Microsoft’s Datel Defense Takes Bite Out Of Apple’s Playbook

Microsoft is battling its latest antitrust challenger – Datel – by taking a page out of the antitrust playbook of its archrival, Apple.

Microsoft is being sued by Datel, a manufacturer of “video game enhancement products,” for allegedly monopolizing an aftermarket for accessories to Microsoft’s popular Xbox 360 video game system in Datel Holdings Ltd. et al. v. Microsoft Corp., Case No. CV 09-5535 EDL.  The case was filed in the Northern District of California on November 20, 2009.

Datel manufactures the “MAX Memory” card which, at two gigabytes, allegedly has quadruple the memory of Microsoft’s largest memory card.  Datel claims it is the only source of memory cards for the Xbox 360 other than Microsoft.

Datel alleges that Microsoft requires Xbox 360 users to download its “dashboard” software update in order to access online gaming, and that the update is “intended to, and does in fact, disable Datel’s memory cards.”  Datel claims that the dashboard update therefore enables Microsoft to monopolize an aftermarket for “Xbox 360 Accessories and Add-ons” in violation of the antitrust laws.

On January 22, 2010, Microsoft moved to dismiss Datel’s complaint.  Interestingly, Microsoft borrowed one of its main arguments from its historic nemesis, Apple – namely, its argument that Datel “cannot pursue antitrust claims based on … a single-brand market . . . [because] the purchasers of the Xbox 360 knew and agreed [when they purchased the Xbox] that they could only use Microsoft-authorized accessories . . . .”

Microsoft’s motion notes that Apple was successful with this argument in 2008 when it moved to dismiss a complaint by Psystar, a manufacturer of computers that used Apple’s Macintosh OS X operating system (the “Mac OS”).  In Apple, Inc. v. Psystar Corp., 586 F. Supp. 2d 1190 (N.D. Cal. 2008), Psystar challenged Apple’s “technological barriers that prevent[ed] Mac OS from operating on non-Apple computers” like Psystar’s (among other conduct).  Id. at 1194.  Psystar claimed that Apple had erected the barriers so that it could “dominate a distinct aftermarket . . . for Mac OS-compatible computer[s].”   Id. at 1193 (emphasis in original).

Judge William Alsup granted Apple’s motion to dismiss.  Most relevant for Microsoft is that Judge Alsup rejected Psystar’s alleged single-product aftermarket in doing so.  He pointed to Apple’s End User License Agreement, which “prohibit[ed] customers from installing the [Mac OS] on non-Apple computers” like Psystar’s.  Id. at 1194.  Judge Alsup held that by this Agreement, Apple customers “knowingly agree[d] to the challenged restraint.”  Id. at 1194.  Therefore, Psystar’s alleged single-product aftermarket did not fall into the exception, created in Eastman Kodak Company v. Image Technical Services, Inc., 504 U.S. 451 (1992), to the rule that single-brand markets do not support antitrust claims.

Microsoft makes a similar argument against Datel’s complaint.  It asserts that, as with the Mac OS, Xbox 360 purchasers “agree that the Xbox 360 software can be used only with Microsoft authorized accessories” – i.e., not with Datel’s products.  Therefore, Microsoft claims, Datel’s alleged aftermarket does not fall within the Kodak exception, and Datel’s complaint should be dismissed.

Whether Microsoft will enjoy the same success as Apple remains to be seen.  Its motion to dismiss is scheduled to be heard on March 9, 2010.

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