Gates May Face Cross-Examination at Trial Over Novell 1994 Monopoly Claims

By Joel Rosenblatt and Margaret Cronin Fisk - Nov 21, 2011 12:00 PM GMT+0700

Microsoft Corp. (MSFT) Chairman Bill Gates may face cross-examination about alleged monopolistic behavior 17 years ago when he testifies in a Novell Inc. lawsuit accusing the world’s largest software maker of undermining the WordPerfect program.

The suit is a byproduct of the U.S. government’s landmark antitrust case against Microsoft that settled more than eight years ago, in which the Redmond, Washington-based company was declared an illegal monopolist.

Novell said in its 2004 complaint that Microsoft unfairly restricted competition by its word processing program. Gates targeted its products by name, Novell’s lawyers alleged, adding that the Microsoft chairman said his company’s software could not compete without the benefit of anticompetitive conduct.

In May, the U.S. Court of Appeals in Richmond, Virginia, revived the case, which had been dismissed by a lower court judge. The appeals court ruled Novell, which briefly owned WordPerfect in the mid-1990s, didn’t cede its rights when it transferred claims related to its personal computer operating system products to Caldera Inc. in 1996.

The appeals court ruling sent the case back to U.S. District Judge J. Frederick Motz in Baltimore, who had originally tossed it out. Motz is conducting the trial in Salt Lake City federal court, where the original lawsuit was filed. Gates is scheduled to testify today.

Market Share Fell

Novell, which was bought by Seattle-based Attachmate Corp. in April, has argued that WordPerfect’s share of the word- processing market fell to less than 10 percent in 1996 from almost 50 percent in 1990.

Its value dropped from $1.2 billion in May 1994 to $170 million in 1996 when it was sold to Ottawa-based Corel Corp., said Novell, which is seeking three times its losses in the lawsuit. The company settled separate antitrust claims against Microsoft for $536 million in 2004.

In its complaint, Novell said that WordPerfect had historically been the “most popular word processing application in the global market.”

“Microsoft engaged in a series of anticompetitive activities, including integrating other Microsoft software products, such as its browser technologies, into Microsoft’s Windows operating system in an exclusionary manner, and entering into exclusionary agreements precluding companies” from providing services to or buying products from Microsoft’s competitors, Novell said in court papers.

Motion to Dismiss

In June 2005, Motz granted Microsoft’s motion to dismiss most of the counts in Novell’s complaint, holding that Novell had standing to proceed on only two. In 2007, a federal appeals court affirmed the ruling.

Count one “asserted that Microsoft had ‘engaged in anticompetitive conduct to thwart the development of products that threatened to weaken the applications barrier to entry’ to the operating systems market,” according to the appeals court opinion. “It contended that Microsoft’s conduct had damaged Novell’s WordPerfect word processing applications and its other office productivity applications in violation of Section 2 of the Sherman Act.”

In count six, Novell alleged Microsoft made exclusionary agreements with the original equipment manufacturers, which restricted the licensing of Novell’s software applications, in unreasonable restraint of trade. According to a footnote, Novell declined to pursue this claim.

In March 2010, Motz found that Novell didn’t assign Caldera its claims under counts one and six. He then granted Microsoft’s motion for summary judgment on those counts. The appeals court reversed the grant of summary judgment on Count 1, and remanded it for further proceedings.

Gates Called

Microsoft, which is calling Gates to testify in the company’s defense, has denied Novell’s arguments that it maintained an operating system monopoly by, in part, withdrawing programming support so as to hobble Novell’s WordPerfect and Quattro Pro programs for Microsoft’s Windows 95 operating system.

In court papers, Microsoft pointed to previous testimony by former Novell Chief Executive Officer Robert Frankenberg. According to the filing, Frankenberg said if Novell had succeeded in releasing versions of WordPerfect and Quattro Pro near the same time Microsoft released Windows 95 in August 1995, the Novell products “would have made Windows 95 market share even higher than what it turned out to be.”

Evidence that Novell intended to use the programming to “make Windows a better and more popular operating system refutes Novell’s theory that Microsoft’s withdrawal” of the programming support in October 1994 “adversely affected competition in the PC operating system market,” Microsoft argued in a court filing.

Previous Gates Testimony

In Microsoft’s 1998 antitrust trial of U.S. government and state claims of anticompetitive conduct, Gates appeared by videotape. His attempts to disavow the software giant’s plans to overtake Netscape Communications Corp. in the Internet browser war prompted laughter from the judge.

U.S. District Judge Thomas Penfield Jackson in Washington laughed out loud, as did many in the courtroom, and at times shook his head as Gates questioned what antitrust enforcers meant by the words “concern,” “compete” and “we.”

In one exchange, Gates was asked if he told Microsoft Vice President Paul Maritz that the Internet browser market share “was a very, very important goal,” and that’s why he stressed efforts to outdo the competition in that area.

“I guess now we’re delving into the inner workings of Paul Maritz’s mind and how he comes to conclusions,” Gates said. Microsoft’s business practices related to the Internet were central to the case against it by the Justice Department and 20 states.

Orchestrated a Scheme

The government alleged Gates orchestrated a scheme of illegal practices to protect Microsoft’s Windows monopoly and crush possible threats, including the growing power of the Internet. Windows 95 and its successor Windows 98 were loaded into about 90 percent of new personal computers as of 1998.

Internal Microsoft e-mail and documents showed the company viewed Netscape’s Navigator browser as its biggest competitor at the time, and David Boies, the Justice Department’s lead attorney, focused on those documents in questioning Gates.

“My question is what non-Microsoft browsers were you concerned about in January of 1996?” Boies asked Gates, referring to an e-mail Gates wrote in which he expressed concern that computer makers were including non-Microsoft browsers on their PCs.

‘What’s the Question?’

“I’m sure -- what’s the question? Is it -- are you asking me about when I wrote this e-mail or what are you asking me about?” Gates said.

“I’m asking you about January of 1996,” Boies responded.

“That month?” Gates asked. “Yes, sir,” replied Boies.

“And what about it?” Gates asked.

“What non-Microsoft browsers were you concerned about in January of 1996,” Boies said again.

“I don’t know what you mean ‘concerned,’” Gates said.

“What is it about the word ‘concerned’ that you don’t understand,” Boies asked.

“I’m not sure what you mean by it,” Gates said.

When the tape ended, the judge had just one question for Boies: “How long did this deposition take?”

“Three days,” the lawyer replied.

The case is Novell Inc. (NOVL) v. Microsoft Corp., 04-01045, U.S. District Court, District of Utah (Salt Lake City).

To contact the reporters on this story: Joel Rosenblatt in Salt Lake City federal court at jrosenblatt@bloomberg.net and; Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net