Invoking antitrust jurisprudence is particularly ill suited for analyzing Microsoft and the connected computing industry. The laws are hopelessly ill equipped to comprehend the nature of the digital economy. The Sherman and Clayton Acts were crafted to address the static era of massive, long-lasting industrial infrastructure and mass durable-goods markets. The existing law does not address a dynamic economy where markets and market leadership can arise and disappear within 18 months or less. Moore's Law and the Law of the Installed Base (that when technological change occurs, whoever has an installed base of customers is at greater risk than a new entrant is) require a new approach.18
Findings of Fact and Conclusions of Law
The suite against Microsoft that began with allegations of monopoly in 1997 was decided by the Honorable Thomas Penfield Jackson in the United States Supreme Court. Justice Jackson handed down his Memorandum and Order along with the Final Judgement on June 7, 2000. Charging documents stated that Microsoft was in violation of the Sherman Act, Sections 1 and 2, as well as various state laws. Finding in the favor of the plaintiffs, Justice Jackson determined that? ?a proposed form of final judgment ? would mandate both conduct modification and structural reorganization by the defendant when fully implemented.?19 The Memorandum continues to cite the Microsoft claims that the proposed remedies were "draconian" and "unprecedented."
Indeed, Microsoft felt that additional discovery was warranted and that a second trial be held. Owing to a delay of five months by the court in its entry of the Conclusion
of Law, and the enlistment of mediation, however, the Court rejected Microsoft?s stand. Microsoft took the position that it was surprised by the decision and needed ample time to act on the Court?s Order. Since Microsoft?s cases had been before the Court and occupied much of its attention for the past two years, Justice Jackson felt that additional delay was unmerited. Despite Microsoft?s continuing protests that none were committed, Microsoft had been found guilty of antitrust violations, following a full trial. 20
The Court was convinced, for several reasons, that a final - and appealable - judgment should be entered quickly. It also reluctantly came to the conclusion, for those same reasons, that a structural remedy is mandatory. The Court?s position is simply this, ?Microsoft as it is presently organized and led is unwilling to accept the notion that it broke the law or accede to an order amending its conduct.?21
In the Court?s Finding of Fact and Conclusions of Law document, it stated that
Microsoft doesn?t recognize or concede that any of its business practices violated the Sherman Act. Microsoft officials stated publicly that the company has done nothing wrong and that it will be vindicated on appeal. There is a substantial body of public opinion, which holds to a similar view. That assertion is now being put to the test. If this is indeed the case then this should be addressed by an appeal court as soon as possible, in order to confirm the opinion of Microsoft?s innocence and to intervene in any modification and reconstruction activities before they become irreversible.
Justice Jackson also determined that there is credible evidence in the record to suggest that Microsoft, convinced of its innocence, continues to do business as it has in the past. The court demonstrated concern that Microsoft may yet do to other markets what it has already done in the PC operating system and browser markets. Microsoft has given no indication that it will voluntarily alter its business policy in any significant way. The Court cited Microsoft?s intention to appeal ?even the imposition of the modest conduct remedies it has itself proposed as an alternative to the non-structural remedies sought by the plaintiffs? as proof of their Business as usual attitude.
The Court also felt that Microsoft had proved itself untrustworthy in the past. In earlier proceedings where a preliminary injunction was entered, Microsoft's claimed compliance with that injunction while it was on appeal. This proved not to be the case and Microsoft?s explanation for its behavior was deemed ?disingenuous.? Assuming that Microsoft would respond in similar fashion to an injunctive solution in this case, it seemed likely that the earlier enforcement measures were employed the more effective they are likely to be.
The last reason the Court gave for refusing Microsoft?s plea for additional findings and another trial stemmed from its? belief that extending the proceedings on what form remedies should take would be fruitless. It seemed highly unlikely that Microsoft would generate what might be generally regarded as an optimum remedy by postponing the outcome. Along with public regard to Microsoft's culpability, opinion of what constitutes an appropriate fix remains sharply divided. There is little hope that those differing opinions can be reconciled by anything short of an actual successful remedy.
Plaintiffs won the case, and for that reason alone, according to the Court, ?have some entitlement to a remedy of their choice.? The proposed final judgment was represented to the Court as incorporating provisions successfully utilized in the past. It appeared to the Court to address all the principal objectives of relief in such cases, namely:
· to terminate the unlawful conduct,
· to prevent its repetition in the future,
· and to revive competition in the relevant markets.
The final judgment proposed by the plaintiffs may have been more radical than what would have resulted if mediation been successful and terminated in a consent decree. It was ordered by the Court that, ?the motion of defendant Microsoft Corporation for summary rejection of the plaintiffs' proposed structural reorganization is denied; and it is
further ordered, that defendant Microsoft Corporation's ?position? as to future proceedings on the issue of remedy is rejected; and it is further ordered, that plaintiffs' proposed final judgment, as revised in accordance with the proceedings of May 24, 2000 and Microsoft's comments thereon, be entered as a Final Judgment herein.?
Microsoft?s conviction was based on several Conclusions of Law. Suite was brought by the United States, nineteen individual states, and the District of Columbia for violations of Sherman Antitrust Act. The plaintiffs charged, in essence, that Microsoft waged an unlawful campaign in defense of its monopoly position in the market for operating systems designed to run on Intel-compatible personal computers ("PCs"). Specifically, the plaintiffs contend that Microsoft violated Section Two of the Sherman Act by engaging in a series of exclusionary, anti-competitive, and predatory acts to maintain its monopoly power. They also asserted that Microsoft attempted, albeit unsuccessfully, to monopolize the Web browser market, also a violation of Section Two.
The plaintiffs also contended that Microsoft had taken steps as part of its campaign to protect its monopoly power by tying its browser to its operating system and entering into exclusive dealing arrangements, which violated Section One of the Act.
Upon consideration, the Court concluded that Microsoft had indeed maintained its monopoly power by violation of Sections One and Two of the Sherman. The facts did not support the conclusion, however, that the effect of Microsoft's marketing arrangements with other companies constituted ?unlawful exclusive dealing? under the criteria established by Section One. The Court also determined that the evidence that proved violations of the Sherman Act also met the criteria for causes of action that fell under the laws of each plaintiff state.
Section Two of the Sherman Act declares that it is unlawful for a person or firm to "monopolize . . . any part of the trade or commerce among the several States, or with foreign nations . . . ." It defines anti-competitive as possession of monopoly power in the relevant market and the willful acquisition or maintenance of power. As in the United States v. Grinnell Corp. (1966) , the Court first had to determine the boundaries of the commercial activity that is termed the "relevant market." The evidence presented at trial proved that there are currently no products - and that there are not likely to be any in the near future - that a significant percentage of computer users worldwide could substitute for Intel-compatible PC operating systems without incurring substantial costs. The Court inferred that if a single firm or cartel controlled the licensing of all Intel-compatible PC operating systems worldwide, it could set the price of a license substantially above that normally charged in a competitive market. It could also leave the price there for a significant period of time without losing so many customers as to make the action unprofitable. This inference, in turn, led the Court to find that the licensing of all Intel-compatible PC operating systems worldwide did indeed constitute the relevant market claimed by the plaintiffs.
The plaintiffs, according to Justice Jackson, also proved that Microsoft's dominant market share is protected by the application?s barrier to entry. This barrier ensures that no Intel-compatible PC operating system other than Windows met consumer needs, and that the barrier would operate to the same effect even if Microsoft held its prices substantially above the competitive level for an extended period of time. Together, proof of dominant market share and the existence of a substantial barrier to effective entry created the belief that Microsoft enjoys monopoly power for the Court.
In cases enforcing Section Two of the Sherman Act, once it is proved that the defendant possesses monopoly power in a relevant market, a demonstration that the defendant used anti-competitive methods to achieve or maintain its position has to exist. Prior cases, such as Aspen Skiing Co. VS Aspen Highlands Skiing Corp, have established an analytical approach to determining whether the challenged business practices are anti-competitive in the context of a monopoly maintenance claim. The primary question in regard to Microsoft is whether its? conduct is "exclusionary." It has
to be determined that Microsoft significantly restricted or threatened to restrict the ability of other firms to compete in the relevant market, based on the merits of what they have offer customers. Microsoft business practices were found by the Court to be predatory, meaning that Microsoft made a conscious effort to build or maintain barriers to keep competition at bay.
The Court determined that Microsoft recognized early on that middleware technology, namely, Netscape's Navigator Web browser and SunMicro?s implementation of the Java technology, was a Trojan horse. Microsoft feared that once having infiltrated the applications barrier, middleware would give rival operating systems the ability to enter the market for Intel-compatible PC operating systems unimpeded. Alerted to the threat, Microsoft strove, according to the Finding of Fact, over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured, cross-platform applications to erode the applications barrier. In pursuit of this goal, Microsoft sought to convince developers to concentrate on Windows-specific APIs and ignore interfaces exposed by the two incarnations of middleware that posed the greatest threat. The Court found that Microsoft's campaign succeeded in preventing by several years, and perhaps permanently, Navigator and Java from reaching their potential to open the market for Intel-compatible PC operating systems to competition, based on the merits. Because Microsoft achieved this result through exclusionary acts the Court considered Microsoft's conduct to be the maintenance of monopoly power by anti-competitive means.
Section 1 of the Sherman Act prohibits "every contract, combination . . . , or conspiracy, in restraint of trade or commerce . . . ." 15 U.S.C. ? 1. Pursuant to this statute, courts have condemned commercial stratagems that constitute unreasonable restraints on competition.? The unreasonable restraints on competition in the charges against Microsoft amounted to "tying arrangements" and "exclusive dealing" contracts. Tying arrangements are defined as unlawful when sellers exploit their market power over one product to force unwilling buyers into acquiring another. The courts have condemned as unlawful exclusive dealing only those contractual arrangements that substantially shutdown competition in a relevant market by significantly reducing the number of outlets a competitor has to reach prospective consumers of his product.
Liability for tying under Section One consists of: (1) two separate "products" are involved; (2) the defendant gives its customers no choice but to take the tied product in order to obtain the tying product; (3) the arrangement affects a substantial volume of interstate commerce; and (4) the defendant has "market power" in the tying product market. All four elements are required to determine a violation.
The plaintiffs alleged that Microsoft's combination of Windows and Internet Explorer by contractual and technological means constituted unlawful tying to the extent that Microsoft's customers and consumers were forced to take Internet Explorer in order to get Windows. Microsoft?s position was that the tied and tying products were in reality only a single product. The Court agreed with the plaintiffs, and found that Microsoft is liable for illegal tying under Section One.
Plaintiffs also called Microsoft?s contractual agreements with various OLSs, ICPs, ISVs, Compaq and Apple into question. They were alleged as exclusive dealing arrangements because each of these agreements with Microsoft required the other party to promote and distribute Internet Explorer and to exclude Navigator. In exchange, Microsoft offered promotional patronage, substantial financial subsidies, technical support, and other ?valuable consideration?. Violation occurs when the practice is ?to place so much of a market's available distribution outlets in the hands of a single firm as to make it difficult for other firms to continue to compete effectively, or even to exist, in the relevant market.? Precedent set in Standard Oil Co. VS United States defined distribution outlets in the hands of a single firm holding 40% or more of distribution outlets in the relevant market. Because the case law suggested that, unless the evidence demonstrated that Microsoft's agreements excluded Netscape altogether from access to roughly 40% of the browser market, exclusive dealing had not taken place. The Court found no violation to this aspect of Section One.
The findings of the Supreme Court asserted the claims of the plaintiff states.
The same facts that established liability under Sections One and Two of the Sherman Act mandated a finding of liability under provisions in each state?s own laws.
Microsoft contended that a plaintiff cannot succeed in an antitrust claim under the laws of California, Louisiana, Maryland, New York, Ohio, or Wisconsin without proving a variable that is not required under the Sherman Act, namely, intrastate impact. Assuming that each of those states has limited the application of its antitrust laws to activity that has a significant, adverse effect on competition in the state or is counter to state interests, than the facts presented at trail showed Microsoft to be culpable. The Court found that certain companies had been adversely affected by Microsoft's anti-competitive campaign, a list that includes IBM, Hewlett-Packard, Intel, Netscape, Sun, and many others. These companies transact business in, and employ citizens of each of the plaintiff states. Those facts compelled the Court to find against Microsoft.
Counsel for the Defense
Despite their surprise of conviction, Microsoft?s attorneys were promptly able to tender a thirty-five page ?Offer of Proof,? summarizing in detail the testimony that
sixteen witnesses would give to explain why the plaintiff?s proposed remedy, as it stands, is a bad idea. Within a week, seven more witnesses were added to the list. In light of this, two states dissented from the imposition of structural remedies but fully supported the rest of the correcting proposal. In Microsoft?s view, this called into question the ?collaborative character? of the process used in determining the final judgement.
Microsoft?s legal strategy refuted the plaintiff?s position on seventy separate points of law. First and foremost, the defense felt that the plaintiffs failed to prove an unlawful tying arrangement that violated Section 1 of the Sherman Act. They sought to prove this point by illustrating that:
· Windows 98 is a single, integrated product
· no OEM was forced to purchase a second distinct product
· the alleged tie does not prevent a substantial amount of sales of the tied product
The defense also asserted that the plaintiffs failed to prove that Microsoft entered into unlawful exclusive dealing agreements in Violation of Section 1 of the Sherman Act, i.e., that the plaintiffs failed to establish the Requisite Degree of Foreclosure. Since the Court had already determined what the applicable standard was in finding for an exclusive dealings claim and found in Microsoft?s favor, the industry giant had hoped to use this chink in the plaintiffs? armor.