IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
_____________________________________
UNITED STATES OF AMERICA,
Plaintiff,
v.
MICROSOFT CORPORATION,
Defendant.
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Civil Action No. 98-1232 (TPJ) |
STATE OF NEW YORK, ex rel.
Attorney General DENNIS C. VACCO, et al.,
Plaintiffs,
v.
MICROSOFT CORPORATION,
Defendant.
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PUBLICLY FILED VERSION
Civil Action No. 98-1233 (TPJ) |
PLAINTIFFS' JOINT RESPONSE TO MICROSOFT'S
MOTION FOR SUMMARY JUDGMENT AND REPLY IN
SUPPORT OF MOTIONS FOR PRELIMINARY INJUNCTION
DATED: August 31, 1998
IN
THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
PLAINTIFFS' JOINT RESPONSE TO
MICROSOFT'S
MOTION
FOR SUMMARY JUDGMENT AND REPLY IN
SUPPORT
OF
MOTIONS FOR PRELIMINARY INJUNCTION
I. INTRODUCTION
Microsoft's motion for summary judgment misstates plaintiffs' claims,
the
evidence
concerning them, and the applicable law. When there is a claim that Microsoft does
not want
to
deal with, it simply ignores it. When there is evidence contrary to Microsoft's factual
assertions,
it ignores that too, even when it is contained in the same document or deposition on
which
Page 2
Microsoft seeks to rely. When controlling precedent is at odds with Microsoft's
arguments,
it
either ignores the authority or treats it as having been overruled sub silentio by
lower
court
rulings.
For purposes of its summary judgment motion, Microsoft does not, and
could
not,
dispute that it has monopoly power in the market for PC operating systems. And on
summary
judgment, Microsoft does not, and could not, dispute the existence of a pattern of
anticompetitive conduct that has preserved its dominance of the PC operating system
market
and
which threatens to extend that dominance to other markets. In essence, Microsoft's
summary
judgment motion thus invites this Court to rule, as a matter of law, that because
of
supposedly
unique characteristics of the computer software business, the antitrust laws do not
(and
cannot)
prohibit an entrenched software monopolist like Microsoft from engaging in the broad
series
of
anticompetitive acts at the core of this case.
Microsoft enjoys the most important and perhaps the most durable
monopoly
in the
economy today. Microsoft has been the dominant supplier of personal computer
desktop
operating systems for more than 15 years, with market shares (depending on how
they are
measured) ranging from 80 percent to 95 percent.
PC
manufacturers have, and recognize they have, no realistic alternative to Microsoft's
Windows operating systems. Microsoft prices its Windows operating systems virtually
without
regard for the prices of other operating systems. Microsoft's monopoly power is
illustrated
by
its ability to secure agreements from competitors and potential competitors (including
companies
as powerful as Intel) to reduce or eliminate their competition with Microsoft.
Page 3
Successful entry or expansion of new operating systems competitors
has
proven
impossible, in significant part because of the applications programming barrier to
entry.
Computer users want PCs that will run the widest range, and largest number, of
programs.
Because of Microsoft's market share and sustained dominance, many more PC
applications
have
been developed for its operating systems than for those of any other manufacturer.
Windows'
high market share begets more applications, which in turn preserve and increase its
high
market
share, which in turn begets still more applications, and so on. Unless and until the
success of
a
particular operating system comes to depend less on the number of applications
written
specifically for it and more on the merits of that operating system, Microsoft's power is
likely
to
remain self-perpetuating.
In
the
past few years, two related industry developments have occurred that have the
potential to erode the applications programming barrier to entry, and thereby ultimately
to
threaten Microsoft's PC operating system monopoly.
One
development was Java, software sponsored by Sun Microsystems that is designed
in
part to enable programmers to write applications that can be used "cross platform"
(i.e.,
on
multiple operating systems) without substantial modification.
(As used herein, "SJ Ex" refers to
exhibits
which accompany this Joint
Response.)
Another development was the explosion in popularity of the World
Wide
Web, and of
Internet browser applications (primarily Netscape's Navigator browser) used to access
and
view
Page 4
material on the Web. Because of the explosive growth of the Internet, and the ease
with
which
Netscape's browser enabled computer users to access the Internet, Netscape's
browser
quickly
came to be widely distributed and used.
The
widespread distribution and use of Netscape's browser was significant in two ways.
First, the browser itself was a platform to which applications could be written -- and
thereafter
run on any of the many operating systems with which that browser was usable.
By
May 1995 Microsoft's CEO recognized Netscape as a competitive threat
United States'
Memorandum in Support of
Motion for Preliminary Injunction, filed May 18, 1998, ("PI Brief"),
Exhibit
(hereinafter
"PI
Ex.") 2.
Second, Netscape's Navigator browser became a primary method by
which the
Java
components necessary for computer users to utilize and benefit from Java programs
were
distributed. Indeed, in July 1997,
Page 5
SJ Ex. 61, p.1. The more applications
that were
written to the
"Java Virtual Machine" component shipped with Netscape's browser, the more
applications
that
could be used on non-Microsoft operating systems -- and the more the applications
programming
barrier to entry would erode.
Microsoft immediately set out to eliminate the potential threats posed
by
Netscape and
Java. At the specific and pointed direction of Microsoft CEO Bill Gates, Microsoft set
out to
In
support of this effort, Microsoft entered into a series of anticompetitive agreements
with
customers and competitors to restrict the use of Java and to substitute the use of
Microsoft's
version of Java, known as "J/Direct."
PI Ex.
101.
At
the same time, Microsoft (again at the specific direction of CEO Bill Gates) set out
to
eliminate Netscape as a viable browser supplier -- and thereby to eliminate both
Netscape's
distribution of Java and Netscape's evolution into a platform that could erode the
applications
programming barrier to entry. Microsoft first attempted to monopolize the browser
market by
a
patently illegal proposal to Netscape that the two companies divide the market and
restrict
or
Page 6
eliminate competition (with Netscape agreeing not to compete in offering its browser
for
Windows 95). When Netscape rejected Microsoft's illegal proposal, Microsoft
undertook
to
eliminate Netscape's ability to compete effectively as a browser supplier, and to
preserve
and
increase barriers to entry in the PC operating system market by a series of predatory
and
anticompetitive acts and agreements. Among other things, Microsoft:
Set
out to "cut off Netscape's air supply" by giving Microsoft's browser away for free
(and
thereby eliminating Netscape's ability to charge for its browser) and entering into
agreements with Internet Content Providers which required those ICPs
to
agree not to
pay
Netscape;
Discouraged customers, suppliers, and others from doing business
with
Netscape by
announcing publicly (and telling customers privately) that Microsoft
would
make its
browser "forever free" and that Netscape therefore had no viable
business;
Entered into agreements with PC manufacturers and Internet Service
Providers that
effectively foreclosed Netscape from the most important channels of
distribution and
substantially increased Netscape's costs;
Entered into agreements with ISPs, ICPs, and others to eliminate or
reduce
those firms'
promotion and/or distribution of Netscape's browser;
Used its monopoly power to induce major computer industry firms,
including
Apple and
Intel,
to limit or reduce their use of and support for Netscape's browser;
and
Page 7
Tied
Microsoft's Internet Explorer browser to its monopoly Windows PC operating
system and prohibited PC makers from removing that browser.
Although Microsoft also set out to improve its browser (which was
initially so
poor in
quality and function that it would have received virtually no distribution if not for
Microsoft's
restrictive agreements and the tie to Windows), Microsoft recognized that
PI Ex. 23. Because
Microsoft believed that it could not win what it repeatedly described as "the browser
war"
legitimately and on the merits, it resorted to the predatory and anticompetitive
agreements
and
conduct described above; and it is those agreements and conduct that unlawfully
maintain
Microsoft's operating systems monopoly and threaten to extend that monopoly to the
browser
market.
The
cumulative effect of Microsoft's anticompetitive and illegal conduct has been, and
continues to be, to increase Microsoft's share of Internet browser usage; to reduce the
revenues
and increase the costs of rival browser manufacturers; to deter innovation by other
browser
manufacturers and, more generally, by others in the industry that would otherwise
seek to
develop new software products in competition with Microsoft; and to further
entrench
Microsoft's operating system monopoly.
Microsoft's conduct with respect to Java and browsers is part of a
broad
pattern of
antitcompetitive conduct designed to eliminate competition, to maintain and
strengthen
Microsoft's core monopoly over PC operating sytems, and to monopolize key
applications
markets.
Page 8
For
example, Microsoft's proposal to Netscape to divide the market and restrict or
eliminate competition is part of a pattern that includes similar discussions with Intel
(concerning
Intel not continuing software development), Apple (concerning Apple agreeing to
stop
marketing QuickTime for use with Windows), and a small company called Real
Networks
(concerning a Real Networks assurance that it would get out of the base streaming
media
platform business and not share its technology with Microsoft's competitors).
Microsoft's
response to Netscape's rejection of its proposed market division is part of a pattern
that
includes
Microsoft's response to Apple when Apple refused to withdraw its "QuickTime"
software
from
competition with Microsoft's "NetShow" software.
SJ Ex. 60,
p.0104683, is part of a pattern of using its control over the monopoly operating system
to
make
competing products operate, or appear to operate, less effectively, a pattern that
began at least
as
early as the Microsoft code designed to disrupt the use of DR-DOS. And Microsoft's
tying of
its
browser to Windows is part of a pattern of tying applications to the operating system --
a
pattern
that will have no limit if Microsoft prevails in its view that it is free to combine any
product
it
wishes with the operating system.
The
extraordinary potential costs to consumers and the economy of Microsoft's conduct
are particularly clear with respect to Java and the browser. First, Microsoft preserves
its
operating systems monopoly as both a rich and powerful monopoly in itself and as the
engine
for
dominating related markets. Second, Microsoft extends its monopoly to browsers --
and
thereby
puts itself in a position to wield tremendous influence in directing computer users to
particular
products, services, and sites on the Web.
Page 9
Because Microsoft's unlawful practices are continuing and are
imposing
ongoing harm to
competition, plaintiffs filed with their Complaints motions for a preliminary injunction.
Microsoft has opposed those motions and has itself moved for summary judgment.
Microsoft's
summary judgment motion (and its opposition to plaintiffs' motion for preliminary
injunction)
asks this Court to create a virtual exemption from the antitrust laws for Microsoft (and
the
entire
computer software industry) and to permit a software monopolist such as Microsoft to
use
anticompetitive means to entrench and extend its monopoly without fear of judicial
intervention.
Microsoft further urges the
Court to
exempt from Section 1 of the Sherman Act any Microsoft decision to coercively tie
together two
separate products, so long as Microsoft can merely
suggest a plausible claim of benefit from the tie. Such an exemption would be
virtually
complete, since the very nature of computer software makes it easy for software
developers
to
join together separate products in ways that create some "plausible" benefit and that
introduce
some "plausible" technical interdependencies that may appear difficult to disentangle.
Microsoft's extraordinary propositions go far beyond the rules previously adopted by
any
court,
and are directly contrary to controlling Supreme Court precedent.
In
addition to seeking wholesale exclusion from the reach of antitrust scrutiny for its
anticompetitive activities, Microsoft's motion also tries to justify summary judgment by
distorting
and mischaracterizing the extensive factual record in this case.
Contrary to Microsoft's representation, MS Memo at 75-80, there is
substantial evidence
that
Microsoft, with its entrenched monopoly in the market for PC operating system
software, engaged in a series of predatory acts to maintain that
monopoly and
extend it to
the
market for internet browser software.
Page 10
Contrary to Microsoft's representation, id., there is substantial
(indeed,
overwhelming)
evidence that its predatory and exclusionary conduct was undertaken
for the
purpose of
impeding competition.
Contrary to Microsoft's representation, MS Memo at 59-74, there is
substantial evidence
that
Microsoft's exclusionary agreements with PC manufacturers and Internet Service
Providers and Internet Content Providers have raised barriers to
competition
and
effectively foreclosed competitors from significant distribution
channels.
Contrary to Microsoft's representation, id., there is substantial
evidence that the
anticompetitive effects of these restrictive agreements far outweigh
any
purported business
justifications.
Contrary to Microsoft's representation, MS Memo at 38-49, there is
substantial evidence
of
separate demand in the marketplace that proves Microsoft's Internet browser is a
separate product from the operating system.
And
contrary to Microsoft's representation, MS Memo at 51-59, there is substantial
evidence that the bootup and screen restrictions in Microsoft's
contracts with
PC
manufacturers are far more onerous than is necessary to protect
Microsoft's
rights under
federal copyright laws.
As
this Court recognized at the August 6 hearing, the presence of even a single
material
factual dispute, without more, would require denial of Microsoft's motion. Transcript,
Aug.
6,
1998 at 11:9-13. In fact, on every material issue the plaintiffs' evidence, even
at this
stage while
discovery is still ongoing, is either uncontroverted or directly counters Microsoft's
assertions.
Page 11
Given the strength and breadth of the plaintiffs' proof, Microsoft's claim that there are
no
genuine
issues of fact is frivolous.1
Much
of the evidence that Microsoft ignores comes from its own files. Microsoft's
approach in depositions and in its motion for summary judgment is to deny what
its
contemporaneous documents plainly say -- and to claim an astonishing lack of recall.
Executives who are stated to be the author of documents claim not to remember
writing them.
Executives who are the stated recipients of documents claim not to remember
receiving them.
And both authors and recipients claim not to know what the documents mean.
Microsoft's CEO Bill Gates, who is placed at the center of key events
by
numerous
documents, displayed a particular failure of recollection at his deposition. Compare,
e.g., SJ Ex.
63 with Gates Dep., 89-92; SJ Ex.18 with Gates Dep. 94-95; SJ Ex. 64
with Gates Dep.,
95,100,102,104,107-108; SJ Ex. 65 with Gates Dep., 160-62; SJ Ex. 354,
p.6012956
with Gates
Dep., 128-29, 207-08, 215-17; SJ Ex. 67 with Gates Dep.,
132-33,135-36,163-64,165-66; SJ Ex.
68 with Gates Dep., 153,155,156-57; and SJ Ex. 69 with Gates Dep.,
173-74,177,181-82,189-
91,194-95.
As discussed below, Microsoft's attempt
to get
Netscape to divide markets is well
established by sworn testimony of participants and by contemporaneous notes.
Page 12
By contrast,
contemporaneous documents show that
Mr.
Gates further testified that
(a)
SJ
Ex.
(b)
SJ Ex. 70
Mr.
Gates' testimony appears to be part of a pattern of Microsoft attempting to rewrite
history. For example,
Page 13
Microsoft in
its
recent
papers (and in the testimony of its deponents -- except when they slip) studiously
avoids the
term
"browser." Although browser is a term used throughout Microsoft's documents and
licenses,
the
industry literature, and even in the dictionary Microsoft publishes for software
professionals,
in
the interest of Microsoft's litigation arguments it becomes a non-word. Witnesses
claim
they
don't know what a browser is. What used to be browsers are now simply "bits" of
"browsing
technologies." Microsoft's refusal to recognize the existence of a browser extends not
only
to
the "integrated" browser but to the stand-alone products Microsoft offers.
At
the trial the trier of fact will undoubtedly give Microsoft's current positions the
weight they deserve. There is, of course, no way that Microsoft can back away from
its
contemporaneous documents and statements in a summary judgment motion.
II. MICROSOFT IS NOT ENTITLED TO
SUMMARY JUDGMENT
In
order to obtain summary judgment, the moving party must demonstrate "that there
is
no genuine issue as to any material fact and that the moving party is entitled to
judgment as
a
matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S.
317,
322 (1986);
Beatty v. WMATA, 860 F.2d 1117, 1120-21 (D.C. Cir. 1988). The party
seeking
summary
judgment carries the initial burden of demonstrating the absence of any genuinely
disputed
issue
of material fact. SeeBeatty, 860 F.2d at 1122. Only then must the
nonmoving
party, through
"‘depositions, answers to interrogatories, . . . admissions on file'" and other
appropriate
evidence demonstrate that there is a genuine issue for trial. Celotex, 477 U.S.
at 324.
"The
evidence must be viewed in a light most favorable to the nonmoving party, giving that
party
the
Page 14
benefit of all reasonable inferences." Startmore v. Goodbody, 866 F.2d 189,
191 (6th
Cir. 1989)
(citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 487
(1986)).
"It
is
axiomatic that Rule 56 must be used carefully so as not improperly to foreclose
trial." Thompson Everett, Inc. v. National Cable Advertising, L.P., 57 F.3d 1317,
1323
(4th Cir.
1995). Courts should be especially cautious before entering summary judgment
where, as
here,
liability is likely to turn on factual questions about the purpose and effects of conduct
whose
existence is not disputed. See, e.g., Eastman Kodak Co. v. Image Tech.
Servs.,
Inc., 504 U.S.
451, 482-86 (1992).2
Microsoft's motion for summary judgment falls far short of meeting
these
standards.
With
respect to plaintiffs' Section 2 claims, Microsoft limits its discussion to its bundling
of Internet Explorer with Windows and certain restrictive agreements with OEMs, ISPs,
and
ICPs. Microsoft's motion (which seeks dismissal of plaintiffs' claims in their entirety)
is
insufficient on its face because it does not even address either
Microsoft'sattempt to
induce
Netscape not to compete, which in itself constitutes an unlawful attempt to
monopolize,
see
United States v. American Airlines, Inc., 743 F.2d 1114,1120-21 (5th Cir. 1984), or
the
other
elements of Microsoft's predatory maintenance of its monopoly and attempted
monopolization
(seeinfra, Section II.A).
Moreover, even with respect to the aspects of its conduct that it does
address,
Microsoft
fails to remotely satisfy the summary judgment standard. Microsoft mounts essentially
three
Page 15
attacks on the factual basis for plaintiffs' claims, asserting that: (1) there is no genuine
issue
that
its agreements with OEMs, ISPs, and ICPs have not had sufficient anticompetitive
effects
to
unreasonably restrain trade;(2) its bundling of Internet Explorer with Windows
is not
an
unlawful tying arrangement because the two are not separate products; and (3) its
restrictive
agreements with OEMs are immunized from antitrust scrutiny by the copyright laws
(and
subsidiary justifications). These arguments are neither supported by substantial
evidence,
let
alone the uncontested evidence that would be required to justify summary judgment,
nor are
they
correct as a matter of law.
Microsoft's motion for summary judgment on the Section 1 tying claim
fails
both as a
matter of law (because it rests on an erroneous intepretation of tying law standards set
forth
by
the Supreme Court and the lower courts) and as a matter of fact (because it is plainly
disputed
whether Microsoft's conduct amounts to "conditioning" of Windows licenses on
OEMs'
acceptance of Internet Explorer, whether Windows and Internet Explorer are a single
product
or
two separate products, and whether Microsoft's conduct has a "not insignificant" effect
on
interstate commerce).
We
discuss below the types of anticompetitive conduct in which Microsoft has engaged.
Much of Microsoft's conduct constitutes an independent violation of Section 1 of the
Sherman
Act; such conduct also necessarily violates Section 2 of the Sherman Act if Microsoft
is found
to
possess monopoly power. United States v. Griffith, 334 U.S. 100, 106 (1948);
Barry Wright
Corp. v. ITT Grinnell Corp., 724 F.2d. 227, 239 (1st Cir. 1983). In addition,
conduct
that does
not violate Section 1 violates Section 2 if Microsoft is demonstrated to possess
monopoly
power
and if the conduct has a significant exclusionary effect and was not reasonably
necessary
to
Page 16
achieve a legitmate business objective or "impaired competition in an unnecessarily
restrictive
way." Aspen Sking Co. v. Aspen Highlands Sking Corp., 472 U.S. 585, 605
(1985);
Lorain
Journal v. United States, 342 U.S. 143, 149 (1951). As Justice Scalia has
observed:
"Where a
defendant maintains substantial market power, his activities are examined through a
special
lens:
Behavior that might otherwise not be of concern to the antitrust laws -- or that might
even
be
viewed as procompetitive -- can take on exclusionary connotations when practiced by
a
monopolist." Eastman Kodak, 504 U.S. at 488 (Scalia, J., dissenting).
A. Microsoft's Motion Ignores Its Predatory Conduct
Microsoft's motion virtually ignores the pattern of predatory conduct
directed
at raising
the costs of Netscape and other Microsoft rivals, raising barriers to entry, depriving
Netscape
and other competitors of revenue and resources (even at the cost of Microsoft itself
foregoing
revenue), below-cost pricing, and intimidating and inducing both customers and
distributors
of
Netscape's browser not to consider that browser on the merits.
First,
Microsoft decided it would give its Internet browser away for free even though it
was costing Microsoft hundreds of millions of dollars to develop, test, promote, and
distribute
Internet Explorer; even though Microsoft would not recoup except through the
maintenance
and
expansion of monopoly power; and even though Netscape was charging OEMs, ISPs,
and
others
for its Navigator browser.
as a browser supplier: "We are going to cut off their air supply. Everything they're
selling,
we're going to give away for free,"
PI Ex. 4.
Page 17
Moreover,
Microsoft set out to undercut Netscape's perceived viability -- and thereby
discourage
customers, suppliers, distributors, and others from dealing with Netscape -- by publicly
warning
Netscape (and those considering dealing with Netscape) in June and July 1996 that:
"Our
business model works even if all Internet software is free . . . . We are still selling
operating
systems. What does Netscape's business model look like? Not very good." SJ Ex.
69, p.4;
see
also SJ Ex. 67, pp.3-4 and Ex. 68, p.2. Microsoft went on to announce that its
browser
would
be distributed free not only for an introductory period but would be "forever free."3
Second, Microsoft did not stop at giving its browser away for free.
Instead,
Microsoft set
out to do whatever it took to induce significant market participants to distribute and use
its
Internet Explorer browser instead of Netscape's browser -- including paying some
customers
to
take the already free Internet Explorer and providing others with valuable concessions
if they
did
so.
Page 18
Ultimately, Microsoft succeeded in getting Intuit to agree not to support
Netscape, but
only after tying Intuit's access to valuable placement on the Windows desktop to
Intuit's
agreement to abandon Netscape. In Microsoft's April 1997 agreement with Intuit,
Microsoft
required Intuit to agree that it would, among other things:
(a)
(b)
(c)
(d)
SJ Ex. 72.
Third, Microsoft set out to further deprive Netscape of revenues by
securing
agreements
from Internet Content Providers not to pay Netscape for participation in any competing
Netscape
"channel" or other browser service. PI Ex. 36-40.
Fourth, Microsoft undertook to raise Netscape's costs by closing off
the most
effective
and profitable (and least costly) distribution channels for its browsers and thereby
forcing
Netscape to resort to less effective and more expensive distribution methods. See
infra,
Section
II.B.1.
Fifth,
Microsoft used its power to intimidate both customers and distributors not to adopt
or support Netscape's browser (as well as non-Microsoft Java technology). Microsoft's
dealings
Page 19
with Apple are illustrative of how far Microsoft was willing to go to limit Netscape's
opportunities and to stifle Java.
Page 20
On
August 21, 1997,
On
January 22, 1998,
On
February 13, 1998
Microsoft's determination to restrict the support and distribution of
Netscape's
browser
by Apple is particularly telling since Apple represents the main alternative to desktop
PCs
running Microsoft's Windows. Whatever the relevance of Microsoft's arguments about
why
it
wanted Windows users also to use Internet Explorer, those arguments cannot apply to
Internet
Explorer use by Apple users.
Page 21
In addition, there is no legitimate
justification
for Microsoft and
Apple
B. Microsoft's Exclusionary Agreements With ISPs, ICPs and OEMs Are
Unlawful
Microsoft's agreements with ISPs,4 OEMs, and ICPs are exclusionary in that they
make
it more difficult and costly for Microsoft's rivals to develop and distribute their
Internet
browsers and thus tend to exclude those rivals from the market. Exclusionary
agreements of
this
nature are judged for antitrust purposes under the rule of reason, and they are
unlawful if
the
exclusionary provisions are on balance anticompetitive -- if, in other words, they
injure
Microsoft's rivals by restricting their output more than they further Microsoft's
legitimate
objectives, National Society of Prof. Eng'rs v. United States, 435 U.S. 679, 691
(1978);
American Ad Mgmt., Inc. v. GTECorp., 92 F.3d 781, 791 (9th Cir. 1996),
or if
their harmful
effects on Microsoft's rivals are not necessary in order to achieve Microsoft's
legitimate
objectives. Sullivan v. NFL, 34 F.3d1091, 1103 (1st Cir. 1994),
cert.
denied, 513 U.S. 1190
(1995). There is substantial evidence that Microsoft's ISP, ICP and OEM agreements
are
unlawful. See, e.g., Sibley Dec., ¶¶ 61-65; Fisher Dec., ¶
III.D.;
Warren-Boulton Dec., ¶¶ 52-
54.
Page 22
Although Microsoft argues principally that its agreements do not
materially
harm its
browser rivals, it also suggests that the agreements can be justified on the ground that
they
were
entered into for "valid business reasons." MS Memo at 59, 61-62. But Microsoft
cannot show
substantial, let alone
undisputed,
evidence, as to either the exclusionary effect of the agreements
or their purported justifications. Microsoft is therefore not entitled to summary
judgment
on
these issues.
1. Microsoft's Agreements Have Substantially Excluded Its Browser
Rivals
From The Most Important Browser Distribution
Channels
The
law condemns the impairment of competition on the merits, even if that
impairment
does not constitute complete exclusion of a rival or foreclosure of its
opportunities.
Even under
the most exacting legal standard, the United States need not prove that every possible
avenue
of
distribution has been effectively foreclosed to a rival. See, e.g., Aspen Skiing Co. v.
Aspen
Highlands Skiing Corp., 472 U.S. 585 (1985) (denial of a necessary input merely
impeded
competitor's ability to market its product; competitor never contended that the joint
marketing
program at issue was essential to its survival). Rather, the exclusionary provisions
in
Microsoft's agreements are unlawful under Section 1 of the Sherman Act (and
therefore
under
Section 2 as well) if on balance they impair competition and thus unreasonably
restrain trade.
See, e.g., Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327-28
(1961).
The
rule of reason inquiry under Section 1 is practical and fact-based and focuses
"directly on the challenged restraint's impact on competitive conditions." National
Society
of
Prof. Eng'rs, 435 U.S. at 688. And, because Microsoft must, for purposes of its
summary
judgment motion, be deemed to be a monopolist, its agreements also should be
condemned
Page 23
under Section 2 of the Sherman Act upon proof that they have had some exclusionary
effect
and
were not reasonably necessary to achieving a legitimate business objective. Aspen
Skiing
Co.,
472 U.S., at 605; see also 3 P.E. Areeda & H. Hovenkamp, Antitrust
Law
¶ 651a, at 78 (conduct
that "reasonably appear[s] capable of making a significant contribution to creating
or
maintaining monopoly power" violates Section 2 and raises a presumption of harm).
Perhaps even more important, the exclusionary effect of each of
Microsoft's
restrictions
must be determined in the context of all of Microsoft's other restrictions and pertinent
market
factors. First, the cumulative effect of all of Microsoft's restrictive agreements
combined,
rather
than of any one individually, must be evaluated. Second, whatever the exclusionary
impact
on
Microsoft's browser rivals of any one of Microsoft's agreements viewed in isolation,
each
such
agreement is also plainly unlawful when, in light of all the other exclusionary factors
and
agreements affecting the market, its exclusionary impact is significant. See, e.g.,
Continental
Ore. Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962).
Thus, as
the Supreme
Court has made clear, instead of examining individual pieces of evidence in a vacuum
as
Microsoft would have this Court do, "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." Id. at 699; see alsoCity of Anaheim v.
Southern
California Co., 955
F.2d 1373, 1376 (9th Cir. 1992) (inquiring into the overall combined effect of
specific
individual acts); Litton Sys. Inc. v. American Tel. & Tel. Co., 700 F.2d 785, 816
(2d
Cir. 1983);
City of Mishawaka, Ind. v. American Elec. Power Co. Inc., 616 F.2d 976, 986 (7th
Cir.
1980).
Microsoft's motion fails to address either the substantial evidence of
foreclosure in the
context of the other restrictions or the cumulative foreclosure as a whole. Instead,
Microsoft
Page 24
seeks to obscure the issue by "tightly compartmentalizing" its few facts in exactly the
way
rejected by the Supreme Court. Plaintiffs' ample (often uncontroverted) evidence of
substantial
anticompetitive effects both in each of the most important browser distribution
channels and as
a
cumulative whole requires denial of Microsoft's motion.
a. Microsoft's
Browser Rivals Have Been Substantially Foreclosed
From The ISP
and
OEM Channels
Plaintiffs' evidence, including unequivocal statements in Microsoft's
business
documents, leave no doubt that the two leading ways in which PC users obtain their
browsers
are
from the Internet Service Providers ("ISPs") that connect them to the Internet, and
from
OEMs,
installed on new PCs. Microsoft's restrictive agreements with ISPs and OEMs
effectively
foreclose Microsoft's browser competitors from these most-important distribution
channels.
(1) The ISP
Agreements Foreclose Microsoft's Rivals
By
their express terms, Microsoft's agreements with ISPs and OLSs significantly
restrict
Netscape and other competitors from access to this critical channel. Among the
restrictions
(detailed at PI Brief at 30-36) are the following:
ISPs must market, promote, and distribute Internet Explorer as
the
"exclusive" or "primary" browser, and cannot distribute a
non-Microsoft
browser unless it is specifically requested by the
customer;
ISPs may not "express or imply" to a customer that another browser
is
available;
Even if a customer specifically requests a competing browser,
Microsoft
requires that ISPs ship Internet Explorer as the only
browser a
large
Page 25
majority of the time, usually for at least 75 to 85 percent of
all
browser
shipments. The providers whose names appear in the
Windows
Online
Services folder must ship Internet Explorer, and no other
browser, at least
85% of the time; and
ISPs, with minor exceptions, cannot advertise or promote any
non-
Microsoft browsers.
There
is concrete evidence of the market effects of these agreements. Microsoft's own
documents track the degree of foreclosure they cause in the ISP channel. For
example, in
June
1996
Microsoft had entered into
restrictive referral server agreements with all of the largest ISPs and OLSs.
Major
ISPs and OLSs would have preferred to have maintained flexibility in the
browsers they distribute and promote.
Because of Microsoft's agreements, however, many no longer distribute or promote
Netscape
Navigator at all.
Conspicuously omitting the huge OLSs, Microsoft argues that it has
referral
server
agreements with only eleven out of thousands of U.S. ISPs. But, even putting OLSs
aside,
those
Page 26
eleven ISPs account for a substantial amount of the total U.S. Internet access provider
subscriber
base, see, e.g., SJ Ex. 26,
5 Once the
OLSs,
including AOL,
CompuServe, and Prodigy -- all of which had and continue to have restrictive
agreements
with
Microsoft -- are added to the picture, the significance of Microsoft's agreements
becomes
far
more dramatic. In 1997, AOL alone accounted for
Plainly, the restrictive ISP agreements
interfere
with the
distribution of non-Microsoft browsers.6
Microsoft (again neglecting the huge and therefore critical OLSs) cites
statistics
suggesting that usage of Internet Explorer by customers of the ISPs that had entered
into
its
exclusionary agreements is roughly equal to usage of Internet Explorer by customers
of
other
ISPs. MS Memo at 12. These statistics are misleading and immaterial because they
do not
say
anything about the impact of the restrictive agreements on the rate of browser
acquisition
over
time. Microsoft appears to have aggregated Internet Explorer usage across all ISPs
currently
in
the Windows Internet referral server -- even those such as Sprint, Concentric, and
GTE,
that
Page 27
entered into referral server agreements as late as September 1997 and were
distributing
large
numbers of Navigator to their customers before that date -- without controlling for the
date
on
which subscribers of these services acquired their browser. Indeed, Microsoft's own
documents
show that Internet Explorer's share of browser usage is
The available evidence establishes that
Microsoft's ISP restrictions have
been quite effective at foreclosing competitors' browser distribution.
(2) The OEM Agreements Foreclose
Microsoft's
Rivals
Microsoft's agreements with OEMs have the practical effect of
significantly
restricting
Netscape and other competitors from access to, by Microsoft's own admissions, one
of the
two
most important channels of browser distribution. Microsoft's Windows 95 and 98
license
agreements with OEMs require that the OEMs license and install Internet Explorer in
order
to
receive a license to Windows. PI Brief at23-24. Microsoft's OEM
agreements also
prohibit the
OEMs from removing the Internet Explorer icon, other means of access, or any of its
code
from
Windows. Id.
Microsoft does not even attempt to refute the evidence that major
OEMs,
contractually
prohibited from removing Internet Explorer from, or otherwise modifying the initial
bootup
sequence or Windows desktop screen of, the PCs they sell, are less likely to preinstall
another
browser, see PI Brief at 24-25; or even to
consider
other browser
Page 28
products on the merits. 7 This effect is explained by practical OEM
concerns -- including the likelihood of customer confusion, costly product testing, and
increased
support costs -- about preinstalling multiple browsers. See PI Brief at 24-25. In
fact,
Microsoft's own Senior Vice President of OEM Sales has testified that,
8 More
recently,
Netscape's former Vice President of Sales and Marketing testified that
9
Microsoft's only rejoinder to this evidence is that, under the letter of
their
Windows
license agreements, OEMs are permitted to add icons and other browsers, MS Memo
at 11-12.
Page 29
The marketplace realities OEMs confront render such formalistic freedom meaningless
because
Microsoft's bootup and desktop screen restrictions deprive them of the ability to take
the steps
--
even modest steps to minimize confusion, testing, and support costs -- necessary to
make
adding
other browsers commercially palatable.
Microsoft seeks to belittle the evidence of foreclosure in the OEM
channel
by
contradicting its own internal documents and arguing that the OEM channel is
insignificant as
a
channel for consumer browser distribution. Microsoft's only support for this assertion
is
What Microsoft does not mention,
however, is
that it failed to
Given Microsoft's conduct in the OEM
channel,
it is dramatic
evidence of competitive harm that Netscape has determined that it receives only
* * * * *
In
the aggregate, the restrictive terms of Microsoft's agreements with ISPs and OEMs
have
left Microsoft's browser rivals with significantly reduced access to distribution, and
therefore
Page 30
with a Hobson's choice: suffer reductions in market share or increase reliance on far
less
efficient
and more costly distribution channels.
In
addition to the above points, Microsoft makes one other argument about both the
ISP
and OEM channels. As a general matter, Microsoft suggests there is no evidence of
foreclosure
because Netscape Navigator currently has an installed MS
Memo
at
9.10 To be
sure,
there is little doubt that Netscape was the first to recognize and respond to the
tremendous commercial opportunity for Internet browsers and that it built up a large
installed
base in the mid-'90s. But the relevant question is not whether the user base includes
many who
got their browsers before Microsoft began its exclusionary practices, but whether
Microsoft's
agreements have since impaired the ability of Netscape and other rivals to continue to
distribute
their browsers.
Thus,
Microsoft fails to
establish the absence of a genuine dispute that there has been a substantial
foreclosure of
browser
competition in the ISP and OEM channels.
b. Microsoft's ICP Agreements Materially
Injure
Its Browser Rivals
Microsoft argues that it has contracts with only 24 U.S. ICPs, and that
the ICP
channel is
not a significant browser distribution channel. But the ICP agreements injure
Microsoft's
browser
Page 31
distribution. Foreclosure is
not
limited to browser distribution. An ICP's endorsement of a
particular browser and its accompanying standards has a real effect on browser
adoption,
especially in a market
characterized
by network effects and heavily influenced byindustry
perception.
Indeed, Microsoft
itself has recognized the importance of content providers, particularly in their
standard-setting
capacity, to its Internet mission.
Microsoft's ICP restrictions have, in addition, had significant impact on
the
browser usage
and distribution practices of important ICPs. For instance, one of
the
largest
Microsoft also
prevented
Absent these
prohibitions, Intuit would have
continued the promotion and distribution of Navigator, not only from its websites, but
also in
its
capacity as a leading ISV.
These
exclusionary effects must of course be considered in the context of Microsoft's
other
exclusionary practices. And they should be considered also in light of the importance
and
prominence of Microsoft's ICP partners (including Disney, Time Warner, and Intuit),
which
are
among the most popular and visible of all content providers.
Page 32
c. Relegating
Its
Rivals To Reliance On Other, Less Efficient And
More Costly
Distribution Channels Cannot Compensate For The
Foreclosure
Microsoft Has Created In The ISP, ICP and OEM
Channels
Microsoft's summary judgment argument is largely premised on the
fact that,
putting the
ISP, OEM, and ICP channels aside, other distribution channels remain available to
Microsoft's
rivals. But the alternatives are decidedly and demonstrably inferior. Most significantly,
Microsoft
itself has repeatedly recognized that ISPs and OEMs are the most important browser
distribution
channels.
Recent depositions of Netscape executives -- on which Microsoft
misleadingly
relies to
support its assertions -- in fact unequivocably confirm the importance of the OEM and
ISP
channels to browser distribution.
Page 33
The
record further shows that other methods of distribution, such as mailing physical
CDs
or disks to individual homes, are more costly and much less effective than distribution
through
ISPs and OEMs. In particular, as
browsers have expanded in size the downloading of browsers has become more
cumbersome,
less
effective, and a far less successful means of distributing browsers.
clearly establish
the serious limitations of
downloading.
11
In
light of this evidence, it is plain that numerous issues of fact remain disputed about
the
extent and significance of the exclusionary effects of Microsoft's ISP, OEM and ICP
restrictions.
Summary judgment is therefore unwarranted.
2. The Exclusionary Provisions In Microsoft's ISP, ICP And OEM
Agreements Are Not Necessary To Further Legitimate
Interests
Microsoft's summary judgment motion should be denied because
plaintiffs
have adduced
strong proof of the significant exclusionary effects of Microsoft's practices. Microsoft's
motion
also must fail because Microsoft cannot show that there are no disputed material facts
concerning
Page 34
the other half of the rule of
reason
analysis: Microsoft's assertion that its contractual restrictions
were implemented for "valid business reasons." MS Memo at 59, 61-62.12 On this point too
the
plaintiffs' evidence overwhelms Microsoft's unsubstantiated claims.
In
addition to ignoring numerous disputed facts, Microsoft's argument on this point
misstates the applicable legal standard. As discussed above, see supra,
Section II.B, it
is well-
settled that an anticompetitive contractual restriction may be justified only if the
restraint's
anticompetitive effects are both outweighed by, and reasonably necessary to further, a
legitimate
business justification.13
Microsoft is thus simply wrong when it argues that the mere existence
of
"legitimate
business reasons" is sufficient to justify its exclusionary contract provisions. To
prevail, it
must
demonstrate more -- that the asserted business reason is truly valid, that it could not
be
achieved
by a means less restrictive of competition, and that its benefits outweigh the harm to
competition
resulting from the exclusionary provisions.
Page 35
When
measured against this standard, the evidence demonstrates not only that
Microsoft's
motion must be denied, but also that Microsoft's purported justifications for its
exclusionary
conduct are plainly insubstantial.
a. Microsoft's
Anticompetitive Restrictions On ISPs Are Not Justified
Microsoft seeks to justify the restrictive provisions in its ISP
agreements by
arguing that
the contracts are "nothing more than commonplace cross-marketing arrangements."
MS Memo
at
63. This simply repeats Microsoft's mantra that its conduct merely reflects "ordinary
business
practice[s] typical of those used in a competitive market" and therefore cannot
"constitute
anti-
competitive conduct." MS Memo at 76 (internal quotations omitted). As noted above,
that
argument is incorrect as a matter of law in light of Microsoft's monopoly power. It is
also
factually infirm.
For
example, Microsoft cites provisions in Netscape's browser distribution agreements
In addition, unlike the Microsoft
agreements, Netscape's licenses contain
and (also unlike the Microsoft
agreements) they
do not
Page 36
Microsoft argues that "consumers benefitted" from its ISP agreements
because
"they were
part of an overall effort to make it easier for Windows 95 users to gain access to the
Internet."
MS
Memo at 63, 67. This argument is both misleading and disingenuous. On their face,
the
exclusionary provisions harm consumers by making it more difficult for them to obtain
non-
Microsoft browsers, and Microsoft has not explained how those exclusions might
benefit
consumers. Moreover, even were Microsoft to offer proof that some part of the
agreements
benefit consumers, the relevant question is not that, but instead whether the
exclusionary
provisions in the agreements are necessary to achieve those benefits. They are
not, and
Microsoft
cannot show any connection between making Internet Explorer available to more PC
users,
and
restricting ISPs ability to distribute and promote competing browsers.
Microsoft suggests that the restrictions compensated Microsoft both
for
maintaining the
ISP referral server and for permitting ISPs in it to enjoy the ICW's favorable desktop
placement,
MS Memo at 63, but there is no reason why Microsoft had to receive compensation in
the form
of
exclusionary restrictions. To the contrary,
demonstrates that
Microsoft could be compensated in ways that do not exclude rivals.
The
evidence shows that any interest Microsoft might assert in receiving compensation
for
"renting" its desktop real-estate is pretextual. SeeEastman Kodak, 504
U.S. at
484. According to
Microsoft executives,
Page 37
Indeed, Microsoft recently
made the decision to permit major OEMs to place the ISPs of the OEM's choice in the
Internet
Connection Wizard for Windows 98 and to
thereby
confirming
that Microsoft has little interest in charging for its desktop real-estate.
Far
from trying to benefit consumers, Microsoft imposed its ISP restrictions to choke off
distributional avenues for competing browsers and thereby choke off consumer
choice.
See
b. Microsoft's Anticompetitive Restrictions
On
OLSs
Are Not
Justified
Microsoft defends its contractual
restrictions on
the ability of OLSs to promote and
distribute non-Microsoft browsers with the refrain that the restrictions are necessary to
prevent
"free riding." See generally Sylvania, 433 U.S. at 55 (explaining that preventing
free
riding may
justify certain vertical restraints). As Microsoft explains, the OLSs are given preferred
placement
on the Windows desktop and assistance in developing a proprietary client (or browser
"shell")
Page 38
based on Internet Explorer in exchange for the OLSs' agreement to curtail their
distribution
and
promotion of non-Microsoft browsers. See MS Memo at 71. Having granted
OLSs
these benefits,
the argument runs, Microsoft is entitled to "some assurance that the OLSs will not take
advantage
of that assistance and then turn around and adopt competing technologies." Id.
at
72.
As
Judge Easterbrook has explained, however, "[w]hen payment is possible, free-riding
is
not a problem because the ‘ride' is not free." SeeChicago Professional
Sports Ltd.
Partnership v.
NBA, 961 F.2d 667, 675 (7th Cir. 1992) (Easterbrook, J.). If Microsoft wishes to
be paid
for
benefits it confers on Online Service Providers, then -- as with its ISP agreements -- it
can
charge
OLSs a fee rather than receive compensation in the form of exclusionary rights.14 Microsoft
similarly cannot show that restricting OLSs' distribution and promotion of competing
browsers
is
reasonably necessary to ensure that competitors do not free ride on Microsoft's
technological
assistance. Any such assistance Microsoft provides to an OLS would be useful only in
developing
a customized OLS browser based on Internet Explorer, and could not readily be used
to assist
the
OLS in working with Netscape or another browser producer. Thus, there is negligible
danger
of
free riding. Because Microsoft cites no evidence, let alone a lack of genuinely
disputed
evidence,
to the contrary, its argument therefore cannot meet its summary judgment
burden.
b. Microsoft's Anticompetitive Restrictions
On
ICPs Are Not Justified
Microsoft offers the same justifications for the exclusionary provisions
in its
ICP
agreements; and, for the same reasons, those asserted justifications are insufficient.
Even
if
Microsoft's creation of its "channel bar" might have "facilitated the use of innovative
technologies
Page 39
and provided consumers with easy access to high quality content on the Internet,"
see
MS Memo
at 69-70, Microsoft makes no attempt to explain why restricting ICPs' relationships
with
competing web browsers and requiring ICPs to implement Internet Explorer-specific
technologies
is reasonably necessary to provide ICPs placement on the channel bar. Moreover, the
restrictions
apply only to ICPs' relationships with the top two "Other Browsers,"
a fact that supports the inference that Microsoft imposed the
restriction
not for any procompetitive purpose but rather to impede the commercial opportunities
of
its
leading competitors.
In
any event, there simply is no justification for Microsoft's restrictions on ICP's ability
to
compensate Netscape, and Microsoft asserts none. At a minimum, there
certainly is
no undisputed
justification, and therefore no basis for summary judgment.
c. Microsoft's
Restrictive OEM LicensesAre Not Justified
Microsoft's principal defense of the exclusionary provisions in its OEM
agreements is an
argument of antitrust immunity based on the copyright laws. That argument is
addressed
separately in Section II.D, below. We address here Microsoft's effort to defend the
exclusionary
OEM agreements on economic grounds.
Microsoft first asserts that its OEM restrictions "preserve[] the
operating
system as a stable
and consistent platform that supports a broad range of compatible software
applications
software."
MS Memo at 57. The
platform
issue, however, has to do with the APIs to which ISVs write. Those APIs are unaffected
by
alterations to the Windows boot-up sequence, modifications to the
contents of desktop folders, or creation of icons of different shapes and sizes. To the
contrary,
Microsoft has promoted Internet Explorer to end-users on the basis that the icon
Page 40
could be easily removed, see Gaspar Dec. ¶ 19 (Consent Decree Case); Sibley
Dec.
¶ 43 n.48
(citing sources); Cole 50:2 - 51:24, while using its screen restrictions to prohibit the
OEMs
from
removing the Internet Explorer icon themselves. Thus, lifting the prohibition on OEMs
removing
access to web browsing via Internet Explorer would not "undermine the consistency of
the
[Windows] platform in any meaningful way." Sibley Dec. ¶ 43.
Microsoft provides no evidentiary support for its platform argument.
Even if
it did, factual
questions concerning the degree to which the restriction furthers the asserted
justification,
and
whether the justification outweighs the anticompetitive effects it causes, plainly would
preclude
summary judgment. See, e.g.,id. ¶ 43 & n.47 (questioning
Microsoft's
argument because ISVs
commonly distribute shared program libraries with applications to ensure that their
software
runs
on the large installed base of machines that lack the latest version of Windows).
Microsoft also argues that its restrictions on altering the initial boot-up
process
"promote a
consistent user experience," MS Memo at 47, but the record makes clear that there
are
disputed
questions of material fact as to whether Microsoft's restrictions are reasonably tailored
to
that
end. As an initial matter, Microsoft's contention that the challenged restrictions are
justified
in
order to provide customers the benefit of "the same initial user experience"
across
brands, MS
Memo at 58 (emphasis added), is belied by Microsoft's own conduct. See
Sibley
Dec.¶ 47.
Among other things, Microsoft permits (1) all OEMs to ship Windows 98 with the
"active
desktop" either on or off; (2) all OEMs to add items of varying sizes to the active
desktop (but
not
to the traditional Windows desktop),
Page 41
(4) some OEMs to replace the list of ISPs
included in the Internet
Referral Server with their own lists; and (5) all OEMs to preload the software of the
OEM's
choice, subject to Microsoft's license restrictions.
These
exceptions create considerable variation in the initial experience a PC user will
have
depending on the OEM from which he or she buys their PC. This level of variation
makes
clear
that, at most, Microsoft's restrictions might help preserve some very general "look and
feel" of
the
Windows operating system. The challenged restrictions, however, cannot be shown to
be
reasonably necessary to achieve that objective. Removal by OEMs of the
Internet
Explorer icon
and other means of using Internet Explorer to browse the Web (which Microsoft
prohibits)
would
not affect the overall "look and feel" of Windows any more than when OEMs
add
various
software (which Microsoft readily permits). Nor is the "look and feel" of Windows
impaired
by
permitting OEMs to install icons of different sizes; Microsoft permits precisely that in
those
instances when an OEM ships the active desktop enabled (which, because it provides
additional
ways of launching Internet Explorer, also increases the likelihood that the user will use
Internet
Explorer).
Even
with respect to the Windows initial boot process, where Microsoft at least can
plausibly argue some legitimate interest in ensuring that users supply and receive
certain
information, the exclusionary provisions in its OEM agreements are far broader than
necessary.
Page 42
As noted above, Microsoft prevents OEMs from
15
Microsoft also argues that "substantial consumer confusion and
disappointment would
result if new personal computers arrived with various advertised features of Windows
altered
or
deleted in various ways unintended by Microsoft." MS Memo at 58. For two reasons,
this
argument does not justify the exclusionary restrictions in the OEM agreements.
Significant factual issues exist as to whether the restrictions
challenged by the
plaintiffs
were designed to advance Microsoft's asserted interest. Internal Microsoft documents
show
that
Microsoft began serious efforts to enforce and augment its exclusionary provisions
only
Page 43
16
Second, Microsoft could have achieved the objective of preventing
consumer
confusion
through substantially less anticompetitive means. For instance, Microsoft has
permitted
certain
OEMs to
17
There is no
reason why
Microsoft could not similarly permit OEMs to insert additional screens in the start-up
sequence
that permit end users to select the browser of their choice, pursuant to guidelines
designed
to
ensure the process' smooth operation and preserve the general "uniformity" of the
first-boot
process.
Moreover, that OEMs -- who have an unquestioned interest in meeting
consumer demand -
- have sought at various times to remove the Internet
Explorer
icon from the Windows 95 and
Windows 98 desktops,
or urged Microsoft to ship Windows
98 with Internet Explorer uninstalled,
supports the conclusion that permitting OEMs to remove the Internet
Explorer
icon and
associated means of browsing the web would meet, rather than disappoint,
consumer
expectations. Any legitimate interest in avoiding "consumer confusion and
disappointment,"
see
MS Memo at 58, could be met by requiring disclosure when OEMs remove the means
of
using
Page 44
Internet Explorer to browse the Web. OEMs vigorously compete against one another
by
advertising to end users the particular features of the machines they sell; many OEMs
allow
end-
users to choose the precise components of their PCs, including the preinstalled
software;18 and
because the OEM market is competitive, OEMs that cause user "confusion and
disappointment"
would be punished by fewer sales,
There is every reason,
therefore, to believe that a labeling requirement can prevent customer disappointment
without
inflicting the competitive harm caused by Microsoft's exclusionary license
provisions.
For
similar reasons, Microsoft's restrictions cannot be sustained on the theory that they
"preserve[] Microsoft's reputation as a supplier of quality operating system software."
MS
Memo at 58-59. OEMs have no incentive to engage in conduct that will cause
consumer
confusion or otherwise impair Microsoft's goodwill. OEMs not only bear their own
support
costs
and face vigorous competition, but also bear the costs of customer support calls
directed to
Microsoft, as Microsoft refers customer calls to the pertinent OEM.
Thus, Microsoft's contention, MS Memo at 58, that its reputation, not
the
OEMs', would "suffer if Windows did not perform as represented" by Microsoft misses
the
point;
the very structure Microsoft has created (quite aside from its contractual restrictions) is
designed
to ensure that OEMs take actions consistent with preserving Microsoft's
reputation.
Moreover, the facts simply do not support Microsoft's contention that
lifting
the
Page 45
challenged restrictions threatens to tarnish the Windows brand. Permitting OEMs to
promote
browsers and to provide browser choice in the boot-up sequence no more threatens
Microsoft's
reputation than Microsoft's decision to permit OEMs to provide in that sequence their
own
ISP
sign-up software. Nor does permitting OEMs to vary the size of shapes and icons,
which
Microsoft permits when the OEM ships the "active desktop" enabled (but with respect
to
the
"classic" desktop screen). Of course, even if Microsoft's conduct were consistent with
respect
to
the claimed justification, a labeling requirement, as discussed above, would (along
with
ordinary
OEM incentives to minimize costs and seek to meet consumer demand) suffice to
prevent
any
reputational injury to Microsoft from OEM removal of the means of using Internet
Explorer
to
browse the web, removal of the On-Line Services Folder, or addition of a choice of
user
interface
in the initial boot-up sequence.
Finally, Microsoft cannot argue that its screen restrictions are justified
because
they simply
reflect ordinary business practice typical of those used in a competitive market. First,
as
already
noted, this argument simply does not apply here because of Microsoft's uncontested
monopoly
power. Second, the factual reality is that, far from using practices similar to Microsoft,
other
operating system vendors commonly allow significantly more customization than
Microsoft.
For
instance, permits
OEMs to
choose among alternative
interfaces and to decide whether or not to install the browser that ships with its
operating
system
products; and does not believe that permitting OEMs these options will impair its
goodwill,
fragment its operating system as a platform, cause end-user confusion or
disappointment.
Page 46
19
3. Microsoft's Sudden Revision Of Some Of Its Exclusionary
Agreements
The Eve Of Litigation Provides No Basis For Summary
Judgment
Microsoft argues that certain exclusionary provisions in its ISP and ICP
agreements
challenged by the plaintiffs are "effectively moot," MS Memo at 13, on the ground that
Microsoft
has "unilaterally waived" those provisions. Seeid. at 65, 68. (Microsoft
makes
no such argument
about its OEM or OLS restrictions.)
Microsoft's courthouse conversion suggests, at the very least, both
that
Microsoft has no
legitimate need for those provisions and that it recognizes their doubtful legality.20 But it does not
provide a legal defense in these cases. To the contrary, "[i]t is the duty of the courts to
beware
of
efforts to defeat injunctive relief by protestations of repentance and reform." United
States
v.
Oregon State Med. Soc'y, 343 U.S. 326, 333 (1952).
There
are several flaws in Microsoft's mootness argument. In the first place, Microsoft
has
not waived all of its exclusionary agreements. While it announced last March -- the
night
before
Mr. Gates testified before Congress about the agreements -- that it was waiving the
restrictive
provisions, it in fact waived some provisions, modified but did not entirely abandon
others,
and
Page 47
left some agreements -- including the exclusionary provisions in its agreement with
AOL, which
is
by far the largest and most important ISP -- entirely unchanged.
In
any event, it is plain that this Court retains jurisdiction to pass on the legality of even
the
"waived" practices because those practices caused anticompetitive effects that are
within
the
court's power to remedy. SeeNorthwestern Environmental Defense Center
v.
Gordon, 849 F.2d
1241, 1245 (9th Cir. 1988) ("The fact that the alleged violation has itself ceased is not
sufficient to
render a case moot. As long as effective relief may still be available to counteract the
effects
of
the violation, the controversy remains live and present.").
Moreover, regardless of the effects of Microsoft's abandoned or
modified
conduct, it is
settled that "voluntary cessation of allegedly illegal conduct" does "not make the case
moot."
United States v. W.T. Grant Co., 345 U.S. 629, 632 (1953). In such
circumstances --
when the
"defendant is free to return to his old ways," id. -- the defendant must
demonstrate that
it is
"‘absolutely clear'" that "‘the allegedly wrongful behavior could not reasonably be
expected
to
recur.'" Vitek v. Jones, 445 U.S. 480, 487 (1980) (quoting United States v.
Phosphate Export
Ass'n, 393 U.S. 199, 203 (1968)). Microsoft has not met this "heavy" burden.
County
of Los
Angeles v. Davis, 440 U.S. 625, 631 (1979). With respect to both its ISP and ICP
restrictions,
Microsoft merely abandoned some of the challenged practices when threatened with
government
enforcement action. It has not even "disclaimed any intention to revive them." W.T.
Grant,
345 U.S. at 633. And, even if it had made such a disclaimer, "[s]uch a profession
does not
suffice
to make a case moot." Id.21
Page 48
C. Microsoft's
Requirement That OEMs Distribute Internet Explorer As A Condition
Of Licensing Windows Is An Unlawful
Tying
Arrangement
1. Microsoft's Forced Licensing of Internet Explorer to OEMs
Violates
Section 1 Of The Sherman Act
There
are four elements to a Section 1 perse tying claim: (1) two separate
products
or
services exist; (2) the sale of one product (the tying product) is conditioned on the
purchase of
the
other (the tied product); (3) the seller has "appreciable economic power" in the tying
market;
and
(4) the tying arrangement affects a not insubstantial volume of interstate commerce in
the
tied
product. See Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 1, 9-18
(1984);
Eastman
Kodak, 504 U.S. at 462. For the purposes of summary judgment, on which all
disputed
issues
must be resolved against the moving party, Microsoft does not contest the third and
fourth
elements. Its arguments on the first and second are both factually and legally
inadequate
to
warrant summary judgment. Indeed, its coercive bundling of Internet Explorer with
Windows
is
per se illegal.22
a. Microsoft
Conditions The License Of Windows On OEM
Distribution
Of
Internet Explorer
Microsoft devotes a single page to the "conditioning" element of the
plaintiffs'
tying
claims, arguing that its refusal to allow OEMs to license Windows without Internet
Explorer
does
Page 49
not amount to "conditioning" because it has charged OEMs only a single royalty for
both
Windows and Internet Explorer and "has never charged OEMs a separate royalty" for
Internet
Explorer alone. MS Memo at 49. This formalism fails to address the evidence that,
despite
the
fact that Internet Explorer and Windows are not separately priced, Microsoft's coercive
bundling
and refusals to permit unbundling have constituted, and continue to constitute, a
powerful
anticompetitive mechanism.
Microsoft correctly states that "conditioning the availability of one
product on
the purchase
of another is a necessary element of a tying claim under Section 1 of the Sherman
Act."
MS
Memo at 49. However, Microsoft misinterprets the "purchase" (or "conditioning")
requirement
to
mean that a separate charge must be assessed for Internet Explorer. To the contrary,
as
Professors
Areeda and Hovenkamp explain:
A tying arrangement is the sale or lease of one item ("tying
product") only on condition that the buyer
or
lessee take a second
item ("tied product") from the same
source. . . .
And the 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.
3A P.E. Areeda & H. Hovenkamp, Antitrust Law, ¶ 760b6 (1996).
Whether the
market price of
the tied product is zero or something higher is thus immaterial to the potential for
anticompetitive
harm, and accordingly should be immaterial to analysis of whether there is a tying
arrangement.23
Page 50
Even
though no separate price is charged for Internet Explorer, and even though it is
licensed under the same licensing agreement as Windows, the evidence plainly
indicates
that
Microsoft's insistence that OEMs accept and preinstall it constitutes anticompetitive
conditioning
because it has materially affected OEMs' judgment as to the browser software they
preinstall
on
their PCs. See supra, Section II.B.1.a(2). The competitive harm which the
per
se rule against
tying is designed to prevent includes the denial of "free access to the market for the
tied
product"
and the forcing of consumers to "forego their free choice between competing
products."
Northern
Pac. Ry., 356 U.S. 1, 6 (1958). Microsoft's tying of Internet Explorer to Windows
produces these
precise evils, and thus imposes real costs on OEMs. Microsoft's argument -- the
mere
formalism
that there is no separately priced purchase of Internet Explorer -- cannot entitle it to
summary
judgment.
b. Under The Clear Standards Set Forth By
The
Supreme Court And
In Subsequent Caselaw, Windows
and
Internet Explorer Are
Separate
Products
For Purposes Of Tying Analysis
Microsoft's real attack on the plaintiffs' per se tying claim
challenges
the first element of
the tying offense, whether Internet Explorer and Windows operating systems are
separate
products. Instead of coming to grips in any serious way with Jefferson Parish
and
Eastman
Kodak, the controlling decisions on the separate product issue, Microsoft relies on
prior
and/or
distinguishable lower court decisions, and on the D.C. Circuit's decision in the consent
decree
Page 51
action brought last year by the United States, United States v. Microsoft, 1998
WL
327855 (D.C.
Cir. June 23, 1998) (hereinafter, "the consent decree case").
The
Supreme Court held in Jefferson Parish, and reiterated in Eastman
Kodak,
that
whether something that is sold by the defendant as a single package or bundle
consists of one
or
more "products" for tying purposes depends on whether there is demand for each of
the
bundled
products separately, apart from the package, and whether, in light of this separate
demand, it
is
efficient for the defendant to sell the different components or products separately.24 The antitrust
issue raised by tying doctrine is thus whether the defendant is required also to offer an
unbundled
alternative (i.e., offer the tying product without the particular tied product
required
as a condition
of that offer), based on whether there is demand for the products separately.
Jefferson Parish makes clear that the test is based in economics,
not
technology. Under
Jefferson Parish, "the answer to the question whether one or two products are
involved
turns not
on the functional relation between them, but rather on the character of the demand for
the
two
items." 466 U.S. at 19; see alsoMultistate Legal Studies, 63 F.3d at
1547;
Klamath-Lake
Pharmaceutical Assn. v. Klamath Medical Service Bureau, 701 F.2d 1276, 1289
(9th Cir.),
cert.
denied, 464 U.S. 822 (1983) ("Products that function together and are sold in
combination
may
still be ‘separate' if consumers would prefer to buy them individually at the price
necessary
to
Page 52
market them separately . . . . It is the relationship of the producer's selling decision to
market
demand, not the physical characteristics of the products alone, that determines the
existence
of
legally separable products.")
(1) There Is Separate Demand For
Internet Explorer And Windows
Microsoft concedes that there is demand for Internet Explorer without
or
separate from
Windows operating systems. For example, the evidence shows that Microsoft has for
years
offered Internet Explorer separate from Windows, both for Windows users and for
users of
operating systems other than Windows, and even Microsoft's brief argues that many
users
obtain
their browsers separately. See MS Memo at 9-17. Customers who acquire
either
Microsoft's
browser or another browser in these various ways, whether from ISPs (in most cases),
through
retail purchase, or otherwise, obviously do so independently of the acquisition of their
operating
system. Microsoft offers Internet Explorer separately, and users obtain it separately,
in order
to
satisfy consumer demand for web browsers.
Microsoft argues that there is no separate demand for the alleged
tying
products
(Windows 95 and Windows 98) without the tied product (Internet Explorer) on the
ground that
the
plaintiffs "cannot show that there is separate demand for operating system software
products
that do not provide web browsing functionality." MS Memo at 45. This argument is
both
wrong
on the facts and rests on a misunderstanding of the applicable legal test. The issue is
not
whether
there is demand for operating system (tying) products without any browser
(tied)
products
whatsoever, but rather whether there is demand for the particular tying product
(Windows)
without the particular tied product (Internet Explorer) required by the
defendant.
Page 53
The
facts presented in Jefferson Parish itself are a clear example of this point.
The
Supreme Court fully recognized that there was, and could be, no suggestion that
anyone
wanted
surgery (the tying product) without any anesthesia (the tied product); but it
nonetheless
asked
whether there was demand for surgery without the particular anesthesiologists
required
by the
defendant, and cited numerous earlier cases in which tying arrangements had been
found
despite
the uselessness of the tying product without some product in the tied product market.
See
Jefferson Parish, 466 U.S. at 19, n.30, 22-23.
In
any event, there is abundant, uncontroverted evidence both of demand (and a
separate
market) for Windows without any browser product at all, and of demand for
Windows
without
Internet Explorer in particular. This evidence includes the following.
(1) OEMs have repeatedly sought to
effectively
remove Internet Explorer by removing
icons and other means of access to Internet Explorer, and they have sought both to
sell
computers
both without Internet browsing capability at all and with browsers other than Internet
Explorer.
Microsoft argues that "[r]emoving `icons and other means of access' is
not the
same as
removing Internet Explorer, and thus does not establish separate consumer demand
for
Windows
without those technologies." MS Memo at 47. But as discussed below, it is immaterial
whether
OEMs have sought to remove all "technologies" that Microsoft chooses to associate
with
Internet
Explorer. The issue for tying purposes is the economic question whether OEMs have
sought,
whether by removing icons, other means of access, or otherwise, to serve demand for
Windows
without Internet Explorer from the perspective of the end user. The evidence shows
exactly
that.
Page 54
(2) Some users prefer Windows operating
systems with a browser other than Internet
Explorer; other users, particularly corporate customers, prefer Windows operating
systems with
no
browser at all. Microsoft ignores the evidence both that some corporate users do not
want
to
license any browser along with Windows, and that other users wish to select
from
among
competing browsers on the merits and across operating system platforms, and
therefore do
not
want to have Internet Explorer forced upon them.
This
evidence
too shows separate demand for Windows without Internet
Explorer.25
(3) Microsoft and others in the industry
recognize that browsers and operating
systems are separate
products. As
detailed in the plaintiffs' PI Briefs, Microsoft has recognized it
is in a "browser war" with Netscape, has made obtaining ever higher "browser share" a
top
corporate goal in order to win that war, and has meticulously tracked that browser
share
wholly
apart from its share of Windows or any other product. See U.S. PI Memo at
19-22,
60-64, and
cites therein. Moreover, Microsoft's strategy of making its Internet Explorer browser
"cross-
Page 55
platform" (i.e., available to run on multiple operating systems) itself
demonstrates that
the browser
is a separate product. The cross-platform versions of Internet Explorer are designed
to
satisfy consumer demand for browsers as products in their own right, not as
components of
particular operating systems. Indeed, Microsoft recognizes that numerous users do
not wish
to
have their choice of browser linked to their choice (or lack thereof) of operating
system.26
Microsoft does not dispute that it has developed versions of Internet Explorer 3.0 and
4.0 for
the
Macintosh, Windows 3.1, and Solaris, or that it will continue to develop future versions
of
Internet
Explorer to be a cross-platform product.
(4) The practices of vendors of other
operating
systems demonstrate that there is
separate demand for operating systems. Microsoft argues that Windows and Internet
Explorer
should not be considered separate products on the ground that "every modern
operating system
for
personal computers includes a variety of technologies that facilitate access to
information on
the Internet, including web browsing functionality." MS Memo at 45. The evidence
shows
just
the opposite.27
Other operating system vendors approach the bundling, if any, of browser
products with their operating systems in a way fundamentally different from
Microsoft.
Page 56
Microsoft has not identified a single operating system vendor which requires licensees
to
install
and not to remove a particular browser as a condition of licensing the operating
system.
Rather,
other vendors either do not bundle a browser at all, see, e.g.,
Wack Dec., ¶¶
23-26, or permit OEM licensees not to install a browser offered with the operating
system (or
to
remove it after installation) if they wish. See, e.g.,
Microsoft does not really contest the evidence that both it and other
industry
participants
treat browsers as separate products or that some OEMs and computer users would
like to
obtain
Windows operating systems without the Internet browsing functionality provided by
Internet
Explorer. It argues, instead, that this evidence is insufficient because there must be
evidence
of
"widespread sales of the tying item in unbundled form." MS Memo at 45, quoting 10
P.E.
Areeda, H. Hovenkamp, E. Elhauge, Antitrust Law ¶ 1745d2 at 211. But
Microsoft is creating a
legal "Catch-22." There obviously cannot be widespread sales of Windows without
Internet
Explorer because Microsoft, with its dominance of the desktop PC operating system
market,
has
consistently required OEMs to take Internet Explorer as a condition of obtaining
Windows.
For
this very reason, the available (and substantial) evidence of separate demand for
Windows
and
Internet Explorer may well understate the actual extent of such demand.
OEMs, having
long
Page 57
since recognized that they
have no
choice, have simply acquiesced with Microsoft's required
bundling.
(2) It Would Be Efficient To Offer OEMs
The Option Of Windows Without
Internet
Explorer
The
efficiency question in tying cases is whether, in light of the demand for an
unbundled
option, it is efficient for the defendant to provide such an option. Eastman Kodak,
504
U.S. at
462. Thus, in this case the question is whether it is efficient for Microsoft to satisfy the
demand
for separate or standalone browsing functionality provided by Internet Explorer, and
the
demand
for Windows operating system functionality without the web browsing functionality
provided
by
Internet Explorer.
There
is no dispute that Microsoft can efficiently satisfy end users' demand for separate
or
standalone web browsing functionality. Microsoft does so by offering the standalone
versions
of
its Internet Explorer web browser product, both to users of Windows and to users of
various
non-
Windows operating systems.
Similarly, if Microsoft wanted to satisfy the demand of OEMs and
computer
users for
operating systems without the web browsing functionality provided by Internet
Explorer,
rather
than wanting just to exclude its browser rivals, it could efficiently offer those OEMs or
users
the
alternative of Windows without that particular web browsing functionality.28 In the case of
Windows 95, Microsoft concededly provided the means, through the Add/Remove
utility,
for
Page 58
users to remove Internet Explorer. It could have offered OEMs a similarly unbundled
version
of
Windows 95,29
but chose not to do so and, instead, prohibited the OEMs from themselves utilizing
the Add/Remove utility or otherwise removing IE.
With
regard to Windows 98, where Microsoft has chosen not to offer anyone the ready
means of removing Internet Explorer using the Add/Remove utility or otherwise, it
would
nonetheless be efficient for Microsoft to offer an unbundled alternative. Felten Dec.,
¶¶ 7-10.30
Of course, under Jefferson Parish, Microsoft need not necessarily offer a
version of
Windows 98
without utilization of any browsing functionality, but rather without that
functionality
necessarily
belonging to a particular browser -- Internet Explorer. This is precisely what other
operating
system vendors universally, and efficiently, do in providing their operating system
products.
Plaintiffs' evidence will establish that it is readily possible and efficient for Microsoft to
offer
Windows 98 in a way that satisfies the demand of OEMs and users who desire either
an
operating
system without web browsing functionality or an operating system on which it is easier
or
more
economical to install a different web browser product.
Microsoft argues that the removal of what it calls "Internet Explorer
technologies" from
Windows 98 will "severely degrad[e] the operating systems." MS Memo at 42. This
argument
--
the linchpin of Microsoft's entire defense to the tying claims -- rests on a semantic
sleight of
hand
and is insufficient for summary judgment both as a matter of law and as a matter of
fact.
This
Page 59
sleight of hand is Microsoft's equation of "Internet Explorer technologies" with every bit
of
software code used to browse the Internet using Internet Explorer. This gambit,
identical to
the
one Microsoft attempted and the Court rejected last winter, is inconsistent with the
economic
inquiry made in Jefferson Parish.31
The
efficiency of providing an unbundled alternative is fundamentally an economic
question, not a technical one. As OEMs have recognized, removing access to Web
browser
functionality from Windows or another software product effectively removes the web
browser,
eliminating the ability of the remaining Windows product to satisfy the separate
demand for
such
functionality (even if shared files are left behind). Moreover, removing such
functionality
or
access to such functionality from Windows leaves a fully functioning operating system
that
satisfies the demand of OEMs and users who desire either an operating system
without
web
browsing functionality or on which it is easier or more economical to install a different
browser.
Microsoft can efficiently remove or permit OEMs to remove the specific Internet
Explorer
Web
browser functionality from its bundled Windows products and, if desired, to substitute
the
Web
browsing functionality provided by competing browsers.
c. Cases
Involving
Product Design Do Not Create Any Exemption
From The
Antitrust Laws
Microsoft argues that the "integration" of "Internet Explorer
technologies"
with Windows
98 is a "technological" tie-in and is, therefore, subject to "a specific body of case law"
that
Page 60
prevents any inquiry into the nature of the tie, the facts bearing on its adoption and
implementation, or its competitive effects. MS Memo at 20. Indeed, Microsoft argues
that
"technically interconnected products" are essentially "immune" from tying claims -- that
the
court's inquiry is at an end once a defendant has made a plausible showing that there
is
"some"
technological benefit from the challenged combination and that the tie was not carried
out
"solely
for the purpose of tying two separate products." MS Memo 20, 24 (emphasis added).
In
substance, Microsoft argues that, even though it may be a monopolist, its bundling of
Internet
Explorer with Windows is not subject to antitrust scrutiny so long as it can show some
plausible
benefit from the conduct, regardless of whether the conduct is anticompetitive
regardless
of
whether the conduct is on balance beneficial or harmful to consumers.
As
discussed in Section II.C.2, infra, Microsoft's arguments do not and cannot
justify
its
conduct under Section 2 of the Sherman Act if (as is clear here) the conduct serves to
maintain
monopoly power by raising barriers to entry, increasing rivals' costs, or foreclosing
competition
on the merits.
Microsoft rests its argument on a few lower court cases that, for two
reasons,
are inapposite
here, even as to plaintiffs' Section 1 claims. First, Microsoft's interpretation of these
cases
conflicts with the Supreme Court's later, seminal pronouncements on tying law in
Jefferson
Parish
and Eastman Kodak. Second, Microsoft has not properly understood even the
cases on
which it
relies.
Both
the Supreme Court and the lower courts have relied on the demand-based analysis
mandated by Jefferson Parish to evaluate separate product claims in
"technological"
tie-ins under
Section l of the Sherman Act. See Eastman Kodak, 504 U.S. at 461-63 (in
context of
what the
Page 61
Court characterized as a "high-technology" service industry, relied on Jefferson
Parish
and other
established tying cases, without any suggestion that any different, more relaxed "body
of
law"
should apply in technology-related cases); Data General v. Grumman Systems
Support,
36 F.3d
1147, 1178-81 (lst Cir. 1994) (alleged tie of ADEX software and services); Service
&
Training,
963 F.2d at 683-85 (reversing grant of summary judgment to defendant on claim of tie
between
ADEX and repair services); Allen-Myland v. IBM Corp., 33 F.3d 194, 200-16
(3d Cir.
1994)
(reversing judgment for defendant on alleged tie of large-scale mainframe computers
and the
labor to install upgrades to mainframes); Digidyne Corp. v. Data General Corp.,
734
F.2d 1336,
1339 (9th Cir. 1984) (holding tie of NOVA computer system to NOVA operating
system
unlawful).
Similarly, the cases on which Microsoft relies in fact look to standard
tie-in
criteria to
evaluate the lawfulness of "technological" ties and rest on facts materially different
from
those
alleged (and not disputed by Microsoft) here.
In
Telex Corp. v. IBM Corp., 367 F. Supp. 258 (N.D. Okla. 1973), rev'd other
grounds,
510 F.2d 894 (10th Cir. 1975), for example, which appears to be the origin of the
"technological"
tie-in language, the court held that, unlike the circumstances here, there was no forced
tie
of
memory and control functions in a central controller. Telex, 367 F. Supp. at 347
("the
integrated
control in the System 370 is wholly optional. IBM continues to offer central processing
units
without integrated controllers.")
Similarly, in Response of Carolina, Inc. v. Leasco Response,
Inc., 537
F.2d 1307 (5th Cir.
1976), the court applied traditional tie-in law to hold that plaintiff's failure to prove
coercion in
the
alleged tie (of computer hardware to a computer time-sharing software franchise
known as
Page 62
"Response I") was fatal to its claim. Id. at 1327-30. After discussing the
absence of
coercion in
great detail and at great length, the court suggested in a sentence of dicta that a tie of
two
different
products accomplished by product design would be unlawful only if "the technological
factor
tying the hardware to the software has been designed for the purpose of tying the
products,
rather
than to achieve some technologically beneficial result." Id. at 1330 (citing
Telex).32
Here, of
course, there is substantial evidence of anticompetitive purpose, see U.S.
Memorandum
in Support
of Motion for Preliminary Injunction at 60-64; and Microsoft enforced its tie, not just by
product
design, but also by contractual prohibitions on OEM efforts to delete the browser.
In
Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534, 539-42 (9th Cir.
1983),
the
plaintiff alleged an "implicit" tie of Kodak's new 110 camera to the film and processing
supplies
needed to use it. Foremost is readily distinguishable from the present case
because it
involved not
the bundling of products, but rather the development of new technological formats that
rendered
competitors' complements incompatible. The court explained there that the
"so-called
technological tie" of a new product that could not be used with old complements, and
thus
required the purchase of new ones, did not "standing alone" (without any contractual
requirement
that users take the two together) establish a per se unlawful tying arrangement.
Id. at
542. Here,
of course, the tying claim is premised not on the creation of any incompatibility, but
rather on
the
clearly demonstrated contractual coercion lacking in Foremost.
Page 63
Microsoft describes Innovation Data Processing, Inc. v. IBM
Corp.,
585 F. Supp. 1470
(D.N.J. 1984), as a case "squarely on point" for the superficial reason that it "involved
the
integration of new features into an operating system." MS Memo at 28. But the court
there
held
that there was no unlawful tie of MVS operating system software and DFDSS software
because,
unlike Microsoft in this case, defendant licensed them separately as well as together,
at the
user's
option. Id. at 1474-75.33
Finally, in ILC I, the court used traditional tie-in criteria to
conclude
that a disk drive that
integrated a drive unit and head/disk assembly was not an unlawful tie-in. The court
found
that
the drive unit and the head/drive assembly were designed to be and would be used as
a unit;
that
the aggregation offered dramatically larger online storage capacity previously
unavailable; that
the
aggregation satisfied a recognized customer need; that the aggregation resulted in
cost savings
that
were passed on, at least in part, to end users; that the drive unit and head/drive
assembly
were
normally used by customers in fixed proportions; and that the practice of other
industry
participants, including the plaintiff, was to sell integrated disks and the drive on which
they
operated for a single price. 448 F. Supp. at 232-34. The court's analysis, based on
these
factors,
is flatly inconsistent with Microsoft's argument that, once the defendant makes a
plausible
showing of some technological benefit, the court should look no further. Moreover, the
facts
that
led the ILC I court to find a single product are conspicuously different than
those in
this case.
Page 64
Operating systems and browsers are not used in fixed proportions;34 not all sellers
bundle
the
products together; no consumer savings have been shown to result from the bundling
of
Windows
and Internet Explorer; and not even Microsoft claims that the benefits from bundling
Internet
Explorer (as opposed to any other browser) are "dramatic." See 448 F.Supp. at
233.
Thus,
even if the cases on which Microsoft relies were good law -- and, to the extent they
precede and conflict with Jefferson Parish and Eastman Kodak and
their
progeny, they are not --
they would not provide a basis for summary judgment. Those cases ultimately turned
on
traditional tie-in law, not some special laissez faire rules for product design
cases, and
that law
requires an inquiry into the economic facts relevant to each element of the tie-in
standard.
For
example, in In re IBM Peripheral EDP Devices, 481 F. Supp. 965 (N.D. Cal.
1979),
aff'd, 698
F.2d 1377 (9th Cir. 1983), the court refused to defer to product design choices
whenever they
are
"justified" or "reasonable" because that would "ignore[] the possibility that a superior
product
might be used as a vehicle for tying sales of other products, and would pronounce
products
superior even where the predominant evidence indicated they were not." 481 F.
Supp. at 1003.
Instead, the existing generalized standard, one applicable to all types of otherwise
legal conduct
by
a monopolist, must be applied to the technological design activity at issue here:
[I]f the design choice is unreasonably restrictive of
competition,
the monopolist's conduct violates the
Sherman
Act. This standard
will allow the fact finder to consider the
effects
of the design on
competitors; the effects of the design on
consumers; the degree to
which the design was the product of
desirable
technological
Page 65
creativity; and the monopolist's intent, since a
contemporaneous
evaluation by the actor should be helpful
to the
fact finder in
determining the effects of a technological
change. Id.
There is no basis in the cases or sound antitrust policy for courts to
grant to
monopolists
the kind of deference Microsoft seeks. Product design questions can be complex, but
they are
not
beyond the competence of courts; courts deal with those and similar questions in
product
liability,
environmental, medical or engineering malpractice, and similar cases.35
Microsoft would have the court believe that showing any plausible
benefit
from product
design is the same as showing that consumers benefit from the design. That is plainly
wrong.
A
new product design, particularly one that bundles what would be deemed under
ordinary
tying
standards to be two separate products, can never be said unambiguously to benefit
consumers
unless consumers are given the choice whether to take the bundle. Such a bundled
design does
not
just reduce cost or improve the functioning of one of the products, but rather changes
the
products'
various attributes. Invariably, a bundled product design will have some pluses (e.g.,
the kind
of
Page 66
one-stop shopping benefits present with any tie-in) and some minuses (e.g., in the
case of
Windows and Internet Explorer, increased size and impairment of user access to other
browsers);
and, as with Microsoft's Windows and Internet Explorer products, some purchasers
will prefer
the
bundle and others will prefer to buy the products separately. As both the Supreme
Court
and
lower courts have repeatedly recognized, it is for the market, not the
self-serving
assertions of the
defendant, to determine whether products are good or bad.36
It
is
for these reasons that the Supreme Court made clear in Jefferson Parish, and
reiterated
in Eastman Kodak, that tie-ins are to be assessed on the basis of consumer
demand.
Indeed, the
defendants in Jefferson Parish, like Microsoft here, argued that the "package"
of
facilities and
services including anesthesiology "d[id] not involve a tying arrangement at all -- that
they
[were]
merely providing a functionally integrated package of services." 466 U.S. at
18-19
(emphasis
added). The Supreme Court rejected the argument, recognizing that companies,
whether in low
or
high technology industries, would always be able to show some plausible synergies.
See
id. at 25,
n.41 ("[W]e reject the view of the District Court that the legality of an arrangement of
this
kind
turns on whether it was adopted for the purpose of improving patient care.");
seealsoMultistate
Legal Studies, 63 F.3d 1540, 1547 (10th Cir. 1995) (bundled version of two
products
should not
be considered single product simply because the combination represents an "effort to
improve
the
[tying product] by adding elements to it"). The same is true here. Microsoft's case,
resting on
the
Page 67
immaterial argument that Windows and Internet Explorer are "integrated," does not
warrant
summary judgment.
d. The Court Of Appeals Decision In The
Consent Decree Case Does
Not Provide A
Basis For Summary Judgment Under The Antitrust
Laws
Microsoft places principal reliance for its argument that "technically
interconnected
products" are essentially "immune" from tying claims on the Court of Appeals' recent
decision
in
the consent decree case. MS Memo at 20. Microsoft argues that the consent decree
decision
sets
the legal framework for this case: The "court's evaluation of a claim of integration
must be
narrow
and deferential," and "an integrated product should pass muster if there are 'facially
plausible
benefits to its integrated design.'" MS Memo at 26, quoting slip op. at 14-15. But the
Court
of
Appeals' holding that facially plausible benefits "pass muster" at the preliminary
injunction
phase
of a lawsuit involving the interpretation of a consent decree neither disposes of nor
forecloses
full
analysis of the legal and factual issues raised here.
The
principal issue in the consent decree case was whether the challenged tie was an
"integrated" product within the specific meaning of language in Section IV(E)(I) of the
decree.
As
addressed by the Court of Appeals, that issue was not coextensive with whether
Microsoft
bundled
one product or two under established antitrust law. The precise issue
beforethe court
was
whether the government was likely to establish its claim that Microsoft had
violated a
provision of
the consent decree, which exempted the "develop[ment]" of "integrated product[s]"
from its
scope
-- not whether it had violated the antitrust laws. Slip op. at *10 ("the
decree
does not embody
either the entirety of the Sherman Act or even all 'tying' law under that Act," and it
cannot be
read
"as though its animating spirit were solely the antitrust laws," citing United States v.
Armour &
Page 68
Co., 402 U.S. 673, 681-82 (1971)). The Court understood its task as
construing
the decree as a
contract, looking to the parties' intent in determining the appropriate meaning of the
word
"integrated," which in any event is immaterial here. Slip op. at *19. As the Court
elsewhere
noted: "The antitrust question is of course distinct. The parties agree that the
consent
decree does
not bar a challenge under the Sherman Act." Id. at *15, n.14 (emphasis
added).
Moreover, the Court of Appeals expressly left to a more fully
developed
record whether, in
fact, Microsoft's arguments about "technological benefit" could be substantiated, slip
op. at 18,
and
even whether Windows 95 and Internet Explorer are an "integrated" product within the
meaning of
the consent decree. Id. at 16 & n.15 (Microsoft had "ascrib[ed] facially plausible
benefits to its
integrated design," which "the [government] may not have contested . . . as vigorously
as it
might .
. . . The ultimate sorting out of any factual disputes . . . we of course cannot resolve on
the
limited
record before us"). The court's decision was "tentative," id. at 19, and "subject
to
reexamination
on a more complete record." Id. at 18. It accordingly cannot serve as a basis
for
summary
judgment in this case.
To be
sure, the Court of Appeals did express in dicta concern about the competence of
courts to scrutinize the packaging of products in high technology industries such as
the
computer
software business. The court noted that "[a]ntitrust scholars have long recognized
the
undesirability of having courts oversee product design, and any dampening of
technological
innovation would be at crosspurposes with the antitrust law." Microsoft, 1998
WL
327855, at
*12. But those concerns do not conflict with, and cannot effect an overruling of,
Jefferson
Parish
and its progeny. The Jefferson Parish market test does not require courts to
engage in
product
design oversight or even to look at the relative technological benefits of various
products.
Rather,
Page 69
the market test enables courts to let the market evaluate the technological benefits and
detriments
of bundled and unbundled products. Cf. Digital Equipment Corp. v. System
Industries,
Inc., 1990
WL 5588 (D. Mass. 1990) (fact that two products are technologically interrelated is
not
determinative under Jefferson Parish separate products test). If there is
sufficient
demand, then
Jefferson Parish requires the defendant to offer the unbundled alternative and
to let the
market, not
the defendant, decide whether the bundle is desirable.
In
any event, even if Microsoft were correct that the legal standard to be applied in
this
case is that technologically tied products are immune from Section 1 scrutiny so long
as
the
"integration" of products produces "plausible" synergistic benefits and the integration is
not
purely
pretextual, see 1998 WL 327855, at *13, summary judgment in favor of
Microsoft
would still be
inappropriate because there are numerous genuinely disputed material facts.37
Page 70
As to
Windows 98, Microsoft claims that there can be no genuine dispute that the
inclusion
of Internet Explorer in Windows 98 achieves technologically beneficial results. MS
Memo at
33.
However, the facts cast serious doubt on the assertion that there are any necessary
synergistic
benefits of the bundled version, and that Microsoft's requirement that Internet Explorer
be used
is
not pretextual.
First,
as discussed above, there is no compelling evidence that requiring the use of
Internet
Explorer in particular, as opposed to any other browser inserted by an OEM or
end
user, is
necessary to provide the benefits Microsoft describes. For example, the other
operating
system
vendors which have incorporated browsing functionality into their operating systems
universally
respect "browser neutrality" in doing so, either by bundling multiple browsers or
contractually
and
technically permitting OEMs and end users to replicate the synergies of bundling by
substituting
browsers different than the one selected as default by the operating system
manufacturer.
Second, Microsoft cannot claim without serious dispute that all (or
even most)
users
consider the integration beneficial; there is evidence that certain users (e.g.,
classes of
corporate
customers) do not prefer the integration -- that is, they want an unbundled
version.
See also SJ
Ex. 6.
Finally, there is a genuine issue of material fact whether, under the
standard
applied by the
D.C. Circuit to the consent decree, Windows 98 and Internet Explorer were essentially
"bolted"
together. As the United States has previously discussed, see PI Memo at
60-64,
numerous
Microsoft documents describe the bundling of Internet Explorer with Windows 98 as
precisely
motivated by a desire to thwart competition among browsers (as opposed to
maintaining a
Page 71
competitive advantage among operating systems) -- and even to specifically "weld" the
products
together in response to this desire.
In light of
these
factors, even under the unduly narrow standard articulated by the Court
of Appeals under the consent decree, disputed issues of material fact preclude
summary
judgment.
2. Microsoft's Forced Licensing Of Internet Explorer To OEMs
Violates Section 2 Of The Sherman Act
The
Complaints allege that Microsoft's forced licensing of Internet Explorer as a
condition
of OEMs licensing its Windows operating systems significantly injures other browsers
and,
both
alone and in concert with Microsoft's other anticompetitive conduct, violates Section 2
of
the
Sherman Act. It constitutes both unlawful monopolization of the PC operating system
market
--
because it injures other browsers that threaten to provide an alternative platform that
would
diminish the monopoly power of Microsoft's operating systems -- and an unlawful
attempt
to
monopolize the market for Internet browsers.
"‘The offense of monopoli[zation] 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
Tech.
Servs., Inc., 504 U.S. 451, 481 (1992) (quoting United States v. Grinnell
Corp.,
384 U.S. 570-71
(1966)). The offense of attempted monopolization under Section 2 has three
elements: "that
the
defendant (1) has engaged in predatory or anticompetitive conduct with (2) a specific
intent
to
monopolize, and (3) a dangerous probability of achieving monopoly power.
Spectrum
Sports v.
McQuillan, 506 U.S. 447, 456 (1993). In substance, Section 2 prohibits
the
maintenance or
creation of monopoly power by anticompetitive means. See, e.g., Aspen Skiing,
472
U.S. at 602-
Page 72
603 (Section 2 condemns maintenance of power when accomplished through improper
or
anticompetitive means); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227,
239
(1st Cir.
1983) (Breyer, J.) (explaining that "[a] monopolist's conduct that from a competitive
point of
view
is unreasonable" violates Sherman Act section 2).
As
discussed above, Microsoft argues largely that its licensing of Windows on
condition
that OEMs license Internet Explorer is not an unlawful tying arrangement because
Internet
Explorer and Windows comprise a single product. MS Memo at 38-48. But, whatever
the
merits
of that argument under Section 1, it does not follow that Microsoft's forced licensing of
Internet
Explorer cannot be challenged under Section 2. As the leading antitrust treatise
explains:
Tying law's ‘two product' inquiry distinguishes competitive
from
anticompetitive bundling only imperfectly.
Some bundling may be
anticompetitive under § 2 even
though the bundled items are
technically a single product. . . . For
example, concluding that
morning and evening newspaper
advertising are
the same product
for tying purposes does not foreclose a
§
2 challenge to a dominant
newspaper's use of morning/evening
bundling
to destroy an evening
rival.
10 P. E. Areeda, E. Elhauge, and H. Hovenkamp, Antitrust Law ¶ 1752g,
at 289
n.46 (1996)
(emphasis added). The very "technological tying" cases Microsoft invokes hold that
Section
2
may be violated when a monopolist "uses" its monopoly "power to tighten its hold on
the
market." Berkey Photo, 603 F.2d at 274-75; Northeastern Tel. Co. v.
American Tel.
& Tel. Co.,
651 F.2d 76, 84-85 (2d Cir. 1981), cert. denied, 455 U.S. 943 (1982);
Telex, 510 F.2d at 926-27.
Those cases also make clear that, in determining whether a product design decision
amounts to
an
unlawful use of monopoly power (or, in the language of other cases, is "predatory"
or
"exclusionary"), the usual Section 2 standard applies and not some special, deferential
rule.
See
Northwest Telephone, 651 F.2d at 84-85 & 95 n.29; Inre IBM Peripherals
EDP
Devices
Page 73
Antitrust Litigation, 481 F. Supp. 965, 1003 (N.D. Cal. 1979) (rejecting the
argument
that
illegality should be found only when "the intent was solely an illegal one" and
concluding that
"[a]
more generalized standard, one applicable to all types of otherwise legal conduct by
a
monopolist . . . must be applied to the technological design activity at issue here."),
aff'd,
671 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955 (1983);
seealso
GAF Corp. v. Eastman
Kodak Co., 519 F. Supp.
1203,
1228-29 & n.19 (S.D.N.Y. 1981) ("the ‘reasonableness' of the
design of a monopolist's new products . . . may be scrutinized under § 2 in cases
in which
. . . a
single firm controls the entire market or in which a monopolist engages in coercive
conduct
to
affect consumer choice," and "an absolute monopolist's design conduct is subject to
antitrust
scrutiny by a jury"); California Computer Products, Inc. v. IBM Corp., 613 F.2d
727,
735-36 (9th
Cir. 1979).
Microsoft argues that its refusal to license Windows except with
Internet
Explorer is
simply an "ordinary business
practice[] typical of those used in a competitive market" and, for
this reason, cannot "constitute anti-competitive conduct violative of Section 2." MS
Memo at
76
(quoting Trace X Chem., Inc. v. Canadian Indus., Ltd., 738 F.2d 261, 266 (8th
Cir.
1984), cert.
denied, 469 U.S. 1160 (1985)). This contention, however, is both factually and
legally
flawed.
As noted above, the evidence shows that other operating system vendors permit
OEMs to
license
their operating system without
a
particular browser, and to remove browsers shipped with the
operating system. Moreover, other operating system vendors, in contrast to Microsoft,
lack
monopoly power; and it has long been clear that, "[w]here a defendant maintains
substantial
market power, his activities are examined through a special lens: Behavior that might
otherwise
Page 74
not be the concern to the antitrust laws -- or that might even be viewed as
procompetitive --
can
take on exclusionary connotations when practiced by a monopolist." Eastman
Kodak,
504 U.S.
at 488 (Scalia, J., dissenting on other grounds) (quoting 3 P.E. Areeda and D.F.
Turner,
Antitrust
Law ¶ 813, at 300-02 (1978)).
Thus,
the Section 2 issues cannot be disposed of by looking merely to the practices of
firms other than Microsoft. Instead, they must be resolved by asking the question that
Section
2
requires -- whether Microsoft's insistence that OEMs license Internet Explorer as a
condition
of
licensing Windows is anticompetitive.38 In making that assessment, the Supreme Court
explained
in Aspen, the court should inquire whether the monopolist's conduct "‘(1)
tends to
impair the
opportunity of rivals'" and (2) "'does so in an unnecessarily restrictive way.'" 472 U.S.
at
605
n.32 (quoting 3 P.E. Areeda & D.F. Turner, Antitrust Law 78 (1978)). In other
words,
Section 2
is violated when a monopolist engages in conduct that excludes rivals and the
exclusion is
not
reasonably necessary to achieve asserted legitimate business objectives.
SeeIn re
IBM
Peripherals EDP Devices Antitrust Litig., 481 F. Supp. at 1003 ("If the design
choice
is
unreasonably restrictive of competition, the monopolist's conduct violates the Sherman
Act.
The
standard will allow the factfinder to consider the effects of the design on competitors;
the
effects
of the design on consumers; the degree to which the design was the product of
desirable
technological creativity; and
the
monopolist's intent, since a contemporaneous evaluation by the
actor should be helpful to the factfinder in determining the effects of a technological
change.").
Page 75
The
evidence here establishes without question material disputes on these issues. First,
the evidence leaves no doubt that, because of Microsoft's monopoly power, OEMs
have no
alternative to the Windows operating system and, thus, to licensing Internet Explorer;
that
OEMs
that license Internet Explorer are less likely as a result also to distribute other
browsers; and
that
the forced licensing of Internet Explorer thus forecloses the opportunities of rival
browsers.
See
supra, Section II.B. The exclusion of non-Microsoft browsers in this way is not a
"competitive
advantage" that "‘accrues to any integrated firm,'" MS Memo at 80 (quoting
Berkey
Photo,
603 F.2d at 276), but rather is a consequence of Microsoft's desktop operating system
monopoly.
Second, the evidence supports the conclusion that this exclusion of
non-Microsoft
browsers was not reasonably
necessary in order for Microsoft to achieve any legitimate business
objective. Microsoft could offer OEMs the option of a Windows product without
Internet
Explorer being required to
supply
browsing functionality and/or easily permit OEMs to remove
the means of access to Internet browsing functionality. See supra, Section
II.C.1. It
chose to tie
Internet Explorer, instead, precisely in order to deny its browser rivals access to the
OEM
distribution channel.
Page 76
This belief in
the
effectiveness of the tie has remained unwavering. See, e.g.,
This
evidence, and the factual disputes it demonstrates, preclude summary judgment on
the
Section 2 claim.
D. Microsoft's Windows Copyright Does Not Protect Its
Anticompetitive OEM License Practices
Microsoft begins its copyright argument by announcing that "Windows
95 and
Windows
98 are both copyrighted works," MS Memo at 54, as though that talismanic invocation
were
enough to shield it from the antitrust laws. But possession of a copyright does not
permit
its
owner to do whatever it likes with that copyright, in defiance not only of antitrust law
but also
of
copyright policy. Microsoft's conduct with respect to its copyrighted works violates
both.
Moreover, the relevant facts regarding the restrictions in Microsoft's licensing
agreements
are
sharply contested, precluding summary judgment.
1. Microsoft Does Not Have ‘Moral Right" Protection
In Its
Copyrighted Software
Much of Microsoft's copyright argument relies on a limited and rather
obscure
set of cases
suggesting that copyright owners are vested with a "moral right" of integrity in their
works.
This
is a continental law concept largely foreign to American jurisprudence.
Microsoft relies most heavily on Gilliam v. ABC, 538 F.2d 14
(2d Cir.
1976), which does
contain language suggesting that the court envisioned a new right of integrity where a
work
was
significantly changed but still promoted under its original name; the decision spoke of
the
"mutilation" of a work by a licensee. But the Gilliam court itself acknowledged
the
lack of
Page 77
statutory or doctrinal support in copyright for its newly-created right.39 Indeed, the
court
ultimately grounded its new right in trademark instead.40 In any event, in the
two
decades since
the decision Gilliam has not been read expansively by other courts. See,
e.g.,Halicki v. United
Artists, 812 F.2d 1213 (9th Cir. 1987) (refusing to endorse the broad new moral
right
plaintiff
read Gilliam to create);
Weinstein v. University of Illinois, 811 F.2d 1091, 1095 n.3 (7th Cir.
1987) (same); Smith v. Montoro, 648 F.2d 602 (9th Cir. 1981) (same);
Paramount v.
Video
Broadcasting, 724 F. Supp. 808, 820 (D. Kan. 1989) (juxtaposition of
advertisements
with
copyrighted movie on videotape was not copyright infringement, despite
Gilliam);
cf.Seshadri v.
Kasraian, 130 F.3d 798, 803 (7th Cir. 1997) (rejecting a Gilliam-based
integrity
argument,
noting that the plaintiffs "might
conceivably have some remedy, but it wouldn't be under the
Copyright Act.").41
Whatever policy justifications might exist for a moral right of integrity in
works of
art, the context in which the concept was developed, they are substantially weaker
when the
work
at issue is a computer program.42 Computer programs -- and particularly operating
systems
-- are
Page 78
functional works. Their value resides not in their artistry, but in what they do. Cf.
Apple
Computer v. Microsoft Corp., 35 F.3d 1435 (9th Cir. 1994). Numerous software
cases
have
allowed defendants to make alterations to a plaintiff's program in appropriate
circumstances,
and
for a variety of reasons.43 Indeed, the Copyright Act itself expressly allows
owners
of a copy of a
computer program to "adapt" it in appropriate circumstances without the permission of
the
copyright owner, a power that is fundamentally at odds with Microsoft's asserted "right
of
integrity" for software. See 17 U.S.C. § 117; Aymes v. Bonelli, 47
F.3d
23 (2d Cir. 1995).
At
a
minimum, application of this novel concept to software raises a number of material
factual issues, none of which Microsoft has addressed. These include the extent of
copyright
protection in the portions of the software being modified, the extent and type of the
modification
involved, the purpose of the modification, and the consequences of permitting or
prohibiting it.
All of these facts are sharply contested, and summary judgment on this issue would
be
particularly
inappropriate.44
Page 79
2. Copyright Protection Is In Any Event Not Unlimited
The
thrust of Microsoft's copyright argument is that it is free to do whatever it wishes in
licensing its copyrighted works. But copyright law does not provide an unbounded
property
right. Rather, as the Supreme Court has repeatedly recognized, it is a limited power
designed
to
encourage to a reasonable degree the creation of new works of authorship. See,
e.g.,Stewart v.
Abend, 495 U.S. 207, 224-25 (1990) (noting the Copyright Act's "balance between
the
artist's
right to control the work . . . and the public's need for access"); Computer Assocs.
Int'l, Inc.
v.
Altai, Inc., 982 F.2d 693, 711 (2d Cir. 1992) ("interest of copyright law is not in
simply
conferring a monopoly on industrious persons, but in advancing the public welfare
through
rewarding artistic creativity, in a manner that permits the free use and development of
non-
protectable ideas and processes"); Twentieth Century Music Corp. v. Aiken, 422
U.S.
151, 156
(1975) ("private motivation must ultimately serve the cause of promoting broad public
availability
of literature, music and other arts"). Limits on the scope of a copyright include the
requirement
that protection extend only to "original works of authorship," Feist, 499 U.S. at
346-47;
the
requirement that copyright protection extend only to the author's expression, and not
to the
underlying idea being expressed, 17 U.S.C. § 102(b); Baker v. Selden,
101 U.S.
99 (1879); and
the absence of copy
protection
against certain "fair" uses, 17 U.S.C. § 107; Campbell v. Acuff-
Rose Music Inc., 510 U.S. 569 (1994).
Page 80
In
the
context of computer programs, these limitations impose significant restrictions on
Microsoft's claimed "right to control the manner in which its copyrighted works are
used."
MS
Memo at 54. First, it is by now well established that the copyright in a computer
program
cannot
extend to the functional aspects of that computer program; to design choices dictated
by
necessity, cost, convenience or consumer demand; or to portions of the program that
are
not
original to its creator. See, e.g.,Mitel v. Iqtel, 124 F.3d 1366, 1374-76
(10th
Cir. 1997)
(interface specifications of a
communications protocol are freely copiable because they are
functional rather than expressive);Apple v. Microsoft Corp., 35 F.3d at
1441
(user interface of a
computer program entitled to only limited protection against "virtually identical"
copying,
because
of license and because of limited number of different ways the underlying idea can be
expressed);
and Computer Associates, 982 F. 2d at 715 (significant portions of the
structure,
sequence, and
organization of a program may be copied in order to write a similar program to run on
a
different
platform).
Second, copyright law does not provide Microsoft with the unfettered
right "to
license
their intellectual property as
they
see fit." MS Memo at 54. Rather, copyright's misuse doctrine
imposes significant restrictions on the ability of a copyright owner to extend its control
to
adjacent markets, to prevent
the
development and use of interoperable programs by competitors,
or to impose anticompetitive restrictions on licensees. Several cases are instructive.
In
DSC
Communications v. DGI Technologies, the Fifth Circuit held that it was likely
copyright
misuse
for DSC to use its copyright in the computer program operating a telephone switch to
try to
prevent a competitor from designing and testing a compatible switch that used DSC's
protocols.
81 F.3d at 601. And in Lasercomb America v. Reynolds, 911 F.2d 970 (4th Cir.
1990)
and
Page 81
Practice Management Info. Corp. v. American Med. Ass'n, 121 F.3d 516 (9th
Cir.
1997), as
amended Jan. 9, 1998, the Fourth and Ninth Circuits found copyright misuse
where a
copyright
owner entered into license agreements that restricted its licensees from competing
with it.45
These
intellectual property principles establish that Microsoft's copyrights do not give it
the right to impose whatever restrictions it wishes on its licensees. Instead, copyright
law
offers
no protection for license restrictions, like those at issue here, that attempt to extend
Microsoft's
rights beyond what the copyright laws protect or for those that attempt to impose
anticompetitive
conditions on the licensing of the copyright.
3. Copyright Interests Do Not Provide Immunity From The Antitrust
Laws
The
underlying error in Microsoft's copyright argument is that it proceeds from an
assumption that, if Microsoft's restrictions are contained in a license to legitimately
copyrighted
material, the copyright automatically prevails and any restrictions it chooses to insert
in
its
licensing agreements are permissible under the antitrust laws. This assumption is
wrong.
A
copyright does not give its owner immunity from the laws of general applicability.
Examples are legion,46 and antitrust law is among them. See, e.g.,
Data
General Corp. v.
Page 82
Grumman Sys. Support, 36 F.3d 1147, 1185 n.63 (1st Cir. 1994) ("[i]t is in any
event well
settled
that concerted and contractual behavior that threatens competition is not immune from
antitrust
scrutiny simply because it involves the exercise of copyright privileges"; citing cases).
Antitrust
liability may attach to anticompetitive licensing restrictions.See United
States v.
Loew's, Inc.,
371 U.S. 38 (1962); United
States v. Paramount Pictures, 334 U.S. 131 (1948); Straus v.
American Publishers Ass'n, 231 U.S. 222, 234 (1913); Digidyne, 734 F.2d
1336.
One
of the principles adopted by the courts in reconciling antitrust and copyright law is
that a copyright owner may
not use
licensing agreements to impose certain anticompetitive
restrictions on its licensees.
Thus,
efforts to use a copyright license to obtain control in an
adjacent market or to tie copyrighted to uncopyrighted works have been held to violate
the
antitrust laws. 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 patent, copyright, or business
acumen can give rise to liability if a seller exploits his dominant position in one market
to
expand
his empire into the next.");47Eastman Kodak v. Image Technical Servs.,
125
F.3d 1195 (9th Cir.
1997); Digidyne, 734 F.2d 1336.
Here,
the United States complains about allegedly anticompetitive restrictions Microsoft
has included in its licensing agreements: requiring the preinstallation and display of
Internet
Explorer and preventing OEMs from utilizing preferred means of developing and
installing
their
own add-on programs or customizing the user interface. With regard to each
restriction,
the
Page 83
conduct at issue is not whether Microsoft has an intellectual property right not to
license its
copyrighted works, but whether Microsoft's insertion into its license agreements of
restrictions
that exclude competing browsers and maintain and extend Microsoft's operating
system
monopoly violates the
antitrust
laws.
4. Microsoft's Copyright Does Not Preclude Appropriate Relief Once
An
Antitrust Violation Has Been Proved
Finally, Microsoft suggests that the relief sought by the United States
would
infringe its
copyright interests. But Microsoft's rights under the copyright laws are very different at
the
remedy stage, after liability has been established. Courts have regularly ordered
compulsory
licensing of valid patents and copyrights as a remedy for a proven antitrust violation.
See,
e.g.,
United States v. Glaxo Group, 410 U.S. 52 (1973) (compulsory licensing of
present
and future
patents at a court-set rate was an appropriate remedy for past antitrust violations);
United
States
v. National Lead Co., 332 U.S. 319, 328-35 (1947); Hartford-Empire Co. v.
United
States, 323
U.S. 386, 419 (1945); F.M. Scherer, Industrial Market Structure and Economic
Performance
456 (1980) ("compulsory licensing has been specified as a remedy in more than 125
antitrust
cases . . ."). If plaintiffs
establish
that Microsoft's licensing restrictions violate the law, the
copyright laws will pose no obstacle to an appropriate remedy.
III. PLAINTIFFS ARE
ENTITLED
TO PRELIMINARY AND PERMANENT RELIEF
Contrary to the unsupported assertions in its Memorandum in
Opposition to
Plaintiffs'
Motions for Preliminary Injunction, Microsoft clearly possesses monopoly power; its
conduct
has
excluded competition; and its conduct cannot be justified by self-serving
pronouncements as to
the benefits of "integration" and its asserted rights in the "integrity" of its intellectual
property.
Page 84
Microsoft claims that the relevant product market in this case is
broader than
that alleged
by the plaintiffs, and that the appropriate market encompasses not only operating
systems for
Intel-based PCs, but also for minicomputers, workstations, non-Intel based PCs,
network
computers attached to mainframes, and handheld computers. See MS Memo.
at
10-11.48
Microsoft's assertion that operating systems for other types of computers are
substitutes for
desktop PC operating systems is utterly unsupported by anything other than
speculation
and
conjecture. There is no evidence that hardware such as workstations
(adapted to run
higher-
powered applications than PCs) or handheld computers (adapted to run
lower-powered
applications than PCs)
provide
viable substitutes for Intel-based desktop PCs for any significant
number of users. To the contrary, the
evidence
supports
plaintiffs' allegations that the relevant market in this case is no broader than (and
perhaps
narrower than) one for
desktop
operating systems for Intel-based PCs.
The
Court of Appeals has twice considered actions against Microsoft and has
commented
on its apparent monopoly power and the characteristics of the operating system
market that
have
contributed to this power. SeeUnited States v. Microsoft Corp., 56 F.3d
1448,
1451-53 (D.C. Cir,
Page 85
1995); United States v. Microsoft Corp., 1998 WL 327855, *1 (D.C. Cir. 1998)
("Because IBM
chose to install Microsoft's operating system on its personal computers, Microsoft
acquired
an
‘installed base' on millions of IBM and IBM-compatible PCs. That base constituted
an
exceptional advantage, and has created exceptional risks of monopoly, because of
two
characteristics of the software industry -- increasing returns to scale and network
externalities.").
Of
course, some of the other companies in the operating system business are large
and
well-funded, and have numerous smart engineers at their disposal. But those assets
do not
enable
firms to enter and compete meaningfully in the relevant market. The evidence plainly
indicates
that other would-be operating system competitors, including computer giant IBM,
despite
the
resources at their disposal,
have
been unable to penetrate the desktop operating system market.
Measured against the
historical record of such companies' utter failure to gain a foothold in the competitive
battle
against Windows, their resources might as well be infinite. The barriers to entry --
exactly
the
barriers described by the plaintiffs in their opening briefs -- would be no less high.
Page 86
Microsoft seeks to deal with these barriers (most notably, the strong
network
effects
exhibited by the operating system market) by simply assuming them away. Microsoft
offers
no
evidence at all to support its claim that the large installed base of Windows users
serves as
a
"magnet" for entry, and certainly none that rebuts the substantial evidence that
Microsoft's
dominance is reinforced by the positive feedback loop between
Windows-specific
applications
and further growth in the
Windows
installed base.
Not a single operating system vendor witness called to testify
in these proceedings has even remotely suggested that he views selling to the
Windows
installed
base as an attractive business opportunity. To the contrary, such vendors repeatedly
have
testified
that the desktop market is essentially foreclosed, forcing them to direct their efforts
elsewhere.
Finally, Microsoft futilely seeks refuge in the assertion that operating
system
prices remain
low and represent a small portion of the cost of a personal computer, and that the
relevant
market
Page 87
is characterized by rapid technological advances. Whether operating system
technology
has
advanced in the past several years (itself a subjective judgment which Microsoft
makes no
effort
to substantiate) is immaterial.
The
courts have consistently held that a firm may possess
monopoly power in an
industry
notwithstanding the fact that innovation has continued to occur
and prices have not increased. See, e.g., Allen-Myland, 33 F.3d at
210-11;
Greyhound Computer
Corp. v. IBM Corp., 559 F.2d 488, 497 (9th Cir. 1977).
Moreover, Microsoft's argument misstates the facts. The prices of
nearly all
other
components of personal computers have decreased substantially, even while their
technological
capabilities have dramatically expanded. See, e.g., The
price of Windows has not. Ibid. As a result, the percentage of the cost of a PC
to a
consumer
represented by Windows has been steadily increasing.
Page 88
have
declined to take any pricing action in response, choosing instead to maintain Windows
royalties
at
least at prior levels. This is evidence of monopoly power, not the absence thereof.
As
discussed in preceding sections of this Memorandum, Microsoft's monopoly power
is
the lens through which its anticompetitive conduct must be viewed.
OEMs repeatedly
express fear of disrupting their relationships with Microsoft. Both their absence of
choice
and
their fear is consistent only with the fact that Microsoft possesses monopoly power.
This
power,
in turn, is the fulcrum by which Microsoft's coercive business practices have been
implemented,
distinguishing them in critical ways from the non-predatory practices of Microsoft's
operating
system and browser competitors. Microsoft's exclusionary conduct is not, as
Microsoft
characterizes it, merely "commonplace." It is extraordinary, and extraordinary for the
very
reason
it offends the antitrust laws: it coerces consumer, OEM, ISP, and ISV purchasing and
licensing
decisions and forecloses competition through the exertion of monopoly power, not the
ordinary
power of persuasion based purely on the merits of Microsoft's products.
Page 89
* * * * * *
*
* *
For
the reasons set forth in plaintiffs' memoranda in support of preliminary injunction,
and
based on the evidence set forth previously and herein, plaintiffs meet each of the
factors
required
for the entrance of preliminary and permanent injunctive relief.
Respectfully submitted,
DATED: August 31, 1998
__________/s/____________
Christopher S Crook
Chief
Phillip R. Malone
Steven C. Holtzman
Pauline T. Wan
Karma M. Giulianelli
Michael C. Wilson
Sandy L. Roth
John F. Cove, Jr.
Denise M. DeMory
Mark S. Popofsky
Attorneys
David Boies
Special Trial Counsel
U.S. Department of Justice
Antitrust Division
450 Golden Gate Avenue Room 10-0101
San Francisco, CA 94102
415/436-6660
__________/s/____________
Dennis C. Vacco
Attorney General
Pamela Jones Harbour
Deputy Attorney General
Stephen D. Houck
Chief, Antitrust Bureau
Alan R. Kusinitz
Assistant
Attorney
General
Antitrust Bureau
New York State Department of Law
Page 90
120 Broadway, Suite 2601
New York, New York 10271
(212) 416-8282
.
.
FOOTNOTES
1 This
memorandum,
which responds to both Microsoft's summary judgment motion and its opposition to the
motions
for a preliminary injunction, addresses the federal law issues. In a separate
memorandum,
plaintiff states address the state law issues and other issues that do not arise in the
United States'
case.
2 In
Eastman
Kodak, the Supreme Court reversed a grant of summary judgment entered by the
District
Court on the ground that the defendant had proffered some business justifications for
its tying
arrangement. 504 U.S. at 461. The Court stated that "[l]egal presumptions that rest on
formalistic distinctions rather than actual market realities are generally disfavored in
antitrust
law. This court has preferred to resolve antitrust claims on a case-by-case basis,
focusing on the
'particular facts disclosed by the record.'" Id. at 466 [citations omitted].
3 Microsoft's
announced intention to make its Internet Explorer browser "forever free" further
undercuts any
suggestion that Microsoft's conduct would maximize Microsoft's profits, except as a
method of
perpetuating its operating system monopoly.
4 As used
herein, the
term "ISPs" includes online services ("OLSs") such as America Online, which are
sometimes
distinguished from ISPs in that they create and/or bring together Internet content for
their
subscribers in addition to providing Internet connections. As discussed below, one of
the many
failings of Microsoft's summary judgment motion is its convenient fiction that the two
can be
disaggregated with respect to their roles as browser distribution channels. In fact,
combined they
represent the single most important browser distribution channel.
5 By contrast,
the
five regional Bell operating companies ("RBOCs") with which Netscape has distribution
agreements and upon which Microsoft places so much emphasis in their memorandum,
have
only about 625,000 subscribers in aggregate, see SJ Ex. 25,
the relative insignificance of which has been confirmed by
6 Microsoft
argues
that it has not enforced the agreements. But there is clear evidence to the contrary.
Moreover,
the fact that Microsoft asserts that it never took legal action to enforce the agreements
does not
mean that ISPs were or felt free to ignore them.
7 Indeed,
according
to This is exactly the raising of rivals' costs with which the antitrust laws are
concerned.
8 Moreover,
internal
Microsoft documents reflect
9 The
exclusion
results not only from the prohibition on removal of the Internet Explorer icon, but also
from the
prohibition on removal of other icons and folders from Windows. For example,
Microsoft's
prohibition of OEM deletion of the Online Services folder, and, in Windows 95, the
Internet
Connection Wizard, was one of a variety of factors inducing ISPs and online services to
enter
into restrictive contracts with Microsoft for the licensing and distribution of Internet
Explorer.
Had OEMs been permitted to delete the Microsoft-selected ISPs and OLSs from
Windows in
order to further entice those providers into making individual deals with the OEMs,
Microsoft
would have had less leverage with which to secure the restrictive agreements. But after
Microsoft imposed its boot-up and desktop screen restrictions, OEMs could no longer
configure
their machines such that alternate user interfaces or non-Windows products appeared
during the
initial Windows boot sequence, and thus have stopped providing important product
choices or
have been forced to provide them in much less desirable ways that adversely impact
consumer
selection of competing products.
10
Microsoft also
argues that its huge user base reflects the superiority of its Internet browser product.
See
MS PI Opp. at 5. The basis for this claim appears to be that Internet Explorer did not
begin to
gain significant market share until 1996, when Microsoft released an improved version
of the
product. But that is also when Microsoft began to (1) enforce its OEM restrictions (by,
inter
alia, threatening the termination of major OEM Windows licenses unless OEMs
restored
Internet Explorer to the desktop screen) and (2) enter into restrictive contracts with
ISPs. It is
enough, in order to find the agreements to be unlawful, that they have material
anticompetitive
effects, even if other factors -- like improvements in Internet Explorer -- also affected
the
relative success of Microsoft and its rivals.
11
12
Indeed, the
balancing of justifications against exclusionary effects, and the assessment of whether
the
challenged restrictions are necessary to effectuate the asserted justifications, are
fact-bound
questions that generally cannot be resolved on summary judgment. See,
e.g.,
Betaseed, Inc. v. U & I Inc., 681 F.2d 1203, 1228-30 (9th Cir. 1982) (explaining that
"the
reasonableness of a restrictive practice is a paradigm fact question" and reversing grant
of
summary judgment for defendant on rule of reason claim); cf.Eastman Kodak
Co. at 483-86 (Section 2 holding) (questions of fact with respect to both "the validity
and
sufficiency of each claimed justification" made "summary judgment inappropriate.")
13
Microsoft's
contractual restrictions with ISPs, ICPs and OEMs are subject to scrutiny under both
Section 1's
rule of reason and under Section 2. "‘Under this rule [of reason of Section 1], the
factfinder
weighs all the circumstances of a case in deciding whether a restrictive practice should
be
prohibited as imposing an unreasonable restraint on competition.'" National Society
of
Professional Engineers v. United States, 435 U.S. 679, 691 (1978) (quoting
Continental
T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977)). The rule of reason thus
requires
balancing a restraint's anticompetitive effects against any procompetitive justifications.
See,
e.g., American Ad Management, Inc. v. GTE Corp., 92 F.3d 781, 791 (9th
Cir.
1996); Sullivan v. NFL, 34 F.3d 1091, 1111 (1st Cir. 1994) (rule of reason
requires "a
weighing of the injury [to competition] and the benefits to competition attributable to the
practice"), cert. denied, 513 U.S. 1190 (1995). Furthermore, "[o]ne basic tenet
of the
rule of reason is that a given restriction is not reasonable, that is, its benefits cannot
outweigh its
harm to competition, if a reasonable, less restrictive alternative to the policy exists that
would
provide the same benefits as the current restraint." Sullivan, 34 F.3d at 1103.
14 Aside
from
Microsoft's ability to secure compensation for its investment, it is in any event unlikely
that
Microsoft would have refused to engage in "cross-marketing" with an OLS (or ISPs and
ICPs) if
Microsoft knew at the outset that the OLS might also distribute and promote
non-Microsoft
browsers. See Sibley Dec., ¶ 50.
15
16
Compare,
e.g., SJ Ex. 92 (MSV 9445A) (1/5/96 B. Gates E-mail) and SJ Ex. 51 (MSV
9360A-61A)
(1/6/96 Maritz e-mail)) with SJ Ex. 89 (MSV 9404A) (9/4/96) ("Windows
Experience
Phase II")
17
18 For
instance,
Gateway, Dell, and Micron, among other OEMs, have features on their web sites that
permit
end-users to select the components of their PC, including the software the user would
like
preinstalled. See Wack Dec. Dell's web site, moreover, informs end-users that
Internet
Explorer is among the software titles that are included in various Microsoft software
packages
among which the end-user can choose. Seeid.
19 This
discussion should not be read to suggest that any of the operating system vendors
discussed in
fact compete in the same relevant product market as Microsoft, or that the existence of
other
operating system vendors has any material impact on Microsoft's monopoly power. In
fact, the
evidence indicates that none of the operating system vendors discussed have
successfully
competed with Microsoft in the desktop PC operating system market, and most in fact
have
stopped trying to do so. See also Section III, infra.
20 A
similar
inference of no real justification can be drawn from recent Microsoft grants of
permission to
selected OEMs to change the start-up sequence and/or first screen to some limited
degree. Of
course, even if the exclusionary agreements did further a legitimate interest of Microsoft
to some
extent, Microsoft would not be entitled to summary judgment: the justification still would
need
to be weighed against the anticompetitive effects of the exclusionary agreements.
Such
weighing is inherently a fact specific exercise, and is far from undisputed in this case.
21 In any
event,
while Microsoft's "protestations of repentance and reform" is "one of the factors to be
considered
in determining the appropriateness of granting an injunction," W.T. Grant, 345
U.S. at
632 n.5, 633 (internal quotations omitted), until disputed factual questions -- including
Microsoft's purpose in implementing the challenged restrictions -- are resolved, it is
premature to
conclude that the plaintiffs are not entitled to an injunction providing prophylactic relief
against
the reinstitution of the waived restrictions and similar anticompetitive schemes.
Compareid. at 633-36 (affirming district court's refusal to issue injunction
based
on undisputed record revealing "no factual dispute" concerning the absence of a
threatened
future violation) withInternational Salt Co. v. United States, 332 U.S. 392,
400
(1948) (explaining that broad prophylactic relief is especially appropriate "[w]hen the
purpose to
restrain trade appears from a clear violation of the law").
22
Because
Microsoft's forced licensing of Internet Explorer is unlawful per se,
anticompetitive
effects are presumed. It also is unlawful under the rule of reason, because plaintiffs'
evidence
actually proves the anticompetitive effects of the tie, which are not outweighed by any
legitimate
business objectives.
23
Microsoft
relies on two lower court cases, neither of which supports its argument. Unlike the case
at bar,
the tie in Multistate Legal Studies did not increase customers' costs or pressure
them to
forego alternatives to the tied product. Indeed, the court was careful to note
that,
under the circumstances there, "economic incentives remained the same" for
customers to
select alternatives to the defendant's version of the tied product on the merits.
Multistate
Legal Studies v. Harcourt Brace Jovanovich, 63 F.3d 1540, 1548 (10th Cir. 1995),
cert.
denied, 516 U.S. 1044 (1996). The evidence here, by contrast, shows that
Microsoft's tying
was not costless to OEMs and materially altered their economic incentives. Microsoft's
requirement that OEMs take IE in order to get Windows, and that they not delete IE,
significantly diminishes their incentive to -- and reduces the likelihood that they will --
select an
alternative to Microsoft's version of the tied product. The other case cited by
Microsoft,
Directory Sales Management Corp. v. Ohio Bell Tel. Co., 833 F.2d 606 (6th Cir.
1987), is
wholly inapplicable. It holds only that there is no tying arrangement where the seller of
the
tying product is not the seller of the tied product, does not charge for the tied product,
and
accordingly had no "economic interest in" the tied product. Id. at 610. That
certainly is
untrue with respect to Microsoft's interest in Internet Explorer.
24
Jefferson
Parish, 466 U.S. at 21-22 (a tying arrangement exists if there is "sufficient demand
for the
purchase of [the tied product] separate from [the tying product] to identify a distinct
product
market in which it is efficient to offer [the tied product] separately from [the tying
product].");
Eastman Kodak, 504 U.S. at 462 (separate products inquiry requires that there
be
"sufficient consumer demand so that it is efficient for a firm to provide" the two products
separately) (internal quotation marks omitted); seealsoMultistate Legal
Studies v. Harcourt Brace Jovanovich, 63 F.3d 1540, 1547 (10th Cir.
1995)
(same); Service & Training, Inc. v. Data General Corp., 963 F.2d 680, 684
(4th Cir. 1992) ("[t]he purpose of the inquiry into consumer demand is to
determine whether there are customers who would, absent an illegal agreement,
purchase the tied
product without the tying product, and the tying product without the tied product. . . .").
25
Microsoft
argues that "the alleged existence of demand among corporate customers for operating
systems
without web browsing functionality is not a commercial opportunity for competitors of
Microsoft (such as Netscape) that is being foreclosed by Microsoft," and that therefore
such
evidence does not support the United States' position that Windows 98 and Internet
Explorer are
separate products. Microsoft relies on the following passage from Jefferson
Parish:
"[W]hen a purchaser is `forced' to buy a product he would not have otherwise bought
even from
another seller in the tied product market, there can be no adverse impact on
competition because
no portion of the market which would otherwise have been available to other sellers has
been
foreclosed." 466 U.S. at 16. Microsoft takes the quoted passage out of context, and
confuses its
reference not to the "separate products" inquiry, but rather to the distinct
question of
whether there is "a substantial potential for impact on competition" sufficient to justify
per se
condemnation. With regard to the question of whether there are separate markets and
separate
products, Jefferson Parish requires aggregation of consumer demand, including
both
consumers who wish to add a competing browser and those who do not wish to buy a
browser at
all. See 466 U.S. at 12 ("[T]he essential characteristic of an invalid tying
arrangement
lies in the seller's exploitation of its control over the tying product to force the buyer into
the
purchase of a tied product that the buyer either did notwant at all, or
might have
preferred to purchase elsewhere on different terms."(emphasis added)).
26
Cross-platform browser products meet unified cross-platform demand for a
single set of
features and functions offered by a cross-platform browser.
PI Exs. 54, 85. These versions share the Internet
Explorer brand
name, logo, and features; in short, they meet customer demand for one functionally and
aesthetically uniform product, known as Internet Explorer, that spans the Macintosh,
Unix, and
Windows operating systems. See, e.g., The demand for consistency --
for a
product with the same look, feel, and features across platforms -- is what Microsoft
wasattempting to meet in developing Internet Explorer for non-Windows
operating
systems.
27 Once
again,
plaintiffs do not intend to suggest that any of the operating system vendors compete in
the same
relevant product market as Microsoft or have any material impact on Microsoft's
monopoly
power. See supra, n. 19; infra, Section III.
28 Of
course,
such unbundled alternatives do not necessarily entail the unbundling of each and every
file or
library distributed with Internet Explorer. Indeed, Microsoft's own public documents
indicate
that the "removal" of an application should generally leave shared program files behind.
Felten
Dec., ¶ 11. The more logical test of unbundling, particularly in the context of the
Jefferson Parish consideration of user demand, not technical interaction, as its
appropriate test of separateness, looks to the steps necessary to "remove" the bundled
software
from the perspective of an end user.
29 In fact,
Microsoft offered just such an option after being ordered to do so by the Court.
30
Indeed, in
light of the evidence that Microsoft itself has long treated Internet Explorer as a
separate
product, that users and OEMs repeatedly asked for Windows without Internet Explorer,
and that
Microsoft designed Windows and Internet Explorer as it did at least in part for
anticompetitive
purposes, Microsoft was on notice from the outset that Windows are separate products
to which
the anti-tying laws apply and had ample opportunity from the outset to conform its
conduct to
the requirements of the law.
31
Similarly,
Microsoft's attempts to obscure marketplace reality by invoking various misleading
labels for
Internet Explorer, such as an "upgrade" to the operating system or "technologies" that
are "part
of" the operating system, do not transform Internet Explorer into any less of a "product"
for
tying purposes. Under Jefferson Parish, it is clear that arbitrary labels such as
"operating
system upgrade" or "Internet Explorer technologies" -- just like the "functionally
integrated
package of services" self-servingly coined by the defendant there -- cannot overcome
evidence
of consumer demand for Internet Explorer as a separate product.
32
Microsoft's
reading of Response of Carolina to stand for the proposition that a tying
arrangement is
unlawful only if its sole purpose is "tying the products" has no basis in that
opinion,
which suggested there was no such purpose, id. at 1330-31. It also
ignores the
numerous cases holding intent irrelevant to separate product analysis. See, e.g., ILC
Peripherals Leasing Corp. v. IBM Corporation, 448 F. Supp. 228, 234 (N.D. Cal.
1978)
(ILC I) ("Good intentions will not change two products into one, and likewise, a
single
product does not become separate and distinct products because of a malevolent
intent").
33 The
court did
say in dicta that, even if the defendant had not offered the operating system and
DFDSS
separately, there would be no unlawful "tie" because the items were part of a single
product.
Id. at 1476. This conclusion rested on the apparent findings that the integration
was
preferred by customers and that there was no substitute for the DFDSS software that
could
provide essential loading functions for new operating system customers. Id.
Notably,
after the Supreme Court decided Jefferson Parish, the Innovation Data
Processing court revisited its decision. See Innovation Data Processing, Inc. v.
IBM., 603 F. Supp. 646 (D.N.J. 1984). In so doing, the court emphasized that the
basis for
that decision had been the finding of no coercion, and that there was no need to reach
the
separate product question in light of the Supreme Court's demand-driven analysis.
Id. at
648-49.
34 The
fact that
operating systems and browsers are not used in fixed proportions is clear,
notwithstanding the
Court of Appeals' assumption to the contrary in the consent decree case, 1998 WL
327855 at *12
(D.C. Cir. June 23, 1998). For example, some users prefer to use multiple browsers
and some
prefer to use no browser at all. These facts in part explain the variety of browser
distribution
practices by operating system vendors other than Microsoft, ranging from no bundling
to the
bundling of as many as three separate browsers with the operating system to provide
consumer
choice.
35
See,
e.g., General Electric Co. v. Joiner, 118 S. Ct. 512, 520 (1997) (in toxic tort
case,
"neither the difficulty of the task nor any comparative lack of expertise can excuse the
judge
from exercising the 'gatekeeper' duties that the Federal Rules impose . . . [J]udges have
increasingly found in the Rules of Evidence and Civil Procedure ways to help them
overcome
the inherent difficulty of making determinations about complicated scientific or
otherwise
technical evidence. . . ") (Breyer, J., concurring); Securities Industry Ass'n v. Board
of
Governors, 468 U.S. 137, 181 (O'Connor, J., dissenting) ("Careful attention to the
statutory
language is especially important in an area as technical and complex as banking law,
where the
policies actually enacted into law are likely to be complicated and difficult for a
nonspecialist
judiciary to discern in their proper perspective"); Zauderer v. Office of Disciplinary
Counsel, 471 U.S. 626, 645 (1985) ("distinguishing deceptive from nondeceptive
advertising in virtually any field of commerce may require resolution of exceedingly
complex
and technical factual issues" and thus there is no reason to have a special rule
prohibiting lawyer
advertising on this basis); United States v. Western Elec. Co., 969 F.2d 1231
(D.C. Cir.
1992) (involving technical telecommunications issue); United States v. AT&T,
552 F.
Supp. 131 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 U.S.
1001
(1983) (evaluating divestiture provisions in telecommunications markets in antitrust
decree);
International Wood Processors v. Power Dry, Inc., 792 F.2d 416, 430-31 (4th
Cir. 1986)
(jury properly considered and determined whether process of kiln drying was superior to
another, and whether one process was "technologically sound" in antitrust case)..
There simply
is no reason why courts cannot muster the same kind of technical competence that they
use to
decide complex issues in other contexts to resolve claims of the tying of high
technology
products. Indeed they do. See, e.g., Allen-Myland v. IBM, 33 F.3d 194 (3d Cir.
1994).
36
See
Berkey Photo, 603 F.2d 263, 287 ("no one can determine with any reasonable
assurance
whether one product is ‘superior' to another. . . The only question that can be
answered is
whether there is sufficient demand for a particular product to make its production
worthwhile,
and the response, so long as the free choice of consumers is preserved, can only be
inferred from
the reaction of the market"); Northeastern Tel., 651 F.2d 76, 95, n. 29 ("In other
circumstances, we might be reluctant to allow a jury to second-guess engineers'
decisions as to
the proper construction of a sophisticated piece of equipment. But in this case we
cannot look to
the reaction of the competitive market to determine whether one design is superior to
another. .
." [citing Berkey Photo]).
37 As the
author
of the treatise on which the Court so heavily relied for its analysis has since pointed out:
[Under
the test outlined in the treatise,] the defendant must show that the items operate better
when
combined by the seller than when bought separately and combined by the buyer. . .
But the
court went astray in identifying who was combining Windows 95 and Internet Explorer.
Did
Microsoft combine the products when it manufactured them -- in which case it is one
product?
Or did the buyers combine the programs when installing onto computers from different
disks --
in which case they are two distinct products? . . . . What the court forgot was the
threshold rule
to judge what constitutes one product: the plaintiff must first show that some buyers
would
actually want the items in their separated form. There are no buyers who want disk 3 of
Windows 95 alone because it is useless without the other disks. But surely, there are
buyers who
would want to buy Windows 95 independently from Internet Explorer. Therefore, the
court
should have ruled that Windows 95 and Internet Explorer are separate products. It is
obviously
feasible to separate them on different diskettes, each of which have independent value
-- since
that is what Microsoft actually did. Nor can Microsoft claim that they work better when
combined by Microsoft than when combined by buyers. Microsoft's main buyers,
computer
manufacturers, actually did combine them from separate disks. E. Elhauge, "Microsoft
Gets An
Undeserved Break," New York Times, June 29, 1998.
38 Of
course, a
finding that Microsoft violated Section 1 by engaging in the conduct challenged here
would
suffice to show a violation of Section 2. It is settled that acts undertaken by a
monopolist that
violate Section 1 and contribute to the maintenance of its monopoly power also violate
Section
2. See United States v. Griffith, 334 U.S. 100, 106 (1948); United States v.
United
Shoe Mach. Corp., 110 F. Supp. 255, 342 (D.Mass. 1953), aff'd per curiam,
348
U.S. 521 (1954).
39 In
Gilliam, the Second Circuit held that ABC's edits to Monty Python's program
probably
constituted an "actionable mutilation" of Python's work. It went on to note that "[t]his
cause of
action . . . finds its roots in the continental concept of droit moral, or moral right . . . .
American
copyright law, as presently written, does not recognize moral rights or provide a cause
of action
for their violation, since the law seeks to vindicate the economic, rather than the
personal, rights
of authors." 538 F.2d at 24.
40
Microsoft has
not offered a defense based on trademark law, either in its answer or in its motion for
summary
judgment.
41 The
other
cases Microsoft cites also do not advance its argument: Community for Creative
Non-Violence v. Reid, 846 F.2d 1485, 1498 (D.C.Cir. 1988) (only notes in dicta that
a right
against mutilation "may" exist in copyright); WGN Continental Broadcasting Co. V.
United
Video, 693 F.2d 622 (7th Cir.1982) (expressly notes that the seller lacks market
power and
will be disciplined by the market if it offers an overloaded product package); and
National
Bank of Commerce v. Shacklee Corp., 503 F. Supp. 533 (W.D. Tex. 1980) (involves
unauthorized use of copyrighted material for the purpose of committing fraud).
42 In
1990,
Congress created a limited moral right for creators of certain works of visual art,
including a
right of integrity and a right to object to "mutilation" of one's work. Visual Artists Rights
Act,
17 U.S.C. § 106A. But Congress limited this right, inter alia, to works
produced
in editions of 200 copies or fewer, declining to extend the right to all copyrighted works.
It is
beyond cavil that VARA does not apply to Windows. It would render meaningless all the
limitations of VARA if Microsoft could create out of whole cloth a new right of integrity
that
lacked those limitations. Indeed, precisely this reasoning led the Seventh Circuit to
reject a
broad right of integrity of the sort Microsoft seeks to create here: "It would not be sound
to use
17 U.S.C. sec. 106(2) to provide artists with exclusive rights deliberately omitted from
the
Visual Artists Rights Act." Lee v. A.R.T., Inc., 125 F.3d 580, 583
(7th
Cir. 1997).
43
See,
e.g.,Lotus Dev. Corp. v. Borland Int'l, 49 F.3d 809 (1st Cir. 1995) (Borland
was free
to create a new spreadsheet program that built on the Lotus spreadsheet menu
command
hierarchy); DSC Communications v. DGI Technologies, 81 F.3d 597 (5th Cir.
1996)
(DGI was free to use plaintiff's communications protocols in developing its own
switching
software); Mitel v. Iqtel, 124 F.3d 1366 (10th Cir. 1997); Mitek Holdings v.
Arce
Eng'g, 89 F.3d 1548 (11th Cir. 1996); Sega of America v. Accolade, Inc.,
977 F.2d
1510 (9th Cir. 1992); Vault v. Quaid Software, 847 F.2d 255 (5th Cir. 1988).
44
Microsoft
also hints at reliance on Section 106(2) of the Copyright Act, which gives a copyright
owner the
exclusive right to prepare or authorize "derivative works" based on its copyrighted work.
The
derivative works right, however, does not preclude anyone from writing a different
program that is complementary to the plaintiff's work or interoperates with it,
because in
these circumstances the original work has not been adapted. See P. Goldstein,
Copyright § 5.3, at 5:82; accord, Lewis Galoob Toys v. Nintendo
of
America, Inc., 964 F.2d 965, 969 (9th Cir. 1992) (device which could
be
attached to a video game console to produce variants of the copyrighted screen
displays of the
video game did not constitute an infringing derivative work). Indeed, a contrary
conclusion
would enable Microsoft to prohibit any other company from producing or selling
any
applications program designed to run on a Microsoft operating system, and enable
Microsoft to
prohibit consumers from using such non-Microsoft software on PCs running Windows.
Moreover, to be derivative and thus require authorization from the copyholder a work
must
contain new, original, copyrightable expression. See, e.g., 17 U.S.C. § 101
("A
work consisting of editorial revisions, annotations, elaborations, or other modifications
which, as
a whole, represent an original work of authorship, is a 'derivative work.'"); P. Goldstein,
Copyright § 5.3, at 5:82; 1 M. Nimmer & D. Nimmer, Nimmer on
Copyright § 3.03 (1997).
45
See
alsoTamburo v. Calvin, No. 94 C 5206, 1995 U.S. Dist. LEXIS 3399 (N.D. Ill.
Mar.
15, 1995) (same); M. Witmark & Sons v. Jensen, 80 F. Supp. 843, 849 (D. Minn.
1948); F.E.L. Publications, Ltd. v. Catholic Bishop, 214 U.S.P.Q. 409, 413 n.9
(7th Cir.
1982) (noting in dictum that "it is copyright misuse to exact a fee for the use of a
musical work
which is already in the public domain").
46 For
example,
an author may claim copyright in a work later judged obscene under contemporary
standards in a
particular community. SeeMitchell Bros. Film Group v. Cinema Adult
Theater,
604 F.2d 852,857 (5th Cir. 1979), cert. denied, 445 U.S. 917 (1980). If the work
is
determined to be obscene, the fact that the author had a copyright will not protect him
from
criminal liability. Similarly, owning a copyright in a book will not protect the author from
civil
liability if the book is found to be defamatory. Cf. Belcher v. Tarbox, 486 F.2d
1087,
1088 (9th Cir. 1973)(false and fraudulent material may be copyrighted). Similarly,
owning a
copyright in a computer "virus" program designed to crash another's computer would
not prevent
civil and criminal liability for its distribution, notwithstanding the fact that "distribution" is
one
of the "exclusive rights" of a copyright owner.
47 The
WGN case relied on by Microsoft specifically noted that the station lacked
market
power, suggesting that had an antitrust claim been raised and proved, the outcome
might have
been different. 693 F.2d at 626.
48
Microsoft,
seizing on one line on page 66 of the United States' memorandum in support of its
preliminary
injunction motion, also erroneously suggests that Netscape Navigator should be
included in the
relevant operating systems market. However,
Netscape
and other browser firms threaten Microsoft's monopoly not so much by any potential to
become
full-fledged operating systems themselves, but rather by their potential to become a
cross-platform application program interface (API) layer on top of other operating
systems. As
such, (and as the plaintiffs' filings generally have made clear), non-Microsoft browsers
are
complements to, and only partial substitutes for, existing operating systems. As such, it
would
be wholly inappropriate to place them in the operating system market. Similarly,
Microsoft's
extreme assertion that there can be no economically relevant market for browsers
simply because
they may in some respects displace certain operating system functions, see MS
PI Opp.
at 20, n.4, cannot survive the uncontroverted evidence that consumers do not (and
technologically could not) consider acquiring browsers instead of operating systems,
and vice
versa.
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