Court Opinion

ID: 4250343
Source: CourtListenerOpinion
Date Created: 2018-02-28 21:24:48.663265+00
Date Added: 2024-06-11T14:44:13.815922
License: Public Domain

IN THE SUPREME COURT OF IOWA

                              No. 145 / 05-0097

                           Filed January 27, 2006

JOE COMES and RILEY PAINT, INC.,
an Iowa Corporation,

      Appellees,

vs.

MICROSOFT CORPORATION,
a Washington Corporation,

      Appellant.

________________________________________________________________________
      Appeal from the Iowa District Court for Polk County,  Artis  I.  Reis,
Judge.

      Defendant appeals from the district  court’s  ruling  that  collateral
estoppel would  apply  to  findings  of  fact  arising  from  prior  federal
antitrust litigation.  Reversed and Remanded with Instructions.

            Edward W. Remsburg of Ahlers & Cooney, P.C., Des Moines, Thomas
W. Burt, Richard J. Wallis, and Steven J. Aeschbacher,  Redmond  Washington,
David B. Tulchin, Joseph  E.  Neuhaus,  and  Richard  C.  Pepperman  II,  of
Sullivan & Cromwell, LLP, New York,  New York,  and  Charles  B.  Casper  of
Montgomery, McCracken, Walker &  Rhoads,  LLP,  Philadelphia,  Pennsylvania,
for appellant.

       Roxanne  Barton  Conlin  of  Roxanne  Conlin  &  Associates,   P.C.,
Des Moines, and Richard M. Hagstrom of  Zelle,  Hofmann,  Voelbel,  Mason  &
Gette LLP, Minneapolis, Minnesota, for appellees.
STREIT, Justice.
      Justice Felix Frankfurter once observed, “to some lawyers,  all  facts
are created equal.”  However, for the purposes of collateral estoppel,  they
are not.  The defendant, Microsoft Corporation, was  granted  permission  to
take  an  interlocutory  appeal  from  the  district  court’s  ruling   that
collateral estoppel would apply to 352 findings of fact arising  from  prior
federal  antitrust  litigation.   Because  we  find  the  district   court’s
application of the  “necessary  and  essential”  requirement  of  collateral
estoppel was too broad, we reverse the district  court’s  order  and  remand
with instructions.
      I.  Facts and Prior Proceedings
      Joe Comes and Riley Paint sued  Microsoft  Corporation  for  violating
provisions of the Iowa Competition Law.   See  Iowa  Code  §§  553.4,  553.5
(1997).  This is the third time this case has  journeyed  into  this  court.
See  Comes  v.  Microsoft  Corp.,  696 N.W.2d 318  (Iowa  2005)   (finding
plaintiffs established the prerequisites for class certification); Comes  v.
Microsoft Corp., 646 N.W.2d 440 (Iowa  2002)  (holding  indirect  purchasers
may maintain an antitrust suit against Microsoft).  The facts were  set  out
fully in our first decision, and we now state  only  those  facts  necessary
for this appeal.
      In the spring of 1998, the United States and several states (including
Iowa) filed a civil action against Microsoft Corporation in the District  of
Columbia for violations of the  Sherman  Act  (hereinafter  the  “Government
Action”).  A bench trial before Judge Thomas  Jackson  lasted  76  days  and
included testimony from 26  live  witnesses,  deposition  excerpts  from  79
additional witnesses,  and  over  2700  exhibits.   Rather  than  issue  one
decision and judgment,  Judge  Jackson  bifurcated  his  decision  by  first
making 412 findings of fact “proved by a  preponderance  of  the  evidence.”
See generally United States v. Microsoft Corp., 84  F. Supp.  2d  9  (D.D.C.
1999).  Five months later, Judge Jackson  entered  his  decision  concluding
Microsoft (1) illegally maintained a monopoly in  the  market  of  licensing
Intel-compatible PC operating systems, (2) attempted to monopolize  the  web
browser market, and  (3)  entered  into  an  illegal  tying  arrangement  by
bundling its Internet  Explorer  web  browser  with  its  Windows  operating
system, in violation of sections 1 and 2 of the Sherman Act.  United  States
v. Microsoft Corp., 87 F. Supp. 2d 30, 35, 44 (D.D.C. 2000).  This  decision
did not refer to a large number of the factual findings entered five  months
earlier.
      Microsoft appealed this decision,  and  the  United  States  Court  of
Appeals for the District of Columbia  affirmed  Judge  Jackson’s  conclusion
that Microsoft illegally maintained a monopoly in the PC  operating  systems
market.  United States v. Microsoft  Corp.,  253 F.3d 34,  80  (D.C.  Cir.
2001).  However, the D.C.  Circuit  reversed  the  attempted  monopolization
claim and remanded the claim of illegally tying the  Internet  Explorer  web
browser to Windows for a new trial.  Id.  at  94.   The  D.C.  Circuit  also
vacated the district court’s  remedy  and  disqualified  Judge  Jackson  for
ethical violations related to his discussion of the merits of the case  with
reporters.  Id. at 117.  On remand, the case was reassigned to Judge Kollar-
Kotelly.   Judge  Kollar-Kotelly  rejected  almost  all  of  the  additional
remedies requested by the states and determined many of Judge Jackson’s  412
findings of fact “were ultimately not relied upon by the district  court  in
conjunction with the imposition of liability for violation of  §  2  of  the
Sherman Act.”  New York v. Microsoft Corp., 224 F. Supp. 2d 76, 138  (D.D.C.
2002).
      In the  present  case,  the  class  of  plaintiffs  alleges  Microsoft
maintained or used a monopoly in conjunction with its Windows  98  operating
system for the purpose of excluding competition or controlling,  fixing,  or
maintaining prices in violation of Iowa  Code  sections  553.4  (prohibiting
restraint of trade) and 553.5 (“A person shall not attempt to  establish  or
establish, maintain, or use a monopoly of trade or commerce  in  a  relevant
market for the purpose of excluding competition or of  controlling,  fixing,
or maintaining prices.”).  These  allegations  are  based  in  part  on  the
factual findings and conclusions made in the Government Action.  In July  of
2004, the plaintiffs filed a motion requesting the court  use  the  doctrine
of collateral estoppel to foreclose Microsoft from relitigating 352  of  the
412 factual findings made in the Government Action.
      The district court  granted  this  motion  through  a  pretrial  order
applying  the  doctrine  of  “offensive”  collateral  estoppel  to  preclude
Microsoft  from  relitigating  the  352  factual   findings.    We   granted
Microsoft’s application for leave to appeal the district court’s ruling.
      The overarching issue in this appeal is  whether  the  district  court
correctly applied the requirement that facts subject to collateral  estoppel
be “necessary and essential”  to  the  judgment  in  the  prior  litigation.
Microsoft contends the court’s misapplication of this  standard  led  to  an
overbroad ruling in  which  preclusive  effect  was  given  to  336  factual
findings that were not “necessary and essential” to the judgment.[1]
      II.  Standard of Review
      Because this appeal is premised upon the district court’s  application
of an incorrect legal standard, our review is for  error.   See  Walters  v.
Herrick, 351 N.W.2d 794, 796 (Iowa 1984) (stating, as  a  general  rule,  an
“assertion that an incorrect legal  standard  was  applied  is  reviewed  on
error”).
      III.  Merits
      The doctrine of collateral estoppel, sometimes referred  to  as  issue
preclusion, prevents parties from relitigating  issues  previously  resolved
in prior litigation if certain prerequisites  are  established.   Hunter  v.
City  of  Des  Moines,  300 N.W.2d 121,  123  (Iowa  1981).   In  general,
collateral estoppel prevents parties to a prior  action  in  which  judgment
has been entered from relitigating in a subsequent action issues raised  and
resolved in the previous action.  Id.  This  doctrine  may  be  utilized  in
either a defensive or offensive manner.  Id.  Defensive use of the  doctrine
is when “a stranger to the judgment, ordinarily the defendant in the  second
action, relies upon a former judgment as conclusively  establishing  in  his
favor an issue which he must prove as  an  element  of  his  defense.”   Id.
Offensive use  of  the  doctrine  is  when  “a  stranger  to  the  judgment,
ordinarily the  plaintiff  in  the  second  action,  relies  upon  a  former
judgment as conclusively establishing in his favor an issue  which  he  must
prove as an essential element of his cause of action or claim.”  Id.
      This case involves offensive use of the collateral estoppel  doctrine.
The plaintiffs, who were strangers to the first judgment, seek to rely  upon
the prior  judgment  that  Microsoft  had  maintained  an  operating  system
monopoly by anticompetitive means and ask the  court  to  accord  preclusive
effect to 352 of the 412 findings of fact entered in the Government  Action.

      Collateral estoppel may be invoked if four prerequisites are met:

      (1)  the issue concluded must be identical; (2) the  issue  must  have
      been raised and litigated in the prior action; (3) the issue must have
      been material and relevant to the disposition of the prior action; and
      (4) the determination made of the issue in the prior action must  have
      been necessary and essential to the resulting judgment.

Id.  The fighting issue in this case involves the application of the  fourth
prerequisite to the findings of fact entered in the Government Action.
      Admittedly,  the  fourth  requirement  of  our   collateral   estoppel
analysis—the determination made of the issue in the prior action  must  have
been necessary  and  essential  to  the  resulting  judgment—is  exceedingly
vague.  However, prior cases demonstrate  that  we  apply  this  requirement
somewhat narrowly.
       Almost  150  years  ago,  long  before  we  articulated  the  present
collateral  estoppel  analysis,  we  said  “[m]atters   which   arise   only
incidentally in the evidence, however much they may influence  the  mind  of
the  judge  or  jury  in  arriving  at  a  conclusion,   are   not   matters
adjudicated.”  Haight v. City of Keokuk,  4 Cl. Ch. 199,  208  (Iowa  1857)
(emphasis in original).
      In Hutchinson v. Maiwurm, 162 N.W.2d 408,  410-11  (Iowa  1968),  we
prefaced our analysis of a case involving the collateral  estoppel  doctrine
by stating “a  judgment  is  not  binding  or  conclusive  as  to  facts  or
questions of law, although put in issue and  actually  tried  and  expressly
determined by the court in  the  former  action,  where  such  matters  were
immaterial or unessential to the determination  of  the  real  and  decisive
issue.”  In applying this standard to the facts of the case,  we  looked  to
other jurisdictions for guidance.  Hutchinson, 162 N.W.2d  at  411-12.   In
particular, we considered a Wyoming case, where a factual finding  that  was
not “vital to the case” and was “not the point upon which the  case  turned”
was not given estoppel effect.  Id. at 412  (citing  Willis  v.  Willis,  49
P.2d 670, 677 (Wyo. 1935), overruled on other grounds by Shaw v. Smith,  964
P.2d 428 (Wyo. 1998)).  In another case, the Supreme  Court  of  New  Mexico
did not grant estoppel  effect  to  a  prior  court’s  conclusions  of  fact
because the facts  “were  not  ultimate  facts  .  .  .  without  which  the
[previous] judgment would lack support in an essential particular.”  Id.  at
413 (citing State v.  Nance,  419 P.2d 242,  245  (N.M.  1966)).   On  the
strength of these decisions, we decided in Hutchinson that the findings  and
conclusions  in  the  previous  action  did  not  satisfy  the  doctrine  of
collateral estoppel and were therefore not subject to estoppel effect.  Id.
      In Supreme Court Board of Ethics  v.  D.J.I.,  545 N.W.2d 866  (Iowa
1996), we analyzed the “necessary and essential” requirement in the  context
of an  attorney  ethical  violation  proceeding.   In  D.J.I.,  an  attorney
subject to a disciplinary proceeding based on unethical  dealings  with  his
clients sought to relitigate whether he had violated various  provisions  of
the Iowa Code of Professional Responsibility, even though that question  had
been decided in an earlier civil proceeding. 545 N.W.2d at 868-69.  In  the
earlier civil proceeding,  two  former  clients  alleged  the  attorney  had
violated several professional rules and  committed  civil  fraud  and  legal
malpractice.  Id. at 869.  The district court, in a bench ruling,  concluded
the attorney committed fraud, legal  malpractice,  constructive  fraud,  and
conspiracy to defraud.  Id.  In  so  ruling,  the  court  found  the  former
clients proved the  scienter  element  of  their  fraud  claim  because  the
attorney had violated lawyer  disciplinary  rules  concerning  conflicts  of
interests.  Id.  The attorney did not appeal the adverse decision.  Id.   An
ethical complaint was  subsequently  filed  against  the  attorney  for  his
representation of the same clients.  Id.  The Iowa Supreme  Court  Board  of
Professional  Ethics  and  Conduct  relied  on  the  principles   of   issue
preclusion to prove  these  same  ethical  violations.   Id.  at  870.   The
attorney argued the  district  court’s  conclusion  in  the  previous  civil
proceeding  that  he  had   violated   the   Iowa   Code   of   Professional
Responsibility was “not necessary and essential to the issues determined  in
the resulting judgment.”  Id.  We disagreed.  We  noted:  “[r]ecovery  in  a
fraud action against an attorney is premised on the plaintiff’s  ability  to
show . . . the following elements:  (1)  representation;  (2)  falsity;  (3)
materiality; (4) scienter; (5) intent to deceive. . . .”  We  concluded  the
disciplinary code violations were “crucial” to the previous civil fraud  and
legal malpractice case against the attorney because the violations were  the
evidence used by the former clients to prove the scienter element  of  their
civil fraud claim.  Id. at 875-76 (emphasis added).
      These cases illustrate that  we  apply  the  necessary  and  essential
requirement narrowly, and only preclude those facts vital or crucial to  the
previous  judgment,  or  those  properly  characterized  as  ultimate  facts
without which the previous judgment would lack support.  See generally  id.;
Hutchinson, 162 N.W.2d at 412-13.
      IV.  Analysis of the District Court’s Ruling
      At the outset, the district court correctly recited the necessary  and
essential requirement—“When issues of law or fact were raised and  litigated
and  relevant  to  the  prior  proceeding,  collateral  estoppel   precludes
relitigation when the determination of those issues was also  necessary  and
essential to the judgment in the earlier action.”  The court then set  forth
the legal standard for monopolization claims  used  by  the  D.C.  Court  of
Appeals in the Government Action and  identified  approximately  two  and  a
half pages of legal conclusions that “survived intact” after the D.C.  Court
of Appeals modified the district court’s judgment in the Government  Action.
 However, when the court determined 352 out of  the  412  findings  of  fact
“were  necessary  and  essential  to  the  elements  of   the   government’s
monopolization claim against Microsoft” because these findings  “provided  a
proper  foundation”  or  “proper  basis”  for  individual  elements  of  the
monopolization claim in the Government Action,  the  court’s  interpretation
of our  collateral  estoppel  doctrine  drifted  away  from  the  doctrine’s
original intent.
      The district court’s first precluded finding of fact illustrates  that
the necessary and essential requirement was misapplied:

      A “personal computer”  (“PC”)  is  a  digital  information  processing
      device designed for use by  one  person  at  a  time.   A  typical  PC
      consists of central processing components (e.g., a microprocessor  and
      main memory) and mass data storage (such as a hard disk).   A  typical
      PC system consists of a PC, certain  peripheral  input/output  devices
      (including a monitor, a keyboard, a mouse,  and  a  printer),  and  an
      operating system.   PC  systems,  which  include  desktop  and  laptop
      models, can  be  distinguished  from  more  powerful,  more  expensive
      computer systems known as “servers,” which  are  designed  to  provide
      data,  services,  and  functionality  through  a  digital  network  to
      multiple users.

This finding is clearly not a fact “upon which the case turned”  and  it  is
not  a  fact  one  would  deem  vital  or  crucial  to  the  ultimate  issue
precluded—that Microsoft violated the antitrust laws for  unlawful  monopoly
maintenance of operating systems from the period of 1995-1998.  See  D.J.I.,
545 N.W.2d at 875; Hutchinson, 162 N.W.2d at  412-13.   This  finding  is  a
subsidiary fact the parties could readily  establish  through  testimony  at
trial, a request for admission, or a pretrial stipulation of  facts.[2]   It
is not a fact crucial or vital to the ultimate issue in the previous case.
      Before a court applies collateral estoppel offensively, the court must
also consider whether treating an issue or fact as  conclusively  determined
will complicate the determination of other issues in the  subsequent  action
or prejudice the interests of the defending party.  Hunter, 300 N.W.2d  at
125.
      A lengthy list of subsidiary facts granted preclusive effect could  be
very prejudicial to a defendant.   Application  of  collateral  estoppel  to
every subsidiary matter actually litigated in  a  prior  proceeding  greatly
increases the hazards in trying the first lawsuit as well as the hazards  of
misuse in a subsequent lawsuit because “[l]ogical relevance is  of  infinite
possibility,” and an innocuous fact in the first proceeding  could  be  used
as a critical fact against  the  defendant  in  a  second  proceeding.   See
Evergreens v. Nunan, 141 F.2d 927, 929  (2d  Cir.  1944).   Along  with  the
inherent danger that preclusive effect will be given  to  determinations  of
issues that were not seriously contested and may have been  barely  relevant
in the first proceeding, a long list of isolated findings could  confuse  or
mislead the jury.  See Coburn v. Smithkline Beecham Corp., 174  F. Supp.  2d
1235, 1241 (D. Utah 2001) (finding “the  risk  of  prejudice  and  confusion
significantly outweighs any benefit that  might  be  derived  from  applying
collateral estoppel” to an isolated factual finding);  see  also  Whelan  v.
Abell, 953 F.2d 663, 669 (D.C. Cir. 1992) (accepting  the  district  court’s
decision to reject a broad application of collateral estoppel  for  fear  of
“unduly swaying or confusing the jury”  and  distorting  the  resolution  of
other issues).  A brief review of  the  336  findings  of  fact  reveals  an
inordinate number of such findings.  These subsidiary facts may or  may  not
have been seriously contested in the Government Action and  therefore  could
unfairly prejudice the defendant in the present case by  unduly  influencing
the jury.
      Because the court did not properly apply the necessary  and  essential
standard and did not properly consider the potential prejudice  inherent  in
such a large list of subsidiary  facts,  we  reverse  the  district  court’s
order granting preclusive effect to these factual findings.
      V.  Directions for Remand
      Our necessary and essential requirement  parallels  the  standard  set
forth in  the  first  Restatement  of  Judgments,  which  stated  collateral
estoppel is “applicable to the determination of facts in issue, but  not  to
the  determination  of   merely   evidentiary   facts,   even   though   the
determination of the facts in issue is dependent upon the  determination  of
the evidentiary facts.”  Restatement  of  Judgments  §  68  cmt.  p  (1942).
Judge Learned Hand stated this distinction more succinctly when he wrote:

           [A] “fact” may be of two kinds.  It may be one of  those  facts,
      upon whose combined occurrence the law raises the duty, or the  right,
      in question; or it  may  be  a  fact,  from  whose  existence  may  be
      rationally inferred the existence of  one  of  the  facts  upon  whose
      combined occurrence the law raises the duty, or the right.  The  first
      kind of fact we shall for convenience call  an  “ultimate”  fact;  the
      second, a “mediate datum.”  “Ultimate” facts are those which  the  law
      makes the occasion for imposing its sanctions.

Evergreens, 141 F.2d at 928.
      This  section  was  significantly  altered  in  1982  by  the   Second
Restatement of Judgments.  The second Restatement rejected rote  application
of the ultimate fact/evidentiary fact analysis because, even if  a  fact  is
properly categorized as evidentiary, “great effort may  have  been  expended
by both parties in seeking to persuade the adjudicator of its  existence  or
nonexistence and it may well have been regarded as  the  key  issue  in  the
dispute.”  Restatement (Second) of  Judgments  §  27  cmt.  j  (1982).   The
second Restatement replaced its comment discussing the  distinction  between
ultimate and evidentiary facts with a new  analysis  where  the  court  must
determine “whether the issue was  actually  recognized  by  the  parties  as
important and by the  trier  as  necessary  to  the  first  judgment.”   Id.
(emphasis added).  This “important and necessary” analysis protects  parties
from the dangers of innocuous, subsidiary facts because  it  only  precludes
such facts as were truly disputed in the first  proceeding.   Or,  as  aptly
stated by the First Circuit Court of Appeals,

      [w]hen two adversaries concentrate in attempting to resolve  an  issue
      importantly  involved  in  litigation,  there  is  no  unfairness   in
      considering that issue settled for all time between  the  parties  and
      those in their shoes.  But . . . it is unfair to  close  the  door  to
      issues which have not been on stage center, for there  is  no  knowing
      what the white light of controversy would have revealed.

Farmington Dowel Prods. Co. v. Forster Mfg. Co., 421 F.2d 61, 79  (1st  Cir.
1970).
      Because this analysis  protects  against  the  dangers  stemming  from
preclusion on subsidiary facts, we adopt  this  analysis  as  well.   Rather
than pigeonholing facts as evidentiary or ultimate,  courts  must  determine
whether the issue was actually recognized by the parties  as  important  and
by  the  adjudicator  as  necessary  to  the  first  judgment.   Under  this
analysis, collateral estoppel will only adhere  to  those  factual  findings
necessary and essential to the  prior  judgment,  rather  than  findings  of
every minute fact contested by the parties in the previous trial.
      As noted above, the parties agree  16  of  the  352  factual  findings
granted  preclusive  effect  by  the  district  court  were  necessary   and
essential to the underlying judgment.   For  example,  findings  33  and  34
hold:

           33.  Microsoft enjoys so much power in  the  market  for  Intel-
      compatible PC operating systems that if it  wished  to  exercise  this
      power solely in terms of price, it could charge a  price  for  Windows
      substantially above that which  could  be  charged  in  a  competitive
      market.  Moreover, it could do so for a  significant  period  of  time
      without losing an unacceptable amount of business to competitors.   In
      other words, Microsoft enjoys monopoly power in the relevant market.

           34.  Viewed together, three main facts indicate  that  Microsoft
      enjoys monopoly power.  First, Microsoft’s share  of  the  market  for
      Intel-compatible PC operating systems is extremely large  and  stable.
      Second, Microsoft’s dominant market  share  is  protected  by  a  high
      barrier to entry.  Third, and largely as a  result  of  that  barrier,
      Microsoft’s  customers  lack  a  commercially  viable  alternative  to
      Windows.

Both of these findings  were  necessary  and  essential  to  the  underlying
judgment because the court had to establish  Microsoft  had  monopoly  power
before it  could  conclude  Microsoft  maintained  monopoly  power.    These
findings were also important  because  both  parties  debated  the  relevant
market and Microsoft’s monopoly power in that market.
      Because the district court failed to  apply  the  proper  standard  in
evaluating plaintiffs’ collateral estoppel claims,  we  reverse  its  order.
The case is remanded to that court  for  a  reconsideration  of  this  issue
under  the  standard  that  we  have  articulated,   aided   by   the   more
particularized arguments that will  now  be  available  to  counsel  as  the
result of our clarification of the rule of law to be  applied.   On  remand,
the parties herein will have the opportunity to  convince  the  court  which
facts were actually recognized by the parties in the  Government  Action  as
the key issues in dispute and by the adjudicator as necessary to  the  final
judgment.
      VI.  Conclusion
      Because  the  district  court’s  application  of  the  “necessary  and
essential” requirement of collateral estoppel was too broad, we reverse  the
district court’s order and remand for  further  proceedings  in  conformance
with this opinion.
      Reversed and Remanded with Instructions.

-----------------------
      [1]The parties agree 16 of the 352 factual findings were necessary and
essential to the D.C. Circuit’s  judgment.   The  sixteen  findings  of  the
judgment are set forth in paragraphs 18, 33-34, 161, 164, 170, 213,  244-45,
339, 350-52, 394, 401, and 406.
      [2]This court is cognizant of the difficulty in presenting  this  case
at trial and an underlying motivation of Comes to start  this  case  with  a
panoply of facts that are deemed established—facts that do not need  further
proof.  These findings would provide a broad landscape of facts  upon  which
to park this case.  Given the size of this litigation,  it  is  enticing  to
start this case with a foundation of basic  facts.   However,  as  explained
herein, such is not the purpose of collateral estoppel.