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U.S. v. Microsoft, The Fight Continues

On April 3, 2000, Judge Thomas Penfield Jackson issued his conclusions of law determining, based upon his findings of fact issued in November, that Microsoft has violated the antitrust laws. That conclusion should come as no surprise to anyone following the case and Judge Jackson’s earlier rulings, but the decision is remarkable in many respects.

  • In ruling that Microsoft was guilty of an antitrust violation by tying, or integrating, its Internet Explorer browser into its Windows operating system, Judge Jackson has picked a fight with the Court of Appeals for the D.C. Circuit. That court in 1998 reversed a preliminary injunction Judge Jackson had issued against Microsoft in the government’s contempt case and rejected Judge Jackson’s view that the integration constituted illegal tying. Judge Jackson makes it clear that he disagrees with the Court of Appeals decision and suggests that the Supreme Court would reach the same result he has. District court judges who pick a fight with the court of appeals that controls them usually lose. However, Judge Jackson is speaking to the Supreme Court, particularly Justice Scalia and has now said he will invite the government to make a motion to appeal directly to the Supreme Court under the Expediting act.
  • Judge Jackson ruled that Microsoft’s exclusive dealing contracts with computer manufacturers and others prohibiting them from distributing the Netscape browser, were not illegal under Sherman Act Section 1 because Netscape was not foreclosed from the market. In fact the court ruled that “Microsoft’s multiple agreements with distributors did not ultimately deprive Netscape of the ability to have access to every PC user worldwide to offer an opportunity to install Navigator” and that Netscape distributed 15 million copies of its browser in 1998 alone. Yet the court relied upon these same contracts to support its conclusion that Microsoft had monopolized the operating system market, by preventing Netscape from offering a competing platform, and its conclusion that Microsoft had attempted to monopolize the browser market and had a dangerous probability of succeeding. Most antitrust scholars would say that it is much easier for the government to prove a violation of Section 1 than to make out a case for monopolization. It is puzzling to rule that conduct that does not affect the market enough to sustain a charge of restraint of trade under Section 1, can nevertheless support a finding of monopolization.
  • The court’s monopolization conclusions are based upon a finding that Microsoft had monopoly power in the Intel-based operating system market and that it engaged in anti-competitive conduct to keep that monopoly. However, the decision does not provide any objective guidance on how the court determined the difference between anti-competitive, or “predatory,” conduct and normal competitive behavior. For example, the court cited as anti-competitive conduct the finding that “Microsoft used incentives and threats to induce especially important OEMs to design their distributional, promotional and technical efforts to favor [Microsoft’s] Internet Explorer to the exclusion of [Netscape’s] Navigator.” Competition always involves an effort to induce your most important customers to favor your products over the competition, but that does not mean, under current law, that such competitive behavior, even by a company with monopoly power, is unlawful. Judge Jackson’s conclusions harken back to days when any competitive action by a company with monopoly power could be the basis for a monopolization claim. Courts, in the last twenty years, however, have generally required some objectively predatory conduct to support a finding of monopolization. I don’t mean to suggest that none of Microsoft’s conduct was predatory, only that it is difficult to identify that conduct from the court’s conclusions.
While these issues, and others certainly raise interesting grounds for appeal, we are not there yet. Before this fight gets to that round, the district court must determine what relief it will order to remedy the violations of law it has found. The court has set a 60 day time limit for the remedy phase. If it has not been completed by that time Judgement will extend on liability and the Judge will grant a motion to permit a direct appeal to the Supreme Court; which may or may not take the case. The remedy phase will not be easy, as reflected by the fact that even the respected Judge Posner could not achieve a settlement in his role as court-appointed mediator. The government, or in this case governments, including 19 states, have a difficult task in proposing relief. The options that have been discussed in leaked reports of the settlement positions have ranged from detailed limitations on Microsoft’s conduct designed to remedy the specific violations found, to the breakup of Microsoft into two or more independently run companies. Proposing the breakup of Microsoft has serious political risks in this election year. George Bush has already made an issue of the government’s case by saying that he supports innovation, not litigation. If Joel Klein, head of the Antitrust Division of the U.S. Department of Justice, pushes the court to break up Microsoft, it could prove very embarrassing to Vice President Gore, since there does not seem to be general public support for breaking up what has been the singlemost successful American company in the last ten years.

While shaping the relief to make sure that Microsoft plays by the antitrust rules is certainly more acceptable, politically it is not easy for three reasons. First, the court has not provided objective standards for determining what “playing by the rules” means in this case. Second, this is a highly technical and dynamic market and neither the government nor the court may feel that “conduct” relief can be shaped in a way that Microsoft could not take advantage of loopholes. The government’s experience with the 1995 Microsoft consent decree will not give them confidence. The Antitrust Division originally believed that Microsoft’s bundling of its browser with the operating system was barred by that consent decree, but both Judge Jackson and the Court of Appeals disagreed. Third, the more drastic the relief the government gets, the harder it will be to sustain in the Court of Appeals.

Because it has been clear since the beginning of this case that it was likely that the district Court would find that Microsoft violated the antitrust laws, the next round, dealing with relief, will be the most interesting. From the tone of the rulings to date it would seem likely that if the Antitrust Division and the states can agree on the relief they want, which is not by any means certain, that Judge Jackson is likely to give them most of what they ask for. My advice to the government, then, is this: be careful what you wish for because you might get it.

Stay tuned.

U.S. v. Microsoft, Round by Round Scorecard

The current case between the Antitrust Division and Microsoft is only the latest of several rounds in the ongoing fight between these two heavyweights. The scoring of the early rounds makes it easier to understand what is happening now.

Round 1: The Federal Trade Commission first started an antitrust investigation of Microsoft in 1990 and collected thousands of documents, but in 1993 split in a 2-to-2 vote over whether to charge the software giant with antitrust violations. - Microsoft wins

Round 2: Antitrust Division takes over investigation in 1993, gathers over 1,000,000 pages of documents and interviews over 100 witnesses. - Draw

Round 3: Division files a complaint on July 15, 1994, charging that Microsoft was trying to expand its monopoly of operating systems for IBM-compatible PCs by certain marketing practices, including requiring computer manufacturers to pay Microsoft a royalty for every PC they manufactured even if the PC did not use Microsoft's operating system. Parties agree to a consent decree with quite limited relief. - Microsoft ahead on points

Round 4: In an extraordinary move, District Judge Stanley Sporkin, on February 14, 1995, refused to approve the consent decree saying that the government's case did not go far enough and should have prohibited Microsoft from engaging in other practices Judge Sporkin found offensive, including using its dominant position in operating systems to give it an undue advantage in developing applications. - Both lose

Round 5: Court of Appeals, on June 16, 1995 finds that Sporkin had exceeded his authority in requiring the Division to bring a complaint it had not brought against Microsoft, and ruled that the case should be assigned to a different judge and that the consent decree be accepted. - Microsoft wins

Round 6: Judge Thomas Penfield Jackson approves on August 21, 1995, the consent decree that restricted Microsoft's long-term licenses for its operating system, prohibited per processor fees, minimum commitments, lump sum, pricing and stated that “Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon: (i) the licensing of any other [Microsoft] Covered Product or other product (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products…)” - Microsoft wins on points

Round 7: On October 20, 1997, the Antitrust Division filed a motion to hold Microsoft in contempt for violating the paragraph of the consent decree that prohibited Microsoft from requiring computer manufacturers to take other Microsoft products in order to get the Windows operating system. But that prohibition had a provision that it “shall not be construed to prohibit Microsoft from developing integrated products.” The Division claimed that Microsoft required PC manufacturers to take its Internet Explorer Web browser in order to get the popular Windows 95 operating system. Microsoft replied that the Web browser was an integrated part of Windows 95 and that the Division knew at the time the consent decree was negotiated that Microsoft intended to include a browser in Windows 95. Microsoft pointed out that the government had told Judge Sporkin that it had not brought a tying claim in opposing Judge Sporkin's effort to broaden the decree. Judge Jackson agreed that Microsoft had a plausible interpretation of the consent decree and refused to hold Microsoft in contempt. - Microsoft wins

Round 8: Even though he found Microsoft was not in contempt of the consent decree and even though the government had not moved for a preliminary injunction, Judge Jackson, in an extraordinary move, entered on his own motion a preliminary injunction requiring that until trial Microsoft cease the practice of requiring PC manufacturers to agree to install Microsoft's Web browser in order to get a license for an operating system “including Windows 95 or any successor version thereof.” - Division wins

Round 9: Microsoft appealed the preliminary injunction order. Before the Court of Appeals ruled on that appeal, it did take the unusual step of granting Microsoft's motion to stay as much of Judge Jackson's order as applied to Windows 98, which was about to be shipped to PC manufacturers. On May 12, 1998, the Court of Appeals ruled that the government was unlikely to be able to establish on the appeal that Windows 98 was not an integrated product and that it violated the decree. “Under these circumstances any interpretation of [the decree] which barred distribution of Windows 98 under the conditions evidently contemplated by Microsoft would ‘put judges and juries in the unwelcome position of designing computers.'” - Microsoft wins BIG

Round 10: Faced with a partial defeat in the Court of Appeals, and the likely rejection of the Division's ploy of bringing its new claims on the browser issue as a proceeding to enforce the existing consent decree, the Division, on May 18, 1998, fired off its new complaint charging that Microsoft has violated the antitrust laws by tying its browser to the Windows 95 and Windows 98 operating systems. Twenty-one states, initially, filed a companion suit, which was consolidated for trial before Judge Jackson. - Undecided

Round 11: The Court of Appeals, in a 2-to-1 decision on June 23, reversed Judge Jackson's grant of a preliminary injunction in the contempt proceeding [Round 7], finding that it was unlikely that the Government would succeed on the merits because Windows 95 and Internet Explorer were integrated within the meaning of the consent decree. The ruling is likely to end the contempt proceeding. While the decision does not directly address the merits of the government's new case [Round 9], the Court's reasoning, that Microsoft's integration of the browser into the Windows operating system provided benefits to consumers that they could not get by purchasing the two products separately, spells serious trouble for the most important claims in the new complaint. The government's strategy of originally bringing its browser claims in a contempt proceeding under the Consent Decree has backfired. - Microsoft Wins. Government barely escapes a T.K.O.

Round 12: Judge Jackson, on September 14, 1998, denied Microsoft's motion for summary judgment, except to grant the motion to dismiss the “monopoly leveraging” claims from the state's complaint finding that the leveraging theory is inconsistent with the plain text of the Sherman Act. The court denied summary judgment on the tying, exclusive dealing, monopolization and attempt to monopolize claims, and on Microsoft's defense that its activities were protected by the copyright laws. Jackson distinguished his broader views of “technological tying” from those of the Court of Appeals, but found plenty of issues of fact even under the narrower Court of Appeals test. - Government wins and avoids a knockout.

Round 13: On September 17, Judge Jackson denied Microsoft's pretrial motion to exclude at trial testimony about the government's recent allegations that Microsoft applied pressure to Intel, Apple, and Sun Microsystems to help preserve Microsoft's dominance of the operating system market. Jackson refused to rule in advance but will rule on a point-by-point basis as the evidence is offered at the trial, which was postponed five weeks. - Both sides lose by the uncertainty.

Round 14: On October 19, the bench trial started before Judge Jackson, who had ordered that the preliminary injunction hearing and the trial on the permanent injunction be consolidated, that each side be limited to 12 witnesses, and that all direct testimony be submitted in writing. - No decision.

Round 15: The Court permitted introduction of evidence that Microsoft used its position in the operating system market to prevent Apple, Sun, Intel and others from competing with it on other products, even though these allegations were not in the Complaint. - Government wins on points.

Round 16: On December 12, 1998, Judge Jackson ruled that Microsoft may access information on the merger between AOL and Netscape and an arrangement with Microsystems, because those transactions may be relevant to the issues being addressed in the trial including market definitions. - Microsoft wins on points.

Round 17: On November 5, Judge Jackson issued his 412 paragraph detailed findings of fact , which will serve as the basis for the parties’ later submissions of conclusions of law. With an occasional nod to arguments raised by Microsoft, the findings accept the government’s view of the facts, making it certain, unless the parties settle that Judge Jackson will determine, as he did in Round 7, that Microsoft has violated the antitrust laws. - Government wins.

Round 18: As expected, on April 3, 2000 , Judge Jackson concludes that Microsoft has violated the antitrust laws by monopolizing the market for Intel-based operating systems, attempted to monopolize the market for browsers, and restrained trade by illegally tying its browsers to its operating system. He did, however, rule that Microsoft's exclusive dealing contracts were not illegal because they did not foreclose Netscape's brower from the market. The rulings raise solid issues for appeal. A government victory, but not a knock out.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require and further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative.
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