, 1995 WL 505998, at

*2 (D.D.C. Aug. 21, 1995).

DICKSON v. MICROSOFT CORPORATION 5

5

the operating system. United States v. Microsoft Corp., 253 F.3d 34,

74 (D.C. Cir. 2001). The D.C. Circuit has explained the threat of mid-

dleware platforms to Microsoft’s monopoly in the operating systems

market as follows:

If a consumer could have access to the applications he

desired — regardless of the operating system he uses —

simply by installing a particular browser on his computer,

then he would no longer feel compelled to select Windows

in order to have access to those applications; he could select

an operating system other than Windows based solely upon

its quality and price. In other words, the market for operat-

ing systems would be competitive.

Id. at 60. Gravity also alleges that Microsoft has faced challenges

from competing operating software, such as DR-DOS.

The restraints on trade in the licensing agreements allegedly have

denied the class members the choice of competitive software products

and have resulted in supracompetitive prices for Microsoft’s operating

system and application software. Gravity does not allege any conspir-

acy between Microsoft and the OEM Defendants to set the resale

price of the software. Instead, it claims that overcharges were passed

on to the consumers by the OEM Defendants when the consumers

purchased personal computers (PCs) from the OEM Defendants.

Microsoft and the OEM Defendants moved to dismiss the First

Amended Complaint (FAC). While those motions were under submis-

sion, the Judicial Panel on Multidistrict Litigation transferred the

action to the United States District Court for the District of Maryland,

where it was coordinated with approximately sixty-four other antitrust

actions against Microsoft. The other antitrust actions were consoli-

dated into a single class action. Gravity’s complaint was not consoli-

dated with these actions because it was the only complaint alleging

claims against OEMs as defendants. In re Microsoft Corp. Antitrust

Litig., 127 F. Supp. 2d 702, 704 & n.2 (D. Md. 2001).

5

Netscape Navigator and the Java programming language are examples

of middleware products written for multiple operating systems.

6 DICKSON v. MICROSOFT CORPORATION

In January 2001, the district court dismissed Gravity’s FAC for

failure to state a claim. Following this dismissal, Gravity moved for

leave to file a Second Amended Complaint (SAC). In the SAC, Grav-

ity alleged two separate vertical conspiracies between Dell and

Microsoft and Compaq and Microsoft.6 Gravity did not name PB as

a defendant.7 Gravity repeated its allegations of anticompetitive con-

duct and included a claim that Microsoft’s licensing agreements

"bundl[ed] or t[ied] the distribution of Microsoft’s middleware, the

Internet Explorer browser, with Microsoft’s Windows operating soft-

ware." (J.A. at 465.) The district court denied leave to file the SAC

on the ground of futility, concluding that the SAC also failed to state

a claim upon which relief could be granted.

On appeal, Gravity contends that both complaints allege proper

claims under § 1 and § 2 of the Sherman Act. Gravity also argues that

the district court erred in applying the indirect purchaser rule of Illi-

nois Brick Co. v. Illinois, 431 U.S. 720 (1977), to foreclose compen-

satory damages. We address each argument in turn.

II.

Before turning to our consideration of Gravity’s claims of error, a

brief overview of the public enforcement action for injunctive relief

brought by the federal government and nineteen states against Micro-

soft in the United States District Court for the District of Columbia

is warranted.8 See United States v. Microsoft Corp., 253 F.3d 34 (D.C.

Cir. 2001). In analyzing the § 2 claim against Microsoft, the D.C. Cir-

cuit upheld the district court’s finding that Microsoft has monopoly

power in the market for operating system software for Intel-

compatible PCs with its Windows software, which has gained more

6

For a discussion of the distinction between a "hub-and-spoke" con-

spiracy and separate vertical conspiracies, see infra at 9-10.

7

Gravity did not allege a separate conspiracy between Microsoft and

PB in the SAC because none of the named plaintiffs purchased a PC

from PB. (Appellant’s Br. at 20 n.5.)

8

Although Gravity’s complaint was filed prior to resolution of the pub-

lic enforcement action, the factual predicate is similar, and on appeal,

Gravity relies upon many of the D.C. Circuit’s findings for general sup-

port for its propositions.

DICKSON v. MICROSOFT CORPORATION 7

than 95% market share. See id. at 51-58. It further affirmed the dis-

trict court’s finding that Microsoft had "engag[ed] in exclusionary [or

anticompetitive] conduct ‘as distinguished from growth or develop-

ment as a consequence of a superior product, business acumen, or his-

toric accident’" for the purpose of maintaining its monopoly power in

the operating systems market. Id. at 58. In detailing Microsoft’s anti-

competitive conduct, the D.C. Circuit relied primarily on the same

licensing agreements underlying Gravity’s complaint, although it

focused on Microsoft’s dealings with all of the OEMs who entered

into such agreements in the aggregate rather than two or three agree-

ments in isolation. Specifically, the D.C. Circuit highlighted the pro-

hibitions against: "(1) removing any desktop icons, folders, or ‘Start’

menu entries; (2) altering the initial boot sequence; and (3) otherwise

altering the appearance of the Windows desktop."9 Id. at 61. It

affirmed the district court’s conclusion that Microsoft used the restric-

tions in the licensing agreements to ensure the predominance of IE in

the browser market, thereby gaining market share in the browser mar-

ket for the purpose of maintaining Microsoft’s monopoly in the oper-

ating systems market.10 Only the third restriction was held to have

been justified by Microsoft’s need to protect its copyrighted work. Id.

at 63. The D.C. Circuit held that the first two restrictions "represent

uses of Microsoft’s market power to protect its monopoly, unre-

deemed by any legitimate justification" and, therefore, that Micro-

soft’s imposition of these restrictions violated § 2 of the Sherman Act.

Id. at 64.

III.

With this background in mind, we evaluate the district court’s dis-

missal of Gravity’s complaint. When reviewing the district court’s

grant of a motion to dismiss a Sherman Act complaint pursuant to

9

For example, the licensing agreements prohibited OEMs from causing

any user interface other than the Windows desktop to launch automati-

cally and from adding icons or folders different in size or shape from

those supplied by Microsoft.

10

For a detailed discussion of the relationship between the browser and

the operating systems markets and the anticompetitive effect of the

license restrictions on the OEMs’ ability to promote rival browsers, see

Microsoft, 253 F.3d at 59-64.

8 DICKSON v. MICROSOFT CORPORATION

Federal Rule of Civil Procedure 12(b)(6), "we must determine

whether allegations covering all the elements that comprise the theory

for relief have been stated as required." Estate Constr. Co. v. Miller

& Smith Holding Co., 14 F.3d 213, 220 (4th Cir. 1994) (internal quo-

tation marks omitted) (citing United States v. Employing Plasterers

Ass’n, 347 U.S. 186, 189 (1954)); Mun. Utils. Bd. of Albertville v.

Ala. Power Co., 934 F.2d 1493, 1501 (11th Cir. 1991) ("A plaintiff

must plead sufficient facts so that each element of the alleged antitrust

violation can be identified."). "Moreover, the allegations must be

stated in terms that are neither vague nor conclusory." Estate Constr.

Co., 14 F.3d at 220-21. "Although we will assume that the plaintiffs

can prove the facts that they allege in their complaint, ‘it is not . . .

proper to assume that . . . the defendants have violated the antitrust

laws in ways that have not been alleged.’" Id. at 221 (quoting Associ-

ated Gen. Contractors v. Cal. State Council of Carpenters, 459 U.S.

519, 526 (1983)).

At the outset, we note that although Gravity alleges violations of

both § 1 and § 2, the district court did not separately examine the suf-

ficiency of Gravity’s claims when it dismissed the FAC. The district

court determined that the alleged § 1 and § 2 conspiracies were "co-

terminous" because they purportedly shared a common goal: main-

taining Microsoft’s monopolies. Gravity, 127 F. Supp. 2d at 455.

Because the conspiracies "coalesce," reasoned the district court, the

sufficiency of both allegations "must be gauged by the elements of a

section 2 claim." Id. "Otherwise, plaintiffs could circumvent the

requirements of a conspiracy to monopolize claim, including the

requirement that a defendant be shown to have acted with the specific

intent to monopolize, simply by characterizing their claim as one aris-

ing under section 1, whose elements of proof are not as stringent." Id.

We disagree with the district court’s reasoning in this regard. A § 1

violation "is legally distinct from that under § 2 . . . though the two

sections overlap in the sense that a monopoly under § 2 is a species

of trade restraint under § 1." United States v. Socony-Vacuum Oil Co.,

310 U.S. 150, 224 n.59 (1940). The same kind of practices, therefore,

may evidence violations of both. See Md. & Va. Milk Pro. Ass’n v.

United States, 362 U.S. 458, 463 (1960) ("[S]ections [1 and 2] closely

overlap, and the same kind of predatory practices may show viola-

tions of [both]."); E. Thomas Sullivan & Jeffrey L. Harrison, Under-

standing Antitrust and its Economic Implications § 6.08, at 258 (2d

DICKSON v. MICROSOFT CORPORATION 9

ed. 1994) ("[The prohibition in § 2 against combinations or conspira-

cies] proscribes a great deal of the same behavior prohibited by § 1).

Thus, even if Gravity failed to allege a § 2 claim, it is possible that

it sufficiently alleged a § 1 claim. See, e.g., Eastman Kodak Co. v.

Image Tech. Servs., Inc., 504 U.S. 451, 481 (1992) (describing the § 2

standard as "the more stringent monopoly standard").

To establish a violation of § 1 of the Sherman Act,11 Gravity must

prove the following elements: (1) a contract, combination, or conspir-

acy; (2) that imposed an unreasonable restraint of trade. Oksanen v.

Page Mem’l Hosp., 945 F.2d 696, 702 (4th Cir. 1991) (en banc). If

Gravity is able to prove a violation of § 1, it then must prove the exis-

tence of "antitrust injury, which is to say injury of the type the anti-

trust laws were intended to prevent and that flows from that which

makes defendants’ acts unlawful." Atl. Richfield Co. v. USA Petro-

leum Co., 495 U.S. 328, 334 (1990); Continental Airlines, Inc. v.

United Airlines, Inc., 277 F.3d 499, 508 (4th Cir. 2002); Oksanen,

945 F.2d at 708; see generally 2 Phillip E. Areeda & Herbert

Hovenkamp, Antitrust Law ¶¶ 360-63, at 191-227 (1995). These

requirements apply with equal force to Gravity’s claims for damages

and injunctive relief; the only relevant distinction being that for

injunctive relief, "the injury itself need only be threatened." 2 Areeda

& Hovenkamp ¶ 360b, at 193.

A.

With respect to the first element, in the FAC, Gravity alleged a sin-

gle "hub-and-spoke," or "rimless wheel" conspiracy among the OEM

Defendants and Microsoft. A rimless wheel conspiracy is one in

which various defendants enter into separate agreements with a com-

mon defendant, but where the defendants have no connection with

one another, other than the common defendant’s involvement in each

transaction. Kotteakos v. United States, 328 U.S. 750, 755 (1946)

("[T]he pattern was that of separate spokes meeting at a common cen-

ter, though we may add without the rim of the wheel to enclose the

11

Section 1 states: "Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade or commerce among the

several States, or with foreign nations, is hereby declared to be illegal."

15 U.S.C.A. § 1 (West 1997).

10 DICKSON v. MICROSOFT CORPORATION

spokes." (internal quotation marks omitted)). In Kotteakos, the

Supreme Court made clear that a rimless wheel conspiracy is not a

single, general conspiracy but instead amounts to multiple conspira-

cies between the common defendant and each of the other defendants.

Id. at 768-69, 772; Joseph F. McSorley, A Portable Guide to Federal

Conspiracy Law 145 (1996) ("While the hub may view its dealings

with the spokes as part of a single agreement, a spoke may be con-

cerned simply with his or her own actions.").

Gravity does not argue that it is able to meet the test for establish-

ing a "rim" between the OEM Defendants and Microsoft.12 (Appel-

lant’s Br. at 53.) Instead, it urges us to follow the Sixth Circuit, which

Gravity asserts has adopted the proposition that a rimless wheel con-

spiracy constitutes a single, general conspiracy in the context of the

Sherman Act. See Elder-Beerman Stores Corp. v. Federated Dep’t

Stores, Inc., 459 F.2d 138, 146 (6th Cir. 1972) (setting forth require-

ments for proving "rimless wheel" conspiracy); see also Impro Prod-

ucts, Inc. v. Herrick, 715 F.2d 1267, 1279 n.14 (8th Cir. 1983) (noting

that "[t]here is some question whether the conspiracy provisions of

Sections 1 and 2 of the Sherman Act apply to a hub-and-spoke con-

spiracy," but declining to resolve the issue after suggesting that such

a theory was appropriate). Nothing in the Supreme Court’s holding in

Kotteakos, however, suggests that such a proposition is correct or per-

missible. Rather, the Supreme Court was clear: a wheel without a rim

12

A single criminal conspiracy generally is demonstrated by an "over-

lap of key actors, methods, and goals." United States v. Strickland, 245

F.3d 368, 385 (4th Cir. 2001) (internal quotation marks and citations

omitted); see also United States v. Bowens, 224 F.3d 302, 308 (4th Cir.

2000) (holding that it was not error for the district court to refuse to

instruct the jury on multiple conspiracies where there was evidence of

common methods of operation and common participants linked by a

mutual interest); United States v. Squillacote, 221 F.3d 542, 574 (4th Cir.

2000) ("A single conspiracy exists where there is one overall agreement,

or one general business venture." (internal quotation marks omitted)).

Because Gravity does not argue that its allegations are sufficient to dem-

onstrate this type of overlap but instead only advocates our adopting the

concept of a rimless wheel conspiracy, we need not decide whether the

same test that applies to demonstrate a single criminal conspiracy would

apply in the context of the Sherman Act.

DICKSON v. MICROSOFT CORPORATION 11

13

is not a single conspiracy. Kotteakos, 328 U.S. at 755. Thus, we

agree with the district court that Gravity’s attempt in its FAC to plead

a single, rimless wheel conspiracy between the OEM Defendants and

Microsoft must be rejected.

In an effort to cure its failure to allege a legally viable conspiracy,

Gravity alleged in the SAC separate vertical conspiracies between

Microsoft and Compaq and between Microsoft and Dell. Compaq and

Dell argue that these allegations also are insufficient to demonstrate

concerted action under § 1 because Gravity is unable, as a matter of

law, to demonstrate that either shared with Microsoft "a unity of pur-

pose or a common design and understanding." Monsanto Co. v.

Spray-Rite Serv. Corp., 465 U.S. 752, 764 (1984) (internal quotation

13

The dissent’s confusion in applying Kotteakos is understandable by

reference to its reliance on the Sixth and Eighth Circuits, both of which

appear to have misinterpreted Kotteakos. Post at 30-31 (citing Elder-

Beerman Stores Corp. v. Federated Dep’t Stores, Inc., 459 F.2d 138 (6th

Cir. 1972); Impro Prods., Inc. v. Herrick, 715 F.2d 1267, 1279 (8th Cir.

1983)). In Elder-Beerman, the Sixth Circuit stated that "[t]here is much

discussion in the Kotteakos decision indicating the possibility that such

a ‘rimless wheel’ theory might be used in a civil case though not appro-

priate in a criminal case." Elder-Beerman, 459 F.2d at 147. In Impro

Products, the Eighth Circuit compounded the Sixth Circuit’s error by

describing the test set forth in Elder-Beerman for a rimless wheel con-

spiracy (which is adopted by the dissent, post at 29-30) and then con-

cluding that a rimless wheel conspiracy constitutes a single conspiracy

in civil actions. Impro Prods., 715 F.2d at 1279 & n.14. Nothing in Kot-

teakos suggests, however, that the definition of a rimless wheel conspir-

acy turns on whether the conspiracy is civil or criminal in nature; the

Sixth and the Eighth Circuits’ contrary belief apparently stems from the

distinction between criminal and civil actions that was drawn in Kot-

teakos for purposes of analyzing harmless error.

In any event, even if we were to further distort the clear holding set

forth in Kotteakos by following the Sixth and Eighth Circuits in the man-

ner suggested by the dissent, our resolution of Gravity’s claims would be

unaffected. Regardless of whether Gravity has alleged a single conspir-

acy among the OEM Defendants and Microsoft or two separate agree-

ments, its § 1 and § 2 claims would be subject to dismissal for failure to

allege facts demonstrating a significant likelihood of anticompetitive

effects.

12 DICKSON v. MICROSOFT CORPORATION

marks and citation omitted). As this court recently emphasized in Vir-

ginia Vermiculite, Ltd. v. HGSI, ___ F.3d ___, 01-1850 (4th Cir. Oct.

4, 2002), "concerted activity susceptible to sanction by section 1 is

activity in which multiple parties join their resources, rights, or eco-

nomic power together in order to achieve an outcome that, but for

concert, would naturally be frustrated by their competing interests (by

way of profit-maximizing choices)." Id. at *9. Gravity has sufficiently

alleged that Microsoft and the OEM Defendants pooled their

resources, rights, or economic power. Furthermore, to the extent

Compaq and Dell argue that it was against their economic interests to

enter into § 1 conspiracies with Microsoft, we note that Gravity has

alleged that Compaq and Dell received financial and other benefits in

exchange for entering into the licensing agreements. These allegations

are sufficient for purposes of Rule 12(b)(6) to demonstrate that a § 1

conspiracy was economically plausible.14 Cf., e.g., Spectators’ Com-

munication Network, Inc. v. Colonial Country Club, 253 F.3d 215,

220-22 (5th Cir. 2001) (analyzing relevant caselaw and concluding

that a vertical conspiracy could be shown under § 1 even though it

likely would be against Anheuser-Busch’s economic interest to con-

spire to restrain competition in a market in which it was a purchaser).

Moreover, "the ‘combination or conspiracy’ element of a section 1

violation is not negated by the fact that one or more of the co-

conspirators acted unwillingly, reluctantly, or only in response to

coercion." MCM Partners, Inc. v. Andrews-Bartlett & Assocs., 62

F.3d 967, 973 (7th Cir. 1995); In re Brand Name Prescription Drugs

Antitrust Litig., 123 F.3d 599, 615 (7th Cir. 1997) (noting that the

wholesaler’s participation would be actionable even if the jury found

that they "were tools of the manufacturers — reluctant accomplices,

yet not the less liable for that."); see also United States v. United

States Gypsum Co., 438 U.S. 422, 436 n.13 (1978) ("[T]he general

14

Arguably, however, these allegations are insufficient as a matter of

law to demonstrate that either Compaq or Dell possessed specific intent

to maintain Microsoft’s alleged monopolies under § 2. See TV Communi-

cations Network, Inc. v. Turner Network Television, Inc., 964 F.2d 1022,

1026-27 (10th Cir. 1992) ("Because the cable operators would have no

rational motive to create [a monopolistic environment], TVCN’s allega-

tions do not provide an inference of specific intent to conspire to achieve

the stated goal of the conspiracy.").

DICKSON v. MICROSOFT CORPORATION 13

rule [is] that a civil violation can be established by proof of either an

unlawful purpose or an anticompetitive effect."). The co-conspirators

need not share the same motive or goal; it is sufficient to allege that

the co-conspirators "acquiesc[ed] in an illegal scheme." United States

v. Paramount Pictures, Inc., 334 U.S. 131, 161 (1948); see also Va.

Vermiculite, Ltd. v. W.R. Grace & Co., 156 F.3d 535, 541 (4th Cir.

1998) ("It is not necessary that [Historic Green Springs, Inc.] have

shared Grace’s alleged anticompetitive motive in entering into a pro-

scribed restraint; it is sufficient that HGSI, regardless of its own

motive, merely acquiesced in the restraint with the knowledge that it

would have anticompetitive effects."); Duplan Corp. v. Deering Mil-

liken Inc., 594 F.2d 979, 982 (4th Cir. 1979) ("Where, as here, the

[defendants] were knowing participants in a scheme whose effect was

to restrain trade, the fact that their motives were different from or

even in conflict with those of the other conspirators is immaterial.").

Accordingly, Gravity’s allegations regarding the commercial license

agreements are sufficient for purposes of 12(b)(6) to set forth two

separate vertical conspiracies between Microsoft and Compaq and

between Microsoft and Dell.

B.

We next address whether Gravity alleged facts which, if proven

true, would establish that the two conspiracies separately imposed

unreasonable restraints of trade in interstate commerce. Continental

Airlines, 277 F.3d at 508. In assessing liability under § 1, courts gen-

erally evaluate agreements pursuant to one of three approaches. Id. at

508-09 ("[T]he Supreme Court has authorized three methods of analy-

sis: (1) per se analysis, for obviously anticompetitive restraints, (2)

quick-look analysis, for those with some procompetitive justification,

and (3) the full ‘rule of reason,’ for restraints whose net impact on

competition is particularly difficult to determine."). Because the pos-

sibility of anticompetitive effects resulting from either licensing

agreement is not obvious, we analyze the two licensing agreements

at issue — individually — pursuant to the "full" rule of reason analysis.15

15

Justice Brandeis in Chicago Bd. of Trade v. United States, 246 U.S.

231 (1918), explained the rule of reason as follows:

The true test of legality is whether the restraint imposed is such

as merely regulates and perhaps thereby promotes competition or

14 DICKSON v. MICROSOFT CORPORATION

Id.; cf., e.g., Microsoft, 253 F.3d at 59-60 (applying full rule of reason

analysis to claimed § 2 violations).

In the rule of reason analysis, "the reasonableness of a restraint is

evaluated based on its impact on competition as a whole within the

relevant market." Oksanen, 945 F.2d at 708. This evaluation requires

a showing of "anticompetitive effect" resulting from the agreement in

restraint of trade. To have an "anticompetitive effect," conduct "must

harm the competitive process and thereby harm consumers." Micro-

soft, 253 F.3d at 58. "[H]arm to one or many competitors will not suf-

fice." Id. "The [Sherman Act] directs itself not against conduct which

is competitive, even severely so, but against conduct which unfairly

tends to destroy competition itself." Id. (internal quotation marks

omitted). Thus, an inquiry into the lawfulness of the restraint begins

"by identifying the ways in which a challenged restraint might possi-

bly impair competition." 7 Areeda & Hovenkamp ¶ 1503a, at 372.

After identifying the type of possible harm to competition alleged, we

must proceed "to determine whether that harm is not only possible but

likely and significant," which requires "examination of market cir-

cumstances," including market power and share. 7 id. ¶¶ 1503a-

1503b, at 374-77.

1.

Gravity alleges that Compaq’s and Dell’s agreements with Micro-

soft aided the maintenance of Microsoft’s monopolies in PC operating

system, word processing, and spreadsheet markets. Aiding the main-

whether it is such as may suppress or even destroy competition.

To determine that question the court must ordinarily consider the

facts peculiar to the business to which the restraint is applied; its

condition before and after the restraint was imposed; the nature

of the restraint and its effect, actual or probable. The history of

the restraint, the evil believed to exist, the reason for adopting

the particular remedy, the purpose or end sought to be attained,

are all relevant facts. This is not because a good intention will

save an otherwise objectionable regulation or the reverse; but

because knowledge of intent may help the court to interpret facts

and to predict consequences.

Id. at 238.

DICKSON v. MICROSOFT CORPORATION 15

tenance of a monopoly theoretically could harm competition by

affecting price and/or output in various ways. For instance, the agree-

ments could allow Microsoft to leverage its market power in the rele-

vant software markets to obtain advantage in some secondary market

(such as the browser market), not based upon consumer choice or effi-

cient performance but from the mere fact of Microsoft’s market

power in the primary market. See Microsoft, 253 F.3d at 62-66 (find-

ing anticompetitive effects resulting from Microsoft’s licensing agree-

ments with OEMs based upon Microsoft’s leveraging of monopoly

power in operating system market to suppress competition in the

browser market); see generally Robin Cooper Feldman, Defensive

Leveraging in Antitrust, 87 Geo. L.J. 2079, 2080, 2098 (1999) (dis-

cussing "traditional leveraging theory" and the "Chicago school" lev-

eraging theory and concluding that "defensive leveraging" can create

the potential for harm to consumers by aiding in the maintenance of

the primary monopoly). Similarly, with respect to the exclusive deal-

ing components of the licensing agreements, the potential harm to

consumers is that rival software firms or browsers will be foreclosed

from access to consumers, denying consumers competitive choice and

allowing supracompetitive pricing with respect to the software mar-

kets for which Microsoft has monopoly power. Per-processor fees

also arguably could "discourage OEMs from licensing competing

operating systems and/or cause OEMs to raise the price for PCs with

a competing operating system to recoup the fee paid to Microsoft,"

theoretically resulting in increased prices for Microsoft’s software and

decreased opportunities for rival software firms to gain access to con-

sumers. United States v. Microsoft Corp., 159 F.R.D. 318, 323

(D.D.C. 1995), rev’d on other grounds, 56 F.3d 1448 (D.C. Cir.

1995); see generally Kenneth C. Baseman et al., Microsoft Plays

Hardball: The Use of Exclusionary Pricing and Technical Incompati-

bility to Maintain Power in Markets for Operating System Software,

40 Antitrust Bull. 265, 267-68 (1995) (criticizing per-processor

licenses).

"Theorizing about conceivable impairments of competition does

not, of course, prove that any such impairment has occurred or is

likely," or much less is "substantial in magnitude."16 7 Areeda &

16

Nor do we suggest whether any such anticompetitive effect, if shown

to be likely and substantial in magnitude, would be outweighed by a pro-

16 DICKSON v. MICROSOFT CORPORATION

Hovenkamp ¶ 1503a, at 373. Thus, we next must examine whether

Gravity sufficiently has alleged the likelihood of a substantial anti-

competitive harm caused by the two licensing agreements at issue

(considered individually), an inquiry that requires Gravity to allege

facts demonstrating "that the defendants played a significant role in

the relevant market." Oksanen, 945 F.2d at 709; see also General

Leaseways, Inc. v. Nat’l Truck Leasing Ass’n, 744 F.2d 588, 596 (7th

Cir. 1984) (stating that in rule of reason analysis, the plaintiff must

"prove that the defendant has sufficient market power to restrain com-

petition substantially. . . . If not, the inquiry is at an end; the practice

is lawful"); 7 Areeda & Hovenkamp ¶ 1503b, at 376 ("[V]irtually all

courts applying the rule of reason require the plaintiff . . . to show, at

a minimum, that the defendants play a significant role in th[e] [alleg-

edly restrained] market.").

2.

Gravity has provided allegations of Microsoft’s market power in

the relevant software markets, in the form of Microsoft’s shares in

these markets.17 Gravity failed, however, to allege facts regarding

competitive justification. See, e.g., Microsoft, 253 F.3d at 59 (noting,

under traditional rule of reason analysis, if the plaintiff successfully dem-

onstrates anticompetitive effect, then the burden shifts to the defendant

to proffer a procompetitive justification for its conduct).

17

Gravity alleged that Microsoft "maintained a monopoly share (in the

range of 90%) in the personal computer operating software market"

throughout the "class periods," (J.A. at 473), and maintained a market

share in the range of 80-90% in the word processing and spreadsheet

software markets throughout the class period. For antitrust purposes,

market power "is the power to force a purchaser to do something that he

would not do in a competitive market." Eastman Kodak Co. v. Image

Tech. Servs., Inc., 504 U.S. 451, 464 (1992) (internal quotation marks

omitted). "It has been defined as the ability of a single seller to raise

price and restrict output." Id. (internal quotation marks omitted). Market

share is defined as "[t]he percentage of a market that is controlled by a

firm." Black’s Law Dictionary 971 (6th ed. 1991). Market power gener-

ally is identified, in part, by examining market share. See, e.g., Andrew

Chin, Note, Antitrust by Chance: A Unified Theory of Horizontal Merger

Doctrine, 106 Yale L.J. 1165, 1169-72 (1997) (discussing movement

away from strict reliance on calculation of market share in antitrust anal-

ysis). For purposes of Rule 12(b)(6), we consider Gravity’s allegations

regarding Microsoft’s market share sufficient to allege Microsoft’s

power in the relevant software markets.

DICKSON v. MICROSOFT CORPORATION 17

Compaq’s or Dell’s market share and concedes that the PC market is

"fiercely competitive" and, therefore, that neither Compaq nor Dell

has power in the PC market.18 Gravity, 168 F. Supp. 2d at 544; see

also Digital Equip. Corp. v. Uniq Digital Techs., Inc., 73 F.3d 756,

761 (7th Cir. 1996) (Easterbrook, J.) ("Computer manufacturers are

vigorous rivals; prices drop daily; this is one of our economy’s most

competitive sectors."). Gravity further concedes that "[t]he only thing

that . . . distinguishes [Compaq and Dell] from other OEMs is the

alacrity with which they acquiesced in accepting [the licensing]

agreements to obtain relatively favorable prices from Microsoft for its

products." Gravity, 168 F. Supp. 2d at 544. Given Gravity’s conces-

sion that the PC market is "fiercely competitive," and in light of

Microsoft’s agreements with other OEMs, Gravity is unable, as a mat-

ter of law, to demonstrate that Microsoft’s agreements with Compaq

and Dell, when considered individually, are capable of causing any

substantial harm to competition. For instance, without having alleged

Compaq’s or Dell’s power or share in the PC market, Gravity is

unable to demonstrate that rival software firms’ access to Compaq or

Dell was an important component of those firms’ potential ability to

compete in the software markets, or that Microsoft’s agreements with

Compaq and Dell substantially hindered the entrance or operation of

these rivals in the software markets or denied them access to a signifi-

cant number of consumers of software. Similarly, given the failure to

allege the market power of Compaq or Dell, Gravity is unable to

show that Compaq or Dell has forced, or is likely to be able to force,

supracompetitive prices on consumers for undesirable software fea-

tures. Consequently, assuming that Compaq and Dell each possessed

an insignificant portion of the PC market and no ability to control

18

Gravity contends that because the relevant markets are in software,

there is no need to evaluate Compaq’s or Dell’s power in the PC market.

Compaq’s and Dell’s power in the PC market is critical in the analysis,

however, because both OEMs pre-install Microsoft’s software on their

PCs; neither operates independently in the software market. Thus, Com-

paq’s and Dell’s ability to influence competition in the relevant software

markets through their separate agreements with Microsoft is dependent

on their ability to influence competition in the PC market. Cf. Jefferson

Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 18 (1984) ("[A]ny inquiry

into the validity of a tying arrangement must focus on the market or mar-

kets in which the two products are sold, for that is where the anticompeti-

tive forcing has its impact.").

18 DICKSON v. MICROSOFT CORPORATION

pricing or output in the PC market (as is proper in light of Gravity’s

failure to allege market share or any other facts demonstrating market

power), the two licensing agreements — considered individually —

would be incapable of succeeding in maintaining or leveraging

Microsoft’s alleged monopolies, in that neither agreement could sub-

stantially reduce the usage share of, or prevent the promotion of, rival

browsers, rival operating system software manufacturers, or rival

applications software manufacturers.19 Cf., e.g., Continental T.V., Inc.

v. GTE Sylvania, Inc., 433 U.S. 36, 52 n.19, 54 (1977) (concluding

that, although a contractual requirement that distributors sell Sylvania

television sets from authorized locations limited competition among

the distributors in the resale of Sylvania televisions ("intrabrand com-

petition"), it ultimately promoted competition with other brands of

television sets ("interbrand competition") and stating that the competi-

tiveness of the interbrand market "provides a significant check on the

exploitation of intrabrand market power"); Jefferson Parish Hosp.

Dist. No. 2 v. Hyde, 466 U.S. 2, 13-14 (1984) ("we have condemned

tying arrangements when the seller has some special ability — usually

called ‘market power’ — to force a purchaser to do something that

he would not do in a competitive market"); id. at 16 ("If only a single

purchaser were ‘forced’ with respect to the purchase of a tied item,

the resultant impact on competition would not be sufficient to warrant

the concern of antitrust law . . . . [W]e have refused to condemn tying

arrangements unless a substantial volume of commerce is foreclosed

19

Gravity asserts that it need not show that Microsoft’s agreements

with Compaq and Dell were each a sole cause of any anticompetitive

effects but need show only that the agreements were each a "material

cause" of anticompetitive effects. See Zenith Radio Corp. v. Hazeltine

Research, Inc., 395 U.S. 100, 114 n.9 (1969) ("It is enough that the ille-

gality is shown to be a material cause of the injury; a plaintiff need not

exhaust all possible alternative sources of injury in fulfilling his burden

of proving compensable injury under § 4."). Without an allegation of

market share or market power of either Compaq or Dell, however, Grav-

ity cannot make the latter showing. Cf. Brunswick Corp. v. Pueblo Bowl-

O-Mat, 429 U.S. 477, 487-88 (1977) (holding that an antitrust claim fails

as a matter of law when the plaintiff would have suffered the identical

loss without regard to the claimed anticompetitive conduct); 2 Areeda &

Hovenkamp ¶ 363a-b, at 219-23 (noting that no material cause can be

demonstrated where an independent cause fully accounts for the claimed

antitrust injury).

DICKSON v. MICROSOFT CORPORATION 19

thereby."); id. at 37-38 (O’Connor, J., concurring) (evaluating tie-ins

and noting that to show an adverse impact on consumers, the plaintiff

generally must demonstrate two things: market power in the tying-

product market and a threat that the seller will acquire market power

in the tied-product market); Digital Equip. Corp., 73 F.3d at 761

(Easterbrook, J.) ("Let us ask, then, whether the inclusion of an [oper-

ating system] with one’s [PC] — ‘tie-in’ or not — is a means to

reduce output and create monopoly profits. Unless the seller has mar-

ket power, the answer is no . . . ."); id. at 762 ("In a competitive mar-

ket a pig-headed refusal to satisfy customers’ preferences, or an

attempt to charge for unwanted items, does not lead to monopoly

prices; instead it leads to ruin as rivals step in to take the business.").

Moreover, with respect to the exclusive dealing component of Gravi-

ty’s claim, absent an allegation regarding Compaq’s or Dell’s power

or share in the PC market, there is no basis in Gravity’s complaint for

concluding that either of the two licensing agreements at issue, when

considered individually, are likely to foreclose a significant share of

the relevant software markets. See Tampa Electric Co. v. Nashville

Coal Co., 365 U.S. 320, 327 (1961) (holding that an exclusive con-

tract does not violate the Clayton Act unless its probable effect is to

"foreclose competition in a substantial share of the line of commerce

affected"); Microsoft, 253 F.3d at 68-70 (discussing the exclusive

dealing aspects of Microsoft’s agreements and concluding that, even

when the cumulative effect of Microsoft’s agreements were consid-

ered, the agreements did not foreclose enough of the relevant browser

market to constitute a § 1 violation).

The district court afforded Gravity ample opportunity to allege

facts demonstrating Compaq’s or Dell’s power in the PC market, but

Gravity refused, contending for various reasons that Compaq’s and

Dell’s power and share in the PC market is immaterial to Compaq’s

and Dell’s (separate) ability to influence competition in the relevant

software markets.20 On appeal, it continues to assert that, as a matter

20

Gravity did allege that Compaq and Dell were the "largest PC mak-

ers" and were "among the largest distributors of Microsoft’s products."

(Appellant’s Br. at 11.) The dissent relies on this as a sufficient allega-

tion of Compaq and Dell’s respective influences in the PC market. Post

at 34. Being the "largest" in a relevant market, however, says nothing of

a firm’s ability to affect competition in that market. For example, Com-

20 DICKSON v. MICROSOFT CORPORATION

of law, Compaq’s and Dell’s power in the PC market is irrelevant to

its § 1 claim because Microsoft’s monopoly power, in a variety of

ways, is adequate to demonstrate the likelihood of substantial anti-

competitive effects. We address each argument below.

Gravity first argues that Microsoft’s significant market power in

the software markets is sufficient to demonstrate anticompetitive

effects in those markets without regard to Compaq’s or Dell’s power

or share in the PC market. The relevant focus of the § 1 inquiry, how-

ever, is the anticompetitive effects of the conspiracy qua conspiracy;

therefore, the plaintiff must demonstrate that the conspiratorial agree-

ment itself affected competition in ways that would not have obtained

absent the agreement. Spectators’ Communication Network, 253 F.3d

at 225 (noting that the issue is "whether the combination or conspir-

acy, not each individual conspirator, has the [market] power to hurt

competition in the relevant market."); FTC v. Ind. Fed’n of Dentists,

476 U.S. 447, 460 (1986) ("[T]he purpose of the inquiries into market

definition and market power is to determine whether an arrangement

has the potential for genuine adverse effects on competition." (empha-

sis added)). To be sure, one can imagine circumstances in which the

allegation of one conspirators’ market power is sufficient to demon-

strate a likelihood of anticompetitive effects. For instance, assuming

as true Gravity’s allegations regarding Microsoft’s market share in the

relevant software markets, had Microsoft agreed to sell its software

only to Compaq and Dell, such an agreement would have had the

potential to harm competition in software markets, and ultimately in

paq and Dell each may possess only five percent of the market share,

whereas many other OEMs each possess four percent of the market

share, in which case, despite being the largest PC makers and software

distributors, neither Compaq nor Dell would have the ability, through

their separate conspiracies with Microsoft, to affect competition in the

relevant software markets. Cf., e.g., Jefferson Parish Hosp. Dist. No. 2

v. Hyde, 466 U.S. 2, 26 & n.43 (1984) (holding, as a matter of law, that

thirty percent share of the relevant market is insufficient to confer market

power). Accordingly, Gravity’s allegations that Compaq and Dell were

the largest PC makers and software distributors provide no basis whatso-

ever to conclude that either had sufficient share of the PC market to

affect competition in the relevant software markets.

DICKSON v. MICROSOFT CORPORATION 21

the PC market, irrespective of Compaq’s or Dell’s power or share in

the PC market. No such arrangement, however, is alleged here.

Gravity next argues that the district court should have evaluated

Microsoft’s "exclusionary conduct both inside and outside the combi-

nations alleged," and the potential for anticompetitive effects resulting

from this conduct in the aggregate. (Appellant’s Br. at 49-50.) The

SAC, however, did not allege a conspiracy among Microsoft and all

OEMs; it alleged discrete conspiracies between Microsoft and Com-

paq and Microsoft and Dell. Consequently, the district court correctly

determined that it could not consider the cumulative harm of Micro-

soft’s agreements with all OEMs but instead was required to consider

— individually — Microsoft’s agreements with Compaq and Dell to

evaluate each agreement’s potential for anticompetitive effects.21

Likewise, it is untrue that Compaq and Dell, as alleged co-

conspirators of Microsoft, are responsible for all of Microsoft’s uni-

lateral acts with other OEMs who were not members of the alleged

conspiracies. As noted above, each licensing agreement must be

treated as a separate conspiracy, and only acts taken in furtherance of

that alleged conspiracy are appropriately considered in determining

the adverse effects of the claimed restraints on trade, not acts of one

conspirator taken in furtherance of other possible, distinct conspira-

cies. Cf. United States v. Bonetti, 277 F.3d 441, 447 (4th Cir. 2002)

(noting, in a criminal conspiracy, that a co-conspirator is liable for

"all substantive offenses of his co-conspirator that are both reasonably

foreseeable and in furtherance of the conspiracy"); cf. also United

States v. Santiago, 906 F.2d 867, 872-73 (2d Cir. 1990) (concluding

that the single conspiracy test applies to determine whether co-

conspirator conduct is reasonably foreseeable and in furtherance of

21

The cumulative harm of Microsoft’s actions "outside" the two licens-

ing agreements at issue has been subject to review in the public enforce-

ment action and will be further subject to review in the consumer class

actions brought against Microsoft individually and in any suits brought

by OEMs against Microsoft. As noted above, supra at 19-20, the focus

of this § 1 inquiry is not Microsoft’s actions standing alone, but the

extent to which its concerted actions with each of the two individual

OEMs promoted Microsoft’s monopoly power or otherwise restrained

trade.

22 DICKSON v. MICROSOFT CORPORATION

the conspiracy); United States v. Gooden, 892 F.2d 725 (8th Cir.

1989) (same). Indeed, to hold otherwise would be to suggest that the

distinction between a single conspiracy and multiple conspiracies

involving a common defendant is one without a difference.

Thus, we agree with the district court that for Gravity to state a via-

ble § 1 claim, it was required to allege facts which, if proven true,

would demonstrate that Compaq’s or Dell’s individual agreements

with Microsoft were likely to result in an anticompetitive effect.

Without alleging facts demonstrating Compaq’s or Dell’s power or

share in the PC market, Gravity was unable to make such a showing.

Similarly, without allegations regarding the market power or share

of Compaq or Dell in the PC market, Gravity is unable to show a con-

spiracy to monopolize under § 2.22 See 3A Areeda & Hovenkamp ¶

809, at 370 ("[I]n those instances where power is a prerequisite to

holding an agreement to be an unreasonable restraint of trade [under

§ 1] . . . it would make no sense to hold the same agreement offensive

to § 2 without proof of power."). The offense of monopolization

requires a showing of "anticompetitive effect." Microsoft, 253 F.3d at

58. Thus, a viable § 2 conspiracy to monopolize claim must include

allegations which, if proven true, would establish that the agreements

Compaq and Dell made with Microsoft could have had an anticompe-

titive effect (when considered separately). See, e.g., id. at 50 (discuss-

ing the meaning of "monopolization" within § 2); U.S. Anchor Mfg.,

Inc. v. Rule Industries, Inc., 7 F.3d 986, 1001 (11th Cir. 1993) (listing

the likelihood of an anticompetitive effect as one of the elements of

a conspiracy to monopolize under § 2); Seagood Trading Corp. v.

Jerrico, Inc., 924 F.2d 1555, 1576 (11th Cir. 1991) ("[A] section 1

claim and a section 2 conspiracy to monopolize claim require the

same threshold showing — the existence of an agreement to restrain

22

Section 2 states:

Every person who shall monopolize, or attempt to monopolize,

or combine or conspire with any other person or persons, to

monopolize any part of the trade or commerce among the several

States, or with foreign nationals, shall be deemed guilty of a fel-

ony . . . .

15 U.S.C.A. § 2 (West 1997).

DICKSON v. MICROSOFT CORPORATION 23

trade."). Accordingly, for the reasons set forth above regarding the

inadequacies in Gravity’s § 1 allegations, Gravity’s § 2 claim also

fails as a matter of law.

Gravity suggests that these conclusions are irreconcilably at odds

with the D.C. Circuit’s conclusions in the public enforcement action,

contending that the D.C. Circuit implicitly recognized that Micro-

soft’s licensing agreements with Compaq and Dell violated § 1. This

contention, however, misapprehends the nature of the D.C. Circuit’s

holding. Notably, the district court in the public enforcement action

held that the exclusive dealing arrangements in Microsoft’s licensing

agreements, including its agreement with Compaq, did not violate § 1

under the rule of reason, concluding "that Microsoft’s arrangements

with various firms did not foreclose enough of the relevant market to

constitute a § 1 violation." United States v. Microsoft, 87 F. Supp. 2d

30, 53 (D.D.C. 2000). The only § 1 violation found by the district

court was based upon Microsoft’s alleged tying of Windows and IE,

and the D.C. Circuit vacated that ruling. Microsoft, 253 F.3d at 84-95.

Moreover, in conducting its § 2 analysis, the D.C. Circuit evaluated

the anticompetitive effects of Microsoft’s licensing agreements with

all OEMs. Of course, as is set forth above, the analysis of anticompe-

titive effects depends on the identification of the defendants’ "signifi-

cant role" within the relevant market — an inquiry that is much

different when examining the cumulative harm of Microsoft’s con-

duct than it is when examining the effects of Microsoft’s individual

agreements with two OEMs for which Gravity declines to provide

information regarding market share or power. Thus, nothing in the

public enforcement action suggests that Gravity’s § 1 and § 2 claims

are viable.

We recognize that "summary procedures should be used sparingly

in complex antitrust litigation where motive and intent play leading

roles," Poller v. Columbia Broadcasting Sys., 368 U.S. 464, 473

(1962), and that an antitrust complaint should not be dismissed at the

Rule 12(b)(6) stage "merely because the court doubts the plaintiff will

ultimately prevail," Advanced Health-Care Servs., Inc. v. Radford

Cmty. Hosp., 910 F.2d 139, 145 n.8 (4th Cir. 1990) (internal quotation

marks omitted). Nevertheless, to avoid dismissal for failure to state a

claim, the plaintiff must "colorably state[ ] facts which, if proven,

would entitle him to relief." Id. (internal quotation marks omitted).

24 DICKSON v. MICROSOFT CORPORATION

We consistently have held this to require an allegation of facts sup-

portive of each element of the plaintiff’s antitrust claim. Estate Con-

str. Co., 14 F.3d at 220 (holding that "notice pleading" requires

"allegations covering all the elements that comprise the theory for

relief" (internal quotation marks omitted); Mun. Utils. Bd. of Albert-

ville, 934 F.2d at 1501 ("A plaintiff must plead sufficient facts so that

each element of the alleged antitrust violation can be identified.")). "A

contrary view would be tantamount to providing antitrust litigation

with an exemption from Rule 12(b)(6)." Car Carriers, Inc. v. Ford

Motor Co., 745 F.2d 1101, 1106-07 (7th Cir. 1984).

Although Gravity alleges that Microsoft’s agreements with Com-

paq and Dell individually produced anticompetitive effects, it does

not provide any factual basis to support this allegation.23 Moreover,

Gravity has made clear that it has no intention of providing evidence

regarding the market power or share of Compaq or Dell; thus, it does

not seek additional discovery or factual development with respect to

the issue of market share or power. Instead, it asks us to accept its

conclusory assertion that Microsoft’s agreements with Compaq and

Dell, when considered individually, created a likelihood of significant

anticompetitive effects in the relevant software markets without

regard to Compaq’s or Dell’s market power or share in the PC mar-

ket. This we cannot do. "The pleader may not evade [Rule 12(b)(6)]

requirements by merely alleging a bare legal conclusion; if the facts

do not at least outline or adumbrate a violation of the Sherman Act,

the plaintiffs will get nowhere merely by dressing them up in the lan-

guage of antitrust." Car Carriers, Inc., 745 F.2d at 1106 (internal

quotation marks omitted). Because Gravity has failed to allege facts

which, if true, would establish that the two licensing agreements at

issue are unreasonable restraints on trade that caused antitrust injury

to consumers, its § 1 and § 2 claims fail as a matter of law. Cf. Dunn

& Mavis, Inc. v. Nu-Car Driveaway, Inc., 691 F.2d 241, 245 (6th Cir.

1982) ("Since the complaint does not allege facts suggesting that [the

manufacturer’s] refusal to deal had any significant anti-competitive

effect on the market, there is no rule of reason case alleged.").

23

While the dissent notes as "unexceptional" the proposition that a

plaintiff may not rely on a bare legal conclusion to avoid dismissal under

Rule 12(b)(6), it proceeds to rely solely on Gravity’s bare legal conclu-

sions to find its complaint sufficient. Post at 37 n.1.

DICKSON v. MICROSOFT CORPORATION 25

This court recently concluded that the Supreme Court’s holding in

Swierkiewicz v. Sorema, N.A., 122 S. Ct. 992 (2002), did not alter the

basic pleading requirement that a plaintiff set forth facts sufficient to

allege each element of his claim. See Iodice v. United States, 289 F.3d

270, 281 (4th Cir. 2002) ("Even in these days of notice pleadings a

complaint asserting a negligence claim must disclose that each of the

elements is present in order to be sufficient." (internal citations and

quotation marks omitted)); see also Swierkiewicz, 122 S. Ct. at 997

(relying upon a distinction between "evidentiary standards" and

"pleading requirement[s]"). As the dissent recognizes, a sufficient

allegation of anticompetitive effects is dependent upon Compaq’s and

Dell’s respective abilities to affect competition in the PC market. Post

at 35 ("[I]f the conspiracy included only minor OEMs, then the con-

spiracy would presumably have no power to cause significant anti-

competitive effects."). Consequently, by failing to allege Compaq’s

and Dell’s market share or power, Gravity has failed to set forth fac-

tual allegations necessary to support the basic elements of its §1 and

§ 2 claims. See McLain v. Real Estate Bd. of New Orleans, 444 U.S.

232, 243 (1980) (noting that to establish liability under the Sherman

Act, a showing of either an anticompetitive effect or an anticompeti-

tive purpose is necessary).

IV. Illinois Brick

Even if we agreed with Gravity that it has alleged sufficient claims

under § 1 and § 2 for purposes of Rule 12(b)(6), we would affirm the

district court’s conclusion that Gravity is barred from seeking com-

pensatory damages relief under the indirect purchaser rule of Illinois

Brick Co. v. Illinois, 431 U.S. 720 (1977).24 A brief review of the evo-

lution of the indirect purchaser rule is helpful to understand its appli-

cation to Gravity’s claims. In Hanover Shoe, Inc. v. United Shoe

Mach. Corp., 392 U.S. 481 (1968), the defendant in a Sherman Act

suit, a manufacturer of machinery for making shoes, defended on the

ground that the plaintiff, a shoe manufacturer that had bought the

24

Illinois Brick’s indirect purchaser rule, when applicable, bars only

compensatory damages relief and does not apply to injunctive relief. See

Cargill, Inc. v. Monfort of Colorado, 479 U.S. 104, 111 n.6 (1986); Cam-

pos v. Ticketmaster, 140 F.3d 1166, 1172 (8th Cir. 1998); McCarthy v.

Recordex Serv., Inc., 80 F.3d 842, 856-57 (3d Cir. 1996).

26 DICKSON v. MICROSOFT CORPORATION

defendant’s machinery, had passed on any monopoly overcharge to its

own customers, the wholesale purchasers of its shoes, and hence had

not been injured. The Supreme Court held that an antitrust defendant

would not be permitted to defend against a damages suit on the

ground that the plaintiff had shifted the cost of the defendant’s wrong-

doing to the plaintiff’s customers. The Court explained the rationale

for its decision as follows:

Even if it could be shown that the buyer raised his price in

response to, and in the amount of, the overcharge and that

his margin of profit and total sales had not thereafter

declined, there would remain the nearly insuperable diffi-

culty of demonstrating that the particular plaintiff could not

or would not have raised his prices absent the overcharge or

maintained the higher price had the overcharge been discon-

tinued. Since establishing the applicability of the passing-on

defense would require a convincing showing of each of

these virtually unascertainable figures, the task would nor-

mally prove insurmountable.

Id. at 493. The Hanover Shoe Court further explained that the plain-

tiff’s customers "would have only a tiny stake" in enforcing the anti-

trust law. Id. at 494.

In Illinois Brick, plaintiffs, who were indirect purchasers of con-

crete blocks, sought to recover damages on the theory that masonry

contractors, who incorporated concrete blocks purchased from defen-

dants into walls and other masonry structures, passed on the alleged

overcharge for the blocks to general contractors, who incorporated the

masonry structures into entire buildings, and that the general contrac-

tors in turn passed on the overcharge to plaintiffs in the bids submit-

ted for those buildings. Illinois Brick, 431 U.S. at 726-27. The Court

extended the Hanover Shoe rule and held that only direct purchasers

from an antitrust violator can sue for damages, providing two ratio-

nales for the rule: it avoids the danger of multiple, "overlapping

recoveries" against the original seller by direct and indirect purchas-

ers, and it avoids the "evidentiary complexities and uncertainties" in

determining the amount of any overcharge passed through the inter-

mediary to the indirect purchaser. Id. at 730-33. The Supreme Court

expressly contemplated two exceptions to the indirect purchaser rule:

DICKSON v. MICROSOFT CORPORATION 27

(1) where the indirect purchaser acquired goods through a preexisting

cost-plus contract and (2) "where the direct purchaser is owned or

controlled by its customer." Id. at 736 & n. 16. Illinois Brick left

unclear whether there might be exceptions for cases in which the

amount of the overcharge that was passed on to a lower tier of pur-

chasers could be determined simply and with mechanical precision,

but thereafter, the Supreme Court held that even where the amount of

overcharge passed on is clear, allowing indirect purchasers to pursue

damages claims would be inconsistent with Illinois Brick, and the

Court refused to create any new exception. Kansas v. Utilicorp

United, Inc., 497 U.S. 199, 208 (1990). Moreover, in Utilicorp

United, the Supreme Court cautioned lower federal courts against cre-

ating new exceptions to the Illinois Brick rule. Id. at 216 ("The ratio-

nales underlying Hanover Shoe and Illinois Brick will not apply with

equal force in all cases. We nonetheless believe ample justification

exists for our stated decision not to carve out exceptions to the direct

purchaser rule." (internal quotation marks omitted)).

Despite this admonition, several courts have recognized a "co-

conspirator exception" to Illinois Brick. See, e.g., Paper Sys. Inc. v.

Nippon Paper Indus., 281 F.3d 629, 631-32 (7th Cir. 2002); Lowell

v. American Cyanamid Co., 177 F.3d 1228, 1231 (11th Cir. 1999);

Campos v. Ticketmaster Corp., 140 F.3d 1166, 1171 (8th Cir. 1998);

In re Brand Name Prescription Drugs, 123 F.3d at 604-05; Arizona

v. Shamrock Foods Co., 729 F.2d 1208, 1211 (9th Cir. 1984). Gravity

asserts that these cases stand for the proposition that Illinois Brick is

inapplicable when any conspiracy has been alleged, but we interpret

these cases as standing for the more narrow proposition that Illinois

Brick is inapplicable to a particular type of conspiracy — price-fixing

conspiracies. Cf. McCarthy v. Recordex Serv., Inc., 80 F.3d 842, 854-

55 (3d Cir. 1996) (refusing to adopt a co-conspirator exception where

plaintiffs have not alleged that the intermediaries immediately

upstream colluded to overcharge). Were we to adopt Gravity’s

broader interpretation, the Illinois Brick rule would be inverted solely

based upon artful pleading. Such a result is contrary to Illinois Brick

itself as well as the Supreme Court’s clear directive in Utilicorp

United against crafting new exceptions to the Illinois Brick rule. Far

more reasonable is the proposition that, to the extent a court were to

recognize a co-conspirator exception to Illinois Brick, such an excep-

tion would be grounded on the damages theory underlying the alleged

28 DICKSON v. MICROSOFT CORPORATION

conspiracy. For example, the rationale for concluding that Illinois

Brick does not apply to a price-fixing conspiracy is that no overcharge

has been passed on to the consumer: When a dealer has illegally con-

spired with a manufacturer with respect to the price paid by a con-

sumer, then "the consumer is the only party who has paid any

overcharge." 2 Areeda & Hovenkamp ¶ 371h, at 264. We need not

resolve whether we would recognize a co-conspirator exception to

Illinois Brick’s indirect purchaser rule for a price-fixing conspiracy

because no such conspiracy has been alleged here. Instead, Gravity’s

compensatory damages claim is premised on an attempt to recover for

Microsoft’s illegal overcharge that allegedly was passed on to Grav-

ity. Accordingly, Gravity’s claim is materially indistinguishable from

the claim under consideration in Illinois Brick, and its inclusion of a

conspiracy allegation is insufficient to circumvent the Illinois Brick

rule.

Nevertheless, Gravity argues that Illinois Brick ought not to control

because the policy concerns underlying Illinois Brick are not impli-

cated here. First, Gravity contends that there is no danger of duplica-

tive recovery because the OEMs "apparently have elected not to sue

Microsoft." (Appellant’s Br. at 69.) The Supreme Court in Illinois

Brick, however, "recognize[d] that direct purchasers sometimes may

refrain from bringing a treble-damages suit for fear of disrupting rela-

tions with their suppliers." Illinois Brick, 431 U.S. at 746. Yet, the

majority concluded that "on balance . . . the legislative purpose in cre-

ating a group of private attorneys general to enforce anti-trust laws

. . . is better served by holding direct purchasers to be injured to the

full extent of the overcharge paid by them than by attempting to

apportion the overcharge among all that may have absorbed part of

it." Id. (internal quotation marks omitted).

Gravity also argues that its claims do not require the complex task

of price-tracing because the consumers’ damages are the difference

between the "but-for" price that they would have paid for the Win-

dows software absent the illegal conspiracy and the amount they actu-

ally paid for it. This argument misses the point, in that to calculate the

"but-for" price, the court would be required to determine the over-

charge, if any, for Microsoft’s software that was passed on to con-

sumers — the exact analysis that Illinois Brick forbids.

DICKSON v. MICROSOFT CORPORATION 29

Finally, Gravity suggests that, to the extent there is any difficulty

in apportioning damages, the court could avoid this difficulty by

awarding 100% of the overcharge to the consumer. Gravity does not

explain, however, why consumers should be awarded a windfall. At

bottom, Gravity’s policy arguments are virtually identical to those

raised by Justice Brennan in his Illinois Brick dissent. Id. at 748-65

(Brennan, J., dissenting). Of course, they were considered and

rejected by the majority in formulating the indirect purchaser rule,

and we are not at liberty to reevaluate those policy choices here.

Accordingly, we conclude that Illinois Brick bars Gravity’s claims for

compensatory damages for the alleged § 1 and § 2 violations.

V.

We conclude that Gravity’s § 1 and § 2 claims fail as a matter of

law and that, in any event, Illinois Brick bars Gravity’s ability to

recover compensatory damages. Thus, we affirm the judgment of the

district court.

AFFIRMED

GREGORY, Circuit Judge, dissenting:

I agree with the majority, ante at 8, that Gravity’s § 1 claims need

not meet the more rigorous standards of § 2 of the Sherman Act.

However, I respectfully dissent. Whether or not Gravity would suc-

ceed on the merits, it has clearly stated claims under both § 1 and § 2

of the Sherman Act.

I.

The majority makes its first error when it rejects Gravity’s allega-

tions of a single conspiracy, relying on Kotteakos v. United States,

328 U.S. 750, 755 (1946). In Kotteakos, the Supreme Court rejected

one articulation of a "rimless wheel" conspiracy. The conspiracy

envisioned—and rejected—by Kotteakos states: "A rimless wheel

conspiracy is one in which various defendants enter into separate

agreements with a common defendant, but where the defendants have

no connection with one another, other than the common defendant’s

30 DICKSON v. MICROSOFT CORPORATION

involvement in each transaction." Ante, at 9. The majority says that

because the Kotteakos Court rejected a variant of a "rimless wheel"

conspiracy, we must too. The problem with that reasoning is that

Gravity is not arguing that we should adopt the specific definition of

conspiracy that was rejected in Kotteakos.

In Kotteakos, the underlying crime was conspiracy to obtain loans

under the National Housing Act by false and fraudulent statements.

The center of the conspiracy was a man named Brown, who was in

the business of brokering fraudulently obtained loans for his co-

conspirator clients. 328 U.S. at 753. All of the clients used Brown to

obtain the loans, but each client’s use of Brown’s services was inde-

pendent of every other client’s use. Id. Kotteakos involved not one,

but multiple conspiracies. Not only did Brown’s co-conspirators have

no express agreements among themselves, their participation was also

in no way dependent on the participation of other users of Brown’s

services. The Court drew upon an analogy offered by the court of

appeals to explain the point: "Thieves who dispose of their loot to a

single receiver—a single ‘fence’—do not by that fact alone become

confederates: they may, but it takes more than knowledge that he is

a ‘fence’ to make them such." Id. at 755.

In contrast to Kotteakos, Gravity outlined the elements of a "rim-

less wheel" conspiracy as follows:

(1) that there is an overall-unlawful plan or common

design in existence;

(2) that knowledge that others must be involved is infer-

able to each member because of his knowledge of the

unlawful nature of the subject of the conspiracy[,] but

knowledge on the part of each member of the exact scope

of the operation or the number of people involved is not

required; and

(3) there must be a showing of each alleged member’s par-

ticipation.

Elder-Beerman Stores Corp. v. Federated Dep’t Stores, Inc., 459 F.2d

138, 146-47 (6th Cir. 1972) (emphasis deleted and added); Impro

DICKSON v. MICROSOFT CORPORATION 31

Prods., Inc. v. Herrick, 715 F.2d 1267, 1279 (8th Cir. 1983) (quoting

Elder-Beerman). Whether we should adopt this test in toto I would

not decide today, but I believe that this definition of a "rimless wheel"

conspiracy is useful for purposes of this case, and is consistent with

well-established interpretations of the Sherman Act.

The critical difference between the test Gravity urges, and the test

Kotteakos rejected lies in the requirement "that knowledge that others

must be involved is inferable to each member because of his knowl-

edge of the unlawful nature of the subject of the conspiracy" (empha-

sis added). Id. Gravity has alleged that the nature of the conspiracy,

by design and by necessity, was broader than any one agreement

between Microsoft and an OEM, and that knowledge of that interde-

pendent design was inferable to each member of the conspiracy.

Regardless of whether any OEM desired the participation of other

OEMs (and they conceivably might have), Gravity alleges that each

OEM joined a conspiracy which it knew was, by its nature, broader

than just itself and Microsoft.

These allegations are plainly sufficient to state a claim under the

Sherman Act. The law has been clear that there need not be an

express agreement between every conspirator in order for a single

conspiracy to be formed. Interstate Circuit, Inc. v. United States, 306

U.S. 208, 227 (1939) ("[I]t is elementary that an unlawful conspiracy

may be and often is formed without simultaneous action or agreement

on the part of the conspirators"); see also United States v. Masonite

Corp., 316 U.S. 265, 275 (1942) ("Here, as in Interstate Circuit, . . .

[i]t was enough that, knowing that concerted action was contemplated

and invited, the distributors gave their adherence to the scheme and

participated in it."); United States v. Tillett, 763 F.2d 628, 632 (4th

Cir. 1985) (stating that plaintiff must show that each alleged conspira-

tor "participated in the conspiracy with knowledge of the essential

nature of the plan.").

In Interstate Circuit, Inc. v. United States, film exhibitors sug-

gested that film distributors insert clauses into their distribution con-

tracts requiring minimum ticket prices for certain films. The

distributors accepted the suggestion nearly unanimously. The Court

held that an agreement among the distributors could be inferred:

32 DICKSON v. MICROSOFT CORPORATION

Each [distributor] was aware that all were in active competi-

tion and that without substantially unanimous action with

respect to the restrictions . . . there was risk of a substantial

loss of the business and good will of the . . . exhibitors, but

that with it there was the prospect of increased profits.

306 U.S. at 222. Such is the case with the OEMs. It takes no stretch

of logic to infer that the OEMs knew that Microsoft’s plans contem-

plated the cooperation of other OEMs. It is the agreement to partici-

pate in this common plan that formed a single conspiracy.

"Acceptance by competitors, without previous agreement, of an invi-

tation to participate in a plan, the necessary consequence of which, if

carried out, is restraint of interstate commerce, is sufficient to estab-

lish an unlawful conspiracy under the Sherman Act." Interstate Cir-

cuit, 306 U.S. at 227. Thus, I would find that the allegations are

sufficient to state a claim.

II.

The majority next finds that Gravity has failed to allege "facts

which, if proven true, would establish that the two conspiracies sepa-

rately imposed unreasonable restraints of trade in interstate com-

merce." Ante, at 13. Even if I agreed that there were two conspiracies

and not one alleged in this case, there is no question that Gravity’s

pleadings are more than adequate.

The majority requires far more from Gravity than is appropriate

under notice pleading standards. Aside from a statement of jurisdic-

tion and a demand for relief, Federal Rule of Civil Procedure 8(a)

requires nothing more than "a short and plain statement of the claim

showing that the pleader is entitled to relief[.]" 122 S.Ct. 992, 997.

The elements for a claim of conspiracy to restrain trade in violation

of § 1 of the Sherman Act are (1) concerted action that (2) unreason-

ably restrains trade. Estate Constr. Co. v. Miller & Smith Holding

Co., 14 F.3d 213, 220 (4th Cir. 1994); Oksanon v. Page Memorial

Hosp., 945 F.2d 696, 702 (4th Cir. 1991). According to the majority,

Gravity has not adequately pled the second element, an unreasonable

restraint of trade, because Gravity failed to plead the market shares

of the OEMs. This is necessary, the majority says, because Gravity

must prove the OEMs’ individual market power in order to prove the

DICKSON v. MICROSOFT CORPORATION 33

conspiracy’s market power. The conspiracy’s market power, in turn,

is required to prove the potential for anticompetitive effects, which is

part of Gravity’s burden to satisfy the "rule of reason."

The majority’s pleading standard conflicts with the Supreme

Court’s recent pronouncement on federal pleading requirements.

"[U]nder a notice pleading system, it is not appropriate to require a

plaintiff to plead facts establishing a prima facie case." Swierkiewcz

v. Sorema, N.A., 534 U.S. 506, 122 S.Ct. 992, 997 (2002). "This sim-

plified notice pleading standard relies on liberal discovery rules and

summary judgment motions to define disputed facts and issues and to

dispose of unmeritorious claims." Id. at 998. "Rule 8(a)’s simplified

pleading standard applies to all civil actions, with certain exceptions."

Id. Thus, the Supreme Court has made crystal clear, just this past

term, that an evidentiary standard does not determine the adequacy of

a complaint. Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 122 S.Ct.

992, 997 (2002). It is inappropriate, therefore, to require plaintiffs to

plead facts going to that evidentiary standard in a complaint.

While I agree that liability in this case, in all likelihood, would be

determined under the "rule of reason" standard, see, e.g., Continental

T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977), it seems to me

that the "rule of reason" is an evidentiary standard, not a pleading

requirement. Courts ordinarily have to undertake a factual inquiry

before it is determined whether the "rule of reason" or per se rules

apply. If per se rules apply, then anticompetitive effects do not matter.

See United States v. W.F. Brinkley & Son Constr. Co., Inc., 783 F.2d

1157, 1162, n.10 (4th Cir. 1986) (noting this circuit recognizes per se

antitrust violations and, in doing so, there is no requirement of proof

of anticompetitive results). The conduct is illegal regardless of proof

of effects. Id.

Additional specificity regarding the OEMs’ market power is not

necessary. While anticompetitive effect is often proven through anal-

ysis of the relevant market definition and market power, it can also

be proven through actual anticompetitive effects. FTC v. Indiana

Fed’n of Dentists, 476 U.S. 447, 460-61 (1986); VII P. Areeda, Anti-

trust Law § 1511, p.429 (1986). The Supreme Court made clear that

it is inappropriate to require a plaintiff to plead facts which he may

not need to succeed on the merits of the claim. Swierkiewicz, 122

34 DICKSON v. MICROSOFT CORPORATION

S.Ct. at 997 (holding that plaintiff need not plead facts establishing

a prima facie case of employment discrimination, in part because it

would be "incongruous to require a plaintiff, in order to survive a

motion to dismiss, to plead more facts than he may ultimately need

to prove to succeed on the merits if direct evidence of discrimination

is discovered"). Gravity has pled actual anticompetitive effects. See

Compl. ¶¶ 4, 59, 62-63, 68-69, 91-92, 95, 107, 115-117, 123-124,

150, 152, 154-156. Accordingly, the complaint should withstand a

motion to dismiss.

To the extent that Gravity intends to rely on market power to dem-

onstrate the likelihood of significant anticompetitive effects, the rele-

vant issue is whether the conspiracy had market power in the software

markets, not whether the defendant OEMs had market power in the

PC hardware market. Gravity has adequately pled the conspiracy’s

market power. See, e.g., Compl. ¶ 150 ("Microsoft and these named

co-conspirators have the power to control prices or exclude competi-

tion in these relevant markets and have committed overt acts in fur-

therance of their conspiracy to monopolize."); id. ¶ 152 ("[The

OEMS] are Microsoft’s three largest distributors in the relevant mar-

ket for Microsoft operating software, and among Microsoft’s very

largest distributors in the relevant markets for the sale of personal

computer word processing and spreadsheet software. As participants

in these markets they have joined Microsoft in extensive licensing and

other agreements with the purpose and effect of monopolizing and

restraining trade in these relevant markets, and they have benefitted

substantially from this common anticompetitive scheme.").

The Court finds Gravity’s allegations of market power deficient,

but only because it misunderstands Gravity’s argument regarding

market power. According to the majority, Gravity argued on appeal

that Microsoft’s monopoly is the only relevant factor in determining

whether the conspiracy had the power to harm competition. This is

not correct. Gravity has asserted that the district court was wrong to

require it to plead that each OEM defendant had sufficient market

power in the hardware market to cause the injury alleged, pointing out

that the relevant market is software, and the relevant entity is the con-

spiracy (either a bilateral or single conspiracy). Appellant’s Br. at 46,

48, 49; id. at 50 ("The district court erred in assessing only Compaq’s

or Dell’s market power rather than the market power of the combina-

DICKSON v. MICROSOFT CORPORATION 35

tions between each of them and Microsoft."). It is clear that Gravity

understands the importance of the OEMs, and the pleadings, read in

the light most favorable to Gravity, do not suggest otherwise. See also

Fed. R. Civ. P. 8(f) ("All pleadings shall be so construed as to do sub-

stantial justice.").

Setting aside any confusion regarding Gravity’s argument, the

majority has identified an important issue concerning market power.

While Microsoft has a monopoly in the relevant software markets, if

the conspiracy included only minor OEMs, then the conspiracy would

presumably have no power to cause significant anticompetitive

effects. See ante, at 19 n.20. The parties dispute whether this should

be treated as a liability issue or a causation issue, Appellants’ Br. at

7; Appellees Compaq, Dell, and PB Electronics’ Br. at 28, and the

majority does not resolve the dispute, ante at 18 n.19. The heading

under which the issue should go is ultimately irrelevant because the

majority identifies only a single deficiency in Gravity’s pleadings:

failure to plead the defendant OEMs’ market shares in the PC market.

Ante at 22. Yet this is not enough to entitle the defendants to a dis-

missal.

The complaint identifies the OEMs involved, states that they are

Microsoft’s largest OEM distributors, identifies the asserted anticom-

petitive conduct, states that the conspiracy’s anticompetitive conduct

had significant anticompetitive effects, and identifies the effects.

Moreover, Microsoft is an adjudicated monopolist, with clear market

power in the relevant software markets, and the defendant OEMs are

among the largest players in the PC hardware market. There is simply

no conceivable argument from which one could conclude, based

solely on a failure to plead market share, that the defendants are not

on notice of the claims against them and the grounds on which they

rest. See Conley, 355 U.S. at 48 ("The Federal Rules reject the

approach that pleading is a game of skill in which one misstep by

counsel may be decisive to the outcome and accept the principle that

the purpose of pleading is to facilitate a proper decision on the mer-

its."). The OEMs’ specific market power in the PC market is, at best,

a subsidiary fact.

The majority cites a number of cases involving pleading standards.

See ante at 23-24. None of those cases, however, support the holding

36 DICKSON v. MICROSOFT CORPORATION

in this case. For example, it is true that in Advanced Health-Care Ser-

vices, Inc. v. Radford Community Hospital, 910 F.2d 139 (4th Cir.

1990), we stated that a plaintiff must "colorably state[] facts which,

if proven, would entitle him to relief." Id. at 145 n.8. But, in that case,

we reversed the district court’s dismissal of the complaint, acknowl-

edging that "the Supreme Court has stated that ‘dismissals prior to

giving the plaintiff ample opportunity for discovery should be granted

very sparingly.’ Hospital Bldg. Co. v. Trustees of Rex Hosp., 425 U.S.

738, 747 (1976)." Id. at 144. Lack of specificity in the complaint was

not the concern of that case. This Court never suggested that a plain-

tiff must plead detailed facts supporting every subsidiary factual con-

clusion. To the contrary, we employed a decidedly permissive

standard for judging the adequacy of the complaint. In Estate Constr.

Co. v. Miller & Smith Holding Co., 14 F.3d 213 (4th Cir. 1994), we

confirmed that a complaint must provide "sufficient facts so that each

element of the alleged antitrust violation can be identified," id. at 222

(internal quotation and citation omitted); but we never suggested that

detailed, underlying facts are required in the complaint. Rather, our

concern was with overly vague factual allegations and mere legal con-

clusions unsupported by any facts.

The full Sherman Act allegations in that case read as follows:

Providence combined and/or conspired with the Miller &

Smith defendants, Gordon V. Smith, Calloway, Connor,

Jack B. Conner Associates, Inc. and others to restrain trade

unreasonably in the Washington, D.C. metropolitan area by

combining and/or conspiring to deprive the Pattersons of

The Property, cause The Property to be sold in foreclosure

at a price that would leave the Pattersons with no assets, and

otherwise to drive them and Estate Construction out of the

real estate development business in the Washington, D.C.

metropolitan area. The combination and/or conspiracy pro-

duced adverse, anticompetitive effects within the relevant

product and geographic market. The objects and conduct of

the combination and/or conspiracy were illegal.

14 F.3d at 221 n.15. We held that a plaintiff must "provide, whenever

possible, some details of the time, place and alleged effect of the con-

spiracy; it is not enough merely to state that a conspiracy has taken

DICKSON v. MICROSOFT CORPORATION 37

place." Id. at 221. Gravity’s claims, in contrast, are replete with all

manner of detail—fifty-eight pages of detail.1 The defendants in this

case know exactly what conduct is alleged to have violated the anti-

trust laws, which is all that Rule 8 requires. It is not for us to change

the rules of civil procedure mid-stream. "A requirement of greater

specificity for particular claims is a result that must be obtained by

the process of amending the Federal Rules, and not by judicial inter-

pretation." Swierkiewicz, 122 S.Ct. at 999.

III.

Finally, the majority holds that the direct purchaser rule of Illinois

Brick Co. v. Illinois, 431 U.S. 720 (1977), and Hanover Shoe, Inc. v.

United Shoe Machinery Corp., 392 U.S. 481 (1968), precludes recov-

ery. I disagree, and would join the Seventh, Ninth, and Eleventh Cir-

cuits, each of which has held that it does not. Paper Systems, Inc. v.

Nippon Paper Indus. Co., Ltd., 281 F.3d 629 (7th Cir. 2002); Lowell

v. American Cynamid Co., 177 F.3d 1228, 1233 (11th Cir. 1999)

("Illinois Brick simply does not apply where the complaint alleges a

vertical conspiracy with no pass-on."); In re Brand Name Prescrip-

tion Drugs Antitrust Litig., 123 F.3d 599, 604 (7th Cir. 1997) (Posner,

C.J.) ("[A]ny indirect-purchaser defense would go by the board since

the [plaintiffs] would then be direct purchasers from the conspira-

tors."); Arizona v. Shamrock Food Co., 729 F.2d 1208, 1212-14 (9th

Cir. 1984); Fontana Aviation, Inc. v. Cessna Aircraft Co., 617 F.2d

478, 481 (7th Cir. 1980); see also II Phillip E. Areeda et al., Antitrust

Law ¶ 346h, at 369 (2d ed. 2000) ("Whether one adopts a co-

conspirator exception or regards this situation as outside Illinois

1

The majority also parenthetically quotes Mun. Utils. Bd. of Albertville

v. Alabama Power Co., 934 F.2d 1493, 1501 (11th Cir. 1991): "A plain-

tiff must plead sufficient facts so that each element of the alleged anti-

trust violation can be identified." Ante at 24. But the majority omits the

important qualifier contained in the same paragraph: "However, the

alleged facts need not be spelled out with exactitude, nor must recovery

appear imminent." Mun Utils. Bd, 934 F.3d at 1501. Finally, Car Carri-

ers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (8th Cir. 1984), stands

for the unexceptional and well-worn proposition that a plaintiff must at

least "outline or adumbrate" a violation of the Sherman Act, instead of

relying on a bare legal conclusion. Id.

38 DICKSON v. MICROSOFT CORPORATION

Brick’s domain, there is no tracing or apportionment to be done."); cf.

McCarthy v. Recordex Serv., Inc., 80 F.3d 842, 855 (3d Cir. 1996)

(noting exception but declining to apply it because the upstream sup-

pliers were not joined as defendants); In re Beef Antitrust Litig., 600

F.2d 1148, 1163 (5th Cir. 1979) (same); Jewish Hosp. Ass’n v. Stew-

art Mech. Enters., 628 F.2d 971, 977 (6th Cir. 1980) (noting excep-

tion but declining to apply it because vertical conspiracy allegations

failed).

The decision in Hanover Shoe was motivated by the Court’s desire

to maximize deterrence by allocating the right to sue to the most effi-

cient enforcer of antitrust law. The rationale was that indirect pur-

chasers have a comparatively small injury, and consequently less

incentive to sue. Hanover Shoe, 392 U.S. at 494; Illinois Brick, 431

U.S. at 745. A passing-on defense would make litigation less effective

for direct purchasers as well, given the reduction in recovery as well

as the complexities of apportioning damages between direct and indi-

rect purchasers. Hanover Shoe, 392 U.S. at 493. Illinois Brick is the

logical corollary to Hanover Shoe. In Illinois Brick, the Court denied

"passed-on" damages to indirect purchasers of a manufacturer’s

goods. Because of Hanover Shoe, failure to deny recovery for such

damages would lead to duplicative recovery. Illinois Brick, 431 U.S.

at 730-31. The two cases therefore ensure full recovery while maxi-

mizing deterrence and avoiding duplicative recovery.

Permitting plaintiffs such as Gravity to sue intermediaries that were

part of a conspiracy to raise retail prices above a competitive level is

consistent with Hanover Shoe and Illinois Brick. As Judge Easter-

brook recently wrote for the Seventh Circuit: "The right to sue mid-

dlemen that joined the conspiracy is sometimes referred to as a co-

conspirator ‘exception’ to Illinois Brick, but it would be better to rec-

ognize that Hanover Shoe and Illinois Brick allocate to the first non-

conspirator in the distribution chain the right to collect 100% of the

damages." Paper Sys., 281 F.3d at 631-32. This is the correct reading

of Hanover Shoe and Illinois Brick. It maximizes deterrence by giving

the right to sue to the plaintiff with the most incentive to sue. As for

any lingering doubt over whether the conspiring intermediary is the

best plaintiff, or concern regarding multiple recovery, the case law

has rightly recognized the importance of joining the intermediary in

the suit—a requirement which has been met in this case. See, e.g.,

DICKSON v. MICROSOFT CORPORATION 39

McCarthy, 80 F.3d at 855; In re Beef Antitrust Litig., 600 F.2d at

1163; In re Midwest Milk Monopolization Litig., 730 F.2d 528, 531

(8th Cir. 1984).

The majority rejects the cases that have unanimously recognized a

direct purchaser’s right to sue, saying that those cases dealt with

price-fixing conspiracies. I think that this case presents a substantially

identical situation. Gravity is not complaining about any overcharge

paid by the OEMs to Microsoft. Rather, Gravity is complaining about

the conspiracy’s ultimate overcharge of the consumer. Gravity actu-

ally argues that the defendant OEMs received discounts on software

purchased from Microsoft. In other words, Microsoft shared some of

the monopoly profits with the OEMs. If one were to assume that

Microsoft gave all its monopoly profits to the OEMs then there would

be no pass-on. The OEMs would simply be overcharging consumers,

like in a resale price maintenance scheme. How much of its monopoly

profits Microsoft retained is merely a matter of how the conspirators

allocated the fruits of their alleged illegality, and is not directly rele-

vant to Gravity. The damages that Gravity is seeking to prove are the

difference between the price consumers actually paid for the Win-

dows software and the "but for" price.

Much of the difficulty in calculating the "but for" price will come

from disaggregating the price of PC hardware from the Microsoft

software. This difficulty, however, is not the concern of Illinois Brick.

It can occur when there is no middleman. It would occur, for exam-

ple, if Microsoft built and sold its own brand of Windows-operated

PC. Mere difficulty in measuring damages is not a reason to preclude

recovery. See Bigelow v. RKO Radio Pictures, 327 U.S. 251, 265

(1946) ("[I]n cases where a wrongdoer has incorporated the subject

of a plaintiff’s patent or trade-mark in a single product to which the

defendant had contributed other elements of value or utility . . . this

Court has sustained recovery of the full amount of defendant’s profits

where his own wrongful action has made it impossible for the plain-

tiff to show in what proportions he and the defendant have contrib-

uted to the profits") (citations omitted); J. Truett Payne Co. v.

Chrysler Motors Corp., 451 U.S. 557, 566-67 (1981) ("[I]t does not

come with very good grace for the wrongdoer to insist upon specific

and certain proof of the injury which has itself inflicted.") (quotation

omitted).

40 DICKSON v. MICROSOFT CORPORATION

Aside from the problem of disaggregation, calculating the "but for"

price may involve determining elasticities of supply and demand—the

complexity identified by Illinois Brick—but no more so than in any

of the other cases in which middlemen conspired with manufacturers.

And there will be no duplicative liability. Moreover, determining

elasticities of supply and demand can complicate any attempt to mea-

sure damages—"it is not occasioned solely by the presence of inter-

mediaries." Paper Sys., 281 F.3d at 633. The real concern of Hanover

Shoe and Illinois Brick is the complexity of measuring the pass-on of

an actual overcharge, and its potential negative effect on deterrence

and compensation, not the mere difficulties of determining what the

price would have been in a competitive market.2 The majority’s rule

is essentially a free pass to any conspiracy that can make the damage

it inflicts difficult to pin down. Until now, that has never been the

law.

The majority reasons that adopting Gravity’s argument would lead

plaintiffs to plead a conspiracy that did not exist in order to evade Illi-

nois Brick. Yet, there are mechanisms, primarily Rule 11, to deal with

the abusive and unethical conduct of litigants and lawyers. I find trou-

bling the majority’s unhesitating willingness to cut off compensation

to all injured consumers based on hypothetical abuses of liberal

pleading rules. The interests of consumers are far more weighty than

the majority is willing to recognize. Moreover, the concern about "art-

ful pleading" has nothing whatsoever to do with Illinois Brick and

Hanover Shoe. The direct purchaser rule is designed to encourage and

incentivize private enforcement of the antitrust laws, not immunize

corporate wrongdoers from having to litigate antitrust claims.

IV.

The most unfortunate aspect of this case is that, to the extent Gravi-

ty’s claims have merit, consumers will be left uncompensated. Even

more, raising the procedural bar for consumers’ claims may further

stifle technological innovation. By giving comfort to those entrenched

2

To the extent that the litigation subsequently revealed true Illinois

Brick issues, such as if the defendant OEMs switched sides and sued

Microsoft, see Paper Sys., 281 F.3d at 632, I agree that Illinois Brick

might then require dismissal of Gravity’s claims.

DICKSON v. MICROSOFT CORPORATION 41

interests that seek to protect the status quo, today’s decision increases

the likelihood of future anticompetitive conduct. To those who would

introduce disruptive technologies, this ruling creates a strong disin-

centive to innovate. Without innovation, we all lose. I respectfully

dissent.