The Politics of Antitrust
Winning the largest antitrust settlement in California's history in an unfriendly political climate — an interview with Eugene Crew of Townsend and Townsend and Crew
Don Marc Dimaranan
Clifford Heller | University of California, Davis, School of Law
Posted Monday, December 4, 2006
7 U.C. Davis Bus. L.J. 8 (2006)

Eugene Crew is a name partner at the San Francisco law firm of Townsend & Townsend & Crew LLP. He has been practicing for the past forty years with a specialization in antitrust and unfair business practices litigation. He served as lead counsel for plaintiffs in a class action suit against Microsoft on behalf of California consumers. The lawsuit settled in 2003 for $1.1 billion, which is the largest recovery ever obtained under California's antitrust laws.

Q: What was the basic issue in the Microsoft antitrust action?

A: Microsoft enjoys a 95 percent monopoly of the Intel-compatible personal computer "operating system" market, which it acquired and maintained through a wide array of exclusionary practices in violation of the Sherman Act[1] over the previous fifteen years. Our class action was to recover the overcharges that consumers were forced to pay for Microsoft's products as a result of Microsoft's actions.

Q: Why did you sue in state rather than federal court?

A: Under the federal Sherman Act, as interpreted by the Supreme Court in Illinois Brick[2], indirect purchasers do not have standing to sue the indirect seller for its antitrust violations. Microsoft's direct customers were resellers such as Dell and Compaq who would pass their overcharges onto consumers like you and me, but we - the indirect purchasers - have no standing in federal court.

The Sherman Act has two sections. The first prohibits conspiracies, combinations, and actions to restrain or monopolize trade. The second covers unilateral conduct. It therefore would cover Microsoft's conduct. However, the consumers we represented had no standing to sue under the Sherman Act, which is a shortcoming of that statute.

Q: How does California's antitrust act differ?

A: That was our next obstacle. Although we had standing, California's Cartwright Act only prohibits concerted action, that is, combinations of two or more parties to restrain trade or monopolize the market.[3] So when we brought the suit, Microsoft immediately demurred and later moved for summary judgment, arguing that we had not alleged a combination because in all of the conduct alleged, Microsoft was acting on its own. The refusal to allow good connections with Netscape, as well as with several competing software applications developers, was ostensibly "unilateral" and thus not covered by the Cartwright Act. Our counterargument was that all of Microsoft's alleged conduct was either direct combinations with others (e.g., the resellers) or exclusionary acts designed to further its combinations with others. The court agreed with us and let the case go forward.

Microsoft had the option of removing our case to federal court but fortunately for us it did not do so. Antitrust plaintiffs generally prefer to be in state court.

Q: Why is that?

A: Antitrust has become politicized over the years, and the current administration is not very friendly to it. Even though the original "trustbusters" were Republicans, including Senator John Sherman himself, there was a movement that began in Ronald Reagan's presidency in the 1980s to diminish the antitrust laws. Antitrust plaintiffs' lawyers did not immediately realize the "sea change" that was underway until the spring of 1986 when the United States Supreme Court handed down a trilogy of decisions involving summary judgments.[4] Reagan had been slowly but steadily appointing judges to the federal bench who shared an ideology known as "Chicago School" or "supply side" economics. They believed the market, if left alone by the courts, would regulate itself. Many still believe that.

Q: What was your strategy in litigating such a large class action against such a large corporation?

A: After we started discovery, over the ensuing half-dozen years we collected and organized a database of approximately six million documents. It was the most comprehensive database about Microsoft anywhere in the United States, and therefore anywhere else. Other states wanted access to our database for their later litigation against Microsoft and we granted that access with Microsoft's permission. We set up a war-room full of computers. We posted notices at the local law schools looking for anyone who had just graduated or was waiting for Bar results and put them to work as "coders." They would categorize the documents by subject, by witness, by issue, so they could be instantly retrieved when it was time to take a deposition. Ninety percent of this work is analyzing, organizing and presenting evidence at trial. The law is the other ten percent.

Q: Can you discuss some of the obstacles you encountered?

A: We filed our case in February of 1999. No one else filed because they were waiting to see what the outcome would be in the Department of Justice's case.[5] In November of 1999, Judge Jackson handed down his decision with its 412 findings of fact, and within a month about 150 lawsuits were filed all over the country, 26 in California alone. Our judge in California state court appointed us Lead Counsel and told us to organize prosecution of all of the consolidated actions going forward.

As we forged ahead with discovery, a small cabal of lawyers in federal actions that had been filed in federal court (wrongly because of the Illinois Brick doctrine) under the Sherman Act back East secretly negotiated a "nationwide" settlement that would not have given our consumers in California a dime. This "sell out" came perilously close to preliminary approval by the federal court in Baltimore. However, we fiercely opposed it and, as a result, it was disapproved. Exactly one year later, three weeks from trial, we mediated a settlement of the California action for $1.1 billion.

Q: Was the settlement ultimately beneficial?

A: Yes. At $1.1 billion, the settlement provided for a refund of about 25 percent of all consumer expenditures on Microsoft products over a period of seven years and was, to the best of our knowledge, the largest consumer overcharge settlement in California's antitrust history. But because few people fill out their forms, the claims rate in class actions is usually low. We did a lot to try to raise public awareness and motivate people to make their claims, but not everyone will. However, two-thirds of the unclaimed portion goes to California's financially needy public schools and the California Department of Education is ecstatic about the benefits going to the schools that are in desperate need of technology funding. All other states used our settlement as a model for their settlements, except with less favorable terms. The overcharge rate was lower than ours and almost all of them had a 50 percent reversion to Microsoft.

Q: Can you speak about the relationship between intellectual property and antitrust?

A: Gladly. Antitrust and intellectual property (IP) have much in common. They both have the same purpose: to promote innovation through competition for the public good. The methods used are different. Patent law uses a carrot. Antitrust law uses a stick. The carrot is: "If you go out and innovate, you will get twenty years of exclusivity." The antitrust stick says: "If you interfere with another's innovation or try to suppress it or do anything against fair competition, you may be required to pay treble damages for the harm caused." So they both play an important role.

Q: Do you feel that there is an imbalance between the two?

A: Yes, I do. The Federal Circuit was created in 1982 and ever since then it has defended and entrenched patent rights. All other circuits must consider other applicable laws, but the Federal Circuit has only one, Title 35 (the patent statute). I do not believe that is good.

Intellectual property should be treated like any other property. You should not be able to use your property - intellectual or otherwise - to eliminate competition and harm consumers if you are dominant in that market. There should not be a special set of rules for intellectual property. That is my personal view but, remember, I am an antitrust lawyer in an intellectual property law firm and reasonable minds can differ on this issue.

The Kodak decision comes close, but it does not go that far.[6] It attempted to reconcile the tension between antitrust and intellectual property law. Antitrust law says it can be illegal to refuse to deal when you have a monopoly product, but patent law says you have an absolute right to exclude others from using your patent. So how do we reconcile that conflict in an antitrust case involving intellectual property? The Ninth Circuit said that generally a monopolist's refusal to deal is presumed to be exclusionary and thus unlawful. The burden is then on defendant to explain how it was intended to be pro-competitive and beneficial to consumers. In the case of a patent monopolist, the Ninth Circuit reversed the burden; that is, the presumption is that a patent monopolist's refusal to deal with a competitor is the mere exercise of its right to exclude others from using that patent under 35 U.S.C. § 271. The burden is thus shifted to the plaintiff to rebut that presumption by introducing evidence that defendant's refusal to deal was to exclude competition in an entirely different market. [7] I like that decision. It shows a nuanced analysis so as to reconcile a conflict between two statutes of equal dignity.

Q: Are there any legislative reforms taking place?

A: Well, first let me talk about federal reforms. In 2002 the Antitrust Modernization Act (AMA) was passed and it formed a commission, the Antitrust Modernization Commission (AMC).[8] This commission has worked to "modernize" antitrust. And I use that as a euphemism. I believe it is basically a movement to reduce antitrust enforcement. There has been something of a hue and cry from the other side with many articles written on the subject. Ultimately, I do not think any material change will occur, which is fine with me and others who believe in strong enforcement of the antitrust laws. I also believe Illinois Brick should be repealed. This is because it allows suit by the direct purchaser (who is not usually injured because it passes the higher price onto the consumer) but does not allow suit by the consumer - who is assuredly injured because he or she cannot pass the overcharge onto anyone else.

On the state front there have been a few attempts in California to amend the antitrust laws to have them cover unilateral conduct, like the federal law does. So far, California's Cartwright Act only covers combinations. Those attempts have been defeated, largely due to defense side lobbying that no changes are necessary. So I see a few areas where the California laws could be improved and some areas where the federal laws could be improved, mainly in terms of increased enforcement. Antitrust is so political and the antitrust laws are so vague in their wording that it becomes a matter of making your case to a judge who is not hesitant to enforce the antitrust laws whenever appropriate. Judge Jackson and his predecessor Judge Sporkin were both Republicans and both saw that Microsoft's conduct was unacceptable. Judge Kollar-Kotelly, a Democrat, took over from Judge Jackson and approved a settlement that many felt did not go far enough to curb Microsoft's exclusionary business practices. So the issue is not really Republican versus Democrat, but rather between those who have a strong belief in competition versus those who do not.

[1] 15 U.S.C.A. §§1-7 (West 1997 & Supp. 2005).

[2] Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).

[3] Cal. Bus. & Prof. Code § 16720 (West 2006)

[4] Matsushita Elec. Indus. Co. v. Zenith Radio Corp. 475 U.S. 574 (1986); Celotex Corp. v. Catrett 477 U.S. 317 (1986); Anderson v. Liberty Lobby, Inc. 477 U.S. 242 (1986).

[5] United States v. Microsoft Corp., 84 F.Supp.2d 9 (D.D.C. 1999).

[6] Image Technical Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997).

[7] Id. at 1219

[8] Antitrust Modernization Commission Act of 2002, Pub. L. No. 107-273, §§ 11051-60, 116 Stat. 1856 (2002).