Microsoft Court Ruling
``CONCLUSIONS OF LAW'', April 3, 2000
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF
COLUMBIA
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UNITED STATES OF AMERICA,
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Plaintiff, )
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v. ) Civil Action
No. 98-1232 (TPJ)
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MICROSOFT CORPORATION,
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Defendant. )
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STATE OF
NEW YORK, et al., )
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Plaintiffs )
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v.
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MICROSOFT CORPORATION, )
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Defendant
)
)
) Civil Action No. 98-1233
(TPJ)
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MICROSOFT CORPORATION, )
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v.
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Counterclaim-Plaintiff, )
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ELLIOT
SPITZER, attorney )
general of the State of )
New
York, in his official )
capacity, et al.,
)
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Counterclaim-Defendants.
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)
CONCLUSIONS OF LAW
The United States,
nineteen individual states, and the District of Columbia
("the plaintiffs") bring these consolidated civil
enforcement actions against defendant Microsoft Corporation
("Microsoft") under the Sherman Antitrust Act, 15 U.S.C. §§
1 and 2. The plaintiffs charge, in essence, that Microsoft
has waged an unlawful campaign in defense of its monopoly
position in the market for operating systems designed to run
on Intel-compatible personal computers ("PCs").
Specifically, the plaintiffs contend that Microsoft violated
§2 of the Sherman Act by engaging in a series of
exclusionary, anticompetitive, and predatory acts to
maintain its monopoly power. They also assert that Microsoft
attempted, albeit unsuccessfully to date, to monopolize the
Web browser market, likewise in violation of §2. Finally,
they contend that certain steps taken by Microsoft as part
of its campaign to protect its monopoly power, namely tying
its browser to its operating system and entering into
exclusive dealing arrangements, violated § 1 of the Act.
Upon consideration of the Court's Findings of Fact
("Findings"), filed herein on November 5, 1999, as amended
on December 21, 1999, the proposed conclusions of law
submitted by the parties, the briefs of amici curiae, and
the argument of counsel thereon, the Court concludes that
Microsoft maintained its monopoly power by anticompetitive
means and attempted to monopolize the Web browser market,
both in violation of § 2. Microsoft also violated § 1 of the
Sherman Act by unlawfully tying its Web browser to its
operating system. The facts found do not support the
conclusion, however, that the effect of Microsoft's
marketing arrangements with other companies constituted
unlawful exclusive dealing under criteria established by
leading decisions under § 1.
The nineteen states and the
District of Columbia ("the plaintiff states") seek to ground
liability additionally under their respective antitrust
laws. The Court is persuaded that the evidence in the record
proving violations of the Sherman Act also satisfies the
elements of analogous causes of action arising under the
laws of each plaintiff state. For this reason, and for
others stated below, the Court holds Microsoft liable under
those particular state laws as well.
I. SECTION TWO OF
THE SHERMAN ACT
A. Maintenance of Monopoly Power by
Anticompetitive Means
Section 2 of the Sherman Act
declares that it is unlawful for a person or firm to
"monopolize . . . any part of the trade or commerce among
the several States, or with foreign nations . . . ." 15
U.S.C. § 2. This language operates to limit the means by
which a firm may lawfully either acquire or perpetuate
monopoly power. Specifically, a firm violates § 2 if it
attains or preserves monopoly power through anticompetitive
acts. See United States v. Grinnell Corp., 384 U.S. 563,
570-71 (1966) ("The offense of monopoly power under § 2 of
the Sherman Act has two elements: (1) the possession of
monopoly power in the relevant market and (2) the willful
acquisition or maintenance of that power as distinguished
from growth or development as a consequence of a superior
product, business acumen, or historic accident."); Eastman
Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451,
488 (1992) (Scalia, J., dissenting) ("Our § 2 monopolization
doctrines are . . . directed to discrete situations in which
a defendant's possession of substantial market power,
combined with his exclusionary or anticompetitive behavior,
threatens to defeat or forestall the corrective forces of
competition and thereby sustain or extend the defendant's
agglomeration of power.").
1. Monopoly Power
The
threshold element of a § 2 monopolization offense being "the
possession of monopoly power in the relevant market,"
Grinnell, 384 U.S. at 570, the Court must first ascertain
the boundaries of the commercial activity that can be termed
the "relevant market." See Walker Process Equip., Inc. v.
Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965) ("Without
a definition of [the relevant] market there is no way to
measure [defendant's] ability to lessen or destroy
competition."). Next, the Court must assess the defendant's
actual power to control prices in - or to exclude
competition from - that market. See United States v. E. I.
du Pont de Nemours & Co., 351 U.S. 377, 391 (1956)
("Monopoly power is the power to control prices or exclude
competition.").
In this case, the plaintiffs postulated the relevant market as being the worldwide licensing of Intel-compatible PC operating systems. Whether this zone of commercial activity actually qualifies as a market, "monopolization of which may be illegal," depends on whether it includes all products "reasonably interchangeable by consumers for the same purposes." du Pont, 351 U.S. at 395. See Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986) ("Because the ability of consumers to turn to other suppliers restrains a firm from raising prices above the competitive level, the definition of the 'relevant market' rests on a determination of available substitutes.").
The Court has already found, based on the evidence in this record, that there are currently no products - and that there are not likely to be any in the near future - that a significant percentage of computer users worldwide could substitute for Intel-compatible PC operating systems without incurring substantial costs. Findings 18-29. The Court has further found that no firm not currently marketing Intel-compatible PC operating systems could start doing so in a way that would, within a reasonably short period of time, present a significant percentage of such consumers with a viable alternative to existing Intel-compatible PC operating systems. Id. 18, 30-32. From these facts, the Court has inferred that if a single firm or cartel controlled the licensing of all Intel-compatible PC operating systems worldwide, it could set the price of a license substantially above that which would be charged in a competitive market - and leave the price there for a significant period of time - without losing so many customers as to make the action unprofitable. Id. 18. This inference, in turn, has led the Court to find that the licensing of all Intel-compatible PC operating systems worldwide does in fact constitute the relevant market in the context of the plaintiffs' monopoly maintenance claim. Id.
The plaintiffs proved at trial that Microsoft possesses a dominant, persistent, and increasing share of the relevant market. Microsoft's share of the worldwide market for Intel-compatible PC operating systems currently exceeds ninety-five percent, and the firm's share would stand well above eighty percent even if the Mac OS were included in the market. Id. 35. The plaintiffs also proved that the applications barrier to entry protects Microsoft's dominant market share. Id. 36-52. This barrier ensures that no Intel-compatible PC operating system other than Windows can attract significant consumer demand, and the barrier would operate to the same effect even if Microsoft held its prices substantially above the competitive level for a protracted period of time. Id. Together, the proof of dominant market share and the existence of a substantial barrier to effective entry create the presumption that Microsoft enjoys monopoly power. See United States v. AT&T Co., 524 F. Supp. 1336, 1347-48 (D.D.C. 1981) ("a persuasive showing . . . that defendants have monopoly power . . . through various barriers to entry, . . . in combination with the evidence of market shares, suffice[s] at least to meet the government's initial burden, and the burden is then appropriately placed upon defendants to rebut the existence and significance of barriers to entry"), quoted with approval in Southern Pac. Communications Co. v. AT&T Co., 740 F.2d 980, 1001-02 (D.C. Cir. 1984).
At trial, Microsoft attempted to rebut the presumption of monopoly power with evidence of both putative constraints on its ability to exercise such power and behavior of its own that is supposedly inconsistent with the possession of monopoly power. None of the purported constraints, however, actually deprive Microsoft of "the ability (1) to price substantially above the competitive level and (2) to persist in doing so for a significant period without erosion by new entry or expansion." IIA Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law 501, at 86 (1995) (emphasis in original); see Findings 57-60. Furthermore, neither Microsoft's efforts at technical innovation nor its pricing behavior is inconsistent with the possession of monopoly power. Id. 61-66.
Even if Microsoft's rebuttal had attenuated the
presumption created by the
prima facie showing of
monopoly power, corroborative evidence of monopoly power
abounds in this record: Neither Microsoft nor its OEM
customers believe that the latter have - or will have
anytime soon - even a single, commercially viable
alternative to licensing Windows for pre-installation on
their PCs. Id. 53-55; cf. Rothery, 792 F.2d at 219 n.4 ("we
assume that economic actors usually have accurate
perceptions of economic realities"). Moreover, over the past
several years, Microsoft has comported itself in a way that
could only be consistent with rational behavior for a
profit-maximizing firm if the firm knew that it possessed
monopoly power, and if it was motivated by a desire to
preserve the barrier to entry protecting that power.
Findings 67, 99, 136, 141, 215-16, 241, 261-62, 286, 291,
330, 355, 393, 407.
In short, the proof of Microsoft's dominant, persistent market share protected by a substantial barrier to entry, together with Microsoft's failure to rebut that prima facie showing effectively and the additional indicia of monopoly power, have compelled the Court to find as fact that Microsoft enjoys monopoly power in the relevant market. Id. 33.
2. Maintenance of Monopoly Power by
Anticompetitive Means
In a § 2 case, once it is proved
that the defendant possesses monopoly power in a relevant
market, liability for monopolization depends on a showing
that the defendant used anticompetitive methods to achieve
or maintain its position. See United States v. Grinnell, 384
U.S. 563, 570-71 (1966); Eastman Kodak Co. v. Image
Technical Services, Inc., 504 U.S. 451, 488 (1992) (Scalia,
J., dissenting); Intergraph Corp. v. Intel Corp., 195 F.3d
1346, 1353 (Fed. Cir. 1999). Prior cases have established an
analytical approach to determining whether challenged
conduct should be deemed anticompetitive in the context of a
monopoly maintenance claim. The threshold question in this
analysis is whether the defendant's conduct is
"exclusionary" - that is, whether it has restricted
significantly, or threatens to restrict significantly, the
ability of other firms to compete in the relevant market on
the merits of what they offer customers. See Eastman Kodak,
504 U.S. at 488 (Scalia, J., dissenting) (§ 2 is "directed
to discrete situations" in which the behavior of firms with
monopoly power "threatens to defeat or forestall the
corrective forces of competition").(1)
If the evidence reveals a significant exclusionary impact in the relevant market, the defendant's conduct will be labeled "anticompetitive" - and liability will attach - unless the defendant comes forward with specific, procompetitive business motivations that explain the full extent of its exclusionary conduct. See Eastman Kodak, 504 U.S. at 483 (declining to grant defendant's motion for summary judgment because factual questions remained as to whether defendant's asserted justifications were sufficient to explain the exclusionary conduct or were instead merely pretextual); see also Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 n.32 (1985) (holding that the second element of a monopoly maintenance claim is satisfied by proof of "'behavior that not only (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way'") (quoting III Phillip E. Areeda & Donald F. Turner, Antitrust Law 626b, at 78 (1978)).
If the defendant with monopoly power consciously
antagonized its customers by making its products less
attractive to them - or if it incurred other costs, such as
large outlays of development capital and forfeited
opportunities to derive revenue from it - with no prospect
of compensation other than the erection or preservation of
barriers against competition by equally efficient firms, the
Court may deem the defendant's conduct "predatory." As the
D.C.
Circuit stated in Neumann v. Reinforced Earth Co.,
[P]redation involves aggression against business rivals
through the use of business practices that would not be
considered profit maximizing except for the expectation that
(1) actual rivals will be driven from the market, or the
entry of potential rivals blocked or delayed, so that the
predator will gain or retain a market share sufficient to
command monopoly profits, or (2) rivals will be chastened
sufficiently to abandon competitive behavior the predator
finds threatening to its realization of monopoly profits.
786 F.2d 424, 427 (D.C. Cir. 1986).
Proof that a profit-maximizing firm took predatory action should suffice to demonstrate the threat of substantial exclusionary effect; to hold otherwise would be to ascribe irrational behavior to the defendant. Moreover, predatory conduct, by definition as well as by nature, lacks procompetitive business motivation. See Aspen Skiing, 472 U.S. at 610-11 (evidence indicating that defendant's conduct was "motivated entirely by a decision to avoid providing any benefits" to a rival supported the inference that defendant's conduct "was not motivated by efficiency concerns"). In other words, predatory behavior is patently anticompetitive. Proof that a firm with monopoly power engaged in such behavior thus necessitates a finding of liability under § 2.
In this case, Microsoft early on recognized middleware as the Trojan horse that, once having, in effect, infiltrated the applications barrier, could enable rival operating systems to enter the market for Intel-compatible PC operating systems unimpeded. Simply put, middleware threatened to demolish Microsoft's coveted monopoly power. Alerted to the threat, Microsoft strove over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured, cross-platform applications to erode the applications barrier. In pursuit of this goal, Microsoft sought to convince developers to concentrate on Windows-specific APIs and ignore interfaces exposed by the two incarnations of middleware that posed the greatest threat, namely, Netscape's Navigator Web browser and Sun's implementation of the Java technology. Microsoft's campaign succeeded in preventing - for several years, and perhaps permanently - Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits. Findings 133, 378. Because Microsoft achieved this result through exclusionary acts that lacked procompetitive justification, the Court deems Microsoft's conduct the maintenance of monopoly power by anticompetitive means.
a. Combating the
Browser Threat
The same ambition that inspired
Microsoft's efforts to induce Intel, Apple, RealNetworks and
IBM to desist from certain technological innovations and
business initiatives - namely, the desire to preserve the
applications barrier - motivated the firm's June 1995
proposal that Netscape abstain from releasing platform-level
browsing software for 32-bit versions of Windows. See id.
79-80, 93-132. This proposal, together with the punitive
measures that Microsoft inflicted on Netscape when it
rebuffed the overture, illuminates the context in which
Microsoft's subsequent behavior toward PC manufacturers
("OEMs"), Internet access providers ("IAPs"), and other
firms must be viewed.
When Netscape refused to abandon
its efforts to develop Navigator into a substantial platform
for applications development, Microsoft focused its efforts
on minimizing the extent to which developers would avail
themselves of interfaces exposed by that nascent platform.
Microsoft realized that the extent of developers' reliance
on Netscape's browser platform would depend largely on the
size and trajectory of Navigator's share of browser usage.
Microsoft thus set out to maximize Internet Explorer's share
of browser usage at Navigator's expense. Id. 133, 359-61.
The core of this strategy was ensuring that the firms
comprising the most effective channels for the generation of
browser usage would devote their distributional and
promotional efforts to Internet Explorer rather than
Navigator. Recognizing that pre-installation by OEMs and
bundling with the proprietary software of IAPs led more
directly and efficiently to browser usage than any other
practices in the industry, Microsoft devoted major efforts
to usurping those two channels. Id. 143.
i. The OEM
Channel
With respect to OEMs, Microsoft's campaign
proceeded on three fronts. First, Microsoft bound Internet
Explorer to Windows with contractual and, later,
technological shackles in order to ensure the prominent (and
ultimately permanent) presence of Internet Explorer on every
Windows user's PC system, and to increase the costs
attendant to installing and using Navigator on any PCs
running Windows. Id. 155-74. Second, Microsoft imposed
stringent limits on the freedom of OEMs to reconfigure or
modify Windows 95 and Windows 98 in ways that might enable
OEMs to generate usage for Navigator in spite of the
contractual and technological devices that Microsoft had
employed to bind Internet Explorer to Windows. Id. 202-29.
Finally, Microsoft used incentives and threats to induce
especially important OEMs to design their distributional,
promotional and technical efforts to favor Internet Explorer
to the exclusion of Navigator.
Id. 230-38.
Microsoft's actions increased the likelihood that
pre-installation of Navigator onto Windows would cause user
confusion and system degradation, and therefore lead to
higher support costs and reduced sales for the OEMs. Id.
159, 172. Not willing to take actions that would jeopardize
their already slender profit margins, OEMs felt compelled by
Microsoft's actions to reduce drastically their distribution
and promotion of Navigator. Id. 239, 241. The substantial
inducements that Microsoft held out to the largest OEMs only
further reduced the distribution and promotion of Navigator
in the OEM channel. Id. 230, 233. The response of OEMs to
Microsoft's efforts had a dramatic, negative impact on
Navigator's usage share. Id. 376. The drop in usage share,
in turn, has prevented Navigator from being the vehicle to
open the relevant market to competition on the merits. Id.
377-78, 383.
Microsoft fails to advance any legitimate business objectives that actually explain the full extent of this significant exclusionary impact. The Court has already found that no quality-related or technical justifications fully explain Microsoft's refusal to license Windows 95 to OEMs without version 1.0 through 4.0 of Internet Explorer, or its refusal to permit them to uninstall versions 3.0 and 4.0. Id. 175-76. The same lack of justification applies to Microsoft's decision not to offer a browserless version of Windows 98 to consumers and OEMs, id. 177, as well as to its claim that it could offer "best of breed" implementations of functionalities in Web browsers. With respect to the latter assertion, Internet Explorer is not demonstrably the current "best of breed" Web browser, nor is it likely to be so at any time in the immediate future. The fact that Microsoft itself was aware of this reality only further strengthens the conclusion that Microsoft's decision to tie Internet Explorer to Windows cannot truly be explained as an attempt to benefit consumers and improve the efficiency of the software market generally, but rather as part of a larger campaign to quash innovation that threatened its monopoly position. Id. 195, 198.
To the extent that Microsoft
still asserts a copyright defense, relying upon federal
copyright law as a justification for its various
restrictions on OEMs, that defense neither explains nor
operates to immunize Microsoft's conduct under the Sherman
Act. As a general proposition, Microsoft argues that the
federal Copyright Act, 17 U.S.C. §101 et seq., endows the
holder of a valid copyright in software with an absolute
right to prevent licensees, in this case the OEMs, from
shipping modified versions of its product without its
express permission. In truth, Windows 95 and Windows 98 are
covered by copyright registrations, Findings 228, that
"constitute prima facie evidence of the validity of the
copyright." 17 U.S.C. §410(c). But the validity of
Microsoft's copyrights has never been in doubt; the issue is
what, precisely, they protect.
Microsoft has presented
no evidence that the contractual (or the technological)
restrictions it placed on OEMs' ability to alter Windows
derive from any of the enumerated rights explicitly granted
to a copyright holder under the Copyright Act. Instead,
Microsoft argues that the restrictions "simply restate" an
expansive right to preserve the "integrity"of its
copyrighted software against any "distortion," "truncation,"
or "alteration," a right nowhere mentioned among the
Copyright Act's list of exclusive rights, 17 U.S.C. §106,
thus raising some doubt as to its existence. See Twentieth
Century Music Corp. v. Aiken, 422 U.S. 151, 155 (1973) (not
all uses of a work are within copyright holder's control;
rights limited to specifically granted "exclusive rights");
cf. 17 U.S.C. § 501(a) (infringement means violating
specifically enumerated rights).(2)
It is also well settled that a copyright holder is not by reason thereof entitled to employ the perquisites in ways that directly threaten competition. See, e.g., Eastman Kodak, 504 U.S. at 479 n.29 ("The Court has held many times that power gained through some natural and legal advantage such as a . . . copyright, . . . can give rise to liability if 'a seller exploits his dominant position in one market to expand his empire into the next.'") (quoting Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 611 (1953)); Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409, 421 (1986); Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147, 1186 n.63 (1st Cir. 1994) (a copyright does not exempt its holder from antitrust inquiry where the copyright is used as part of a scheme to monopolize); see also Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1219 (9th Cir. 1997), cert. denied, 523 U.S. 1094 (1998) ("Neither the aims of intellectual property law, nor the antitrust laws justify allowing a monopolist to rely upon a pretextual business justification to mask anticompetitive conduct."). Even constitutional privileges confer no immunity when they are abused for anticompetitive purposes. See Lorain Journal Co. v. United States, 342 U.S. 143, 155-56 (1951). The Court has already found that the true impetus behind Microsoft's restrictions on OEMs was not its desire to maintain a somewhat amorphous quality it refers to as the "integrity" of the Windows platform, nor even to ensure that Windows afforded a uniform and stable platform for applications development. Microsoft itself engendered, or at least countenanced, instability and inconsistency by permitting Microsoft-friendly modifications to the desktop and boot sequence, and by releasing updates to Internet Explorer more frequently than it released new versions of Windows. Findings 226. Add to this the fact that the modifications OEMs desired to make would not have removed or altered any Windows APIs, and thus would not have disrupted any of Windows' functionalities, and it is apparent that Microsoft's conduct is effectively explained by its foreboding that OEMs would pre-install and give prominent placement to middleware like Navigator that could attract enough developer attention to weaken the applications barrier to entry. Id. 227. In short, if Microsoft was truly inspired by a genuine concern for maximizing consumer satisfaction, as well as preserving its substantial investment in a worthy product, then it would have relied more on the power of the very competitive PC market, and less on its own market power, to prevent OEMs from making modifications that consumers did not want. Id. 225, 228-29.
ii. The IAP Channel
Microsoft adopted
similarly aggressive measures to ensure that the IAP channel
would generate browser usage share for Internet Explorer
rather than Navigator. To begin with, Microsoft licensed
Internet Explorer and the Internet Explorer Access Kit to
hundreds of IAPs for no charge. Id. 250-51. Then, Microsoft
extended valuable promotional treatment to the ten most
important IAPs in exchange for their commitment to promote
and distribute Internet Explorer and to exile Navigator from
the desktop. Id. 255-58, 261, 272, 288-90, 305-06. Finally,
in exchange for efforts to upgrade existing subscribers to
client software that came bundled with Internet Explorer
instead of Navigator, Microsoft granted rebates - and in
some cases made outright payments - to those same IAPs. Id.
259-60, 295. Given the importance of the IAP channel to
browser usage share, it is fair to conclude that these
inducements and restrictions contributed significantly to
the drastic changes that have in fact occurred in Internet
Explorer's and Navigator's respective usage shares. Id.
144-47, 309-10. Microsoft's actions in the IAP channel
thereby contributed significantly to preserving the
applications barrier to entry.
There are no valid reasons to justify the full extent of Microsoft's exclusionary behavior in the IAP channel. A desire to limit free riding on the firm's investment in consumer-oriented features, such as the Referral Server and the Online Services Folder, can, in some circumstances, qualify as a procompetitive business motivation; but that motivation does not explain the full extent of the restrictions that Microsoft actually imposed upon IAPs. Under the terms of the agreements, an IAP's failure to keep Navigator shipments below the specified percentage primed Microsoft's contractual right to dismiss the IAP from its own favored position in the Referral Server or the Online Services Folder. This was true even if the IAP had refrained from promoting Navigator in its client software included with Windows, had purged all mention of Navigator from any Web site directly connected to the Referral Server, and had distributed no browser other than Internet Explorer to the new subscribers it gleaned from the Windows desktop. Id. 258, 262, 289. Thus, Microsoft's restrictions closed off a substantial amount of distribution that would not have constituted a free ride to Navigator.
Nor can an ostensibly procompetitive desire to "foster brand association" explain the full extent of Microsoft's restrictions. If Microsoft's only concern had been brand association, restrictions on the ability of IAPs to promote Navigator likely would have sufficed. It is doubtful that Microsoft would have paid IAPs to induce their existing subscribers to drop Navigator in favor of Internet Explorer unless it was motivated by a desire to extinguish Navigator as a threat. See id. 259, 295. More generally, it is crucial to an understanding of Microsoft's intentions to recognize that Microsoft paid for the fealty of IAPs with large investments in software development for their benefit, conceded opportunities to take a profit, suffered competitive disadvantage to Microsoft's own OLS, and gave outright bounties. Id. 259-60, 277, 284-86, 295. Considering that Microsoft never intended to derive appreciable revenue from Internet Explorer directly, id. 136-37, these sacrifices could only have represented rational business judgments to the extent that they promised to diminish Navigator's share of browser usage and thereby contribute significantly to eliminating a threat to the applications barrier to entry. Id. 291. Because the full extent of Microsoft's exclusionary initiatives in the IAP channel can only be explained by the desire to hinder competition on the merits in the relevant market, those initiatives must be labeled anticompetitive.
In sum, the efforts Microsoft directed at OEMs and IAPs successfully ostracized Navigator as a practical matter from the two channels that lead most efficiently to browser usage. Even when viewed independently, these two prongs of Microsoft's campaign threatened to "forestall the corrective forces of competition" and thereby perpetuate Microsoft's monopoly power in the relevant market. Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 488 (1992) (Scalia, J., dissenting). Therefore, whether they are viewed separately or together, the OEM and IAP components of Microsoft's anticompetitive campaign merit a finding of liability under § 2.
iii. ICPs, ISVs and Apple
No
other distribution channels for browsing software approach
the efficiency of OEM pre-installation and IAP bundling.
Findings 144-47. Nevertheless, protecting the applications
barrier to entry was so critical to Microsoft that the firm
was willing to invest substantial resources to enlist ICPs,
ISVs, and Apple in its campaign against the browser threat.
By extracting from Apple terms that significantly diminished
the usage of Navigator on the Mac OS, Microsoft helped to
ensure that developers would not view Navigator as truly
cross-platform middleware. Id. 356. By granting ICPs and
ISVs free licenses to bundle Internet Explorer with their
offerings, and by exchanging other valuable inducements for
their agreement to distribute, promote and rely on Internet
Explorer rather than Navigator, Microsoft directly induced
developers to focus on its own APIs rather than ones exposed
by Navigator. Id. 334-35, 340. These measures supplemented
Microsoft's efforts in the OEM and IAP channels.
Just as
they fail to account for the measures that Microsoft took in
the IAP channel, the goals of preventing free riding and
preserving brand association fail to explain the full extent
of Microsoft's actions in the ICP channel. Id. 329-30. With
respect to the ISV agreements, Microsoft has put forward no
procompetitive business ends whatsoever to justify their
exclusionary terms. See id. 339-40. Finally, Microsoft's
willingness to make the sacrifices involved in cancelling
Mac Office, and the concessions relating to browsing
software that it demanded from Apple, can only be explained
by Microsoft's desire to protect the applications barrier to
entry from the threat posed by Navigator. Id. 355. Thus,
once again, Microsoft is unable to justify the full extent
of its restrictive behavior.
b. Combating the Java Threat
As part of its grand strategy to protect the
applications barrier, Microsoft employed an array of tactics
designed to maximize the difficulty with which applications
written in Java could be ported from Windows to other
platforms, and vice versa. The first of these measures was
the creation of a Java implementation for Windows that
undermined portability and was incompatible with other
implementations. Id. 387-93. Microsoft then induced
developers to use its implementation of Java rather than
Sun-compliant ones. It pursued this tactic directly, by
means of subterfuge and barter, and indirectly, through its
campaign to minimize Navigator's usage share. Id. 394,
396-97, 399-400, 401-03. In a separate effort to prevent the
development of easily portable Java applications, Microsoft
used its monopoly power to prevent firms such as Intel from
aiding in the creation of cross-platform interfaces. Id.
404-06.
Microsoft's tactics induced many Java developers
to write their applications using Microsoft's developer
tools and to refrain from distributing Sun-compliant JVMs to
Windows users. This stratagem has effectively resulted in
fewer applications that are easily portable. Id. 398. What
is more, Microsoft's actions interfered with the development
of new cross-platform Java interfaces. Id. 406. It is not
clear whether, absent Microsoft's machinations, Sun's Java
efforts would by now have facilitated porting between
Windows and other platforms to a degree sufficient to render
the applications barrier to entry vulnerable. It is clear,
however, that Microsoft's actions markedly impeded Java's
progress to that end. Id. 407. The evidence thus compels the
conclusion that Microsoft's actions with respect to Java
have restricted significantly the ability of other firms to
compete on the merits in the market for Intel-compatible PC
operating systems.
Microsoft's actions to counter the Java threat went far beyond the development of an attractive alternative to Sun's implementation of the technology. Specifically, Microsoft successfully pressured Intel, which was dependent in many ways on Microsoft's good graces, to abstain from aiding in Sun's and Netscape's Java development work. Id. 396, 406. Microsoft also deliberately designed its Java development tools so that developers who were opting for portability over performance would nevertheless unwittingly write Java applications that would run only on Windows. Id. 394. Moreover, Microsoft's means of luring developers to its Java implementation included maximizing Internet Explorer's share of browser usage at Navigator's expense in ways the Court has already held to be anticompetitive. See supra, § I.A.2.a. Finally, Microsoft impelled ISVs, which are dependent upon Microsoft for technical information and certifications relating to Windows, to use and distribute Microsoft's version of the Windows JVM rather than any Sun-compliant version.
Id.
401-03.
These actions cannot be described as competition
on the merits, and they did not benefit consumers. In fact,
Microsoft's actions did not even benefit Microsoft in the
short run, for the firm's efforts to create incompatibility
between its JVM for Windows and others' JVMs for Windows
resulted in fewer total applications being able to run on
Windows than otherwise would have been written. Microsoft
was willing nevertheless to obstruct the development of
Windows-compatible applications if they would be easy to
port to other platforms and would thus diminish the
applications barrier to entry. Id. 407.
c. Microsoft's
Conduct Taken As a Whole
As the foregoing discussion
illustrates, Microsoft's campaign to protect the
applications barrier from erosion by network-centric
middleware can be broken down into discrete categories of
activity, several of which on their own independently
satisfy the second element of a § 2 monopoly maintenance
claim. But only when the separate categories of conduct are
viewed, as they should be, as a single, well-coordinated
course of action does the full extent of the violence that
Microsoft has done to the competitive process reveal itself.
See Continental Ore Co. v. Union Carbide & Carbon Corp., 370
U.S. 690, 699 (1962) (counseling that in Sherman Act cases
"plaintiffs should be given the full benefit of their proof
without tightly compartmentalizing the various factual
components and wiping the slate clean after scrutiny of
each"). In essence, Microsoft mounted a deliberate assault
upon entrepreneurial efforts that, left to rise or fall on
their own merits, could well have enabled the introduction
of competition into the market for Intel-compatible PC
operating systems. Id. 411. While the evidence does not
prove that they would have succeeded absent Microsoft's
actions, it does reveal that Microsoft placed an oppressive
thumb on the scale of competitive fortune, thereby
effectively guaranteeing its continued dominance in the
relevant market. More broadly, Microsoft's anticompetitive
actions trammeled the competitive process through which the
computer software industry generally stimulates innovation
and conduces to the optimum benefit of consumers. Id. 412.
Viewing Microsoft's conduct as a whole also reinforces
the conviction that it was predacious. Microsoft paid vast
sums of money, and renounced many millions more in lost
revenue every year, in order to induce firms to take actions
that would help enhance Internet Explorer's share of browser
usage at Navigator's expense. Id. 139. These outlays cannot
be explained as subventions to maximize return from Internet
Explorer. Microsoft has no intention of ever charging for
licenses to use or distribute its browser. Id. 137-38.
Moreover, neither the desire to bolster demand for Windows
nor the prospect of ancillary revenues from Internet
Explorer can explain the lengths to which Microsoft has
gone. In fact, Microsoft has expended wealth and foresworn
opportunities to realize more in a manner and to an extent
that can only represent a rational investment if its purpose
was to perpetuate the applications barrier to entry. Id.
136, 139-42. Because Microsoft's business practices "would
not be considered profit maximizing except for the
expectation that . . . the entry of potential rivals" into
the market for Intel-compatible PC operating systems will be
"blocked or delayed," Neumann v. Reinforced Earth Co., 786
F.2d 424, 427 (D.C. Cir. 1986), Microsoft's campaign must be
termed predatory. Since the Court has already found that
Microsoft possesses monopoly power, see supra, § I.A.1, the
predatory nature of the firm's conduct compels the Court to
hold Microsoft liable under § 2 of the Sherman Act.
B.
Attempting to Obtain Monopoly Power in a Second Market by
Anticompetitive
Means
In addition to condemning
actual monopolization, § 2 of the Sherman Act declares that
it is unlawful for a person or firm to "attempt to
monopolize . . . any part of the trade or commerce among the
several States, or with foreign nations . . . ." 15 U.S.C. §
2. Relying on this language, the plaintiffs assert that
Microsoft's anticompetitive efforts to maintain its monopoly
power in the market for Intel-compatible PC operating
systems warrant additional liability as an illegal attempt
to amass monopoly power in "the browser market." The Court
agrees.
In order for liability to attach for attempted monopolization, a plaintiff generally must prove "(1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize," and (3) that there is a "dangerous probability" that the defendant will succeed in achieving monopoly power. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993). Microsoft's June 1995 proposal that Netscape abandon the field to Microsoft in the market for browsing technology for Windows, and its subsequent, well-documented efforts to overwhelm Navigator's browser usage share with a proliferation of Internet Explorer browsers inextricably attached to Windows, clearly meet the first element of the offense.
The
evidence in this record also satisfies the requirement of
specific intent. Microsoft's effort to convince Netscape to
stop developing platform-level browsing software for the
32-bit versions of Windows was made with full knowledge that
Netscape's acquiescence in this market allocation scheme
would, without more, have left Internet Explorer with such a
large share of browser
usage as to endow Microsoft with
de facto monopoly power in the browser market.
Findings
79-89.
When Netscape refused to abandon the development
of browsing software for 32-bit versions of Windows,
Microsoft's strategy for protecting the applications barrier
became one of expanding Internet Explorer's share of browser
usage - and simultaneously depressing Navigator's share - to
an extent sufficient to demonstrate to developers that
Navigator would never emerge as the standard software
employed to browse the Web. Id. 133. While Microsoft's top
executives never expressly declared acquisition of monopoly
power in the browser market to be the objective, they knew,
or should have known, that the tactics they actually
employed were likely to push Internet Explorer's share to
those extreme heights. Navigator's slow demise would leave a
competitive vacuum for only Internet Explorer to fill. Yet,
there is no evidence that Microsoft tried - or even
considered trying - to prevent its anticompetitive campaign
from achieving overkill. Under these circumstances, it is
fair to presume that the wrongdoer intended "the probable
consequences of its acts." IIIA Phillip E. Areeda & Herbert
Hovenkamp, Antitrust Law 805b, at 324 (1996); see also
Spectrum Sports, 506 U.S. at 459 (proof of "'predatory'
tactics . . . may be sufficient to prove the necessary
intent to monopolize, which is something more than an intent
to compete vigorously"). Therefore, the facts of this case
suffice to prove the element of specific intent.
Even if the first two elements of the offense are met, however, a defendant may not be held liable for attempted monopolization absent proof that its anticompetitive conduct created a dangerous probability of achieving the objective of monopoly power in a relevant market. Id. The evidence supports the conclusion that Microsoft's actions did pose such a danger.
At the time Microsoft presented its market allocation proposal to Netscape, Navigator's share of browser usage stood well above seventy percent, and no other browser enjoyed more than a fraction of the remainder. Findings 89, 372. Had Netscape accepted Microsoft's offer, nearly all of its share would have devolved upon Microsoft, because at that point, no potential third-party competitor could either claim to rival Netscape's stature as a browser company or match Microsoft's ability to leverage monopoly power in the market for Intel-compatible PC operating systems. In the time it would have taken an aspiring entrant to launch a serious effort to compete against Internet Explorer, Microsoft could have erected the same type of barrier that protects its existing monopoly power by adding proprietary extensions to the browsing software under its control and by extracting commitments from OEMs, IAPs and others similar to the ones discussed in § I.A.2, supra. In short, Netscape's assent to Microsoft's market division proposal would have, instanter, resulted in Microsoft's attainment of monopoly power in a second market. It follows that the proposal itself created a dangerous probability of that result. See United States v. American Airlines, Inc., 743 F.2d 1114, 1118-19 (5th Cir. 1984) (fact that two executives "arguably" could have implemented market-allocation scheme that would have engendered monopoly power was sufficient for finding of dangerous probability). Although the dangerous probability was no longer imminent with Netscape's rejection of Microsoft's proposal, "the probability of success at the time the acts occur" is the measure by which liability is determined. Id. at 1118.
This conclusion alone is sufficient to support a finding of liability for attempted monopolization. The Court is nonetheless compelled to express its further conclusion that the predatory course of conduct Microsoft has pursued since June of 1995 has revived the dangerous probability that Microsoft will attain monopoly power in a second market. Internet Explorer's share of browser usage has already risen above fifty percent, will exceed sixty percent by January 2001, and the trend continues unabated. Findings 372-73; see M&M Medical Supplies & Serv., Inc. v. Pleasant Valley Hosp., Inc., 981 F.2d 160, 168 (4th Cir. 1992) (en banc) ("A rising share may show more probability of success than a falling share. . . . [C]laims involving greater than 50% share should be treated as attempts at monopolization when the other elements for attempted monopolization are also satisfied.") (citations omitted); see also IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 807d, at 354-55 (1996) (acknowledging the significance of a large, rising market share to the dangerous probability element).
II.
SECTION ONE OF THE SHERMAN ACT
Section 1 of the Sherman
Act prohibits "every contract, combination . . . , or
conspiracy, in restraint of trade or commerce . . . ." 15
U.S.C. § 1. Pursuant to this statute, courts have condemned
commercial stratagems that constitute unreasonable
restraints on competition. See Continental T.V., Inc. v. GTE
Sylvania Inc., 433 U.S. 36, 49 (1977); Chicago Board of
Trade v. United States, 246 U.S. 231, 238-39 (1918), among
them "tying arrangements" and "exclusive dealing" contracts.
Tying arrangements have been found unlawful where sellers
exploit their market power over one product to force
unwilling buyers into acquiring another. See Jefferson
Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 12
(1984); Northern Pac. Ry. Co. v. United States, 356 U.S. 1,
6 (1958); Times-Picayune Pub. Co. v. United States, 345 U.S.
594, 605 (1953). Where agreements have been challenged as
unlawful exclusive dealing, the courts have condemned only
those contractual arrangements that substantially foreclose
competition in a relevant market by significantly reducing
the number of outlets available to a competitor to reach
prospective consumers of the competitor's product. See Tampa
Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327
(1961); Roland Machinery Co. v. Dresser Industries, Inc.,
749 F.2d 380, 393 (7th Cir. 1984).
A. Tying
Liability
for tying under § 1 exists where (1) two separate "products"
are involved; (2) the defendant affords its customers no
choice but to take the tied product in order to obtain the
tying product; (3) the arrangement affects a substantial
volume of interstate commerce; and (4) the defendant has
"market power" in the tying product market. Jefferson
Parish, 466 U.S. at 12-18. The Supreme Court has since
reaffirmed this test in Eastman Kodak Co. v. Image Technical
Services, Inc., 504 U.S. 451, 461-62 (1992). All four
elements are required, whether the arrangement is subjected
to a per se or Rule of Reason analysis.
The plaintiffs allege that Microsoft's combination of Windows and Internet Explorer by contractual and technological artifices constitute unlawful tying to the extent that those actions forced Microsoft's customers and consumers to take Internet Explorer as a condition of obtaining Windows. While the Court agrees with plaintiffs, and thus holds that Microsoft is liable for illegal tying under § 1, this conclusion is arguably at variance with a decision of the U.S. Court of Appeals for the D.C. Circuit in a closely related case, and must therefore be explained in some detail. Whether the decisions are indeed inconsistent is not for this Court to say.
The decision of the D.C. Circuit in question is United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998) ("Microsoft II") which is itself related to an earlier decision of the same Circuit, United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995) ("Microsoft I"). The history of the controversy is sufficiently set forth in the appellate opinions and need not be recapitulated here, except to state that those decisions anticipated the instant case, and that Microsoft II sought to guide this Court, insofar as practicable, in the further proceedings it fully expected to ensue on the tying issue. Nevertheless, upon reflection this Court does not believe the D.C. Circuit intended Microsoft II to state a controlling rule of law for purposes of this case. As the Microsoft II court itself acknowledged, the issue before it was the construction to be placed upon a single provision of a consent decree that, although animated by antitrust considerations, was nevertheless still primarily a matter of determining contractual intent. The court of appeals' observations on the extent to which software product design decisions may be subject to judicial scrutiny in the course of § 1 tying cases are in the strictest sense obiter dicta, and are thus not formally binding. Nevertheless, both prudence and the deference this Court owes to pronouncements of its own Circuit oblige that it follow in the direction it is pointed until the trail falters.
The majority opinion in Microsoft II evinces both an extraordinary degree of respect for changes (including "integration") instigated by designers of technological products, such as software, in the name of product "improvement," and a corresponding lack of confidence in the ability of the courts to distinguish between improvements in fact and improvements in name only, made for anticompetitive purposes. Read literally, the D.C. Circuit's opinion appears to immunize any product design (or, at least, software product design) from antitrust scrutiny, irrespective of its effect upon competition, if the software developer can postulate any "plausible claim" of advantage to its arrangement of code. 147 F.3d at 950.
This undemanding test appears to this Court to be inconsistent with the pertinent Supreme Court precedents in at least three respects. First, it views the market from the defendant's perspective, or, more precisely, as the defendant would like to have the market viewed. Second, it ignores reality: The claim of advantage need only be plausible; it need not be proved. Third, it dispenses with any balancing of the hypothetical advantages against any anticompetitive effects.
The two most recent Supreme Court cases to have addressed the issue of product and market definition in the context of Sherman Act tying claims are Jefferson Parish, supra, and Eastman Kodak, supra. In Jefferson Parish, the Supreme Court held that a hospital offering hospital services and anesthesiology services as a package could not be found to have violated the anti-tying rules unless the evidence established that patients, i.e. consumers, perceived the services as separate products for which they desired a choice, and that the package had the effect of forcing the patients to purchase an unwanted product. 466 U.S. at 21-24, 28-29. In Eastman Kodak the Supreme Court held that a manufacturer of photocopying and micrographic equipment, in agreeing to sell replacement parts for its machines only to those customers who also agreed to purchase repair services from it as well, would be guilty of tying if the evidence at trial established the existence of consumer demand for parts and services separately. 504 U.S. at 463.
Both defendants asserted, as Microsoft does here, that the tied and tying products were in reality only a single product, or that every item was traded in a single market.(3) In Jefferson Parish, the defendant contended that it offered a "functionally integrated package of services" - a single product - but the Supreme Court concluded that the "character of the demand" for the constituent components, not their functional relationship, determined whether separate "products" were actually involved. 466 U.S. at 19. In Eastman Kodak, the defendant postulated that effective competition in the equipment market precluded the possibility of the use of market power anticompetitively in any after-markets for parts or services: Sales of machines, parts, and services were all responsive to the discipline of the larger equipment market. The Supreme Court declined to accept this premise in the absence of evidence of "actual market realities," 504 U.S. at 466-67, ultimately holding that "the proper market definition in this case can be determined only after a factual inquiry into the 'commercial realities' faced by consumers." Id. at 482 (quoting United States v. Grinnell Corp., 384 U.S. 563, 572 (1966)).(4)
In both Jefferson Parish and Eastman Kodak, the Supreme Court also gave consideration to certain theoretical "valid business reasons" proffered by the defendants as to why the arrangements should be deemed benign. In Jefferson Parish, the hospital asserted that the combination of hospital and anesthesia services eliminated multiple problems of scheduling, supply, performance standards, and equipment maintenance. 466 U.S. at 43-44. The manufacturer in Eastman Kodak contended that quality control, inventory management, and the prevention of free riding justified its decision to sell parts only in conjunction with service. 504 U.S. at 483. In neither case did the Supreme Court find those justifications sufficient if anticompetitive effects were proved. Id. at 483-86; Jefferson Parish, 466 U.S. at 25 n.42. Thus, at a minimum, the admonition of the D.C. Circuit in Microsoft II to refrain from any product design assessment as to whether the "integration" of Windows and Internet Explorer is a "net plus," deferring to Microsoft's "plausible claim" that it is of "some advantage" to consumers, is at odds with the Supreme Court's own approach.
The significance of those cases, for this Court's purposes, is to teach that resolution of product and market definitional problems must depend upon proof of commercial reality, as opposed to what might appear to be reasonable. In both cases the Supreme Court instructed that product and market definitions were to be ascertained by reference to evidence of consumers' perception of the nature of the products and the markets for them, rather than to abstract or metaphysical assumptions as to the configuration of the "product" and the "market." Jefferson Parish, 466 U.S. at 18; Eastman Kodak, 504 U.S. at 481-82. In the instant case, the commercial reality is that consumers today perceive operating systems and browsers as separate "products," for which there is separate demand. Findings 149-54. This is true notwithstanding the fact that the software code supplying their discrete functionalities can be commingled in virtually infinite combinations, rendering each indistinguishable from the whole in terms of files of code or any other taxonomy. Id. 149-50, 162-63, 187-91.
Proceeding in line with the Supreme Court cases, which are indisputably controlling, this Court first concludes that Microsoft possessed "appreciable economic power in the tying market," Eastman Kodak, 504 U.S. at 464, which in this case is the market for Intel-compatible PC operating systems. See Jefferson Parish, 466 U.S. at 14 (defining market power as ability to force purchaser to do something that he would not do in competitive market); see also Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 504 (1969) (ability to raise prices or to impose tie-ins on any appreciable number of buyers within the tying product market is sufficient). While courts typically have not specified a percentage of the market that creates the presumption of "market power," no court has ever found that the requisite degree of power exceeds the amount necessary for a finding of monopoly power. See Eastman Kodak, 504 U.S. at 481. Because this Court has already found that Microsoft possesses monopoly power in the worldwide market for Intel-compatible PC operating systems (i.e., the tying product market), Findings 18-67, the threshold element of "appreciable economic power" is a fortiori met.
Similarly, the Court's Findings strongly support a conclusion that a "not insubstantial" amount of commerce was foreclosed to competitors as a result of Microsoft's decision to bundle Internet Explorer with Windows. The controlling consideration under this element is "simply whether a total amount of business" that is "substantial enough in terms of dollar-volume so as not to be merely de minimis" is foreclosed. Fortner, 394 U.S. at 501; cf. International Salt Co. v. United States, 332 U.S. 392, 396 (1947) (unreasonable per se to foreclose competitors from any substantial market by a tying arrangement).
Although the Court's Findings do not specify a dollar amount of business that has been foreclosed to any particular present or potential competitor of Microsoft in the relevant market,(5) including Netscape, the Court did find that Microsoft's bundling practices caused Navigator's usage share to drop substantially from 1995 to 1998, and that as a direct result Netscape suffered a severe drop in revenues from lost advertisers, Web traffic and purchases of server products. It is thus obvious that the foreclosure achieved by Microsoft's refusal to offer Internet Explorer separately from Windows exceeds the Supreme Court's de minimis threshold. See Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1341 (9th Cir. 1984) (citing Fortner).
The facts of this case also prove the elements of the forced bundling requirement. Indeed, the Supreme Court has stated that the "essential characteristic" of an illegal tying arrangement is a seller's decision to exploit its market power over the tying product "to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms." Jefferson Parish, 466 U.S. at 12. In that regard, the Court has found that, beginning with the early agreements for Windows 95, Microsoft has conditioned the provision of a license to distribute Windows on the OEMs' purchase of Internet Explorer. Findings 158-65. The agreements prohibited the licensees from ever modifying or deleting any part of Windows, despite the OEMs' expressed desire to be allowed to do so. Id. 158, 164. As a result, OEMs were generally not permitted, with only one brief exception, to satisfy consumer demand for a browserless version of Windows 95 without Internet Explorer. Id. 158, 202. Similarly, Microsoft refused to license Windows 98 to OEMs unless they also agreed to abstain from removing the icons for Internet Explorer from the desktop. Id. 213. Consumers were also effectively compelled to purchase Internet Explorer along with Windows 98 by Microsoft's decision to stop including Internet Explorer on the list of programs subject to the Add/Remove function and by its decision not to respect their selection of another browser as their default. Id. 170-72.
The fact that Microsoft ostensibly priced Internet Explorer at zero does not detract from the conclusion that consumers were forced to pay, one way or another, for the browser along with Windows. Despite Microsoft's assertion that the Internet Explorer technologies are not "purchased" since they are included in a single royalty price paid by OEMs for Windows 98, see Microsoft's Proposed Conclusions of Law at 12-13, it is nevertheless clear that licensees, including consumers, are forced to take, and pay for, the entire package of software and that any value to be ascribed to Internet Explorer is built into this single price. See United States v. Microsoft Corp., Nos. CIV. A. 98-1232, 98-1233, 1998 WL 614485, *12 (D.D.C., Sept. 14, 1998); IIIA Philip E. Areeda & Herbert Hovenkamp, Antitrust Law 760b6, at 51 (1996) ("[T]he tie may be obvious, as in the classic form, or somewhat more subtle, as when a machine is sold or leased at a price that covers 'free' servicing."). Moreover, the purpose of the Supreme Court's "forcing" inquiry is to expose those product bundles that raise the cost or difficulty of doing business for would-be competitors to prohibitively high levels, thereby depriving consumers of the opportunity to evaluate a competing product on its relative merits. It is not, as Microsoft suggests, simply to punish firms on the basis of an increment in price attributable to the tied product. See Fortner, 394 U.S. at 512-14 (1969); Jefferson Parish, 466 U.S. at 12-13.
As for the crucial requirement that Windows and Internet Explorer be deemed "separate products" for a finding of technological tying liability, this Court's Findings mandate such a conclusion. Considering the "character of demand" for the two products, as opposed to their "functional relation," id. at 19, Web browsers and operating systems are "distinguishable in the eyes of buyers." Id.; Findings 149-54. Consumers often base their choice of which browser should reside on their operating system on their individual demand for the specific functionalities or characteristics of a particular browser, separate and apart from the functionalities afforded by the operating system itself. Id. 149-51. Moreover, the behavior of other, lesser software vendors confirms that it is certainly efficient to provide an operating system and a browser separately, or at least in separable form. Id. 153. Microsoft is the only firm to refuse to license its operating system without a browser. Id.; see Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 287 (2d Cir. 1979). This Court concludes that Microsoft's decision to offer only the bundled - "integrated" - version of Windows and Internet Explorer derived not from technical necessity or business efficiencies; rather, it was the result of a deliberate and purposeful choice to quell incipient competition before it reached truly minatory proportions.
The Court is fully mindful of the reasons for the admonition of the D.C. Circuit in Microsoft II of the perils associated with a rigid application of the traditional "separate products" test to computer software design. Given the virtually infinite malleability of software code, software upgrades and new application features, such as Web browsers, could virtually always be configured so as to be capable of separate and subsequent installation by an immediate licensee or end user. A court mechanically applying a strict "separate demand" test could improvidently wind up condemning "integrations" that represent genuine improvements to software that are benign from the standpoint of consumer welfare and a competitive market. Clearly, this is not a desirable outcome. Similar concerns have motivated other courts, as well as the D.C. Circuit, to resist a strict application of the "separate products" tests to similar questions of "technological tying." See, e.g., Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 542-43 (9th Cir. 1983); Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307, 1330 (5th Cir. 1976); Telex Corp. v. IBM Corp., 367 F. Supp. 258, 347 (N.D. Okla. 1973).
To the extent that the Supreme Court has spoken authoritatively on these issues, however, this Court is bound to follow its guidance and is not at liberty to extrapolate a new rule governing the tying of software products. Nevertheless, the Court is confident that its conclusion, limited by the unique circumstances of this case, is consistent with the Supreme Court's teaching to date.(6)
B. Exclusive Dealing Arrangements
Microsoft's various contractual agreements with some
OLSs, ICPs, ISVs, Compaq and Apple are also called into
question by plaintiffs as exclusive dealing arrangements
under the language in § 1 prohibiting "contract[s] . . . in
restraint of trade or commerce . . . ." 15 U.S.C. § 1. As
detailed in §I.A.2, supra, each of these agreements with
Microsoft required the other party to promote and distribute
Internet Explorer to the partial or complete exclusion of
Navigator. In exchange, Microsoft offered, to some or all of
these parties, promotional patronage, substantial financial
subsidies, technical support, and other valuable
consideration. Under the clear standards established by the
Supreme Court, these types of "vertical restrictions" are
subject to a Rule of Reason analysis. See Continental T.V.,
Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977); Jefferson
Parish, 466 U.S. at 44-45 (O'Connor, J., concurring); cf.
Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717,
724-26 (1988) (holding that Rule of Reason analysis
presumptively applies to cases brought under § 1 of the
Sherman Act).
Acknowledging that some exclusive dealing arrangements may have benign objectives and may create significant economic benefits, see Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 333-35 (1961), courts have tended to condemn under the § 1 Rule of Reason test only those agreements that have the effect of foreclosing a competing manufacturer's brands from the relevant market. More specifically, courts are concerned with those exclusive dealing arrangements that work to place so much of a market's available distribution outlets in the hands of a single firm as to make it difficult for other firms to continue to compete effectively, or even to exist, in the relevant market. See U.S. Healthcare Inc. v. Healthsource, Inc., 986 F.2d 589, 595 (1st Cir. 1993); Interface Group, Inc. v. Massachusetts Port Authority, 816 F.2d 9, 11 (1st Cir. 1987) (relying upon III Phillip E. Areeda & Donald F. Turner, Antitrust Law 732 (1978), Tampa Electric, 365 U.S. at 327-29, and Standard Oil Co. v. United States, 337 U.S. 293 (1949)).
To evaluate an agreement's likely
anticompetitive effects, courts have consistently looked at
a variety of factors, including: (1) the degree of
exclusivity and the relevant line of commerce implicated by
the agreements' terms; (2) whether the percentage of the
market foreclosed by the contracts is substantial enough to
import that rivals will be largely excluded from
competition; (3) the agreements' actual anticompetitive
effect in the relevant line of commerce; (4) the existence
of any legitimate, procompetitive business justifications
offered by the defendant; (5) the length and irrevocability
of the agreements; and (6) the availability of any less
restrictive means for achieving the same benefits. See,
e.g., Tampa Electric, 365 U.S. at 326-35; Roland Machinery
Co. v. Dresser Industries, Inc., 749 F.2d 380, 392-95 (7th
Cir. 1984); see also XI Herbert Hovenkamp, Antitrust Law
1820 (1998).
Where courts have found that the agreements
in question failed to foreclose absolutely outlets that
together accounted for a substantial percentage of the total
distribution of the relevant products, they have
consistently declined to assign liability. See, e.g., id.
1821; U.S. Healthcare, 986 F.2d at 596-97; Roland Mach. Co.,
749 F.2d at 394 (failure of plaintiff to meet threshold
burden of proving that exclusive dealing arrangement is
likely to keep at least one significant competitor from
doing business in relevant market dictates no liability
under § 1). This Court has previously observed that the case
law suggests that, unless the evidence demonstrates that
Microsoft's agreements excluded Netscape altogether from
access to roughly forty percent of the browser market, the
Court should decline to find such agreements in violation of
§ 1. See United States v. Microsoft Corp., Nos. CIV. A.
98-1232, 98-1233, 1998 WL 614485, at *19 (D.D.C. Sept. 14,
1998) (citing cases that tended to converge upon forty
percent foreclosure rate for finding of § 1 liability).
The only agreements revealed by the evidence which could
be termed so "exclusive" as to merit scrutiny under the § 1
Rule of Reason test are the agreements Microsoft signed with
Compaq, AOL and several other OLSs, the top ICPs, the
leading ISVs, and Apple. The Findings of Fact also establish
that, among the OEMs discussed supra, Compaq was the only
one to fully commit itself to Microsoft's terms for
distributing and promoting Internet Explorer to the
exclusion of Navigator. Beginning with its decisions in 1996
and 1997 to promote Internet Explorer exclusively for its PC
products, Compaq essentially ceased to distribute or
pre-install Navigator at all in exchange for significant
financial remuneration from Microsoft. Findings 230-34.
AOL's March 12 and October 28, 1996 agreements with
Microsoft also guaranteed that, for all practical purposes,
Internet Explorer would be AOL's browser of choice, to be
distributed and promoted through AOL's dominant, flagship
online service, thus leaving Navigator to fend for itself.
Id. 287-90, 293-97. In light of the severe shipment quotas
and promotional restrictions for third-party browsers
imposed by the agreements, the fact that Microsoft still
permitted AOL to offer Navigator through a few subsidiary
channels does not negate this conclusion. The same
conclusion as to exclusionary effect can be drawn with
respect to Microsoft's agreements with AT&T WorldNet,
Prodigy and CompuServe, since those contract terms were
almost identical to the ones contained in AOL's March 1996
agreement. Id. 305-06.
Microsoft also successfully induced some of the most popular ICPs and ISVs to commit to promote, distribute and utilize Internet Explorer technologies exclusively in their Web content in exchange for valuable placement on the Windows desktop and technical support. Specifically, the "Top Tier" and "Platinum" agreements that Microsoft formed with thirty-four of the most popular ICPs on the Web ensured that Navigator was effectively shut out of these distribution outlets for a significant period of time. Id. 317-22, 325-26, 332. In the same way, Microsoft's "First Wave" contracts provided crucial technical information to dozens of leading ISVs that agreed to make their Web-centric applications completely reliant on technology specific to Internet Explorer. Id. 337, 339-40. Finally, Apple's 1997 Technology Agreement with Microsoft prohibited Apple from actively promoting any non-Microsoft browsing software in any way or from pre-installing a browser other than Internet Explorer. Id. 350-52. This arrangement eliminated all meaningful avenues of distribution of Navigator through Apple. Id.
Notwithstanding the extent to which these "exclusive" distribution agreements preempted the most efficient channels for Navigator to achieve browser usage share, however, the Court concludes 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. Navigator can be downloaded from the Internet. It is available through myriad retail channels. It can (and has been) mailed directly to an unlimited number of households. How precisely it managed to do so is not shown by the evidence, but in 1998 alone, for example, Netscape was able to distribute 160 million copies of Navigator, contributing to an increase in its installed base from 15 million in 1996 to 33 million in December 1998. Id. 378. As such, the evidence does not support a finding that these agreements completely excluded Netscape from any constituent portion of the worldwide browser market, the relevant line of commerce.
The fact that Microsoft's arrangements with various firms did not foreclose enough of the relevant market to constitute a § 1 violation in no way detracts from the Court's assignment of liability for the same arrangements under § 2. As noted above, all of Microsoft's agreements, including the non-exclusive ones, severely restricted Netscape's access to those distribution channels leading most efficiently to the acquisition of browser usage share. They thus rendered Netscape harmless as a platform threat and preserved Microsoft's operating system monopoly, in violation of § 2. But virtually all the leading case authority dictates that liability under § 1 must hinge upon whether Netscape was actually shut out of the Web browser market, or at least whether it was forced to reduce output below a subsistence level. The fact that Netscape was not allowed access to the most direct, efficient ways to cause the greatest number of consumers to use Navigator is legally irrelevant to a final determination of plaintiffs' § 1 claims.
Other courts in similar contexts have declined to
find liability where alternative channels of distribution
are available to the competitor, even if those channels are
not as efficient or reliable as the channels foreclosed by
the defendant. In Omega Environmental, Inc. v. Gilbarco,
Inc., 127 F.3d 1157 (9th Cir. 1997), for example, the Ninth
Circuit found that a manufacturer of petroleum dispensing
equipment "foreclosed roughly 38% of the relevant market for
sales." 127 F.3d at 1162. Nonetheless, the Court refused to
find the defendant liable for exclusive dealing because
"potential alternative sources of distribution" existed for
its competitors. Id. at 1163. Rejecting plaintiff's argument
(similar to the one made in this case) that these
alternatives were "inadequate substitutes for the existing
distributors," the Court stated that "[c]ompetitors are free
to sell directly, to develop alternative distributors, or to
compete for the services of existing distributors. Antitrust
laws require no more." Id.; accord Seagood Trading Corp. v.
Jerrico, Inc., 924 F.2d 1555, 1572-73 (11th Cir. 1991).
III. THE STATE LAW CLAIMS
In their amended
complaint, the plaintiff states assert that the same facts
establishing liability under §§ 1 and 2 of the Sherman Act
mandate a finding of liability under analogous provisions in
their own laws. The Court agrees. The facts proving that
Microsoft unlawfully maintained its monopoly power in
violation of § 2 of the Sherman Act are sufficient to meet
analogous elements of causes of action arising under the
laws of each plaintiff state.(7) The Court reaches the same
conclusion with respect to the facts establishing that
Microsoft attempted to monopolize the browser market in
violation of § 2,(8) and with respect to those facts
establishing that Microsoft instituted an improper tying
arrangement in violation of § 1.(9)
The plaintiff states
concede that their laws do not condemn any act proved in
this case that fails to warrant liability under the Sherman
Act. States' Reply in Support of their Proposed Conclusions
of Law at 1. Accordingly, the Court concludes that, for
reasons identical to those stated in § II.B, supra, the
evidence in this record does not warrant finding Microsoft
liable for exclusive dealing under the laws of any of the
plaintiff states.
Microsoft contends that a plaintiff
cannot succeed in an antitrust claim under the laws of
California, Louisiana, Maryland, New York, Ohio, or
Wisconsin without proving an element that is not required
under the Sherman Act, namely, intrastate impact. Assuming
that each of those states has, indeed, expressly limited the
application of its antitrust laws to activity that has a
significant, adverse effect on competition within the state
or is otherwise contrary to state interests, that element is
manifestly proven by the facts presented here. The Court has
found that Microsoft is the leading supplier of operating
systems for PCs and that it transacts business in all fifty
of the United States. Findings 9.(10) It is common and
universal knowledge that millions of citizens of, and
hundreds, if not thousands, of enterprises in each of the
United States and the District of Columbia utilize PCs
running on Microsoft software. It is equally clear that
certain companies that have been adversely affected by
Microsoft's anticompetitive campaign - a list that includes
IBM, Hewlett-Packard, Intel, Netscape, Sun, and many others
- transact business in, and employ citizens of, each of the
plaintiff states. These facts compel the conclusion that, in
each of the plaintiff states, Microsoft's anticompetitive
conduct has significantly hampered competition.
Microsoft once again invokes the federal Copyright Act
in defending against state claims seeking to vindicate the
rights of OEMs and others to make certain modifications to
Windows 95 and Windows 98. The Court concludes that these
claims do not encroach on Microsoft's federally protected
copyrights and, thus, that they are not pre-empted under the
Supremacy Clause. The Court already concluded in §
I.A.2.a.i, supra, that Microsoft's decision to bundle its
browser and impose first-boot and start-up screen
restrictions constitute independent violations of § 2 of the
Sherman Act. It follows as a matter of course that the same
actions merit liability under the plaintiff states'
antitrust and unfair competition laws. Indeed, the parties
agree that the standards for liability under the several
plaintiff states' antitrust and unfair competition laws are,
for the purposes of this case, identical to those expressed
in the federal statute. States' Reply in Support of their
Proposed Conclusions of Law at 1; Microsoft's Sur-Reply in
Response to the States' Reply at 2 n.1. Thus, these state
laws cannot "stand[] as an obstacle to" the goals of the
federal copyright law to any greater extent than do the
federal antitrust laws, for they target exactly the same
type of anticompetitive behavior. Hines v. Davidowitz, 312
U.S. 52, 67 (1941). The Copyright Act's own preemption
clause provides that "[n]othing in this title annuls or
limits any rights or remedies under the common law or
statutes of any State with respect to . . . activities
violating legal or equitable rights that are not equivalent
to any of the exclusive rights within the general scope of
copyright as specified by section 106 . . . ." 17 U.S.C. §
301(b)(3). Moreover, the Supreme Court has recognized that
there is "nothing either in the language of the copyright
laws or in the history of their enactment to indicate any
congressional purpose to deprive the states, either in whole
or in part, of their long-recognized power to regulate
combinations in restraint of trade." Watson v. Buck, 313
U.S. 387, 404 (1941). See also Allied Artists Pictures Corp.
v. Rhodes, 496 F. Supp. 408, 445 (S.D. Ohio 1980), aff'd in
relevant part, 679 F.2d 656 (6th Cir. 1982) (drawing upon
similarities between federal and state antitrust laws in
support of notion that authority of states to regulate
market practices dealing with copyrighted subject matter is
well-established); cf. Hines, 312 U.S. at 67 (holding state
laws preempted when they "stand[] as an obstacle to the
accomplishment and execution of the full purposes and
objectives of Congress").
The Court turns finally to the
counterclaim that Microsoft brings against the attorneys
general of the plaintiff states under 42 U.S.C. § 1983. In
support of its claim, Microsoft argues that the attorneys
general are seeking relief on the basis of state laws,
repeats its assertion that the imposition of this relief
would deprive it of rights granted to it by the Copyright
Act, and concludes with the contention that the attorneys
general are, "under color of" state law, seeking to deprive
Microsoft of rights secured by federal law - a classic
violation of 42 U.S.C. § 1983.
Having already addressed
the issue of whether granting the relief sought by the
attorneys general would entail conflict with the Copyright
Act, the Court rejects Microsoft's counterclaim on yet more
fundamental grounds as well: It is inconceivable that their
resort to this Court could represent an effort on the part
of the attorneys general to deprive Microsoft of rights
guaranteed it under federal law, because this Court does not
possess the power to act in contravention of federal law.
Therefore, since the conduct it complains of is the pursuit
of relief in federal court, Microsoft fails to state a claim
under 42 U.S.C. § 1983. Consequently, Microsoft's request
for a declaratory judgment against the states under 28
U.S.C. §§ 2201 and 2202 is denied, and the counterclaim is
dismissed.
Thomas Penfield Jackson
U.S. District
Judge
Date:
UNITED STATES DISTRICT COURT
FOR THE
DISTRICT OF COLUMBIA
)
)
UNITED STATES OF
AMERICA, )
)
Plaintiff, )
)
v. ) Civil
Action No. 98-1232 (TPJ)
)
MICROSOFT CORPORATION,
)
)
Defendant. )
)
)
STATE OF
NEW YORK, et al., )
)
Plaintiffs )
)
v.
)
)
MICROSOFT CORPORATION, )
)
Defendant
)
)
) Civil Action No. 98-1233
(TPJ)
)
MICROSOFT CORPORATION, )
)
v.
)
)
Counterclaim-Plaintiff, )
)
ELLIOT
SPITZER, attorney )
general of the State of )
New
York, in his official )
capacity, et al.,
)
)
Counterclaim-Defendants.
)
)
ORDER