Opinion
105193/2000.
Decided July 29, 2005.
Plaintiffs move, pursuant to CPLR 901, for class certification.
Plaintiffs Charles Cox and Old Factories, Inc., bring this action under New York State law to recover damages consumers sustained as a result of defendant Microsoft Corporation's anti-competitive conduct. Plaintiffs assert a claim under General Business Law (GBL) § 349 and a common-law claim for unjust enrichment.
Plaintiffs seek to represent two classes:
All persons and entities who indirectly purchased for their own use and not for purposes of further selling, leasing or licensing, a license in New York for Microsoft Operating System Software (including MS-DOS, Windows 3.11, Windows for Workgroups, Windows NT Workstation, Windows 95, Windows 98, and any upgrades to new versions), on or after May 18, 1994;
and
All persons and entities who indirectly purchased for their own use and not for purposes of further selling, leasing or licensing, a license in New York for Microsoft Application Software (including Microsoft Word, Excel, Office Suite, Office and any upgrades to newer versions), on or after May 18, 1994.
Plaintiffs set forth numerous instances of anti-competitive conduct that two federal decisions have found Microsoft perpetrated, United States v. Microsoft Corp. ( 56 F 3d 1448 [DC Cir 1995] (Microsoft I), and United States v. Microsoft Corp. ( 84 F Supp 2d 9 [D DC 1999] [Findings of Fact], and 87 F Supp 2d 30 [D DC 2000] [Conclusions of Law], aff'd in part, rev'd in part, and remanded 253 F 3d 34 [DC Cir 2001]) (Microsoft II).
Specifically, plaintiffs allege that Microsoft has a monopoly in the operating system software market and in the applications systems software market. In an effort to maintain its monopoly, Microsoft has required manufacturers of personal computers to enter into per-processor license agreements with Microsoft. These agreements have required the manufacturer to pay a royalty to Microsoft on every computer the manufacturer ships out, regardless of whether the computer contains a Microsoft system, another operating system or no operating system at all. Thus, a manufacturer could use a competing operating system only if it was willing to pay twice once to Microsoft and once to Microsoft's competitor. Plaintiffs allege that this practice has had the effect of destroying competition and denying consumers a choice in the operating systems and applications software markets and that it has raised prices for the licensing of Intel-compatible personal computer operating system software and applications system software.
In addition, because of Microsoft's monopoly in the operating system market, Microsoft has been able to dictate the terms and conditions under which manufacturers use Microsoft products. Microsoft has required manufacturers to pre-install Microsoft operating systems on their PCs and to act as Microsoft's agents in offering end-user licenses for customers to accept or reject under terms Microsoft strictly and exclusively dictates.
The federal court decisions found an "applications barrier to entry," by which consumers' interest in an operating system derives primarily from the ability of that system to run software applications ( see Microsoft II, 253 F 3d at 55-56). Windows 95 and Windows 98 are operating systems. Plaintiffs allege that from 1988 to 1998, several products, known as middleware products, threatened to weaken or circumvent the applications barrier to entry, that had insulated Microsoft from competition. Included in this category of products was Netscape Navigator, a web browser that was a complement to, not a substitute for, Windows. Plaintiffs allege that when Netscape Navigator became popular, shortly after its introduction in December 1994, Microsoft attempted to mislead Netscape and the public by conditioning the timing of availability of essential technical information that Netscape needed on Netscape's willingness to agree to certain secret proposed limitations on Netscape's development of platform-level browsing technologies for Windows 95.
Plaintiffs further allege that, in an attempt to steer consumers away from the use of Navigator, Microsoft deliberately engineered a malfunction into Windows 95 by commingling the computer code for Microsoft's Internet Explorer (IE) with that for Windows 95, that would result in a malfunction when using any other browser, such as Navigator. The purpose of this engineered defect was to deceive consumers into believing that any dysfunction with other browsers, such as Netscape, were attributable to defects in that browser software. Plaintiffs allege that Microsoft continued this strategy with Windows 98. In the federal action, the District Court also found that Microsoft designed Windows 98 so "that using Navigator on Windows 98 would have unpleasant consequences for users" by, in some circumstances, overriding the user's choice of a browser other than IE as his or her default browser (Microsoft II, Findings of Fact, ¶ 172).
In October 2002, plaintiffs filed a First Amended Complaint alleging causes of action for violation of GBL § 349, unjust enrichment and breach of implied warranty. I denied Microsoft's motion to dismiss the GBL § 349 claim and granted the motion to dismiss the unjust enrichment and breach of implied warranty claims. Both parties appealed.
By Order dated June 8, 2004, the Appellate Division reinstated plaintiffs' claim for unjust enrichment and otherwise affirmed the ruling. The Appellate Division found that it did not matter that, as indirect purchasers of Microsoft's software products, plaintiffs only indirectly bestowed a benefit upon Microsoft and stated that "plaintiffs' allegations that Microsoft's deceptive practices caused them to pay artificially inflated prices for its products state a cause of action for unjust enrichment" ( Cox v. Microsoft Corp., 8 AD3d 39, 40 [1st Dept 2004]).
A class action must satisfy the prerequisites of numerosity, commonality, typicality, adequacy of representation and superiority (CPLR 901 [a]). Courts must liberally construe New York's class action statute and read it to "favor the maintenance of class actions" ( Englade v. HarperCollins Publs., Inc., 289 AD2d 159, 159 [1st Dept 2001]; Brandon v. Chefetz, 106 AD2d 162, 168 [1st Dept 1985]).
Further, at the class certification stage, inquiry into the merits is limited "to whether on the surface there appears to be a cause of action which is not a sham" ( Brandon v. Chefetz, supra).
CPLR 901 (a) (1) requires that "the class [be] so numerous that joinder of all members, whether otherwise required or permitted, is impracticable." Here, plaintiffs allege that the class consists of at least thousands of purchasers of Microsoft software. Because each class member's potential recovery is small and they are not likely to bring individual actions for nominal economic injuries, joinder would be impracticable. Therefore, plaintiffs have met the requirement of numerosity.
CPLR 901 (a) (3) requires that: "the claims or defenses of the representative parties are typical of the claims or defense of the class." Where, as here, a plaintiff's claims derive from the same practice or course of conduct that gives rise to the claims of the other class members and is based upon the same legal theory, the requirement of typicality is satisfied ( see Friar v. Vanguard Holding Corp., 78 AD2d 83, 98 [2nd Dept 1980]). Microsoft contends that plaintiffs cannot satisfy the typicality requirement of 901 (a) (3) because neither of the two named plaintiffs can assert that they were exposed to, or in any way deceived by, all of the conduct alleged in the amended complaint. This is essentially the same argument that Microsoft makes with regard to CPLR 901 (a) (2); the requirement of common questions of law and fact. As set forth below, plaintiffs need not demonstrate that Microsoft's conduct in fact deceived each plaintiff.
Plaintiffs have also met the requirements of CPLR 901 (a) (4), requiring plaintiffs to demonstrate that they will fairly and adequately protect the interests of the class. Plaintiffs allege, and it is not disputed, that plaintiffs' counsel have extensive experience in litigating complex class actions. In addition, plaintiffs' interests are aligned with the interests of other class members because the same alleged conduct has injured the plaintiffs and all class members. There are no allegations that plaintiffs or their counsel have any interests antagonistic to those of the other class members.
The Claim Under General Business Law § 349
In its ruling, the Appellate Division determined that the allegations of the First Amended Complaint adequately set forth a claim for relief under GBL § 349:
A cause of action under General Business Law § 349 is stated by plaintiffs' allegations that Microsoft engaged in purposeful, deceptive, monopolistic business practices, including entering into secret agreements with computer manufacturers and distributors to inhibit competition and technological development, and creating an "applications barrier" in its Windows software that, unbeknownst to consumers, rejected competitors' Intel-compatible PC operating systems, and that such practices resulted in artificially inflated prices for defendants' products and denial of consumer access to competitors' innovations, services and products.
( Cox v. Microsoft Corp., 8 AD3d at 40).
Microsoft argues that plaintiffs' GBL § 349 claim will involve predominantly individual issues and is therefore inappropriate for class certification under CPLR 901 (a) (2). Microsoft contends that, in a consumer fraud class action pursuant to GBL § 349, the proof must show that the defendant's misrepresentations or omissions deceived and injured plaintiff. Microsoft argues that first, plaintiffs cannot show that Microsoft reasonably deceived each member of the class, and second, that not every consumer suffered damages. Microsoft presents evidence in the form of pricing information of computers to demonstrate that the cost of the software is a small price of the computer package and that it did not pass all increases on to consumers.
Microsoft relies on Solomon v. Bell Atlantic Corp. ( 9 AD3d 49 [1st Dept 2004]). In Solomon, the First Department decertified a class in an action against Verizon Communications, where the action was based upon Verizon's false advertisements regarding the speed of its DSL service. The Appellate Division found that "[i]n a class action alleging deceptive acts and practices and false advertising, the proof must show that each plaintiff was reasonably deceived by the defendant's misrepresentations or omissions and was injured by reason thereof" ( 9 AD3d at 52).
However, while reliance may be necessary in a false advertising claim, it is well settled that reliance is not an element of a GBL § 349 claim ( Stutman v. Chemical Bank, 95 NY2d 24, 29 citing Small v. Lorillard Tobacco Co., 94 NY2d 43, 55-56; Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, 85 NY2d 20, 26). To prevail in a cause of action under GBL § 349, the plaintiff must prove three elements: that the challenged act or practice was consumer-oriented; that it was misleading in a material way; and that the plaintiff suffered injury as a result of the deceptive act ( Stutman v. Chemical Bank, supra at 29). In short, the plaintiff must prove causation, not reliance. In Solomon, reliance was the only form of causation that was asserted. In this case, plaintiffs sufficiently allege that Microsoft's acts were consumer-oriented, deceptive, and that the plaintiffs suffered injury as a result of the deceptive act.
As to Microsoft's second objection, regarding damages, Microsoft's argument is essentially that each class member will need to show that he or she suffered harm, by showing that the alleged overcharge of Microsoft software passed through the chain of distribution.
Microsoft relies on Small v. Lorillard Tobacco Co. ( 94 NY2d 43) in which the Court of Appeals upheld the First Department's decertification of a class action. In Small, the plaintiffs sought to bring a GBL § 349 claim as well as common-law claims resulting from the defendant tobacco companies' deceptive practices in selling cigarettes. Plaintiffs alleged that the defendants, inter alia, suppressed evidence that nicotine was addictive and controlled the level of nicotine in cigarettes to cause or maintain nicotine addiction. The Appellate Division concluded that the class actions would be unmanageable because of the individual issues of damages with respect to each of the five million plaintiffs. On appeal, the plaintiffs argued that the Appellate Division incorrectly held that they must prove that they were addicted to nicotine in order to allege a cognizable injury and harm. According to the plaintiffs, addiction was not the injury, rather, they asserted that defendants' deception prevented them from making free and informed choices as consumers. Plaintiffs alleged that, had they known that nicotine was addictive, they never would have purchased cigarettes. The Court of Appeals found that the plaintiffs' definition of injury was legally flawed because their theory contained no manifestation of either pecuniary or "actual" harm. Plaintiffs did not allege the alleged misrepresentation affected the cost of cigarettes, nor did they seek recovery for injury to their health as a result of their ensuing addiction. Thus, the Court of Appeals held that deception does not, in and of itself, constitute an injury.
This case is not similar to Small, where the plaintiffs could not prove actual harm. Here, plaintiffs allege that Microsoft was able to charge inflated prices for its products as a result of its deceptive actions and that these inflated prices passed to consumers. In addition, as the Appellate Division noted, plaintiffs also allege that class members had been denied a choice of products as a result of Microsoft's deceptive conduct. Although a plaintiff must prove "actual" injury to recover under a GBL § 349 claim, he or she need not prove pecuniary harm ( Oswego Laborers' Local 214 Pension fund v. Marine Midland Bank, 85 NY2d at 26).
In addition, although Microsoft has presented evidence that some original equipment manufacturers or retailers may not have raised their prices on computer packages when the price of the Microsoft products went up, this argument goes to the amount of dollar damages individual class members suffered and is not determinative of the question of class certification ( see Makastchian v. Oxford Health Plans, Inc., 270 AD2d 25 [1st Dept 2000]; Ackerman v. Price Waterhouse, 252 AD2d 179 [1st Dept 1998]). Where there are differences in the amount of damages the individual class members suffered, the court may try the class aspects first and create subclasses or appoint a special master to hear the individual damage claims ( see e.g. Godwin Realty Assoc. v. CATV Enterprises, Inc., 275 AD2d 269 [1st Dept 2000]).
The Unjust Enrichment Claim
A claim for unjust enrichment must show that the defendant (1) was enriched; (2) at plaintiff's expense; and (3) that "it is against equity and good conscience to permit defendant to retain what is sought to be recovered" ( Matter of Coordinated Title Ins.Cases v. Commonwealth Land Title Ins. Co., 2 Misc 3d 1007[A] * * * 9 [Sup Ct Nassau County 2004], quoting Albrechta v. Broome County Indus. Dev. Agency, 274 AD2d 651, 652 [3rd Dept 2003]). As to this cause of action, the Appellate Division has held that "plaintiffs' allegations that Microsoft's deceptive practices caused them to pay artificially inflated prices for its products state a cause of action for unjust enrichment" (Cox v. Microsoft Corp., 8 AD3d at 40).
As to this claim, Microsoft again argues that the only way an indirect purchaser can prove that Microsoft was unjustly enriched is to show that the alleged overcharge passed through the chain of distribution. Microsoft argues that, as a result, plaintiff cannot establish injury and damages on plaintiffs' claims under GBL § 349. As already noted, individual issues regarding the amount of damages will not prevent class action certification ( see Friar v. Vanguard Holding Corp., 78 AD2d 83 supra).
CPLR 901 (a) (5) requires that the court find that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. Clearly, the difficulty and expense of proving the dollar amount of damages an individual consumer suffered, versus the comparatively small amount that any one consumer would expect to recover, indicates that the class action is a superior method to adjudicate this controversy. Moreover, although Microsoft has already defended federal antitrust litigation involving its actions, this class action redresses injuries to individual consumers.
Accordingly, for the foregoing reasons, plaintiffs' motion for class certification is granted.
Settle Order.