U.S. and Microsoft, A Fight to the Finish?

On Friday, November 5, District Judge Thomas Penfield Jackson issued his findings of fact in the combined action between the Antitrust Division and 19 states against Microsoft. This is the first step in a unique decisional process that will next include conclusions of law and finally consideration of the appropriate remedy and a final judgment. Nobody who has followed this trial closely should be surprised that the extensive and detailed findings accept the government’s view of the facts. Nor should anybody be surprised when Judge Jackson finds that Microsoft has violated the antitrust laws and issues a permanent injunction against Microsoft. The only open issues are (1) will the parties be able to work out a settlement agreement before the process is completed; (2) if not, what will be the relief granted by the District Court; and (3) how much of that relief will be sustained by the Court of Appeals and/or the Supreme Court.

The numbing detail of the 412 findings will give Microsoft a powerful incentive to try to reach a settlement, because if the case continues through judgment, the findings can be used, as prima facie evidence, by any number of private parties, who could bring treble damage actions against Microsoft. The court makes specific findings on how Microsoft’s conduct has harmed a long list of identified companies, including some of the biggest names in the industry such as Apple, IBM, Netscape, Intel, and AOL. However, a settlement will not be easy because the government may be emboldened by the findings to press for extensive relief, perhaps even including the breakup of Microsoft – much like the breakup of ATT. However, if such broad relief is sought, Microsoft would have no choice but to continue to defend the case, at least until the case gets to the Court of Appeals for the DC Circuit, which has already ruled in Microsoft’s favor in this dispute, and can be expected to disagree with Judge Jackson on the legal consequences of at least some of the facts that he has found. For example, Judge Jackson is critical of Microsoft for offering incentives to OEM manufactures to favor its browser over Netscape’s, a practice that does not seem surprising or unlawful to many observers. In addition the findings that Microsoft’s monopoly in the operating system market is attributed in large part to the fact that application developers and consumers prefer a single operating system on which to operate, points to very real advantages of what might be called a natural monopoly. The findings also are at their most theoretical, and therefore weakest, in demonstrating how consumers have been harmed by Microsoft’s conduct. Thus the government should want to avoid pushing Microsoft so hard that it has no choice but to fight on until it gets to the Court of Appeals. In short, the time is right for a settlement, but the government may be too flush with its victory on the findings to offer Microsoft an acceptable exit strategy.

Another consequence of the findings is the focus of the case has clearly shifted more and more to the impact of Microsoft’s conduct in maintaining its monopoly in the market for operating systems for Intel-based PCs, with much less emphasis on the original claim that Microsoft was extending that monopoly into the market for Internet browsers. That shift is in keeping with the Court of Appeals’ earlier rejection of Judge Jackson’s preliminary injunction, which prohibited Microsoft from integrating its Internet Explorer with its Windows operating systems. While the findings are quite convincing that Microsoft crossed the line in its agreements with OEM computer manufacturers and others to prevent them from installing or supporting Netscape, the browser then leading the market, they are less clear on the impact on Microsoft’s monopoly in the market for operating systems. The court points to several efforts by others to develop cross platform systems that would render Microsoft’s operating system monopoly insignificant. These include Java’s programming language that would run on different operating systems, an Intel innovation that would have the same result, and Apple’s development of Quick Time (for running multi-media applications on different operating systems). The court describes in great detail how Microsoft reacted to each such threat, but does not explain how application developers would ever be convinced to write applications for each of these alternatives. Unless developers would do so in very large numbers, and the court has found that they are unwilling to develop different versions of their programs for multiple operating systems, the logical result is for one of these competing technologies, to replace Microsoft as the natural monopoly in providing the standard platform on which applications would run. If so, it is hard to understand how consumers would be better off by substituting one natural monopoly for another.

However, if the government focuses its settlement demands and its requests for relief on Microsoft’s specific anti-competitive practices, it might achieve a settlement before the case gets to the Court of Appeals, and not coincidentally, before there is a new President, a new Attorney General, and a new Assistant Attorney General in charge of the Antitrust Division.

Stay tuned.

Not surprisingly, the current trial has received innovative and extensive Internet coverage. Microsoft and the government are conducting a war of competing Web sites, each putting its own spin on developments in the case. As might be expected, Microsoft is winning that war. The Microsoft site at http://www.microsoft.com/presspass/trial/ includes the full text of the court’s findings, Microsoft’s daily press releases on the developments of the trial, daily transcripts of the court proceedings posted within 24 hours, the trial exhibits, the court papers it has filed and significant judicial decisions, and its own chronology. The Antitrust Division at http://www.usdoj.gov/atr/cases/ms_index.htm includes the government's direct testimony, trial exhibits, deposition excerpts, including that of Bill Gates, and all the government filings in this case and the prior consent decree case. As you might guess, the government's documents are, for the most part, in Word Perfect, not Microsoft Word, and you may experience difficulty in viewing or downloading them unless you use Word Perfect.

U.S. vs 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 4: Court of Appeals, on June 15, 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 5: 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 6: 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 7: 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 8: 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 9: 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 10: 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 11: 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 12: 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 13: 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. In his opening statement, Steve Houck, of the NY Attorney General's office, stated that “the monopoly power that has been abused must be dissipated” but that it was “premature…to talk about the precise form of relief… .” - No decision.

Round 14: 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 15: 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 16: 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.

Copyright) 1999 Nixon Peabody LLP. All rights reserved.