Software developer Caldera sues Microsoft for antitrust practices
Alleges monopolistic acts shut its DR DOS operating system out of market
PROVO, Utah, July 24, 1996 -- Caldera, Inc., a Utah-based software developer, said today it has filed an antitrust lawsuit against Microsoft® Corp. seeking treble damages, as well an injunction to halt "illegal conduct by Microsoft calculated and intended to prevent and destroy competition in the computer software industry."
The lawsuit, filed late Tuesday in the U.S. District Court in Salt Lake City, echoes many of the charges made by the U.S. Department of Justice in its 1994 antitrust complaint against Microsoft, including violations of the Sherman Act. In the complaint, Caldera states that Microsoft's anticompetitive conduct includes unfair pricing practices and license agreements, as well as false statements and "vaporware" announcements intended to dissuade consumers from purchasing products in competition with Microsoft's MS-DOS® software.
"Unless restrained by order of this court, Microsoft will permanently destroy competition in the DOS Market in the microcomputer software industry, and Caldera will be artificially and illegally prevented from realizing the full financial potential of the DOS Business," the complaint says.
Caldera, which designs, develops and markets system software products, today acquired the DR DOS® operating system and DR DOS- related assets, including this claim, from Novell®, Inc.
Raymond J. Noorda, former chief executive officer of Novell, Inc., is the majority owner of Caldera. In 1991, while Mr. Noorda was CEO of Novell, that company purchased Digital Research Inc.® (DRI), developers of the DR DOS software technologies.
According to the lawsuit, Microsoft's practices "have had the effect of excluding competitors [including DR DOS] from the DOS Market, a market in which Microsoft has monopoly power." The lawsuit continues, "as a direct and proximate result of [Microsoft's] predatory acts and practices, the DR DOS business which Caldera has acquired is being and will continue to be immediately and irreparably injured through.. the loss of profits ... sales ... market presence ... [and] market share that might otherwise have been achieved in a freely competitive market," as well as "the substantial reduction in the value of the DR DOS business assets."
Caldera's lawsuit states, "As outlined in the Justice Department's complaint, through various unfair and predatory acts, Microsoft has willfully maintained a monopoly of the market for MS-DOS operating systems software and functionally equivalent operating system software."
According to the Justice Department complaint, "Microsoft's exclusionary contracting practices have had the effect of excluding competitors on a basis other than competition on the merits and have thereby allowed Microsoft illegally to perpetuate its monopoly in the PC operating system market. Through the unlawful acts and practices described ... [in the antitrust action], Microsoft has harmed competition, consumers and innovation..."
Microsoft settled the U.S. government's charges against it by signing a consent decree in 1994. In the consent decree, Microsoft neither admitted nor denied guilt, but did agree to end certain practices, including so-called per-processor license agreements, certain multi-year license agreements and highly restrictive confidentiality agreements with software developers who create programs to work with MS-DOS and Windows.
Stephen D. Susman, of Susman Godfrey in Houston, one of the law firms representing Caldera, said, "It is my belief, from reading the government's antitrust complaint against Microsoft, that it recognized the need to open the market to Microsoft competitors."
Mr. Susman added, "It is our intention to finish the job the Justice Department left unfinished when it settled its antitrust complaint through a consent decree."
Microsoft's "conduct has had a direct, substantial and adverse effect on competition by raising barriers to entry to competing DOS Software, foreclosing competition with Microsoft on the basis of price and performance, and stifling innovation," the complaint says. "Buyers of PCs and software have thus been forced to pay higher prices for less innovative, inferior products."
Caldera's lawsuit, in addition to asking for treble damages, pursuant to the Clayton Act, seeks permanent injunctive relief:
Mr. Noorda's long-term interest in nurturing competitive alternatives in the software industry fit closely with the desires of Caldera's chief executive, Bryan Sparks, to pursue the DR DOS business and the legal action against Microsoft to help open the way for Caldera and other companies to compete against the software giant.
Mr. Noorda said that competition is necessary for the growth of the market. He added, "This lawsuit is about injury to competition. In my opinion, the antitrust decree was too little too late. It is my belief that if Caldera is successful, the entire computer industry -- not just Caldera -- will benefit." Mr. Sparks said, "The industry demands an open marketplace. It's simply free enterprise. No single organization should have absolute power over the free market process.
"Caldera's business philosophy," Mr. Sparks continued, "is to dramatically level the technology playing field, giving independent developers open access to system software technologies."
The Caldera complaint continues, "... By the mid-1980s, MS-DOS had become entrenched as the standard in the DOS Market .... Not surprisingly, in view of Microsoft's monopoly power and the absence of competition, the price of MS-DOS in the OEM [original equipment manufacturers] channel escalated from $2-5 per copy in the 1981-1982 period to $25-$28 per copy by 1988.
"At the same time, for much of the 1980s, Microsoft did almost nothing to improve MS-DOS ... Microsoft's inaction was remarkable given that improvements in hardware technology and applications software had created a demand among PC users for an enhanced operating system," the lawsuit continues.
As these demands escalated, the suit explains, "a number of OEMs approached DRI and requested that it develop a version of DOS that would fill the gaps in functionality that plagued MS-DOS. ... Accordingly, in 1987 DRI began planning for a new version of DOS, to be called DR DOS.
"The result of DRI's initial development effort was a product designated as DR DOS 3.31, introduced on May 28, 1988. DR DOS 3.31 was followed quickly by enhanced versions of the product. Thus DR DOS 5.0, introduced in May 1990, and DR DOS 6.0, introduced in September 1991, were significantly superior to then-existing versions MS-DOS in many areas."
The Caldera suit continues, "Industry experts responded enthusiastically to DR DOS. DR DOS 5.0 received several awards including the 1990 BYTE(TM) Award of Distinction and Finalist in the 1990 PC Magazine(TM) Award for Technical Excellence. DR DOS 6.0 similarly received a number of industry awards, including the 1991 BYTE Award of Excellence, BEST of COMDEX (Fall 1991), and the Infoworld Buyers Assurance Seal.
"The technical superiority of DR DOS resulted in a rise in sales from about $15 million in fiscal year 1990 to $30 million in fiscal year 1991. Notwithstanding Microsoft's anticompetitive conduct, DR DOS sold well in the retail distribution channel, but due to Microsoft's exclusive dealings and other predatory conduct, it was largely locked out of the OEM channel."
The suit goes on, "Microsoft refused to tolerate this challenge to its monopoly position in the DOS Market.... DR DOS posed a particularly significant threat to Microsoft because it was compatible with applications written for MS-DOS; and ... Microsoft could not claim that DR DOS infringed upon any proprietary technology it owned.
"Microsoft's principal defense against any competitive threat, including DR DOS, was the wall of 'per processor' licenses that it had begun to construct in 1988, the year that DR DOS was first released to the market. Under per processor licenses, OEMs were required (must to agree)to pay Microsoft a royalty on every PC they sold regardless of whether it contains Microsoft's MS-DOS, some other software developer's DOS Software or no operating system software. This royalty system effectively imposed a tax in favor of Microsoft whenever an OEM sold a PC equipped with any operating system other than MS-DOS. Given the razor-thin margins on the sale of PCs, this royalty scheme caused OEMs to ship MS-DOS exclusively.
"Microsoft compounded this per processor licensing scheme by insisting on long-term licenses of MS-DOS from its OEM customers, contracts that tended to be longer than typical product cycles. Microsoft also obtained large 'take or pay' minimum commitment licenses that also effectively foreclosed the ability of competitors such as Novell to sell competing DOS Software products to OEMs, and engaged in other licensing practices that had the effect of coercing OEMs to deal exclusively with Microsoft."
"In the fall of 1991, Microsoft announced to the market that DR DOS would not be compatible with the next release of Windows known as Windows 3.1 .... The market perceived that it was critical for an operating system to support Windows; therefore Microsoft's statements that DR DOS could not do so substantially undercut Novell's efforts to penetrate the DOS Market."
Microsoft reinforced this misleading impression of incompatibility between DR DOS and Windows 3.1, when, "beginning in December, 1991, Microsoft released beta versions of Windows 3.1 containing code that generated error messages when Windows 3.1 ran on top of DR DOS rather than MS-DOS. Microsoft created these error messages solely for the purpose of creating the impression that DR DOS would be incompatible with Windows in order to dissuade customers from purchasing DR DOS."
Caldera's lawsuit also states that Microsoft "refused to provide a Windows 3.1 beta to Novell. Microsoft's refusal to do so was another predatory effort to ... hamper Novell's ability to offer a Windows 3.1-compatible release of DR DOS to the market."
Microsoft officials made "false public statements," the suit also states, "concerning future product features and anticipated shipment dates, known in the industry as 'vaporware,' timed to match announcements or releases of new versions of competing DOS Software, in particular DR DOS."
For instance, "Microsoft responded to DR DOS 5.0 by announcing, in May 1990, that it intended to issue a new release of MS-DOS, to be called MS-DOS 5.0, that would mirror the technical advantages already present in DR DOS 5.0. Microsoft indicated that the new release of MS-DOS would be available within a few months. Industry experience indicates that it would have been near-impossible for Microsoft to develop and release a commercial version of its product matching the features of DR DOS 5.0 within that period. Nonetheless, Microsoft repeated this vaporware announcement throughout the summer and into the fall of 1990. In fact, MS-DOS 5.0 was not released until June 1991 and, when finally released, it did not offer the features Microsoft had promised."
Microsoft unfairly used "other pricing tactics," Caldera's complaint charges. "Microsoft also informed certain PC manufacturers that they could not obtain Windows or be given access to essential information, product support and service if they did not purchase and ship MS-DOS, to the exclusion of DR DOS.
"Similarly, Microsoft established a pricing structure for Windows that made it prohibitive to buy that product in the absence of MS-DOS. For example, certain Korean OEMs were informed that the price of Windows without MS-DOS would be double the price of Windows with MS-DOS.
"Microsoft's most devastating tactic, however, was its massive expansion of per processor licenses in the OEM channel. Following the announcement of Novell's acquisition of DRI, Microsoft substantially stepped up its efforts to coerce OEMs to enter into per-processor licenses or comparably exclusionary MS-DOS licenses. Thereafter, Novell's sales force found the OEM channel virtually impenetrable... thwarted in account by account by Microsoft's per-processor license wall."
"The combined effect of Microsoft's anticompetitive practices on DR DOS was devastating. DR DOS sales plummeted during fiscal year 1992, totaling $15.5 million in the first quarter, $13.7 million in the second quarter, $6.9 million in the third quarter, and $1.4 million in the fourth quarter (which ended October 31, 1992).
"Microsoft continued with its predatory practices throughout 1992 and up to the present day. Microsoft has employed another tactic for locking OEMs exclusively to MS-DOS, namely, 'cliff pricing,' through which a commercially reasonable price is provided to OEMs if and only if they commit to obtain all of their requirements for operating system software from Microsoft.
"Although various governmental agencies, including the United States Department of Justice, have sought to bar certain of Microsoft's predatory practices such as the per-processor license, Microsoft has been permitted to employ its 'cliff pricing' practice with impunity."
Caldera intends "to reintroduce the full line of DR DOS products to the market and to offer additional product features," the company said in its complaint.
Caldera designs, develops and markets to consumers and businesses a line of full-featured, economical system software as alternatives to such products as Microsoft's Windows NT®, Sun Solaris® and SCO UNIX®. It uses its own technological and marketing resources to leverage technologies -- including the Linux operating system -- created by independent developers worldwide. Caldera's web site is at http://www.caldera.com/.
CONTACT: Michael Sitrick or Donna K.H. Walters of Sitrick And Company, 310-788-2850; or Computer Industry Press: Caldera, Inc., 801-377-7687, or info@caldera.com