Antitrust Law Daily Wrap Up, ANTITRUST—Cal. App.: Claims procedure in Microsoft case did not violate settlement, (Nov 4, 2013)

By Peter Reap, J.D., LL.M.

A California state trial court did not abuse its discretion in an antitrust class action against Microsoft Corporation in directing the court-appointed settlement claims administrator to implement a procedure for determining the portion of settlement proceeds to be awarded to certain class members who had purchased eligible software products from Microsoft, a California appellate court has decided (Lingo v. Microsoft Corp, October 31, 2013, Dondero, R.). The procedure, which was developed by the parties themselves, did not violate the terms of the underlying settlement agreement.

Background. On June 16, 2003, the parties settled the underlying antitrust class action lawsuit by executing a settlement agreement that required Microsoft to pay up to $1.1 billion to California businesses and consumers who had purchased licenses for certain of Microsoft’s software products and who submitted settlement claims. Under the agreement, the amount awarded to each claimant was to be determined by the number of eligible software license purchases the class member made during the period from 1995 to 2001. After each participating class member submitted a claim, the court-appointed settlement claims administrator, Rust Consulting, Inc., was authorized to review the records of the software purchases and calculate the settlement award based on established amounts for each type of purchased license. Rust was then to issue settlement vouchers that could be redeemed by the claimants for cash.

According to the plaintiffs, the vast majority of software licenses that are eligible for settlement awards were sold to thousands of large business purchasers that participated in Microsoft’s volume licensing program (volume claimants). Microsoft does not sell its software directly to these customers. Instead, it supplies its software through a network of authorized software resellers, including computer manufacturers that provide preinstalled software on the computers they sell (original equipment manufacturers or OEMs), as well as software distributors, systems integrators, and retailers that sell standalone software (resellers). When the claims submission period closed on January 8, 2005, Rust had received over 4,550 volume claims encompassing over 20 million licenses.

As part of the 2003 settlement agreement approval process, the plaintiffs’ counsel had subpoenaed records of more than 70 third-party OEMs and other software resellers for the sole purpose of identifying potential class members. In January 2006, after the claims submission period had closed, the plaintiffs’ counsel first raised the idea of supplementing some volume claims using the software purchase records derived from this third-party reseller data.

Rust processed numerous claims in accordance with the OEM Tutorial rules and posted the results for the parties to review. Subsequently, Rust issued settlement vouchers to 1,391 volume licensee claimants after the parties approved its calculations. However, as Microsoft’s counsel reviewed sample claims in late 2007 and early 2008, it appeared the reseller data was incomplete and/or inconsistent, and that Rust’s procedures were unsatisfactory in determining whether the licenses in the reseller records were the same as the licenses cataloged in Microsoft’s end user database, referred to as the “License Information Repository.”

In December 2007, Microsoft asked Rust to stop issuing volume claim vouchers and began negotiating with plaintiffs’ counsel to establish new rules for de-duplicating purchase records. The changes were memorialized in a written addendum to a February 2009 settlement claims processing agreement.

The addendum includes instructions on the procedures to be used in determining whether a license found in the reseller data should be deemed a duplicate of a license found in Microsoft’s records. In comparing the two types of records, Rust was to consider three criteria: (1) purchase date matching period; (2) exact quantity match; and (3) product name match.

If all of the criteria matched, a purchase identified in both Microsoft’s and the resellers’ records would be considered a duplicate and the claimant could only recover once. If any of these criteria was not met, each transaction would be counted separately in determining the final voucher amount distributed to the claimant. According to Microsoft, Rust followed and implemented the addendum’s procedures with the oversight and guidance of the parties for over two and a half years.

In October 2011, the plaintiffs’ counsel asserted (reportedly for the first time) that Rust was required to consider other criteria in addition to date, product name, and quantity. In the plaintiffs’ view, their counsel had never agreed to eliminate any of the de-duplication matching criteria that Rust had been using up until December 2007. Instead, in agreeing to the addendum, he had merely authorized three “minor adjustments” to Rust’s existing de-duplication process. Contrary to his intent, Rust “had mistakenly concluded that the changes to the product description, quantity and purchase date criteria listed in the [addendum] for matching duplicate software purchase records were intended to completely replace Rust’s existing de-duplication procedures…” Microsoft disagreed with the plaintiffs’ position.

Under the terms of the settlement agreement, when the parties could not agree on the “rules and procedures” for processing claims, either party could bring the issue to the superior court by filing a motion. On May 21, 2012, the plaintiffs filed a motion “For Court Resolution of the Parties’ Settlement Claims Processing Dispute and Enforcement of the Parties’ Claims Processing Agreements.”

On June 27, 2012, after hearing arguments from the parties, the trial court issued its order determining that the de-duplication procedures set forth in the addendum were to govern the claims-processing task. The order reiterated that Rust should apply only the three criteria set out in the addendum—date range, quantity, and product name—in determining whether purchase records are duplicates. Thereafter, Rust resumed its processing using these criteria. It certified to the court on August 15, 2012, that the de-duplication process was complete and that it was ready to issue volume claimant vouchers. This appeal followed.

Analysis. The plaintiffs argued that the trial court erred in issuing its order because the ruling would deprive them of valuable benefits promised by the settlement agreement. They also claimed the court violated their right to due process by modifying the agreement without giving them notice of the changes or an opportunity to object. The appellate court rejected both contentions.

The challenged order merely implemented the addendum, according to the court. It did not modify the terms of the settlement agreement. The settlement agreement itself allowed the parties to determine how claims are to be processed and awarded. The relevant provision stated: “The Settlement Claims Administrator [Rust], Lead Counsel for the California Class and Microsoft will agree on the rules and procedures that will govern the processing of claims under this Settlement Agreement and the administration of this Settlement generally.” (Italics added.) This provision further stated: “If [Rust] and the parties are unable to agree on any such rules or procedures, the parties shall submit their disagreement to the Court or to a referee appointed by the Court with the consent of the parties for resolution.” (Italics added.)

In February 2009, in accordance with the terms of the settlement agreement, the parties negotiated, agreed, and approved the three-factor process to be used by Rust. Thereafter, in further adherence to the terms of the settlement agreement, the parties’ dispute concerning the claims processing procedure was submitted to the trial court. Thus, the agreement had functioned exactly as the parties intended. Claimants possessing valid claims, backed by nonduplicative business records as determined under the procedures the parties asked Rust to follow, would receive awards pursuant to the terms of the settlement agreement. Thus, no modification occurred, the court held.

The plaintiffs’ contention that the terms of the settlement agreement placed the burden on Microsoft to challenge the veracity of the reseller records was without merit. This argument was based on the faulty premise that reseller records constitute “other written evidence” submitted as proof of a claim, the court noted.

The plaintiffs also asserted that Microsoft’s opposition to their motion “failed to provide even a shred of evidence proving that any of the [materially different records at issue in this appeal actually] are duplicates.” They claimed the only authenticated evidence before the trial court proved the disputed records could not possibly memorialize the same software purchase transaction.

Regardless, the trial court made it clear that the instant proceeding was not an evidentiary hearing, the appellate court explained. Instead, the trial court indicated that the central issue was the proper interpretation of the addendum. Given that at the time of the hearing over 3,000 volume claims had yet to be processed, it would be extremely impractical for the court to have become involved in individual license determinations. As the trial court explained to the plaintiffs’ counsel: “[T]his is an inexact effort by both sides to try and reach a system, a process to identify duplicate records. And it’s inexact. It’s not perfect. And so your effort to show that a certain way that it can be done would result in perfection is just not possible.”

The plaintiffs next asserted that the trial court’s interpretation of the February 2009 addendum was erroneous. In so arguing, they relied on rules that apply to contract interpretation. Assuming the challenged document was a “contract,” the trial court’s interpretation was valid, the appeals court determined.

The plaintiffs argued that the addendum contemplated preservation of the process then being used by Rust, with only a few minor adjustments. This argument was founded on the assumption that the parties sought to preserve the OEM Tutorial’s de-duplication process. However, the addendum did not reference any of the criteria contained in the OEM Tutorial, the court observed. If the parties had intended to incorporate prior written procedures or criteria, they certainly could have said so. Thus, there was nothing in the plain language of the addendum reflecting the intent that the plaintiffs would have the court ascribe to it.

The plaintiffs failed to conclusively establish that the OEM Tutorial method of de-duplication was inherently superior to the method set forth in the addendum. Thus, the appellate court could not hold that the trial court abused its discretion in issuing the challenged order.

The case is No. A136531.

Attorneys: James G. Gilliland (Kilpatrick Townsend) for Charles J. Lingo. Robert Allan Rosenfeld (Orrick Herrington & Sutcliffe) for Microsoft Corp.

Companies: Microsoft Corp.

Cases: Antitrust CaliforniaNews