BANNED OUT OF COUFT DIRECT GOVERNMENT
COMMUNICATIONS
During
the week of February 5, 2001, Plaintiff knowingly violated this Court’s
Orders of June 19, 200 and July 25, 2000. Plaintiff appeared at the office
of Fred Carino, Human Resource Director of Highlands County and a
supervisory employee of a named defendant in this action, and demanded to
view his personnel file. This request was made directly to Mr. Carino’s
office and not through Defendant Highlands County ’s counsel.
(D.E. 511,
¶6, PG.3)
On
February 13, 2001, Plaintiff appeared at Fred Carino’s office and demanded
to view attorney billing records from Defendant Highlands County ’s
counsel relevant to its defense of his litigation.
D.E. 511,
¶7, PG.3)
On
February 14, 2001, Plaintiff returned to Fred Carino’s office and demanded
to view attorney billing records from Defendant Highlands County ’s
counsel relevant to its defense of his litigation. This request was made
directly to Mr. Canno’s office and not through Defendant Highlands County
’s counsel.
D.E. 511,
¶8, PG.4)
After
reviewing the, records, Mr. Mason penned a note to Mr. Carino stating that
he wanted unredacted portions of billing records and if he did not get
them he will file a lawsuit by February 16, 2001
D.E. 511, ¶9,
PG.4)
Mr.
Mason returned to Mr. Carino’s office a second time on February 14, 2001
and knowingly violated this Court’s Orders of June 19, 200 and July 25,
2000. He demanded to view Defendant Highlands County ’s Insurance Document
of Coverage, a document that had previously been produced to him. This
request was made directly to Mr. Carino’s office and not through Defendant
Highlands County ’s counsel. Notwithstanding, the document was produced to
him.
D.E. 511, ¶10,
PG.4)
During
this visit, Plaintiff became loud, aggressive, disruptive, and questioned
the need for Mr. Carino’s presence during his review of the document.
D.E. 511, ¶11,
PG.4)
Plaintiffs conduct in violation of this Court’s Orders of June 19,
2000 and July 25, 2000 require a dismissal with prejudice of all of
plaintiff’s claims in the above-referenced matter.
D.E. 511, ¶15,
PG.5)
Since
April 3, 2001 - subsequent to the Court’s March 27th Order - Plaintiff has
repeatedly personally contacted supervisory employees and/or the
individual Defendants about matters related to this case. Specifically,
Plaintiff sent e-mail communications directly to supervisory employees of
the Defendants, which discussed the “no trespass warnings” that were
issued against Plaintiff, Plaintiffs tortious interference claim, as well
as Allen, Norton & Blue’s “track record” of litigating appeals
(including Eleventh Circuit appeals). (Exhibit 1).
(D.E. 646,
¶10, PG.3)
Clearly,
Plaintiffs “no trespass” and tortious interference claims were an integral
part of Plaintiffs present litigation, and involve the same set of facts
that Plaintiff continues to rely on in pursuing his present claims.
Indeed, Plaintiff’s Fourth Amended Complaint alleged several causes of
action based on the issuance of the “no trespass” warnings against
Plaintiff. Although Plaintiff’s “no trespass” claims were ultimately
dismissed by the Court (D.E.’s #435; 466), Plaintiff has recently
indicated his intent to appeal the Court’s dismissal of all claims in his
Fourth Amended Complaint. (Exhibit 2). Consequently, the issuance of the
“no trespass” warnings against Plaintiff are still part of this present
litigation.
(D.E. 646,
¶11, PG.4)
In
addition, Plaintiff’s communications regarding Defendants’ counsel’s
Eleventh Circuit “track record” clearly have no relevance to his state
court claim(s), and pertain only to his federal litigation.
(D.E. 646,
¶12, PG.4)
All of
Plaintiff’s claims arise from the same set of facts and are all related,
and he should simply not be allowed to continuously disregard Orders of
this Court and blatantly challenge the Court’s authority.
(D.E. 646,
¶13, PG.4)
Plaintiff has demonstrated a blatant disregard and disdain for this
Court’s authority, as evidenced by Plaintiff’s statement that “ANYBODY,
who supports your position. . . is a racist and is part of the problem. I
fear no man!!! This includes white men wearing robes” and “I aint afraid
of a white men wearing robes of any color.” (Exhibit 1, e-mails dated
4/03/01 at 10:57 a.m. and 4/06/01 at 8:33 a.m. respectively)
(D.E. 646,
¶14, PG.4)
FUTILE ATTEMPTS AT APPELLATE
REVIEW
“Plaintiff shall be
prohibited from contacting any of the Defendants,
including their supervisory employees and/or the individual
Defendants, regarding any matter related to this case.”
(DE
#201). This order is dated
“Plaintiff shall
correspond only with Defendants' counsel including any requests for public
records.” (DE #246).
“Plaintiff shall be prohibited from contacting any of the Defendants,
including their supervisory employees and/or the individual Defendants,
regarding any matter related to this case.” (DE #246). This order is dated July 25,
2000.
The Eleventh Circuit, US Court of Appeal has had a multiplicity of opportunities to review these
orders, but has declined to do so. These orders were reviewable under collateral order doctrine and
could have been appealed prior to entry of final judgment because these
orders resolved issues independent and easily separable from other claims
in the prior pending
lawsuit. Ortho Pharmaceutical Corp. v. Sona
Distributors, 847 F.2d 1512, 1515 (11th Cir.
1988). Following is a
list of
opportunities The
Eleventh Circuit has to review these orders:
a.
Case No.
01-13664.
The Eleventh Circuit rendered a prolix 14 page opinion on October 16, 2002
that does not discuss the validity of these orders. It is
quite remarkable in that The Eleventh Circuit is single-mindedly focused on
alleged out of court communications with his government by Mason as
alleged violations of the orders above while steadfastly refusing to
review the validity of these orders. . “On appeal,
Mason argues that the magistrate's discovery orders enjoined him without
legal authority and violated his First Amendment and Florida state-law
rights to petition Florida government officials and to request public
records.” See Pg. 10.
Even though The Eleventh Circuit admitted the orders in question were being tested
for validity on appeal, The Eleventh Circuit refused to review these orders
for validity.
c.
Case No.
02-13418.
This lawsuit was filed against Judge Graham and his Magistrate,
Judge Frank Lynch, Jr., for issuing these orders. In an opinion
rendered on Dec. 6, 2002, The Eleventh Circuit again declined to discuss the
validity of these orders while asserting in a mere conclusory fashion that
the Judges have absolute immunity. In reading the
opinion, one can not determine what the judges are immune
from.
d.
Case
No.
01-13664. Mason filed a Appellant’s Renewed
Motion For Summary Reversal on or about September 25,
2002. Yet again The Eleventh Circuit refuses to discuss the
validity of these orders.
e.
Case No.
01-11305.
On April 26, 2001, The Eleventh Circuit yet again refused to review the
validity of theses orders. “With regard to his
requests for relief from the order granting the defendants’ motions for
preliminary injunction, which the court construed as preliminary discovery
motion, Mason has alternative remedy. He may either
comply with the district’s courts discovery order and challenge it on
appeal from the final judgment, or refuse to comply with the order and
challenge its validity if cited for contempt”.
See Mandamus
Petition. Was Mason supposed to wait until
the end of trial to get his First Amendment rights back?
The Eleventh Circuit has answered this question with a resounding
no. “[I]t is well
established that "[t]he loss of First Amendment
freedoms, for even minimal periods of time, unquestionably constitutes
irreparable injury.” KH Outdoor, LLC v.
Trussville, 458 F.3d 1261, 1271-1272 (11th. Cir.
2006);
Cate v.
Oldham, 707 F.2d
1176, 1188 (11th Cir. 1983). The Eleventh Circuit
declined to review these orders via interlocutory appeal because they were
characterized as “discovery orders” by the district court”.
However, it is well established that an appellate court is not
bound by a district court’s characterization of its own orders with
respect to appellate jurisdiction. United
States v. Hylton, 710 F.2d
1106 (5th Cir. 1983);
United States v. Jorn, 400 U.S. 470 (1971).
***********************************************************************************************************
**********************************************************************************************************
USA. v. Microsoft Corp., 253 F.3d
34 (D.C. Cir., 2001)
253 F.3d 34
(D.C. Cir. 2001)
United
States of America, Appellee
v.
Microsoft Corporation,
Appellant
No. 00-5212
and 00-5213
United
States Court of Appeals FOR THE DISTRICT OF COLUMBIA
CIRCUIT
Argued
February 26 and 27, 2001
Decided June 28, 2001
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Appeals from the United
States District Court for the District of Columbia (No. 98cv01232) (No.
98cv01233)
Page 44
Richard J. Urowsky and
Steven L. Holley argued the causes for appellant. With them on the briefs
were John L. Warden, Richard C. Pepperman, II, William H. Neukom, Thomas
W. Burt, David A. Heiner, Jr., Charles F. Rule, Robert A. Long, Jr., and
Carter G. Phillips. Christopher J. Meyers entered an appearance.
Lars H. Liebeler,
Griffin B. Bell, Lloyd N. Cutler, Louis R. Cohen, C. Boyden Gray, William
J. Kolasky, William F. Adkinson, Jr., Jeffrey D. Ayer, and Jay V. Prabhu
were on the brief of amici curiae The Association for Competitive
Technology and Computing Technology Industry Association in support of
appellant.
David R. Burton was on
the brief for amicus curiae Center for the Moral Defense of Capitalism in
support of appellant.
Robert S. Getman was
on the brief for amicus curiae Association for Objective Law in support of
appellant.
Jeffrey P. Minear and
David C. Frederick, Assistants to the Solicitor General, United States
Department of Justice, and John G. Roberts, Jr., argued the causes for
appellees. With them on the brief were A. Douglas Melamed, Acting
Assistant Attorney General, United States Department of Justice, Jeffrey
H. Blattner, Deputy Assistant Attorney General, Catherine G. O'Sullivan,
Robert B. Nicholson, Adam D. Hirsh, Andrea Limmer, David Seidman, and
Christopher Sprigman, Attorneys, Eliot Spitzer, Attorney General, State of
New York, Richard L. Schwartz, Assistant Attorney General, and Kevin J.
O'Connor, Office of the Attorney General, State of Wisconsin.
John Rogovin, Kenneth
W. Starr, John F. Wood, Elizabeth Petrela, Robert H. Bork, Jason M.
Mahler, Stephen M. Shapiro, Donald M. Falk, Mitchell S. Pettit, Kevin J.
Arquit, and Michael C. Naughton were on the brief for amici curiae America
Online, Inc., et al., in support of appellee. Paul T. Cappuccio entered an
appearance.
Lee A. Hollaar,
appearing pro se, was on the brief for amicus curiae Lee A. Hollaar.
Carl Lundgren,
appearing pro se, was on the brief for amicus curiae Carl Lundgren.
Before: Edwards, Chief
Judge, Williams, Ginsburg, Sentelle, Randolph, Rogers and Tatel, Circuit
Judges.
Opinion for the Court
filed Per Curiam.
Table of Contents
Summary.................................................................44
I. Introduction......................................................47
A. Background.....................................................47
B. Overview.......................................................48
II. Monopolization....................................................50
A. Monopoly Power.................................................51
1. Market Structure............................................51
a. Market definition........................................51
b. Market power.............................................54
2. Direct Proof................................................56
B. Anticompetitive Conduct........................................58
1. Licenses Issued to Original Equipment Manufacturers.........59
a. Anticompetitive effect of the license restrictions.......60
b. Microsoft's justifications for the license restrictions..62
2. Integration of IE and Windows...............................64
a. Anticompetitive effect of integration....................65
Page 45
b. Microsoft's justifications for integration...............66
3. Agreements with Internet Access Providers...................67
4. Dealings with Internet Content Providers, Independent
Software Vendors, and Apple Computer........................71
5. Java........................................................74
a. The incompatible JVM.....................................74
b. The First Wave Agreements................................75
c. Deception of Java developers.............................76
d. The threat to Intel......................................77
6. Course of Conduct...........................................78
C. Causation......................................................78
III. Attempted Monopolization..........................................80
A. Relevant Market................................................81
B. Barriers to Entry..............................................82
IV. Tying.............................................................84
A. Separate-Products Inquiry Under the Per Se Test................85
B. Per Se Analysis Inappropriate for this Case....................89
C. On Remand......................................................95
V. Trial Proceedings and Remedy......................................97
A. Factual Background.............................................98
B. Trial Proceedings.............................................100
C. Failure to Hold an Evidentiary Hearing........................101
D. Failure to Provide an Adequate Explanation....................103
E. Modification of Liability.....................................103
F. On Remand.....................................................105
G. Conclusion....................................................107
VI. Judicial Misconduct..............................................107
A. The District Judge's Communications with the Press............107
B. Violations of the Code of Conduct for United States Judges....111
C. Appearance of Partiality......................................114
D. Remedies for Judicial Misconduct and Appearance of Partiality.116
1. Disqualification...........................................116
2. Review of Findings of Fact and Con clusions of Law.........117
VII. Conclusion.......................................................118
Per Curiam:
Microsoft Corporation
appeals from judgments of the District Court finding the company in
violation of 1 and 2 of the Sherman Act and ordering various remedies.
The action against
Microsoft arose pursuant to a complaint filed by the United States and
separate complaints filed by individual States. The District Court
determined that Microsoft had maintained a monopoly in the market for
Intelcompatible PC operating systems in violation of 2; attempted to gain
a monopoly in the market for internet browsers in violation of 2; and
illegally tied two purportedly separate products, Windows and Internet
Explorer ("IE"), in violation of 1. United States v. Microsoft Corp., 87 F. Supp. 2d 30 (D.D.C.
2000) ("Conclusions of Law"). The District Court then found that the
same facts that established liability under 1 and 2 of the Sherman Act
mandated findings of liability under analogous state law antitrust
provisions. Id. To remedy the Sherman Act violations, the District Court
issued a Final Judgment requiring Microsoft to submit a proposed plan of
divestiture, with the company to be split into an operating systems
business and an applications business. United States v. Microsoft Corp., 97 F. Supp. 2d 59, 64-65
(D.D.C. 2000) ("Final Judgment"). The District Court's remedial order
also contains a number of interim restrictions on Microsoft's conduct. Id.
at 66-69.
Page 46
Microsoft's appeal
contests both the legal conclusions and the resulting remedial order.
There are three principal aspects of this appeal. First, Microsoft
challenges the District Court's legal conclusions as to all three alleged
antitrust violations and also a number of the procedural and factual
foundations on which they rest. Second, Microsoft argues that the remedial
order must be set aside, because the District Court failed to afford the
company an evidentiary hearing on disputed facts and, also, because the
substantive provisions of the order are flawed. Finally, Microsoft asserts
that the trial judge committed ethical violations by engaging in
impermissible ex parte contacts and making inappropriate public comments
on the merits of the case while it was pending. Microsoft argues that
these ethical violations compromised the District Judge's appearance of
impartiality, thereby necessitating his disqualification and vacatur of
his Findings of Fact, Conclusions of Law, and Final Judgment.
After carefully
considering the voluminous record on appeal--including the District
Court's Findings of Fact and Conclusions of Law, the testimony and
exhibits submitted at trial, the parties' briefs, and the oral arguments
before this court--we find that some but not all of Microsoft's liability
challenges have merit. Accordingly, we affirm in part and reverse in part
the District Court's judgment that Microsoft violated 2 of the Sherman Act
by employing anticompetitive means to maintain a monopoly in the operating
system market; we reverse the District Court's determination that
Microsoft violated 2 of the Sherman Act by illegally attempting to
monopolize the internet browser market; and we remand the District Court's
finding that Microsoft violated 1 of the Sherman Act by unlawfully tying
its browser to its operating system. Our judgment extends to the District
Court's findings with respect to the state law counterparts of the
plaintiffs' Sherman Act claims.
We also find merit in
Microsoft's challenge to the Final Judgment embracing the District Court's
remedial order. There are several reasons supporting this conclusion.
First, the District Court's Final Judgment rests on a number of liability
determinations that do not survive appellate review; therefore, the
remedial order as currently fashioned cannot stand. Furthermore, we would
vacate and remand the remedial order even were we to uphold the District
Court's liability determinations in their entirety, because the District
Court failed to hold an evidentiary hearing to address remedies-specific
factual disputes.
Finally, we vacate the
Final Judgment on remedies, because the trial judge engaged in
impermissible ex parte contacts by holding secret interviews with members
of the media and made numerous offensive comments about Microsoft
officials in public statements outside of the courtroom, giving rise to an
appearance of partiality. Although we find no evidence of actual bias, we
hold that the actions of the trial judge seriously tainted the proceedings
before the District Court and called into question the integrity of the
judicial process. We are therefore constrained to vacate the Final
Judgment on remedies, remand the case for reconsideration of the remedial
order, and require that the case be assigned to a different trial judge on
remand. We believe that this disposition will be adequate to cure the
cited improprieties.
In sum, for reasons
more fully explained below, we affirm in part, reverse in part, and remand
in part the District Court's judgment assessing liability. We vacate in
full the Final Judgment embodying the remedial order and remand the case
to a
Page 47
different trial judge for further proceedings consistent with this
opinion.
I. Introduction
A. Background
In July 1994,
officials at the Department of Justice ("DOJ"), on behalf of the United
States, filed suit against Microsoft, charging the company with, among
other things, unlawfully maintaining a monopoly in the operating system
market through anticompetitive terms in its licensing and software
developer agreements. The parties subsequently entered into a consent
decree, thus avoiding a trial on the merits. United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir.
1995) ("Microsoft I"). Three years later, the Justice Department filed
a civil contempt action against Microsoft for allegedly violating one of
the decree's provisions. On appeal from a grant of a preliminary
injunction, this court held that Microsoft's technological bundling of IE
3.0 and 4.0 with Windows 95 did not violate the relevant provision of the
consent decree. United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir.
1998) ("Microsoft II"). We expressly reserved the question whether
such bundling might independently violate 1 or 2 of the Sherman Act. Id.
at 950 n.14.
On May 18, 1998,
shortly before issuance of the Microsoft II decision, the United States
and a group of State plaintiffs filed separate (and soon thereafter
consolidated) complaints, asserting antitrust violations by Microsoft and
seeking preliminary and permanent injunctions against the company's
allegedly unlawful conduct. The complaints also sought any "other
preliminary and permanent relief as is necessary and appropriate to
restore competitive conditions in the markets affected by Microsoft's
unlawful conduct." Gov't's Compl. at 53, United States v. Microsoft Corp.,
No. 98-1232 (D.D.C. 1999). Relying almost exclusively on Microsoft's
varied efforts to unseat Netscape Navigator as the preeminent internet
browser, plaintiffs charged four distinct violations of the Sherman Act:
(1) unlawful exclusive dealing arrangements in violation of 1; (2)
unlawful tying of IE to Windows 95 and Windows 98 in violation of 1; (3)
unlawful maintenance of a monopoly in the PC operating system market in
violation of 2; and (4) unlawful attempted monopolization of the internet
browser market in violation of 2. The States also brought pendent claims
charging Microsoft with violations of various State antitrust laws.
The District Court
scheduled the case on a "fast track." The hearing on the preliminary
injunction and the trial on the merits were consolidated pursuant to Fed.
R. Civ. P. 65(a)(2). The trial was then scheduled to commence on September
8, 1998, less than four months after the complaints had been filed. In a
series of pretrial orders, the District Court limited each side to a
maximum of 12 trial witnesses plus two rebuttal witnesses. It required
that all trial witnesses' direct testimony be submitted to the court in
the form of written declarations. The District Court also made allowances
for the use of deposition testimony at trial to prove subordinate or
predicate issues. Following the grant of three brief continuances, the
trial started on October 19, 1998.
After a 76-day bench
trial, the District Court issued its Findings of Fact. United States v. Microsoft Corp., 84 F.
Supp. 2d 9 (D.D.C. 1999) ("Findings of Fact"). This triggered two
independent courses of action. First, the District Court established a
schedule for briefing on possible legal conclusions, inviting Professor
Lawrence Lessig to participate as amicus curiae. Second, the District
Court referred the case to mediation to afford the parties an opportunity
to settle their differences. The
Page 48
Honorable Richard A. Posner, Chief Judge of the United States Court of
Appeals for the Seventh Circuit, was appointed to serve as mediator. The
parties concurred in the referral to mediation and in the choice of
mediator.
Mediation failed after
nearly four months of settlement talks between the parties. On April 3,
2000, with the parties' briefs having been submitted and considered, the
District Court issued its conclusions of law. The District Court found
Microsoft liable on the 1 tying and 2 monopoly maintenance and attempted
monopolization claims, Conclusions of Law, at 35-51, while ruling that
there was insufficient evidence to support a 1 exclusive dealing
violation, id. at 5154. As to the pendent State actions, the District
Court found the State antitrust laws conterminous with 1 and 2 of the
Sherman Act, thereby obviating the need for further Statespecific
analysis. Id. at 54-56. In those few cases where a State's law required an
additional showing of intrastate impact on competition, the District Court
found the requirement easily satisfied on the evidence at hand. Id. at
55.
Having found Microsoft
liable on all but one count, the District Court then asked plaintiffs to
submit a proposed remedy. Plaintiffs' proposal for a remedial order was
subsequently filed within four weeks, along with six supplemental
declarations and over 50 new exhibits. In their proposal, plaintiffs
sought specific conduct remedies, plus structural relief that would split
Microsoft into an applications company and an operating systems company.
The District Court rejected Microsoft's request for further evidentiary
proceedings and, following a single hearing on the merits of the remedy
question, issued its Final Judgment on June 7, 2000. The District Court
adopted plaintiffs' proposed remedy without substantive change.
Microsoft filed a
notice of appeal within a week after the District Court issued its Final
Judgment. This court then ordered that any proceedings before it be heard
by the court sitting en banc. Before any substantive matters were
addressed by this court, however, the District Court certified appeal of
the case brought by the United States directly to the Supreme Court
pursuant to 15 U.S.C. 29(b), while staying the final judgment order in the
federal and state cases pending appeal. The States thereafter petitioned
the Supreme Court for a writ of certiorari in their case. The Supreme
Court declined to hear the appeal of the Government's case and remanded
the matter to this court; the Court likewise denied the States' petition
for writ of certiorari. Microsoft Corp. v. United States, 530 U.S. 1301 (2000).
This consolidated appeal followed.
B. Overview
Before turning to the
merits of Microsoft's various arguments, we pause to reflect briefly on
two matters of note, one practical and one theoretical.
The practical matter
relates to the temporal dimension of this case. The litigation timeline in
this case is hardly problematic. Indeed, it is noteworthy that a case of
this magnitude and complexity has proceeded from the filing of complaints
through trial to appellate decision in a mere three years. See, e.g., Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147,
1155 (1st Cir. 1994) (six years from filing of complaint to appellate
decision); Transamerica Computer Co., Inc. v. IBM, 698 F.2d 1377, 1381
(9th Cir. 1983) (over four years from start of trial to appellate
decision); United States v. United Shoe Mach. Corp., 110 F. Supp. 295,
298 (D. Mass. 1953) (over five years from filing of complaint to trial
court decision).
Page 49
What is somewhat
problematic, however, is that just over six years have passed since
Microsoft engaged in the first conduct plaintiffs allege to be
anticompetitive. As the record in this case indicates, six years seems
like an eternity in the computer industry. By the time a court can assess
liability, firms, products, and the marketplace are likely to have changed
dramatically. This, in turn, threatens enormous practical difficulties for
courts considering the appropriate measure of relief in equitable
enforcement actions, both in crafting injunctive remedies in the first
instance and reviewing those remedies in the second. Conduct remedies may
be unavailing in such cases, because innovation to a large degree has
already rendered the anticompetitive conduct obsolete (although by no
means harmless). And broader structural remedies present their own set of
problems, including how a court goes about restoring competition to a
dramatically changed, and constantly changing, marketplace. That is just
one reason why we find the District Court's refusal in the present case to
hold an evidentiary hearing on remedies--to update and flesh out the
available information before seriously entertaining the possibility of
dramatic structural relief--so problematic. See infra Section V.
We do not mean to say
that enforcement actions will no longer play an important role in curbing
infringements of the antitrust laws in technologically dynamic markets,
nor do we assume this in assessing the merits of this case. Even in those
cases where forward-looking remedies appear limited, the Government will
continue to have an interest in defining the contours of the antitrust
laws so that law-abiding firms will have a clear sense of what is
permissible and what is not. And the threat of private damage actions will
remain to deter those firms inclined to test the limits of the law.
The second matter of
note is more theoretical in nature. We decide this case against a backdrop
of significant debate amongst academics and practitioners over the extent
to which "old economy" 2 monopolization doctrines should apply to firms
competing in dynamic technological markets characterized by network
effects. In markets characterized by network effects, one product or
standard tends towards dominance, because "the utility that a user derives
from consumption of the good increases with the number of other agents
consuming the good." Michael L. Katz & Carl Shapiro, Network
Externalities, Competition, and Compatibility, 75 Am. Econ. Rev. 424, 424
(1985). For example, "[a]n individual consumer's demand to use (and hence
her benefit from) the telephone network ... increases with the number of
other users on the network whom she can call or from whom she can receive
calls." Howard A. Shelanski & J. Gregory Sidak, Antitrust Divestiture
in Network Industries, 68 U. Chi. L. Rev. 1, 8 (2001). Once a product or
standard achieves wide acceptance, it becomes more or less entrenched.
Competition in such industries is "for the field" rather than "within the
field." See Harold Demsetz, Why Regulate Utilities?, 11 J.L. & Econ.
55, 57 & n.7 (1968) (emphasis omitted).
In technologically
dynamic markets, however, such entrenchment may be temporary, because
innovation may alter the field altogether. See Joseph A. Schumpeter,
Capitalism, Socialism and Democracy 81-90 (Harper Perennial 1976) (1942).
Rapid technological change leads to markets in which "firms compete
through innovation for temporary market dominance, from which they may be
displaced by the next wave of product advancements." Shelanski &
Sidak, at 11-12 (discussing Schumpeterian competition, which proceeds
"sequentially over time rather than
Page 50
simultaneously across a market"). Microsoft argues that the operating
system market is just such a market.
Whether or not
Microsoft's characterization of the operating system market is correct
does not appreciably alter our mission in assessing the alleged antitrust
violations in the present case. As an initial matter, we note that there
is no consensus among commentators on the question of whether, and to what
extent, current monopolization doctrine should be amended to account for
competition in technologically dynamic markets characterized by network
effects. Compare Steven C. Salop & R. Craig Romaine, Preserving
Monopoly: Economic Analysis, Legal Standards, and Microsoft, 7 Geo. Mason
L. Rev. 617, 654-55, 663-64 (1999) (arguing that exclusionary conduct in
high-tech networked industries deserves heightened antitrust scrutiny in
part because it may threaten to deter innovation), with Ronald A. Cass
& Keith N. Hylton, Preserving Competition: Economic Analysis, Legal
Standards and Microsoft, 8 Geo. Mason L. Rev. 1, 36-39 (1999)
(equivocating on the antitrust implications of network effects and noting
that the presence of network externalities may actually encourage
innovation by guaranteeing more durable monopolies to innovating winners).
Indeed, there is some suggestion that the economic consequences of network
effects and technological dynamism act to offset one another, thereby
making it difficult to formulate categorical antitrust rules absent a
particularized analysis of a given market. See Shelanski & Sidak, at
6-7 ("High profit margins might appear to be the benign and necessary
recovery of legitimate investment returns in a Schumpeterian framework,
but they might represent exploitation of customer lock-in and monopoly
power when viewed through the lens of network economics.... The issue is
particularly complex because, in network industries characterized by rapid
innovation, both forces may be operating and can be difficult to
isolate.").
Moreover, it should be
clear that Microsoft makes no claim that anticompetitive conduct should be
assessed differently in technologically dynamic markets. It claims only
that the measure of monopoly power should be different. For reasons fully
discussed below, we reject Microsoft's monopoly power argument. See infra
Section II.A.
With this backdrop in
mind, we turn to the specific challenges raised in Microsoft's appeal.
II. Monopolization
Section 2 of the
Sherman Act makes it unlawful for a firm to "monopolize." 15 U.S.C. 2. The
offense of monopolization 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."
United States v. Grinnell Corp., 384 U.S. 563, 570-71
(1966). The District Court applied this test and found that Microsoft
possesses monopoly power in the market for Intel-compatible PC operating
systems. Focusing primarily on Microsoft's efforts to suppress Netscape
Navigator's threat to its operating system monopoly, the court also found
that Microsoft maintained its power not through competition on the merits,
but through unlawful means. Microsoft challenges both conclusions. We
defer to the District Court's findings of fact, setting them aside only if
clearly erroneous. Fed R. Civ. P. 52(a). We review legal questions de
novo. United States ex rel. Modern
Page 51
Elec., Inc. v. Ideal Elec. Sec. Co., 81 F.3d 240, 244 (D.C. Cir.
1996).
We begin by
considering whether Microsoft possesses monopoly power, see infra Section
II.A, and finding that it does, we turn to the question whether it
maintained this power through anticompetitive means. Agreeing with the
District Court that the company behaved anticompetitively, see infra
Section II.B, and that these actions contributed to the maintenance of its
monopoly power, see infra Section II.C, we affirm the court's finding of
liability for monopolization.
A. Monopoly Power
While merely
possessing monopoly power is not itself an antitrust violation, Northeastern Tel. Co. v. AT & T, 651 F.2d 76, 84-85 (2d
Cir. 1981), it is a necessary element of a monopolization charge, see
Grinnell, 384 U.S. at 570. The Supreme Court defines monopoly power as
"the power to control prices or exclude competition." United States v.
E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). More
precisely, a firm is a monopolist if it can profitably raise prices
substantially above the competitive level. 2A Phillip E. Areeda et al.,
Antitrust Law p 501, at 85 (1995); cf. Ball Mem'l Hosp., Inc. v. Mut. Hosp. Ins., Inc., 784 F.2d 1325, 1335 (7th Cir.
1986) (defining market power as "the ability to cut back the market's
total output and so raise price"). Where evidence indicates that a firm
has in fact profitably done so, the existence of monopoly power is clear.
Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th
Cir. 1995); see also FTC v. Indiana Fed'n of Dentists, 476 U.S. 447,
460-61 (1986) (using direct proof to show market power in Sherman Act 1
unreasonable restraint of trade action). Because such direct proof is only
rarely available, courts more typically examine market structure in search
of circumstantial evidence of monopoly power. 2A Areeda et al., Antitrust
Law p 531a, at 156; see also, e.g., Grinnell, 384 U.S. at 571. Under this
structural approach, monopoly power may be inferred from a firm's
possession of a dominant share of a relevant market that is protected by
entry barriers. See Rebel Oil, 51 F.3d at 1434. "Entry barriers" are
factors (such as certain regulatory requirements) that prevent new rivals
from timely responding to an increase in price above the competitive
level. S. Pac. Communications Co. v. AT & T, 740 F.2d 980,
1001-02 (D.C. Cir. 1984).
The District Court
considered these structural factors and concluded that Microsoft possesses
monopoly power in a relevant market. Defining the market as
Intel-compatible PC operating systems, the District Court found that
Microsoft has a greater than 95% share. It also found the company's market
position protected by a substantial entry barrier. Conclusions of Law, at
36.
Microsoft argues that
the District Court incorrectly defined the relevant market. It also claims
that there is no barrier to entry in that market. Alternatively, Microsoft
argues that because the software industry is uniquely dynamic, direct
proof, rather than circumstantial evidence, more appropriately indicates
whether it possesses monopoly power. Rejecting each argument, we uphold
the District Court's finding of monopoly power in its entirety.
1. Market Structure
a. Market
definition
"Because the ability
of consumers to turn to other suppliers restrains a firm from raising
prices above the competitive level," Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792
F.2d 210, 218
Page 52
(D.C. Cir. 1986), the relevant market must include all products
"reasonably interchangeable by consumers for the same purposes." du Pont,
351 U.S. at 395. In this case, the District Court defined the market as
"the licensing of all Intel-compatible PC operating systems worldwide,"
finding that there are "currently no products--and ... there are not
likely to be any in the near future--that a significant percentage of
computer users worldwide could substitute for [these operating systems]
without incurring substantial costs." Conclusions of Law, at 36. Calling
this market definition "far too narrow," Appellant's Opening Br. at 84,
Microsoft argues that the District Court improperly excluded three types
of products: non-Intel compatible operating systems (primarily Apple's
Macintosh operating system, Mac OS), operating systems for non-PC devices
(such as handheld computers and portal websites), and "middleware"
products, which are not operating systems at all.
We begin with Mac OS.
Microsoft's argument that Mac OS should have been included in the relevant
market suffers from a flaw that infects many of the company's monopoly
power claims: the company fails to challenge the District Court's factual
findings, or to argue that these findings do not support the court's
conclusions. The District Court found that consumers would not switch from
Windows to Mac OS in response to a substantial price increase because of
the costs of acquiring the new hardware needed to run Mac OS (an Apple
computer and peripherals) and compatible software applications, as well as
because of the effort involved in learning the new system and transferring
files to its format. Findings of Fact p 20. The court also found the Apple
system less appealing to consumers because it costs considerably more and
supports fewer applications. Id. p 21. Microsoft responds only by saying:
"the district court's market definition is so narrow that it excludes
Apple's Mac OS, which has competed with Windows for years, simply because
the Mac OS runs on a different microprocessor." Appellant's Opening Br. at
84. This general, conclusory statement falls far short of what is required
to challenge findings as clearly erroneous. Pendleton v. Rumsfeld, 628 F.2d 102, 106 (D.C. Cir. 1980);
Terry v. Reno, 101 F.3d 1412, 1415 (D.C. Cir. 1996)
(holding that claims made but not argued in a brief are waived). Microsoft
neither points to evidence contradicting the District Court's findings nor
alleges that supporting record evidence is insufficient. And since
Microsoft does not argue that even if we accept these findings, they do
not support the District Court's conclusion, we have no basis for
upsetting the court's decision to exclude Mac OS from the relevant
market.
Microsoft's challenge
to the District Court's exclusion of non-PC based competitors, such as
information appliances (handheld devices, etc.) and portal websites that
host serverbased software applications, suffers from the same defect: the
company fails to challenge the District Court's key factual findings. In
particular, the District Court found that because information appliances
fall far short of performing all of the functions of a PC, most consumers
will buy them only as a supplement to their PCs. Findings of Fact p 23.
The District Court also found that portal websites do not presently host
enough applications to induce consumers to switch, nor are they likely to
do so in the near future. Id. p 27. Again, because Microsoft does not
argue that the District Court's findings do not support its conclusion
that information appliances and portal websites are outside the relevant
market, we adhere to that conclusion.
Page 53
This brings us to
Microsoft's main challenge to the District Court's market definition: the
exclusion of middleware. Because of the importance of middleware to this
case, we pause to explain what it is and how it relates to the issue
before us.
Operating systems
perform many functions, including allocating computer memory and
controlling peripherals such as printers and keyboards. See Direct
Testimony of Frederick Warren-Boulton p 20, reprinted in 5 J.A. at
3172-73. Operating systems also function as platforms for software
applications. They do this by "exposing"--i.e., making available to
software developers--routines or protocols that perform certain
widely-used functions. These are known as Application Programming
Interfaces, or "APIs." See Direct Testimony of James Barksdale p 70,
reprinted in 5 J.A. at 2895-96. For example, Windows contains an API that
enables users to draw a box on the screen. See Direct Testimony of Michael
T. Devlin p 12, reprinted in 5 J.A. at 3525. Software developers wishing
to include that function in an application need not duplicate it in their
own code. Instead, they can "call"--i.e., use--the Windows API. See Direct
Testimony of James Barksdale p p 70-71, reprinted in 5 J.A. at 2895-97.
Windows contains thousands of APIs, controlling everything from data
storage to font display. See Direct Testimony of Michael Devlin p 12,
reprinted in 5 J.A. at 3525.
Every operating system
has different APIs. Accordingly, a developer who writes an application for
one operating system and wishes to sell the application to users of
another must modify, or "port," the application to the second operating
system. Findings of Fact p 4. This process is both timeconsuming and
expensive. Id. p 30.
"Middleware" refers to
software products that expose their own APIs. Id. p 28; Direct Testimony
of Paul Maritz p p 234-36, reprinted in 6 J.A. at 3727-29. Because of
this, a middleware product written for Windows could take over some or all
of Windows's valuable platform functions--that is, developers might begin
to rely upon APIs exposed by the middleware for basic routines rather than
relying upon the API set included in Windows. If middleware were written
for multiple operating systems, its impact could be even greater. The more
developers could rely upon APIs exposed by such middleware, the less
expensive porting to different operating systems would be. Ultimately, if
developers could write applications relying exclusively on APIs exposed by
middleware, their applications would run on any operating system on which
the middleware was also present. See Direct Testimony of Avadis Tevanian,
Jr. p 45, reprinted in 5 J.A. at 3113. Netscape Navigator and Java--both
at issue in this case--are middleware products written for multiple
operating systems. Findings of Fact p 28.
Microsoft argues that,
because middleware could usurp the operating system's platform function
and might eventually take over other operating system functions (for
instance, by controlling peripherals), the District Court erred in
excluding Navigator and Java from the relevant market. The District Court
found, however, that neither Navigator, Java, nor any other middleware
product could now, or would soon, expose enough APIs to serve as a
platform for popular applications, much less take over all operating
system functions. Id. p p 28-29. Again, Microsoft fails to challenge these
findings, instead simply asserting middleware's "potential" as a
competitor. Appellant's Opening Br. at 86. The test of reasonable
interchangeability, however, required the District Court to consider only
substitutes that constrain pricing in the reasonably foreseeable
Page 54
future, and only products that can enter the market in a relatively
short time can perform this function. See Rothery, 792 F.2d at 218
("Because the ability of consumers to turn to other suppliers restrains a
firm from raising prices above the competitive level, the definition of
the 'relevant market' rests on a determination of available
substitutes."); see also Findings of Fact p 29 ("[I]t would take several
years for middleware ... to evolve" into a product that can constrain
operating system pricing.). Whatever middleware's ultimate potential, the
District Court found that consumers could not now abandon their operating
systems and switch to middleware in response to a sustained price for
Windows above the competative level. Findings of Fact p p 28, 29. Nor is
middleware likely to overtake the operating system as the primary platform
for software development any time in the near future. Id.
Alternatively,
Microsoft argues that the District Court should not have excluded
middleware from the relevant market because the primary focus of the
plaintiffs' 2 charge is on Microsoft's attempts to suppress middleware's
threat to its operating system monopoly. According to Microsoft, it is
"contradict[ory]," 2/26/2001 Ct. Appeals Tr. at 20, to define the relevant
market to exclude the "very competitive threats that gave rise" to the
action. Appellant's Opening Br. at 84. The purported contradiction lies
between plaintiffs' 2 theory, under which Microsoft preserved its monopoly
against middleware technologies that threatened to become viable
substitutes for Windows, and its theory of the relevant market, under
which middleware is not presently a viable substitute for Windows. Because
middleware's threat is only nascent, however, no contradiction exists.
Nothing in 2 of the Sherman Act limits its prohibition to actions taken
against threats that are already well-developed enough to serve as present
substitutes. See infra Section II.C. Because market definition is meant to
identify products "reasonably interchangeable by consumers," du Pont, 351
U.S. at 395, and because middleware is not now interchangeable with
Windows, the District Court had good reason for excluding middleware from
the relevant market.
b. Market power
Having thus properly
defined the relevant market, the District Court found that Windows
accounts for a greater than 95% share. Findings of Fact p 35. The court
also found that even if Mac OS were included, Microsoft's share would
exceed 80%. Id. Microsoft challenges neither finding, nor does it argue
that such a market share is not predominant. Cf. Grinnell, 384 U.S. at 571
(87% is predominant); Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S.
451, 481 (1992) (80%); du Pont, 351 U.S. at 379, 391 (75%).
Instead, Microsoft
claims that even a predominant market share does not by itself indicate
monopoly power. Although the "existence of [monopoly] power ordinarily may
be inferred from the predominant share of the market," Grinnell, 384 U.S.
at 571, we agree with Microsoft that because of the possibility of
competition from new entrants, see Ball Mem'l Hosp., Inc., 784 F.2d at
1336, looking to current market share alone can be "misleading." Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 924
(9th Cir. 1980); see also Ball Mem'l Hosp., Inc., 784 F.2d at 1336
("Market share reflects current sales, but today's sales do not always
indicate power over sales and price tomorrow.") In this case, however, the
District Court was not misled. Considering
Page 55
the possibility of new rivals, the court focused not only on
Microsoft's present market share, but also on the structural barrier that
protects the company's future position. Conclusions of Law, at 36. That
barrier--the "applications barrier to entry"--stems from two
characteristics of the software market: (1) most consumers prefer
operating systems for which a large number of applications have already
been written; and (2) most developers prefer to write for operating
systems that already have a substantial consumer base. See Findings of
Fact p p 30, 36. This "chicken-and-egg" situation ensures that
applications will continue to be written for the already dominant Windows,
which in turn ensures that consumers will continue to prefer it over other
operating systems. Id.
Challenging the
existence of the applications barrier to entry, Microsoft observes that
software developers do write applications for other operating systems,
pointing out that at its peak IBM's OS/2 supported approximately 2,500
applications. Id. p 46. This misses the point. That some developers write
applications for other operating systems is not at all inconsistent with
the finding that the applications barrier to entry discourages many from
writing for these less popular platforms. Indeed, the District Court found
that IBM's difficulty in attracting a larger number of software developers
to write for its platform seriously impeded OS/2's success. Id. p 46.
Microsoft does not
dispute that Windows supports many more applications than any other
operating system. It argues instead that "[i]t defies common sense" to
suggest that an operating system must support as many applications as
Windows does (more than 70,000, according to the District Court, id. p 40)
to be competitive. Appellant's Opening Br. at 96. Consumers, Microsoft
points out, can only use a very small percentage of these applications.
Id. As the District Court explained, however, the applications barrier to
entry gives consumers reason to prefer the dominant operating system even
if they have no need to use all applications written for it:
The consumer wants an
operating system that runs not only types of applications that he knows he
will want to use, but also those types in which he might develop an
interest later. Also, the consumer knows that if he chooses an operating
system with enough demand to support multiple applications in each product
category, he will be less likely to find himself straitened later by
having to use an application whose features disappoint him. Finally, the
average user knows that, generally speaking, applications improve through
successive versions. He thus wants an operating system for which
successive generations of his favorite applications will be
released--promptly at that. The fact that a vastly larger number of
applications are written for Windows than for other PC operating systems
attracts consumers to Windows, because it reassures them that their
interests will be met as long as they use Microsoft's product.
Findings of Fact p 37.
Thus, despite the limited success of its rivals, Microsoft benefits from
the applications barrier to entry.
Of course, were
middleware to succeed, it would erode the applications barrier to entry.
Because applications written for multiple operating systems could run on
any operating system on which the middleware product was present with
little, if any, porting, the operating system market would become
competitive. Id. p p 29, 72. But as the District Court found, middleware
will not expose a sufficient number of APIs to erode the applications
barrier to entry in the foreseeable future. See id. p p 28-29.
Page 56
Microsoft next argues
that the applications barrier to entry is not an entry barrier at all, but
a reflection of Windows' popularity. It is certainly true that Windows may
have gained its initial dominance in the operating system market
competitively--through superior foresight or quality. But this case is not
about Microsoft's initial acquisition of monopoly power. It is about
Microsoft's efforts to maintain this position through means other than
competition on the merits. Because the applications barrier to entry
protects a dominant operating system irrespective of quality, it gives
Microsoft power to stave off even superior new rivals. The barrier is thus
a characteristic of the operating system market, not of Microsoft's
popularity, or, as asserted by a Microsoft witness, the company's
efficiency. See Direct Testimony of Richard Schmalensee p 115, reprinted
in 25 J.A. at 16153-14.
Finally, Microsoft
argues that the District Court should not have considered the applications
barrier to entry because it reflects not a cost borne disproportionately
by new entrants, but one borne by all participants in the operating system
market. According to Microsoft, it had to make major investments to
convince software developers to write for its new operating system, and it
continues to "evangelize" the Windows platform today. Whether costs borne
by all market participants should be considered entry barriers is the
subject of much debate. Compare 2A Areeda & Hovenkamp, Antitrust Law
420c, at 61 (arguing that these costs are entry barriers), and Joe S.
Bain, Barriers to New Competition: Their Character and Consequences in
Manufacturing Industries 6-7 (1956) (considering these costs entry
barriers), with L.A. Land Co. v. Brunswick Corp., 6 F.3d 1422, 1428 (9th Cir.
1993) (evaluating cost based on "[t]he disadvantage of new entrants as
compared to incumbents"), and George Stigler, The Organization of Industry
67 (1968) (excluding these costs). We need not resolve this issue,
however, for even under the more narrow definition it is clear that there
are barriers. When Microsoft entered the operating system market with
MS-DOS and the first version of Windows, it did not confront a dominant
rival operating system with as massive an installed base and as vast an
existing array of applications as the Windows operating systems have since
enjoyed. Findings of Fact p p 6, 7, 43. Moreover, when Microsoft
introduced Windows 95 and 98, it was able to bypass the applications
barrier to entry that protected the incumbent Windows by including APIs
from the earlier version in the new operating systems. See id. p 44. This
made porting existing Windows applications to the new version of Windows
much less costly than porting them to the operating systems of other
entrants who could not freely include APIs from the incumbent Windows with
their own.
2. Direct Proof
Having sustained the
District Court's conclusion that circumstantial evidence proves that
Microsoft possesses monopoly power, we turn to Microsoft's alternative
argument that it does not behave like a monopolist. Claiming that software
competition is uniquely "dynamic," Appellant's Opening Br. at 84 (quoting
Findings of Fact p 59), the company suggests a new rule: that monopoly
power in the software industry should be proven directly, that is, by
examining a company's actual behavior to determine if it reveals the
existence of monopoly power. According to Microsoft, not only does no such
proof of its power exist, but record evidence demonstrates the absence of
monopoly power. The company claims that it invests heavily in research and
development, id. at 88-89 (citing
Page 57
Direct Testimony of Paul Maritz p 155, reprinted in 6 J.A. at 3698
(testifying that Microsoft invests approximately 17% of its revenue in
R&D)), and charges a low price for Windows (a small percentage of the
price of an Intelcompatible PC system and less than the price of its
rivals, id. at 90 (citing Findings of Fact p p 19, 21, 46)).
Microsoft's argument
fails because, even assuming that the software market is uniquely dynamic
in the long term, the District Court correctly applied the structural
approach to determine if the company faces competition in the short term.
Structural market power analyses are meant to determine whether potential
substitutes constrain a firm's ability to raise prices above the
competitive level; only threats that are likely to materialize in the
relatively near future perform this function to any significant degree.
Rothery, 792 F.2d at 218 (quoting Lawrence Sullivan, Antitrust 12, at 41
(1977)) (only substitutes that can enter the market "promptly" should be
considered). The District Court expressly considered and rejected
Microsoft's claims that innovations such as handheld devices and portal
websites would soon expand the relevant market beyond Intel-compatible PC
operating systems. Because the company does not challenge these findings,
we have no reason to believe that prompt substitutes are available. The
structural approach, as applied by the District Court, is thus capable of
fulfilling its purpose even in a changing market. Microsoft cites no case,
nor are we aware of one, requiring direct evidence to show monopoly power
in any market. We decline to adopt such a rule now.
Even if we were to
require direct proof, moreover, Microsoft's behavior may well be
sufficient to show the existence of monopoly power. Certainly, none of the
conduct Microsoft points to--its investment in R&D and the relatively
low price of Windows--is inconsistent with the possession of such power.
Conclusions of Law, at 37. The R&D expenditures Microsoft points to
are not simply for Windows, but for its entire company, which most likely
does not possess a monopoly for all of its products. Moreover, because
innovation can increase an already dominant market share and further delay
the emergence of competition, even monopolists have reason to invest in
R&D. Findings of Fact p 61. Microsoft's pricing behavior is similarly
equivocal. The company claims only that it never charged the short-term
profit-maximizing price for Windows. Faced with conflicting expert
testimony, the District Court found that it could not accurately determine
what this price would be. Id. p 65. In any event, the court found, a price
lower than the short-term profit-maximizing price is not inconsistent with
possession or improper use of monopoly power. Id. p p 65-66. Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 274 (2d
Cir. 1979) ("[I]f monopoly power has been acquired or maintained
through improper means, the fact that the power has not been used to
extract [a monopoly price] provides no succor to the monopolist.").
Microsoft never claims that it did not charge the longterm monopoly price.
Micosoft does argue that the price of Windows is a fraction of the price
of an Intel-compatible PC system and lower than that of rival operating
systems, but these facts are not inconsistent with the District Court's
finding that Microsoft has monopoly power. See Findings of Fact p 36
("Intel-compatible PC operating systems other than Windows [would not]
attract[ ] significant demand ... even if Micosoft held its prices
substantially above the competitive level.").
More telling, the
District Court found that some aspects of Microsoft's behavior are
difficult to explain unless Windows is a monopoly product. For instance,
according
Page 58
to the District Court, the company set the price of Windows without
considering rivals' prices, Findings of Fact p 62, something a firm
without a monopoly would have been unable to do. The District Court also
found that Microsoft's pattern of exclusionary conduct could only be
rational "if the firm knew that it possessed monopoly power." Conclusions
of Law, at 37. It is to that conduct that we now turn.
B. Anticompetitive
Conduct
As discussed above,
having a monopoly does not by itself violate 2. A firm violates 2 only
when it acquires or maintains, or attempts to acquire or maintain, a
monopoly by engaging in exclusionary conduct "as distinguished from growth
or development as a consequence of a superior product, business acumen, or
historic accident." Grinnell, 384 U.S. at 571; United States v. Aluminum Co. of Am., 148 F.2d 416, 430 (2d
Cir. 1945) (Hand, J.) ("The successful competitor, having been urged
to compete, must not be turned upon when he wins.").
In this case, after
concluding that Microsoft had monopoly power, the District Court held that
Microsoft had violated 2 by engaging in a variety of exclusionary acts
(not including predatory pricing), to maintain its monopoly by preventing
the effective distribution and use of products that might threaten that
monopoly. Specifically, the District Court held Microsoft liable for: (1)
the way in which it integrated IE into Windows; (2) its various dealings
with Original Equipment Manufacturers ("OEMs"), Internet Access Providers
("IAPs"), Internet Content Providers ("ICPs"), Independent Software
Vendors ("ISVs"), and Apple Computer; (3) its efforts to contain and to
subvert Java technologies; and (4) its course of conduct as a whole. Upon
appeal, Microsoft argues that it did not engage in any exclusionary
conduct.
Whether any particular
act of a monopolist is exclusionary, rather than merely a form of vigorous
competition, can be difficult to discern: the means of illicit exclusion,
like the means of legitimate competition, are myriad. The challenge for an
antitrust court lies in stating a general rule for distinguishing between
exclusionary acts, which reduce social welfare, and competitive acts,
which increase it.
From a century of case
law on monopolization under 2, however, several principles do emerge.
First, to be condemned as exclusionary, a monopolist's act must have an
"anticompetitive effect." That is, it must harm the competitive process
and thereby harm consumers. In contrast, harm to one or more competitors
will not suffice. "The [Sherman Act] directs itself not against conduct
which is competitive, even severely so, but against conduct which unfairly
tends to destroy competition itself." Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458
(1993); Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509
U.S. 209, 225 (1993) ("Even an act of pure malice by one business
competitor against another does not, without more, state a claim under the
federal antitrust laws....").
Second, the plaintiff,
on whom the burden of proof of course rests, see, e.g., Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 763
(1984); United States v. Arnold, Schwinn & Co., 388 U.S. 365,
374 n.5 (1967), overruled on other grounds, Cont'l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977), must
demonstrate that the monopolist's conduct indeed has the requisite
anticompetitive
Page 59
effect. See generally Brooke Group, 509 U.S. at 225-26. In a case
brought by a private plaintiff, the plaintiff must show that its injury is
"of 'the type that the statute was intended to forestall,' " Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477,
487-88 (1977) (quoting Wyandotte Transp. v. United States, 389 U.S. 191, 202
(1967)); no less in a case brought by the Government, it must
demonstrate that the monopolist's conduct harmed competition, not just a
competitor.
Third, if a plaintiff
successfully establishes a prima facie case under 2 by demonstrating
anticompetitive effect, then the monopolist may proffer a "procompetitive
justification" for its conduct. See Eastman Kodak, 504 U.S. at 483. If the
monopolist asserts a procompetitive justification--a nonpretextual claim
that its conduct is indeed a form of competition on the merits because it
involves, for example, greater efficiency or enhanced consumer
appeal--then the burden shifts back to the plaintiff to rebut that claim.
Cf. Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537, 543
(2d Cir. 1993).
Fourth, if the
monopolist's procompetitive justification stands unrebutted, then the
plaintiff must demonstrate that the anticompetitive harm of the conduct
outweighs the procompetitive benefit. In cases arising under 1 of the
Sherman Act, the courts routinely apply a similar balancing approach under
the rubric of the "rule of reason." The source of the rule of reason is Standard Oil Co. v. United States, 221 U.S. 1 (1911), in
which the Supreme Court used that term to describe the proper inquiry
under both sections of the Act. See id. at 61-62 ("[W]hen the second
section [of the Sherman Act] is thus harmonized with ... the first, it
becomes obvious that the criteria to be resorted to in any given case for
the purpose of ascertaining whether violations of the section have been
committed, is the rule of reason guided by the established law...."). As
the Fifth Circuit more recently explained, "[i]t is clear ... that the
analysis under section 2 is similar to that under section 1 regardless
whether the rule of reason label is applied...." Mid-Texas Communications Sys., Inc. v. AT & T, 615 F.2d
1372, 1389 n.13 (5th Cir. 1980) (citing Byars v. Bluff City News Co., 609 F.2d 843, 860 (6th Cir.
1979)); see also Cal. Computer Prods., Inc. v. IBM Corp., 613 F.2d 727, 737 (9th
Cir. 1979).
Finally, in
considering whether the monopolist's conduct on balance harms competition
and is therefore condemned as exclusionary for purposes of 2, our focus is
upon the effect of that conduct, not upon the intent behind it. Evidence
of the intent behind the conduct of a monopolist is relevant only to the
extent it helps us understand the likely effect of the monopolist's
conduct. See, e.g., Chicago Bd. of Trade v. United States, 246 U.S. 231, 238
(1918) ("knowledge of intent may help the court to interpret facts and
to predict consequences"); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S.
585, 603 (1985).
With these principles
in mind, we now consider Microsoft's objections to the District Court's
holding that Microsoft violated 2 of the Sherman Act in a variety of
ways.
1. Licenses Issued to
Original Equipment Manufacturers
The District Court
condemned a number of provisions in Microsoft's agreements licensing
Windows to OEMs, because it
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found that Microsoft's imposition of those provisions (like many of
Microsoft's other actions at issue in this case) serves to reduce usage
share of Netscape's browser and, hence, protect Microsoft's operating
system monopoly. The reason market share in the browser market affects
market power in the operating system market is complex, and warrants some
explanation.
Browser usage share is
important because, as we explained in Section II.A above, a browser (or
any middleware product, for that matter) must have a critical mass of
users in order to attract software developers to write applications
relying upon the APIs it exposes, and away from the APIs exposed by
Windows. Applications written to a particular browser's APIs, however,
would run on any computer with that browser, regardless of the underlying
operating system. "The overwhelming majority of consumers will only use a
PC operating system for which there already exists a large and varied set
of ... applications, and for which it seems relatively certain that new
types of applications and new versions of existing applications will
continue to be marketed...."
Findings of Fact p 30.
If a consumer could have access to the applications he desired--regardless
of the operating system he uses--simply by installing a particular browser
on his computer, then he would no longer feel compelled to select Windows
in order to have access to those applications; he could select an
operating system other than Windows based solely upon its quality and
price. In other words, the market for operating systems would be
competitive.
Therefore, Microsoft's
efforts to gain market share in one market (browsers) served to meet the
threat to Microsoft's monopoly in another market (operating systems) by
keeping rival browsers from gaining the critical mass of users necessary
to attract developer attention away from Windows as the platform for
software development. Plaintiffs also argue that Microsoft's actions
injured competition in the browser market--an argument we will examine
below in relation to their specific claims that Microsoft attempted to
monopolize the browser market and unlawfully tied its browser to its
operating system so as to foreclose competition in the browser market. In
evaluating the 2 monopoly maintenance claim, however, our immediate
concern is with the anticompetitive effect of Microsoft's conduct in
preserving its monopoly in the operating system market.
In evaluating the
restrictions in Microsoft's agreements licensing Windows to OEMs, we first
consider whether plaintiffs have made out a prima facie case by
demonstrating that the restrictions have an anticompetitive effect. In the
next subsection, we conclude that plaintiffs have met this burden as to
all the restrictions. We then consider Microsoft's proffered
justifications for the restrictions and, for the most part, hold those
justifications insufficient.
a. Anticompetitive
effect of the license restrictions
The restrictions
Microsoft places upon Original Equipment Manufacturers are of particular
importance in determining browser usage share because having an OEM
pre-install a browser on a computer is one of the two most cost-effective
methods by far of distributing browsing software. (The other is bundling
the browser with internet access software distributed by an IAP.) Findings
of Fact p 145. The District Court found that the restrictions Microsoft
imposed in licensing Windows to OEMs prevented many OEMs from distributing
browsers other than IE.
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Conclusions of Law, at 39-40. In particular, the District Court
condemned the license provisions prohibiting the OEMs from: (1) removing
any desktop icons, folders, or "Start" menu entries; (2) altering the
initial boot sequence; and (3) otherwise altering the appearance of the
Windows desktop. Findings of Fact p 213.
The District Court
concluded that the first license restriction--the prohibition upon the
removal of desktop icons, folders, and Start menu entries--thwarts the
distribution of a rival browser by preventing OEMs from removing visible
means of user access to IE. Id. p 203. The OEMs cannot practically install
a second browser in addition to IE, the court found, in part because
"[p]re-installing more than one product in a given category ... can
significantly increase an OEM's support costs, for the redundancy can lead
to confusion among novice users." Id. p 159; see also id. p 217. That is,
a certain number of novice computer users, seeing two browser icons, will
wonder which to use when and will call the OEM's support line. Support
calls are extremely expensive and, in the highly competitive original
equipment market, firms have a strong incentive to minimize costs. Id. p
210.
Microsoft denies the
"consumer confusion" story; it observes that some OEMs do install multiple
browsers and that executives from two OEMs that do so denied any knowledge
of consumers being confused by multiple icons. See 11/5/98 pm Tr. at 41-42
(trial testimony of Avadis Tevanian of Apple), reprinted in 9 J.A. at
5493-94; 11/18/99 am Tr. at 69 (trial testimony of John Soyring of IBM),
reprinted in 10 J.A. at 6222.
Other testimony,
however, supports the District Court's finding that fear of such confusion
deters many OEMs from pre-installing multiple browsers. See, e.g.,
01/13/99 pm Tr. at 614-15 (deposition of Microsoft's Gayle McClain played
to the court) (explaining that redundancy of icons may be confusing to end
users); 02/18/99 pm Tr. at 46-47 (trial testimony of John Rose of Compaq),
reprinted in 21 J.A. at 14237-38 (same); 11/17/98 am Tr. at 68 (deposition
of John Kies of Packard Bell-NEC played to the court), reprinted in 9 J.A.
at 6016 (same); 11/17/98 am Tr. at 67-72 (trial testimony of Glenn
Weadock), reprinted in 9 J.A. at 6015-20 (same). Most telling, in
presentations to OEMs, Microsoft itself represented that having only one
icon in a particular category would be "less confusing for endusers." See
Government's Trial Exhibit ("GX") 319 at MS98 0109453. Accordingly, we
reject Microsoft's argument that we should vacate the District Court's
Finding of Fact 159 as it relates to consumer confusion.
As noted above, the
OEM channel is one of the two primary channels for distribution of
browsers. By preventing OEMs from removing visible means of user access to
IE, the license restriction prevents many OEMs from pre-installing a rival
browser and, therefore, protects Microsoft's monopoly from the competition
that middleware might otherwise present. Therefore, we conclude that the
license restriction at issue is anticompetitive. We defer for the moment
the question whether that anticompetitive effect is outweighed by
Microsoft's proffered justifications.
The second license
provision at issue prohibits OEMs from modifying the initial boot
sequence--the process that occurs the first time a consumer turns on the
computer. Prior to the imposition of that restriction, "among the programs
that many OEMs inserted into the boot sequence were Internet sign-up
procedures that encouraged users to choose from a list of IAPs assembled
by the OEM." Findings of Fact p 210. Microsoft's prohibition on any
alteration of the boot sequence thus
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prevents OEMs from using that process to promote the services of IAPs,
many of which--at least at the time Microsoft imposed the
restriction--used Navigator rather than IE in their internet access
software. See id. p 212; GX 295, reprinted in 12 J.A. at 14533 (Upon
learning of OEM practices including boot sequence modification,
Microsoft's Chairman, Bill Gates, wrote: "Apparently a lot of OEMs are
bundling non-Microsoft browsers and coming up with offerings together with
[IAPs] that get displayed on their machines in a FAR more prominent way
than MSN or our Internet browser."). Microsoft does not deny that the
prohibition on modifying the boot sequence has the effect of decreasing
competition against IE by preventing OEMs from promoting rivals' browsers.
Because this prohibition has a substantial effect in protecting
Microsoft's market power, and does so through a means other than
competition on the merits, it is anticompetitive. Again the question
whether the provision is nonetheless justified awaits later treatment.
Finally, Microsoft
imposes several additional provisions that, like the prohibition on
removal of icons, prevent OEMs from making various alterations to the
desktop: Microsoft prohibits OEMs from causing any user interface other
than the Windows desktop to launch automatically, from adding icons or
folders different in size or shape from those supplied by Microsoft, and
from using the "Active Desktop" feature to promote third-party brands.
These restrictions impose significant costs upon the OEMs; prior to
Microsoft's prohibiting the practice, many OEMs would change the
appearance of the desktop in ways they found beneficial. See, e.g.,
Findings of Fact p 214; GX 309, reprinted in 22 J.A. at 14551 (March 1997
letter from Hewlett-Packard to Microsoft: "We are responsible for the cost
of technical support of our customers, including the 33% of calls we get
related to the lack of quality or confusion generated by your product....
We must have more ability to decide how our system is presented to our end
users. If we had a choice of another supplier, based on your actions in
this area, I assure you [that you] would not be our supplier of
choice.").
The dissatisfaction of
the OEM customers does not, of course, mean the restrictions are
anticompetitive. The anticompetitive effect of the license restrictions
is, as Microsoft itself recognizes, that OEMs are not able to promote
rival browsers, which keeps developers focused upon the APIs in Windows.
Findings of Fact p 212 (quoting Microsoft's Gates as writing, "[w]inning
Internet browser share is a very very important goal for us," and
emphasizing the need to prevent OEMs from promoting both rival browsers
and IAPs that might use rivals' browsers); see also 01/13/99 Tr. at 305-06
(excerpts from deposition of James Von Holle of Gateway) (prior to
restriction Gateway had pre-installed non-IE internet registration icon
that was larger than other desktop icons). This kind of promotion is not a
zero-sum game; but for the restrictions in their licenses to use Windows,
OEMs could promote multiple IAPs and browsers. By preventing the OEMs from
doing so, this type of license restriction, like the first two
restrictions, is anticompetitive: Microsoft reduced rival browsers' usage
share not by improving its own product but, rather, by preventing OEMs
from taking actions that could increase rivals' share of usage.
b. Microsoft's
justifications for the license restrictions
Microsoft argues that
the license restrictions are legally justified because, in imposing them,
Microsoft is simply "exercising its rights as the holder of valid
copyrights." Appellant's Opening Br. at
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102. Microsoft also argues that the licenses "do not unduly restrict
the opportunities of Netscape to distribute Navigator in any event."
Id.
Microsoft's primary
copyright argument borders upon the frivolous. The company claims an
absolute and unfettered right to use its intellectual property as it
wishes: "[I]f intellectual property rights have been lawfully acquired,"
it says, then "their subsequent exercise cannot give rise to antitrust
liability." Appellant's Opening Br. at 105. That is no more correct than
the proposition that use of one's personal property, such as a baseball
bat, cannot give rise to tort liability. As the Federal Circuit succinctly
stated: "Intellectual property rights do not confer a privilege to violate
the antitrust laws." In re Indep. Serv. Orgs. Antitrust Litig., 203 F.3d 1322, 1325
(Fed. Cir. 2000).
Although Microsoft
never overtly retreats from its bold and incorrect position on the law, it
also makes two arguments to the effect that it is not exercising its
copyright in an unreasonable manner, despite the anticompetitive
consequences of the license restrictions discussed above. In the first
variation upon its unqualified copyright defense, Microsoft cites two
cases indicating that a copyright holder may limit a licensee's ability to
engage in significant and deleterious alterations of a copyrighted work.
Gilliam v. ABC, 538 F.2d 14, 21 (2d Cir. 1976); WGN Cont'l
Broad. Co. v. United Video, Inc., 693 F.2d 622, 625 (7th Cir.
1982). The relevance of those two cases for the present one is
limited, however, both because those cases involved substantial
alterations of a copyrighted work, see Gilliam, 538 F.2d at 18, and
because in neither case was there any claim that the copyright holder was,
in asserting its rights, violating the antitrust laws, see WGN Cont'l
Broad., 693 F.2d at 626; see also Cmty. for Creative NonViolence v. Reid, 846 F.2d 1485, 1498 (D.C. Cir.
1988) (noting, again in a context free of any antitrust concern, that
"an author [ ] may have rights against" a licensee that "excessively
mutilated or altered" the copyrighted work).
The only license
restriction Microsoft seriously defends as necessary to prevent a
"substantial alteration" of its copyrighted work is the prohibition on
OEMs automatically launching a substitute user interface upon completion
of the boot process. See Findings of Fact p 211 ("[A] few large OEMs
developed programs that ran automatically at the conclusion of a new PC
system's first boot sequence. These programs replaced the Windows desktop
either with a user interface designed by the OEM or with Navigator's user
interface."). We agree that a shell that automatically prevents the
Windows desktop from ever being seen by the user is a drastic alteration
of Microsoft's copyrighted work, and outweighs the marginal
anticompetitive effect of prohibiting the OEMs from substituting a
different interface automatically upon completion of the initial boot
process. We therefore hold that this particular restriction is not an
exclusionary practice that violates 2 of the Sherman Act.
In a second variation
upon its copyright defense, Microsoft argues that the license restrictions
merely prevent OEMs from taking actions that would reduce substantially
the value of Microsoft's copyrighted work: that is, Microsoft claims each
license restriction in question is necessary to prevent OEMs from so
altering Windows as to undermine "the principal value of Windows as a
stable and consistent platform that supports a broad range of applications
and that is familiar to
users." Appellant's
Opening Br. at 102. Microsoft, however, never substantiates this claim,
and, because an OEM's altering
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the appearance of the desktop or promoting programs in the boot
sequence does not affect the code already in the product, the practice
does not self-evidently affect either the "stability" or the "consistency"
of the platform. See Conclusions of Law, at 41; Findings of Fact p 227.
Microsoft cites only one item of evidence in support of its claim that the
OEMs' alterations were decreasing the value of Windows. Defendant's Trial
Exhibit ("DX") 2395 at MSV0009378A, reprinted in 19 J.A. at 12575. That
document, prepared by Microsoft itself, states: "there are quality issues
created by OEMs who are too liberal with the pre-install process,"
referring to the OEMs' installation of Windows and additional software on
their PCs, which the document says may result in "user concerns and
confusion." To the extent the OEMs' modifications cause consumer
confusion, of course, the OEMs bear the additional support costs. See
Findings of Fact p 159. Therefore, we conclude Microsoft has not shown
that the OEMs' liberality reduces the value of Windows except in the sense
that their promotion of rival browsers undermines Microsoft's
monopoly--and that is not a permissible justification for the license
restrictions.
Apart from copyright,
Microsoft raises one other defense of the OEM license agreements: It
argues that, despite the restrictions in the OEM license, Netscape is not
completely blocked from distributing its product. That claim is
insufficient to shield Microsoft from liability for those restrictions
because, although Microsoft did not bar its rivals from all means of
distribution, it did bar them from the cost-efficient ones.
In sum, we hold that
with the exception of the one restriction prohibiting automatically
launched alternative interfaces, all the OEM license restrictions at issue
represent uses of Microsoft's market power to protect its monopoly,
unredeemed by any legitimate justification. The restrictions therefore
violate 2 of the Sherman Act.
2. Integration of IE
and Windows
Although Microsoft's
license restrictions have a significant effect in closing rival browsers
out of one of the two primary channels of distribution, the District Court
found that "Microsoft's executives believed ... its contractual
restrictions placed on OEMs would not be sufficient in themselves to
reverse the direction of Navigator's usage share. Consequently, in late
1995 or early 1996, Microsoft set out to bind [IE] more tightly to Windows
95 as a technical matter." Findings of Fact p 160.
Technologically
binding IE to Windows, the District Court found, both prevented OEMs from
pre-installing other browsers and deterred consumers from using them. In
particular, having the IE software code as an irremovable part of Windows
meant that pre-installing a second browser would "increase an OEM's
product testing costs," because an OEM must test and train its support
staff to answer calls related to every software product preinstalled on
the machine; moreover, pre-installing a browser in addition to IE would to
many OEMs be "a questionable use of the scarce and valuable space on a
PC's hard drive." Id. p 159.
Although the District
Court, in its Conclusions of Law, broadly condemned Microsoft's decision
to bind "Internet Explorer to Windows with ... technological shackles,"
Conclusions of Law, at 39, its findings of fact in support of that
conclusion center upon three specific actions Microsoft took to weld IE to
Windows: excluding IE from the "Add/Remove Programs" utility; designing
Windows so as in certain circumstances to override the user's choice of a
default browser other than IE; and commingling code related
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to browsing and other code in the same files, so that any attempt to
delete the files containing IE would, at the same time, cripple the
operating system. As with the license restrictions, we consider first
whether the suspect actions had an anticompetitive effect, and then
whether Microsoft has provided a procompetitive justification for
them.
a. Anticompetitive
effect of integration
As a general rule,
courts are properly very skeptical about claims that competition has been
harmed by a dominant firm's product design changes. See, e.g., Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534,
544-45 (9th Cir. 1983). In a competitive market, firms routinely
innovate in the hope of appealing to consumers, sometimes in the process
making their products incompatible with those of rivals; the imposition of
liability when a monopolist does the same thing will inevitably deter a
certain amount of innovation. This is all the more true in a market, such
as this one, in which the product itself is rapidly changing. See Findings
of Fact p 59. Judicial deference to product innovation, however, does not
mean that a monopolist's product design decisions are per se lawful. See
Foremost Pro Color, 703 F.2d at 545; see also Cal. Computer Prods., 613
F.2d at 739, 744; In re IBM Peripheral EDP Devices Antitrust Litig., 481 F.
Supp. 965, 1007-08 (N.D. Cal. 1979).
The District Court
first condemned as anticompetitive Microsoft's decision to exclude IE from
the "Add/Remove Programs" utility in Windows 98. Findings of Fact p 170.
Microsoft had included IE in the Add/Remove Programs utility in Windows
95, see id. p p 175-76, but when it modified Windows 95 to produce Windows
98, it took IE out of the Add/Remove Programs utility. This change reduces
the usage share of rival browsers not by making Microsoft's own browser
more attractive to consumers but, rather, by discouraging OEMs from
distributing rival products. See id. p 159. Because Microsoft's conduct,
through something other than competition on the merits, has the effect of
significantly reducing usage of rivals' products and hence protecting its
own operating system monopoly, it is anticompetitive; we defer for the
moment the question whether it is nonetheless justified.
Second, the District
Court found that Microsoft designed Windows 98 "so that using Navigator on
Windows 98 would have unpleasant consequences for users" by, in some
circumstances, overriding the user's choice of a browser other than IE as
his or her default browser. Id. p p 171-72. Plaintiffs argue that this
override harms the competitive process by deterring consumers from using a
browser other than IE even though they might prefer to do so, thereby
reducing rival browsers' usage share and, hence, the ability of rival
browsers to draw developer attention away from the APIs exposed by
Windows. Microsoft does not deny, of course, that overriding the user's
preference prevents some people from using other browsers. Because the
override reduces rivals' usage share and protects Microsoft's monopoly, it
too is anticompetitive.
Finally, the District
Court condemned Microsoft's decision to bind IE to Windows 98 "by placing
code specific to Web browsing in the same files as code that provided
operating system functions." Id. p 161; see also id. p p 174, 192. Putting
code supplying browsing functionality into a file with code supplying
operating system functionality "ensure[s] that the deletion of any file
containing browsing-specific routines would also delete vital operating
system routines and thus cripple Windows...." Id. p 164. As noted above,
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preventing an OEM from removing IE deters it from installing a second
browser because doing so increases the OEM's product testing and support
costs; by contrast, had OEMs been able to remove IE, they might have
chosen to pre-install Navigator alone. See id. p 159.
Microsoft denies, as a
factual matter, that it commingled browsing and non-browsing code, and it
maintains the District Court's findings to the contrary are clearly
erroneous. According to Microsoft, its expert "testified without
contradiction that '[t]he very same code in Windows 98 that provides Web
browsing functionality' also performs essential operating system
functions--not code in the same files, but the very same software code."
Appellant's Opening Br. at 79 (citing 5 J.A. 3291-92).
Microsoft's expert did
not testify to that effect "without contradiction," however. A Government
expert, Glenn Weadock, testified that Microsoft "design[ed] [IE] so that
some of the code that it uses co-resides in the same library files as
other code needed for Windows." Direct Testimony p 30. Another Government
expert likewise testified that one library file, SHDOCVW.DLL, "is really a
bundle of separate functions. It contains some functions that have to do
specifically with Web browsing, and it contains some general user
interface functions as well." 12/14/98 am Tr. at 60-61 (trial testimony of
Edward Felten), reprinted in 11 J.A. at 6953-54. One of Microsoft's own
documents suggests as much. See Plaintiffs' Proposed Findings of Fact p
131.2.vii (citing GX 1686 (under seal) (Microsoft document indicating some
functions in SHDOCVW.DLL can be described as "IE only," others can be
described as "shell only" and still others can be described as providing
both "IE" and "shell" functions)).
In view of the
contradictory testimony in the record, some of which supports the District
Court's finding that Microsoft commingled browsing and non-browsing code,
we cannot conclude that the finding was clearly erroneous. Anderson v. City of Bessemer City, 470 U.S. 564, 573-74
(1985) ("If the district court's account of the evidence is plausible
in light of the record viewed in its entirety, the court of appeals may
not reverse it even though convinced that had it been sitting as the trier
of fact, it would have weighed the evidence differently."). Accordingly,
we reject Microsoft's argument that we should vacate Finding of Fact 159
as it relates to the commingling of code, and we conclude that such
commingling has an anticompetitive effect; as noted above, the commingling
deters OEMs from pre-installing rival browsers, thereby reducing the
rivals' usage share and, hence, developers' interest in rivals' APIs as an
alternative to the API set exposed by Microsoft's operating system.
b. Microsoft's
justifications for integration
Microsoft proffers no
justification for two of the three challenged actions that it took in
integrating IE into Windows--excluding IE from the Add/Remove Programs
utility and commingling browser and operating system code. Although
Microsoft does make some general claims regarding the benefits of
integrating the browser and the operating system, see, e.g., Direct
Testimony of James Allchin p 94, reprinted in 5 J.A. at 3321 ("Our vision
of deeper levels of technical integration is highly efficient and provides
substantial benefits to customers and developers."), it neither specifies
nor substantiates those claims. Nor does it argue that either excluding IE
from the Add/Remove Programs utility or commingling code achieves any
integrative
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benefit. Plaintiffs plainly made out a prima facie case of harm to
competition in the operating system market by demonstrating that
Microsoft's actions increased its browser usage share and thus protected
its operating system monopoly from a middleware threat and, for its part,
Microsoft failed to meet its burden of showing that its conduct serves a
purpose other than protecting its operating system monopoly. Accordingly,
we hold that Microsoft's exclusion of IE from the Add/Remove Programs
utility and its commingling of browser and operating system code
constitute exclusionary conduct, in violation of 2.
As for the other
challenged act that Microsoft took in integrating IE into Windows--causing
Windows to override the user's choice of a default browser in certain
circumstances--Microsoft argues that it has "valid technical reasons."
Specifically, Microsoft claims that it was necessary to design Windows to
override the user's preferences when he or she invokes one of "a few" out
"of the nearly 30 means of accessing the Internet." Appellant's Opening
Br. at 82. According to Microsoft:
The Windows 98 Help
system and Windows Update feature depend on ActiveX controls not supported
by Navigator, and the now-discontinued Channel Bar utilized Microsoft's
Channel Definition Format, which Navigator also did not support. Lastly,
Windows 98 does not invoke Navigator if a user accesses the Internet
through "My Computer" or "Windows Explorer" because doing so would defeat
one of the purposes of those features-enabling users to move seamlessly
from local storage devices to the Web in the same browsing window.
Id. (internal citations
omitted). The plaintiff bears the burden not only of rebutting a proffered
justification but also of demonstrating that the anticompetitive effect of
the challenged action outweighs it. In the District Court, plaintiffs
appear to have done neither, let alone both; in any event, upon appeal,
plaintiffs offer no rebuttal whatsoever. Accordingly, Microsoft may not be
held liable for this aspect of its product design.
3. Agreements with
Internet Access Providers
The District Court
also condemned as exclusionary Microsoft's agreements with various IAPs.
The IAPs include both Internet Service Providers, which offer consumers
internet access, and Online Services ("OLSs") such as America Online
("AOL"), which offer proprietary content in addition to internet access
and other services. Findings of Fact p 15. The District Court deemed
Microsoft's agreements with the IAPs unlawful because:
Microsoft licensed
[IE] and the [IE] Access Kit [(of which, more below)] to hundreds of IAPs
for no charge. [Findings of Fact] p p 250-51. Then, Microsoft extended
valuable promotional treatment to the ten most important IAPs in exchange
for their commitment to promote and distribute [IE] and to exile Navigator
from the desktop. Id. p p 255-58, 261, 272, 288-90, 305-06. Finally, in
exchange for efforts to upgrade existing subscribers to client software
that came bundled with [IE] instead of Navigator, Microsoft granted
rebates--and in some cases made outright payments--to those same IAPs. Id.
p p 259-60, 295.
Conclusions of Law, at
41.
The District Court
condemned Microsoft's actions in (1) offering IE free of charge to IAPs
and (2) offering IAPs a bounty for each customer the IAP signs up for
service using the IE browser. In effect, the court concluded that
Microsoft is
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acting to preserve its monopoly by offering IE to IAPs at an attractive
price. Similarly, the District Court held Microsoft liable for (3)
developing the IE Access Kit ("IEAK"), a software package that allows an
IAP to "create a distinctive identity for its service in as little as a
few hours by customizing the [IE] title bar, icon, start and search
pages," Findings of Fact p 249, and (4) offering the IEAK to IAPs free of
charge, on the ground that those acts, too, helped Microsoft preserve its
monopoly. Conclusions of Law, at 41-42. Finally, the District Court found
that (5) Microsoft agreed to provide easy access to IAPs' services from
the Windows desktop in return for the IAPs' agreement to promote IE
exclusively and to keep shipments of internet access software using
Navigator under a specific percentage, typically 25%. See Conclusions of
Law, at 42 (citing Findings of Fact p p 258, 262, 289). We address the
first four items--Microsoft's inducements--and then its exclusive
agreements with IAPs.
Although offering a
customer an attractive deal is the hallmark of competition, the Supreme
Court has indicated that in very rare circumstances a price may be
unlawfully low, or "predatory." See generally Brooke Group, 509 U.S. at
220-27. Plaintiffs argued before the District Court that Microsoft's
pricing was indeed predatory; but instead of making the usual predatory
pricing argument--that the predator would drive out its rivals by pricing
below cost on a particular product and then, sometime in the future, raise
its prices on that product above the competitive level in order to recoup
its earlier losses--plaintiffs argued that by pricing below cost on IE
(indeed, even paying people to take it), Microsoft was able simultaneously
to preserve its stream of monopoly profits on Windows, thereby more than
recouping its investment in below-cost pricing on IE. The District Court
did not assign liability for predatory pricing, however, and plaintiffs do
not press this theory on appeal.
The rare case of price
predation aside, the antitrust laws do not condemn even a monopolist for
offering its product at an attractive price, and we therefore have no
warrant to condemn Microsoft for offering either IE or the IEAK free of
charge or even at a negative price. Likewise, as we said above, a
monopolist does not violate the Sherman Act simply by developing an
attractive product. See Grinnell, 384 U.S. at 571 ("[G]rowth or
development as a consequence of a superior product [or] business acumen"
is no violation.). Therefore, Microsoft's development of the IEAK does not
violate the Sherman Act.
We turn now to
Microsoft's deals with IAPs concerning desktop placement. Microsoft
concluded these exclusive agreements with all "the leading IAPs," Findings
of Fact p 244, including the major OLSs. Id. p 245; see also id. p p 305,
306. The most significant of the OLS deals is with AOL, which, when the
deal was reached, "accounted for a substantial portion of all existing
Internet access subscriptions and ... attracted a very large percentage of
new IAP subscribers." Id. p 272. Under that agreement Microsoft puts the
AOL icon in the OLS folder on the Windows desktop and AOL does not promote
any non-Microsoft browser, nor provide software using any non-Microsoft
browser except at the customer's request, and even then AOL will not
supply more than 15% of its subscribers with a browser other than IE. Id.
p 289.
The Supreme Court most
recently considered an antitrust challenge to an exclusive contract Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320
(1961). That case,
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which involved a challenge to a requirements contract, was brought
under 3 of the Clayton Act and 1 and 2 of the Sherman Act. The Court held
that an exclusive contract does not violate the Clayton Act unless its
probable effect is to "foreclose competition in a substantial share of the
line of commerce affected." Id. at 327. The share of the market foreclosed
is important because, for the contract to have an adverse effect upon
competition, "the opportunities for other traders to enter into or remain
in that market must be significantly limited." Id. at 328. Although
"[n]either the Court of Appeals nor the District Court [had] considered in
detail the question of the relevant market," id. at 330, the Court in
Tampa Electric examined the record and, after defining the relevant
market, determined that the contract affected less than one percent of
that market. Id. at 333. After concluding, under the Clayton Act, that
this share was "conservatively speaking, quite insubstantial," id., the
Court went on summarily to reject the Sherman Act claims. Id. at 335
("[I]f [the contract] does not fall within the broader prescription of 3
of the Clayton Act it follows that it is not forbidden by those of the
[Sherman Act].").
Following Tampa
Electric, courts considering antitrust challenges to exclusive contracts
have taken care to identify the share of the market foreclosed. Some
courts have indicated that 3 of the Clayton Act and 1 of the Sherman Act
require an equal degree of foreclosure before prohibiting exclusive
contracts. See, e.g., Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 393
(7th Cir. 1984) (Posner, J.). Other courts, however, have held that a
higher market share must be foreclosed in order to establish a violation
of the Sherman Act as compared to the Clayton Act. See, e.g., Barr Labs. v. Abbott Labs., 978 F.2d 98, 110 (3d
Cir.1992); 11 Herbert Hovenkamp, Antitrust Law p 1800c4 (1998) ("[T]he
cases are divided, with a likely majority stating that the Clayton Act
requires a smaller showing of anticompetitive effects.").
Though what is
"significant" may vary depending upon the antitrust provision under which
an exclusive deal is challenged, it is clear that in all cases the
plaintiff must both define the relevant market and prove the degree of
foreclosure. This is a prudential requirement; exclusivity provisions in
contracts may serve many useful purposes. See, e.g., Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1162 (9th
Cir. 1997) ("There are, however, well-recognized economic benefits to
exclusive dealing arrangements, including the enhancement of interbrand
competition."); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 236
(1st Cir. 1983) (Breyer, J.) ("[V]irtually every contract to buy
'forecloses' or 'excludes' alternative sellers from some portion of the
market, namely the portion consisting of what was bought."). Permitting an
antitrust action to proceed any time a firm enters into an exclusive deal
would both discourage a presumptively legitimate business practice and
encourage costly antitrust actions. Because an exclusive deal affecting a
small fraction of a market clearly cannot have the requisite harmful
effect upon competition, the requirement of a significant degree of
foreclosure serves a useful screening function. Cf. Frank H. Easterbrook,
The Limits of Antitrust, 63 Tex. L. Rev. 1, 2123 (1984) (discussing use of
presumptions in antitrust law to screen out cases in which loss to
consumers and economy is likely outweighed by cost of inquiry and risk of
deterring procompetitive behavior).
Page 70
In this case,
plaintiffs challenged Microsoft's exclusive dealing arrangements with the
IAPs under both 1 and 2 of the Sherman Act. The District Court, in
analyzing the 1 claim, stated, "unless the evidence demonstrates that
Microsoft's agreements excluded Netscape altogether from access to roughly
forty percent of the browser market, the Court should decline to find such
agreements in violation of 1." Conclusions of Law, at 52. The court
recognized that Microsoft had substantially excluded Netscape from "the
most efficient channels for Navigator to achieve browser usage share," id.
at 53; see also Findings of Fact p 145 ("[N]o other distribution channel
for browsing software even approaches the efficiency of OEM
pre-installation and IAP bundling."), and had relegated it to more costly
and less effective methods (such as mass mailing its browser on a disk or
offering it for download over the internet); but because Microsoft has not
"completely excluded Netscape" from reaching any potential user by some
means of distribution, however ineffective, the court concluded the
agreements do not violate 1. Conclusions of Law, at 53. Plaintiffs did not
cross-appeal this holding.
Turning to 2, the
court stated: "the fact that Microsoft's arrangements with various [IAPs
and other] firms did not foreclose enough of the relevant market to
constitute a 1 violation in no way detracts from the Court's assignment of
liability for the same arrangements under 2.... [A]ll of Microsoft's
agreements, including the non-exclusive ones, severely restricted
Netscape's access to those distribution channels leading most efficiently
to the acquisition of browser usage share." Conclusions of Law, at 53.
On appeal Microsoft
argues that "courts have applied the same standard to alleged exclusive
dealing agreements under both Section 1 and Section 2," Appellant's
Opening Br. at 109, and it argues that the District Court's holding of no
liability under 1 necessarily precludes holding it liable under 2. The
District Court appears to have based its holding with respect to 1 upon a
"total exclusion test" rather than the 40% standard drawn from the
caselaw. Even assuming the holding is correct, however, we nonetheless
reject Microsoft's contention.
The basic prudential
concerns relevant to 1 and 2 are admittedly the same: exclusive contracts
are commonplace-particularly in the field of distribution--in our
competitive, market economy, and imposing upon a firm with market power
the risk of an antitrust suit every time it enters into such a contract,
no matter how small the effect, would create an unacceptable and
unjustified burden upon any such firm. At the same time, however, we agree
with plaintiffs that a monopolist's use of exclusive contracts, in certain
circumstances, may give rise to a 2 violation even though the contracts
foreclose less than the roughly 40% or 50% share usually required in order
to establish a 1 violation. See generally Dennis W. Carlton, A General
Analysis of Exclusionary Conduct and Refusal to Deal--Why Aspen and Kodak
Are Misguided, 68 Antitrust L.J. 659 (2001) (explaining various scenarios
under which exclusive dealing, particularly by a dominant firm, may raise
legitimate concerns about harm to competition).
In this case,
plaintiffs allege that, by closing to rivals a substantial percentage of
the available opportunities for browser distribution, Microsoft managed to
preserve its monopoly in the market for operating systems. The IAPs
constitute one of the two major channels by which browsers can be
distributed. Findings of Fact p 242. Microsoft has exclusive deals with
Page 71
"fourteen of the top fifteen access providers in North America[, which]
account for a large majority of all Internet access subscriptions in this
part of the world." Id. p 308. By ensuring that the "majority" of all IAP
subscribers are offered IE either as the default browser or as the only
browser, Microsoft's deals with the IAPs clearly have a significant effect
in preserving its monopoly; they help keep usage of Navigator below the
critical level necessary for Navigator or any other rival to pose a real
threat to Microsoft's monopoly. See, e.g., id. p 143 (Microsoft sought to
"divert enough browser usage from Navigator to neutralize it as a
platform."); see also Carlton, at 670.
Plaintiffs having
demonstrated a harm to competition, the burden falls upon Microsoft to
defend its exclusive dealing contracts with IAPs by providing a
procompetitive justification for them. Significantly, Microsoft's only
explanation for its exclusive dealing is that it wants to keep developers
focused upon its APIs--which is to say, it wants to preserve its power in
the operating system market. 02/26/01 Ct. Appeals Tr. at 45-47. That is
not an unlawful end, but neither is it a procompetitive justification for
the specific means here in question, namely exclusive dealing contracts
with IAPs. Accordingly, we affirm the District Court's decision holding
that Microsoft's exclusive contracts with IAPs are exclusionary devices,
in violation of 2 of the Sherman Act.
4. Dealings with
Internet Content Providers, Independent Software Vendors, and Apple
Computer
The District Court
held that Microsoft engages in exclusionary conduct in its dealings with
ICPs, which develop websites; ISVs, which develop software; and Apple,
which is both an OEM and a software developer. See Conclusions of Law, at
42-43 (deals with ICPs, ISVs, and Apple "supplemented Microsoft's efforts
in the OEM and IAP channels"). The District Court condemned Microsoft's
deals with ICPs and ISVs, stating: "By granting ICPs and ISVs free
licenses to bundle [IE] with their offerings, and by exchanging other
valuable inducements for their agreement to distribute, promote[,] and
rely on [IE] rather than Navigator, Microsoft directly induced developers
to focus on its own APIs rather than ones exposed by Navigator." Id.
(citing Findings of Fact p p 334-35, 340).
With respect to the
deals with ICPs, the District Court's findings do not support liability.
After reviewing the ICP agreements, the District Court specifically stated
that "there is not sufficient evidence to support a finding that
Microsoft's promotional restrictions actually had a substantial,
deleterious impact on Navigator's usage share." Findings of Fact p 332.
Because plaintiffs failed to demonstrate that Microsoft's deals with the
ICPs have a substantial effect upon competition, they have not proved the
violation of the Sherman Act.
As for Microsoft's ISV
agreements, however, the District Court did not enter a similar finding of
no substantial effect. The District Court described Microsoft's deals with
ISVs as follows:
In dozens of "First
Wave" agreements signed between the fall of 1997 and the spring of 1998,
Microsoft has promised to give preferential support, in the form of early
Windows 98 and Windows NT betas, other technical information, and the
right to use certain Microsoft seals of approval, to important ISVs that
agree to certain conditions. One of these conditions is that the ISVs use
Internet Explorer as the default browsing software for any software they
develop with a hypertext-based user interface.
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Another condition is that the ISVs use Microsoft's "HTML Help," which
is accessible only with Internet Explorer, to implement their
applications' help systems.
Id. p 339. The District
Court further found that the effect of these deals is to "ensure [ ] that
many of the most popular Web-centric applications will rely on browsing
technologies found only in Windows," id. p 340, and that Microsoft's deals
with ISVs therefore "increase[ ] the likelihood that the millions of
consumers using [applications designed by ISVs that entered into
agreements with Microsoft] will use Internet Explorer rather than
Navigator." Id. p 340.
The District Court did
not specifically identify what share of the market for browser
distribution the exclusive deals with the ISVs foreclose. Although the
ISVs are a relatively small channel for browser distribution, they take on
greater significance because, as discussed above, Microsoft had largely
foreclosed the two primary channels to its rivals. In that light, one can
tell from the record that by affecting the applications used by "millions"
of consumers, Microsoft's exclusive deals with the ISVs had a substantial
effect in further foreclosing rival browsers from the market. (Data
introduced by Microsoft, see Direct Testimony of Cameron Myhrvold p 84,
reprinted in 6 J.A. at 3922-23, and subsequently relied upon by the
District Court in its findings, see, e.g., Findings of Fact p 270,
indicate that over the two-year period 1997-98, when Microsoft entered
into the First Wave agreements, there were 40 million new users of the
internet.) Because, by keeping rival browsers from gaining widespread
distribution (and potentially attracting the attention of developers away
from the APIs in Windows), the deals have a substantial effect in
preserving Microsoft's monopoly, we hold that plaintiffs have made a prima
facie showing that the deals have an anticompetitive effect.
Of course, that
Microsoft's exclusive deals have the anticompetitive effect of preserving
Microsoft's monopoly does not, in itself, make them unlawful. A
monopolist, like a competitive firm, may have a perfectly legitimate
reason for wanting an exclusive arrangement with its distributors.
Accordingly, Microsoft had an opportunity to, but did not, present the
District Court with evidence demonstrating that the exclusivity provisions
have some such procompetitive justification. See Conclusions of Law, at 43
(citing Findings of Fact p p 339-40) ("With respect to the ISV agreements,
Microsoft has put forward no procompetitive business ends whatsoever to
justify their exclusionary terms."). On appeal Microsoft likewise does not
claim that the exclusivity required by the deals serves any legitimate
purpose; instead, it states only that its ISV agreements reflect an
attempt "to persuade ISVs to utilize Internet-related system services in
Windows rather than Navigator." Appellant's Opening Br. at 114. As we
explained before, however, keeping developers focused upon Windows--that
is, preserving the Windows monopoly-is a competitively neutral goal.
Microsoft having offered no procompetitive justification for its exclusive
dealing arrangements with the ISVs, we hold that those arrangements
violate 2 of the Sherman Act.
Finally, the District
Court held that Microsoft's dealings with Apple violated the Sherman Act.
See Conclusions of Law, at 42-43. Apple is vertically integrated: it makes
both software (including an operating system, Mac OS), and hardware (the
Macintosh line of computers). Microsoft primarily makes software,
including, in addition to its operating system,
Page 73
a number of popular applications. One, called "Office," is a suite of
business productivity applications that Microsoft has ported to Mac OS.
The District Court found that "ninety percent of Mac OS users running a
suite of office productivity applications [use] Microsoft's Mac Office."
Findings of Fact p 344. Further, the District Court found that:
In 1997, Apple's
business was in steep decline, and many doubted that the company would
survive much long er.... [M]any ISVs questioned the wisdom of continuing
to spend time and money developing applications for the Mac OS. Had
Microsoft announced in the midst of this atmosphere that it was ceasing to
develop new versions of Mac Office, a great number of ISVs, customers,
developers, and investors would have interpreted the announcement as
Apple's death notice.
Id. p 344. Microsoft
recognized the importance to Apple of its continued support of Mac Office.
See id. p 347 (quoting internal Microsoft e-mail) ("[We] need a way to
push these guys[, i.e., Apple] and [threatening to cancel Mac Office] is
the only one that seems to make them move."); see also id. ("[Microsoft
Chairman Bill] Gates asked whether Microsoft could conceal from Apple in
the coming month the fact that Microsoft was almost finished developing
Mac Office 97."); id. at p 354 ("I think ... Apple should be using [IE]
everywhere and if they don't do it, then we can use Office as a
club.").
In June 1997 Microsoft
Chairman Bill Gates determined that the company's negotiations with Apple
" 'have not been going well at all.... Apple let us down on the browser by
making Netscape the standard install.' Gates then reported that he had
already called Apple's CEO ... to ask 'how we should announce the
cancellation of Mac Office....' " Id. at p 349. The District Court further
found that, within a month of Gates' call, Apple and Microsoft had reached
an agreement pursuant to which
Microsoft's primary
obligation is to continue releasing up-to-date versions of Mac Office for
at least five years.... [and] Apple has agreed ... to "bundle the most
current version of [IE] ... with [Mac OS]"... [and to] "make [IE] the
default [browser]".... Navigator is not installed on the computer hard
drive during the default installation, which is the type of installation
most users elect to employ.... [The] Agreement further provides that ...
Apple may not position icons for nonMicrosoft browsing software on the
desktop of new Macintosh PC systems or Mac OS upgrades.
Id. p p 350-52. The
agreement also prohibits Apple from encouraging users to substitute
another browser for IE, and states that Apple will "encourage its
employees to use [IE]." Id. p 352.
This exclusive deal
between Microsoft and Apple has a substantial effect upon the distribution
of rival browsers. If a browser developer ports its product to a second
operating system, such as the Mac OS, it can continue to display a common
set of APIs. Thus, usage share, not the underlying operating system, is
the primary determinant of the platform challenge a browser may pose.
Pre-installation of a browser (which can be accomplished either by
including the browser with the operating system or by the OEM installing
the browser) is one of the two most important methods of browser
distribution, and Apple had a not insignificant share of worldwide sales
of operating systems. See id. p 35 (Microsoft has 95% of the market not
counting Apple and "well above" 80% with Apple included in the relevant
market). Because Microsoft's exclusive contract with Apple
Page 74
has a substantial effect in restricting distribution of rival browsers,
and because (as we have described several times above) reducing usage
share of rival browsers serves to protect Microsoft's monopoly, its deal
with Apple must be regarded as anticompetitive. See Conclusions of Law, at
42 (citing Findings of Fact p 356) ("By extracting from Apple terms that
significantly diminished the usage of Navigator on the Mac OS, Microsoft
helped to ensure that developers would not view Navigator as truly
cross-platform middleware.").
Microsoft offers no
procompetitive justification for the exclusive dealing arrangement. It
makes only the irrelevant claim that the IE-for-Mac Office deal is part of
a multifaceted set of agreements between itself and Apple, see Appellant's
Opening Br. at 61 ("Apple's 'browsing software' obligation was [not] the
quid pro quo for Microsoft's Mac Office obligation[;] ... all of the
various obligations ... were part of one 'overall agreement' between the
two companies."); that does not mean it has any procompetitive
justification. Accordingly, we hold that the exclusive deal with Apple is
exclusionary, in violation of 2 of the Sherman Act.
5. Java
Java, a set of
technologies developed by Sun Microsystems, is another type of middleware
posing a potential threat to Windows' position as the ubiquitous platform
for software development. Findings of Fact p 28. The Java technologies
include: (1) a programming language; (2) a set of programs written in that
language, called the "Java class libraries," which expose APIs; (3) a
compiler, which translates code written by a developer into "bytecode";
and (4) a Java Virtual Machine ("JVM"), which translates bytecode into
instructions to the operating system. Id. p 73. Programs calling upon the
Java APIs will run on any machine with a "Java runtime environment," that
is, Java class libraries and a JVM. Id. p p 73, 74.
In May 1995 Netscape
agreed with Sun to distribute a copy of the Java runtime environment with
every copy of Navigator, and "Navigator quickly became the principal
vehicle by which Sun placed copies of its Java runtime environment on the
PC systems of Windows users." Id. p 76. Microsoft, too, agreed to promote
the Java technologies--or so it seemed. For at the same time, Microsoft
took steps "to maximize the difficulty with which applications written in
Java could be ported from Windows to other platforms, and vice versa."
Conclusions of Law, at 43. Specifically, the District Court found that
Microsoft took four steps to exclude Java from developing as a viable
cross-platform threat: (a) designing a JVM incompatible with the one
developed by Sun; (b) entering into contracts, the so-called "First Wave
Agreements," requiring major ISVs to promote Microsoft's JVM exclusively;
(c) deceiving Java developers about the Windows-specific nature of the
tools it distributed to them; and (d) coercing Intel to stop aiding Sun in
improving the Java technologies.
a. The incompatible
JVM
The District Court
held that Microsoft engaged in exclusionary conduct by developing and
promoting its own JVM. Conclusions of Law, at 43-44. Sun had already
developed a JVM for the Windows operating system when Microsoft began work
on its version. The JVM developed by Microsoft allows Java applications to
run faster on Windows than does Sun's JVM, Findings of Fact p 389, but a
Java application designed to work with Microsoft's JVM does not work with
Sun's JVM and vice versa. Id. p 390. The District Court found that
Microsoft "made a large
Page 75
investment of engineering resources to develop a high-performance
Windows JVM," id. p 396, and, "[b]y bundling its ... JVM with every copy
of [IE] ... Microsoft endowed its Java runtime environment with the unique
attribute of guaranteed, enduring ubiquity across the enormous Windows
installed base," id. p 397. As explained above, however, a monopolist does
not violate the antitrust laws simply by developing a product that is
incompatible with those of its rivals. See supra Section II.B.1. In order
to violate the antitrust laws, the incompatible product must have an
anticompetitive effect that outweighs any procompetitive justification for
the design. Microsoft's JVM is not only incompatible with Sun's, it allows
Java applications to run faster on Windows than does Sun's JVM.
Microsoft's faster JVM lured Java developers into using Microsoft's
developer tools, and Microsoft offered those tools deceptively, as we
discuss below. The JVM, however, does allow applications to run more
swiftly and does not itself have any anticompetitive effect. Therefore, we
reverse the District Court's imposition of liability for Microsoft's
development and promotion of its JVM.
b. The First Wave
Agreements
The District Court
also found that Microsoft entered into First Wave Agreements with dozens
of ISVs to use Microsoft's JVM. See Findings of Fact p 401 ("[I]n exchange
for costly technical support and other blandishments, Microsoft induced
dozens of important ISVs to make their Java applications reliant on
Windows-specific technologies and to refrain from distributing to Windows
users JVMs that complied with Sun's standards."). Again, we reject the
District Court's condemnation of low but non-predatory pricing by
Microsoft.
To the extent
Microsoft's First Wave Agreements with the ISVs conditioned receipt of
Windows technical information upon the ISVs' agreement to promote
Microsoft's JVM exclusively, they raise a different competitive concern.
The District Court found that, although not literally exclusive, the deals
were exclusive in practice because they required developers to make
Microsoft's JVM the default in the software they developed. Id. p 401.
While the District
Court did not enter precise findings as to the effect of the First Wave
Agreements upon the overall distribution of rival JVMs, the record
indicates that Microsoft's deals with the major ISVs had a significant
effect upon JVM promotion. As discussed above, the products of First Wave
ISVs reached millions of consumers. Id. p 340. The First Wave ISVs
included such prominent developers as Rational Software, see GX 970,
reprinted in 15 J.A. at 999410000, "a world leader" in software
development tools, see Direct Testimony of Michael Devlin p 2, reprinted
in 5 J.A. at 3520, and Symantec, see GX 2071, reprinted in 22 J.A. at
14960-66 (sealed), which, according to Microsoft itself, is "the leading
supplier of utilities such as anti-virus software," Defendant's Proposed
Findings of Fact p 276, reprinted in 3 J.A. at 1689. Moreover, Microsoft's
exclusive deals with the leading ISVs took place against a backdrop of
foreclosure: the District Court found that "[w]hen Netscape announced in
May 1995 [prior to Microsoft's execution of the First Wave Agreements]
that it would include with every copy of Navigator a copy of a Windows JVM
that complied with Sun's standards, it appeared that Sun's Java
implementation would achieve the necessary ubiquity on Windows." Findings
of Fact p 394. As discussed above, however, Microsoft undertook a number
of anticompetitive actions that seriously reduced the distribution of
Navigator, and the District
Page 76
Court found that those actions thereby seriously impeded distribution
of Sun's JVM. Conclusions of Law, at 43-44. Because Microsoft's agreements
foreclosed a substantial portion of the field for JVM distribution and
because, in so doing, they protected Microsoft's monopoly from a
middleware threat, they are anticompetitive.
Microsoft offered no
procompetitive justification for the default clause that made the First
Wave Agreements exclusive as a practical matter. See Findings of Fact p
401. Because the cumulative effect of the deals is anticompetitive and
because Microsoft has no procompetitive justification for them, we hold
that the provisions in the First Wave Agreements requiring use of
Microsoft's JVM as the default are exclusionary, in violation of the
Sherman Act.
c. Deception of Java
developers
Microsoft's "Java
implementation" included, in addition to a JVM, a set of software
development tools it created to assist ISVs in designing Java
applications. The District Court found that, not only were these tools
incompatible with Sun's cross-platform aspirations for Java--no violation,
to be sure-but Microsoft deceived Java developers regarding the
Windows-specific nature of the tools. Microsoft's tools included "certain
'keywords' and 'compiler directives' that could only be executed properly
by Microsoft's version of the Java runtime environment for Windows." Id. p
394; see also Direct Testimony of James Gosling p 58, reprinted in 21 J.A.
at 13959 (Microsoft added "programming instructions ... that alter the
behavior of the code."). As a result, even Java "developers who were
opting for portability over performance ... unwittingly [wrote] Java
applications that [ran] only on Windows." Conclusions of Law, at 43. That
is, developers who relied upon Microsoft's public commitment to cooperate
with Sun and who used Microsoft's tools to develop what Microsoft led them
to believe were cross-platform applications ended up producing
applications that would run only on the Windows operating system.
When specifically
accused by a PC Week reporter of fragmenting Java standards so as to
prevent cross-platform uses, Microsoft denied the accusation and indicated
it was only "adding rich platform support" to what remained a
crossplatform implementation. An e-mail message internal to Microsoft,
written shortly after the conversation with the reporter, shows
otherwise:
[O]k, i just did a
followup call.... [The reporter] liked that i kept pointing customers to
w3c standards [(commonly observed internet protocols)].... [but] he
accused us of being schizo with this vs. our java approach, i said he
misunderstood [--] that [with Java] we are merely trying to add rich
platform support to an interop layer.... this plays well.... at this point
its [sic] not good to create MORE noise around our win32 java classes.
instead we should just quietly grow j [(Microsoft's development tools)]
share and assume that people will take more advantage of our classes
without ever realizing they are building win32-only java apps.
GX 1332, reprinted in
22 J.A. at 14922-23.
Finally, other
Microsoft documents confirm that Microsoft intended to deceive Java
developers, and predicted that the effect of its actions would be to
generate Windows-dependent Java applications that their developers
believed would be cross-platform; these documents also indicate that
Microsoft's ultimate objective was to thwart Java's threat to Microsoft's
monopoly in the market for operating systems. One Microsoft document, for
example, states as a strategic goal: "Kill cross-platform
Page 77
Java by grow[ing] the polluted Java market." GX 259, reprinted in 22
J.A. at 14514; see also id. ("Cross-platform capability is by far the
number one reason for choosing/using Java.") (emphasis in original).
Microsoft's conduct
related to its Java developer tools served to protect its monopoly of the
operating system in a manner not attributable either to the superiority of
the operating system or to the acumen of its makers, and therefore was
anticompetitive. Unsurprisingly, Microsoft offers no procompetitive
explanation for its campaign to deceive developers. Accordingly, we
conclude this conduct is exclusionary, in violation of 2 of the Sherman
Act.
d. The threat to
Intel
The District Court
held that Microsoft also acted unlawfully with respect to Java by using
its "monopoly power to prevent firms such as Intel from aiding in the
creation of cross-platform interfaces." Conclusions of Law, at 43. In 1995
Intel was in the process of developing a highperformance,
Windows-compatible JVM. Microsoft wanted Intel to abandon that effort
because a fast, cross-platform JVM would threaten Microsoft's monopoly in
the operating system market. At an August 1995 meeting, Microsoft's Gates
told Intel that its "cooperation with Sun and Netscape to develop a Java
runtime environment ... was one of the issues threatening to undermine
cooperation between Intel and Microsoft." Findings of Fact p 396. Three
months later, "Microsoft's Paul Maritz told a senior Intel executive that
Intel's [adaptation of its multimedia software to comply with] Sun's Java
standards was as inimical to Microsoft as Microsoft's support for
non-Intel microprocessors would be to Intel." Id. p 405.
Intel nonetheless
continued to undertake initiatives related to Java. By 1996 "Intel had
developed a JVM designed to run well ... while complying with Sun's
cross-platform standards." Id. p 396. In April of that year, Microsoft
again urged Intel not to help Sun by distributing Intel's fast,
Suncompliant JVM. Id. And Microsoft threatened Intel that if it did not
stop aiding Sun on the multimedia front, then Microsoft would refuse to
distribute Intel technologies bundled with Windows. Id. p 404.
Intel finally
capitulated in 1997, after Microsoft delivered the coup de grace.
[O]ne of Intel's
competitors, called AMD, solicited support from Microsoft for its "3DX"
technology.... Microsoft's Allchin asked Gates whether Microsoft should
support 3DX, despite the fact that Intel would oppose it. Gates responded:
"If Intel has a real problem with us supporting this then they will have
to stop supporting Java Multimedia the way they are. I would gladly give
up supporting this if they would back off from their work on JAVA."
Id. p 406.
Microsoft's internal
documents and deposition testimony confirm both the anticompetitive effect
and intent of its actions. See, e.g., GX 235, reprinted in 22 J.A. at
14502 (Microsoft executive, Eric Engstrom, included among Microsoft's
goals for Intel: "Intel to stop helping Sun create Java
Multimedia APIs,
especially ones that run well ... on Windows."); Deposition of Eric
Engstrom at 179 ("We were successful [in convincing Intel to stop aiding
Sun] for some period of time.").
Microsoft does not
deny the facts found by the District Court, nor does it offer any
procompetitive justification for pressuring Intel not to support
cross-platform Java. Microsoft lamely characterizes its threat to Intel as
"advice." The District Court,
Page 78
however, found that Microsoft's "advice" to Intel to stop aiding
cross-platform Java was backed by the threat of retaliation, and this
conclusion is supported by the evidence cited above. Therefore we affirm
the conclusion that Microsoft's threats to Intel were exclusionary, in
violation of 2 of the Sherman Act.
6. Course of
Conduct
The District Court
held that, apart from Microsoft's specific acts, Microsoft was liable
under 2 based upon its general "course of conduct." In reaching this
conclusion the court relied upon Continental Ore Co. v. Union Carbide & Carbon Corp., 370
U.S. 690, 699 (1962), where the Supreme Court stated, "[i]n [Sherman
Act cases], plaintiffs should be given the full benefit of their proof
without tightly compartmentalizing the various factual components and
wiping the slate clean after scrutiny of each."
Microsoft points out
that Continental Ore and the other cases cited by plaintiffs in support of
"course of conduct" liability all involve conspiracies among multiple
firms, not the conduct of a single firm; in that setting the "course of
conduct" is the conspiracy itself, for which all the participants may be
held liable. See Appellant's Opening Br. at 112-13. Plaintiffs respond
that, as a policy matter, a monopolist's unilateral "campaign of [acts
intended to exclude a rival] that in the aggregate has the requisite
impact" warrants liability even if the acts viewed individually would be
lawful for want of a significant effect upon competition. Appellees' Br.
at 8283.
We need not pass upon
plaintiffs' argument, however, because the District Court did not point to
any series of acts, each of which harms competition only slightly but the
cumulative effect of which is significant enough to form an independent
basis for liability. The "course of conduct" section of the District
Court's opinion contains, with one exception, only broad, summarizing
conclusions. See, e.g., Conclusions of Law, at 44 ("Microsoft placed an
oppressive thumb on the scale of competitive fortune...."). The only
specific acts to which the court refers are Microsoft's expenditures in
promoting its browser, see id. ("Microsoft has expended wealth and
foresworn opportunities to realize more...."), which we have explained are
not in themselves unlawful. Because the District Court identifies no other
specific acts as a basis for "course of conduct" liability, we reverse its
conclusion that Microsoft's course of conduct separately violates 2 of the
Sherman Act.
C. Causation
As a final parry,
Microsoft urges this court to reverse on the monopoly maintenance claim,
because plaintiffs never established a causal link between Microsoft's
anticompetitive conduct, in particular its foreclosure of Netscape's and
Java's distribution channels, and the maintenance of Microsoft's operating
system monopoly. See Findings of Fact p 411 ("There is insufficient
evidence to find that, absent Microsoft's actions, Navigator and Java
already would have ignited genuine competition in the market for
Intel-compatible PC operating systems."). This is the flip side of
Microsoft's earlier argument that the District Court should have included
middleware in the relevant market. According to Microsoft, the District
Court cannot simultaneously find that middleware is not a reasonable
substitute and that Microsoft's exclusionary conduct contributed to the
maintenance of monopoly power in the operating system market. Microsoft
claims that the first finding depended on the court's view that middleware
does not pose a serious threat to Windows, see supra Section II.A, while
the
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second finding required the court to find that Navigator and Java would
have developed into serious enough cross-platform threats to erode the
applications barrier to entry. We disagree.
Microsoft points to no
case, and we can find none, standing for the proposition that, as to 2
liability in an equitable enforcement action, plaintiffs must present
direct proof that a defendant's continued monopoly power is precisely
attributable to its anticompetitive conduct. As its lone authority,
Microsoft cites the following passage from Professor Areeda's antitrust
treatise: "The plaintiff has the burden of pleading, introducing evidence,
and presumably proving by a preponderance of the evidence that
reprehensible behavior has contributed significantly to the ...
maintenance of the monopoly." 3 Phillip E. Areeda & Herbert Hovenkamp,
Antitrust Law p 650c, at 69 (1996) (emphasis added).
But, with respect to
actions seeking injunctive relief, the authors of that treatise also
recognize the need for courts to infer "causation" from the fact that a
defendant has engaged in anticompetitive conduct that "reasonably
appear[s] capable of making a significant contribution to ... maintaining
monopoly power." Id. p 651c, at 78; Morgan v. Ponder, 892 F.2d 1355, 1363 (8th Cir. 1989);
Barry Wright, 724 F.2d at 230. To require that 2 liability turn on a
plaintiff's ability or inability to reconstruct the hypothetical
marketplace absent a defendant's anticompetitive conduct would only
encourage monopolists to take more and earlier anticompetitive action.
We may infer causation
when exclusionary conduct is aimed at producers of nascent competitive
technologies as well as when it is aimed at producers of established
substitutes. Admittedly, in the former case there is added uncertainty,
inasmuch as nascent threats are merely potential substitutes. But the
underlying proof problem is the same--neither plaintiffs nor the court can
confidently reconstruct a product's hypothetical technological development
in a world absent the defendant's exclusionary conduct. To some degree,
"the defendant is made to suffer the uncertain consequences of its own
undesirable conduct." 3 Areeda & Hovenkamp, Antitrust Law p 651c, at
78.
Given this rather
edentulous test for causation, the question in this case is not whether
Java or Navigator would actually have developed into viable platform
substitutes, but (1) whether as a general matter the exclusion of nascent
threats is the type of conduct that is reasonably capable of contributing
significantly to a defendant's continued monopoly power and (2) whether
Java and Navigator reasonably constituted nascent threats at the time
Microsoft engaged in the anticompetitive conduct at issue. As to the
first, suffice it to say that it would be inimical to the purpose of the
Sherman Act to allow monopolists free reign to squash nascent, albeit
unproven, competitors at will--particularly in industries marked by rapid
technological advance and frequent paradigm shifts. Findings of Fact p p
59-60. As to the second, the District Court made ample findings that both
Navigator and Java showed potential as middleware platform threats.
Findings of Fact p p 68-77. Counsel for Microsoft admitted as much at oral
argument. 02/26/01 Ct. Appeals Tr. at 27 ("There are no constraints on
output. Marginal costs are essentially zero. And there are to some extent
network effects. So a company like Netscape founded in 1994 can be by the
middle of 1995 clearly a potentially lethal competitor to Windows because
it can supplant its position in the market because of the characteristics
of these markets.").
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Microsoft's concerns
over causation have more purchase in connection with the appropriate
remedy issue, i.e., whether the court should impose a structural remedy or
merely enjoin the offensive conduct at issue. As we point out later in
this opinion, divestiture is a remedy that is imposed only with great
caution, in part because its long-term efficacy is rarely certain. See
infra Section V.E. Absent some measure of confidence that there has been
an actual loss to competition that needs to be restored, wisdom counsels
against adopting radical structural relief. See 3 Areeda & Hovenkamp,
Antitrust Law p 653b, at 91-92 ("[M]ore extensive equitable relief,
particularly remedies such as divestiture designed to eliminate the
monopoly altogether, raise more serious questions and require a clearer
indication of a significant causal connection between the conduct and
creation or maintenance of the market power."). But these queries go to
questions of remedy, not liability. In short, causation affords Microsoft
no defense to liability for its unlawful actions undertaken to maintain
its monopoly in the operating system market.
III. Attempted
Monopolization
Microsoft further
challenges the District Court's determination of liability for
"attempt[ing] to monopolize ... any part of the trade or commerce among
the several States." 15 U.S.C. 2 (1997). To establish a 2 violation for
attempted monopolization, "a plaintiff must prove (1) that the defendant
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, Inc. v. McQuillan, 506 U.S. 447, 456
(1993); Times Picayune Pub. Co. v. United States, 345 U.S. 594, 626
(1953); Lorain Journal Co. v. United States, 342 U.S. 143, 153-55
(1951). Because a deficiency on any one of the three will defeat
plaintiffs' claim, we look no further than plaintiffs' failure to prove a
dangerous probability of achieving monopoly power in the putative browser
market.
The determination
whether a dangerous probability of success exists is a particularly
fact-intensive inquiry. Because the Sherman Act does not identify the
activities that constitute the offense of attempted monopolization, the
court "must examine the facts of each case, mindful that the determination
of what constitutes an attempt, as Justice Holmes explained, 'is a
question of proximity and degree.' " United States v. Am. Airlines, Inc., 743 F.2d 1114, 1118 (5th
Cir. 1984) (quoting Swift & Co. v. United States, 196 U.S. 375, 402
(1904)). The District Court determined that "[t]he evidence supports
the conclusion that Microsoft's actions did pose such a danger."
Conclusions of Law, at 45. Specifically, the District Court concluded that
"Netscape's assent to Microsoft's market division proposal would have,
instanter, resulted in Microsoft's attainment of monopoly power in a
second market," and that "the proposal itself created a dangerous
probability of that result." Conclusions of Law, at 46 (citation omitted).
The District Court further concluded that "the predatory course of conduct
Microsoft has pursued since June of 1995 has revived the dangerous
probability that Microsoft will attain monopoly power in a second market."
Id.
At the outset we note
a pervasive flaw in the District Court's and plaintiffs' discussion of
attempted monopolization. Simply put, plaintiffs have made the same
argument under two different headings--monopoly maintenance and attempted
monopolization.
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They have relied upon Microsoft's 2 liability for monopolization of the
operating system market as a presumptive indicator of attempted
monopolization of an entirely different market. The District Court
implicitly accepted this approach: It agreed with plaintiffs that the
events that formed the basis for the 2 monopolization claim "warrant[ed]
additional liability as an illegal attempt to amass monopoly power in 'the
browser market.' " Id. at 45 (emphasis added). Thus, plaintiffs and the
District Court failed to recognize the need for an analysis wholly
independent of the conclusions and findings on monopoly maintenance.
To establish a
dangerous probability of success, plaintiffs must as a threshold matter
show that the browser market can be monopolized, i.e., that a hypothetical
monopolist in that market could enjoy market power. This, in turn,
requires plaintiffs (1) to define the relevant market and (2) to
demonstrate that substantial barriers to entry protect that market.
Because plaintiffs have not carried their burden on either prong, we
reverse without remand.
A. Relevant Market
A court's evaluation
of an attempted monopolization claim must include a definition of the
relevant market. See Spectrum Sports, 506 U.S. at 455-56. Such a
definition establishes a context for evaluating the defendant's actions as
well as for measuring whether the challenged conduct presented a dangerous
probability of monopolization. See id. The District Court omitted this
element of the Spectrum Sports inquiry.
Defining a market for
an attempted monopolization claim involves the same steps as defining a
market for a monopoly maintenance claim, namely a detailed description of
the purpose of a browser--what functions may be included and what are
not--and an examination of the substitutes that are part of the market and
those that are not. See also supra Section II.A. The District Court never
engaged in such an analysis nor entered detailed findings defining what a
browser is or what products might constitute substitutes. In the Findings
of Fact, the District Court (in a section on whether IE and Windows are
separate products) stated only that "a Web browser provides the ability
for the end user to select, retrieve, and perceive resources on the Web."
Findings of Fact p 150. Furthermore, in discussing attempted
monopolization in its Conclusions of Law, the District Court failed to
demonstrate analytical rigor when it employed varying and imprecise
references to the "market for browsing technology for Windows," "the
browser market," and "platform-level browsing software." Conclusions of
Law, at 45.
Because the
determination of a relevant market is a factual question to be resolved by
the District Court, see, e.g., All Care Nursing Serv., Inc. v. High Tech Staffing Servs.,
Inc., 135 F.3d 740, 749 (11th Cir. 1998); Tunis Bros. Co., Inc. v. Ford Motor Co., 952 F.2d 715, 722-23
(3d Cir. 1991); Westman Comm'n Co. v. Hobart Int'l, Inc., 796 F.2d
1216, 1220 (10th Cir. 1986), we would normally remand the case so that the
District Court could formulate an appropriate definition. Pullman-Standard v. Swint, 456 U.S. 273, 291-92 & n.22
(1982); Janini v. Kuwait Univ., 43 F.3d 1534, 1537 (D.C. Cir.
1995); Palmer v. Shultz, 815 F.2d 84, 103 (D.C. Cir. 1987). A
remand on market definition is unnecessary, however, because the District
Court's imprecision is directly traceable to plaintiffs' failure to
articulate and identify evidence before the District Court as to (1) what
constitutes a browser (i.e., what are the technological components of or
functionalities
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provided by a browser) and (2) why certain other products are not
reasonable substitutes (e.g., browser shells or viewers for individual
internet extensions, such as Real Audio Player or Adobe Acrobat Reader).
See Plaintiffs' Joint Proposed Findings of Fact, at 817-19, reprinted in 2
J.A. at 1480-82; Plaintiffs' Joint Proposed Conclusions of Law IV (No.
981232); Lee v. Interstate Fire & Cas. Co., 86 F.3d 101, 105 (7th
Cir. 1996) (stating that remand for development of a factual record is
inappropriate where plaintiff failed to meet burden of persuasion and
never suggested that additional evidence was necessary). Indeed, when
plaintiffs in their Proposed Findings of Fact attempted to define a
relevant market for the attempt claim, they pointed only to their separate
products analysis for the tying claim. See, e.g., Plaintiffs' Joint
Proposed Findings of Fact, at 818, reprinted in 2 J.A. at 1481. However,
the separate products analysis for tying purposes is not a substitute for
the type of market definition that Spectrum Sports requires. See infra
Section IV.A.
Plaintiffs' proposed
findings and the District Court's actual findings on attempted
monopolization pale in comparison to their counterparts on the monopoly
maintenance claim. Compare Findings of Fact p 150, and Plaintiffs' Joint
Proposed Findings of Fact, at 817-819, reprinted in 2 J.A. at 1480-82,
with Findings of Fact p p 18-66, and Plaintiffs' Joint Proposed Findings
of Fact, at 20-31, reprinted in 1 J.A. at 658-69. Furthermore, in their
brief and at oral argument before this court, plaintiffs did nothing to
clarify or ameliorate this deficiency. See, e.g., Appellees' Br. at
93-94.`
B. Barriers to
Entry
Because a firm cannot
possess monopoly power in a market unless that market is also protected by
significant barriers to entry, see supra Section II.A, it follows that a
firm cannot threaten to achieve monopoly power in a market unless that
market is, or will be, similarly protected. See Spectrum Sports, 506 U.S.
at 456 ("In order to determine whether there is a dangerous probability of
monopolization, courts have found it necessary to consider ... the
defendant's ability to lessen or destroy competition in that market.")
(citing cases). Plaintiffs have the burden of establishing barriers to
entry into a properly defined relevant market. See 2A Phillip E. Areeda et
al., Antitrust Law p 420b, at 57-59 (1995); 3A Phillip E. Areeda &
Herbert Hovenkamp, Antitrust Law p 807g, at 361-62 (1996); Neumann v. Reinforced Earth Co., 786 F.2d 424, 429 (D.C. Cir.
1986). Plaintiffs must not only show that barriers to entry protect
the properly defined browser market, but that those barriers are
"significant." United States v. Baker Hughes Inc., 908 F.2d 981, 987 (D.C.
Cir. 1990). Whether there are significant barriers to entry cannot, of
course, be answered absent an appropriate market definition; thus,
plaintiffs' failure on that score alone is dispositive. But even were we
to assume a properly defined market, for example browsers consisting of a
graphical interface plus internet protocols, plaintiffs nonetheless failed
to carry their burden on barriers to entry.
Contrary to
plaintiffs' contention on appeal, see Appellees' Br. at 91-93, none of the
District Court's statements constitutes a finding of barriers to entry
into the web browser market. Finding of Fact 89 states:
At the time Microsoft
presented its proposal, Navigator was the only browser product with a
significant share of the market and thus the only one with the potential
to weaken the applications barrier to entry. Thus, had it convinced
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Netscape to accept its offer of a "special relationship," Microsoft
quickly would have gained such control over the extensions and standards
that networkcentric applications (including Web sites) employ as to make
it all but impossible for any future browser rival to lure appreciable
developer interest away from Microsoft's platform.
This finding is far too
speculative to establish that competing browsers would be unable to enter
the market, or that Microsoft would have the power to raise the price of
its browser above, or reduce the quality of its browser below, the
competitive level. Moreover, it is ambiguous insofar as it appears to
focus on Microsoft's response to the perceived platform threat rather than
the browser market. Finding of Fact 144, on which plaintiffs also rely, is
part of the District Court's discussion of Microsoft's alleged
anticompetitive actions to eliminate the platform threat posed by Netscape
Navigator. This finding simply describes Microsoft's reliance on studies
indicating consumers' reluctance to switch browsers, a reluctance not
shown to be any more than that which stops consumers from switching brands
of cereal. Absent more extensive and definitive factual findings, the
District Court's legal conclusions about entry barriers amount to nothing
more than speculation.
In contrast to their
minimal effort on market definition, plaintiffs did at least offer
proposed findings of fact suggesting that the possibility of network
effects could potentially create barriers to entry into the browser
market. See Plaintiffs' Joint Proposed Findings of Fact, at 822-23,
825-27, reprinted in 2 J.A. at 1485-86, 1488-90. The District Court did
not adopt those proposed findings. See Findings of Fact p 89. However, the
District Court did acknowledge the possibility of a different kind of
entry barrier in its Conclusions of Law:
In the time it would
have taken an aspiring entrant to launch a serious effort to compete
against Internet Explorer, Microsoft could have erected the same type of
barrier that protects its existing monopoly power by adding proprietary
extensions to the browsing software under its control and by extracting
commitments from OEMs, IAPs and others similar to the ones discussed in
[the monopoly maintenance section].
Conclusions of Law, at
46 (emphasis added).
Giving plaintiffs and
the District Court the benefit of the doubt, we might remand if the
possible existence of entry barriers resulting from the possible creation
and exploitation of network effects in the browser market were the only
concern. That is not enough to carry the day, however, because the
District Court did not make two key findings: (1) that network effects
were a necessary or even probable, rather than merely possible,
consequence of high market share in the browser market and (2) that a
barrier to entry resulting from network effects would be "significant"
enough to confer monopoly power. Again, these deficiencies are in large
part traceable to plaintiffs' own failings. As to the first point, the
District Court's use of the phrase "could have" reflects the same
uncertainty articulated in testimony cited in plaintiffs' proposed
findings. See Plaintiffs' Joint Proposed Findings of Fact, at 822 (citing
testimony of Frederick Warren-Boulton), at 826 (citing testimony of
Franklin Fisher), reprinted in 2 J.A. at 1485, 1489. As to the second
point, the cited testimony in plaintiffs' proposed findings offers little
more than conclusory statements. See id. at 822-27, reprinted in 2 J.A. at
1485-90. The proffered testimony contains no evidence regarding the
Page 84
cost of "porting" websites to different browsers or the potentially
different economic incentives facing ICPs, as opposed to ISVs, in their
decision to incur costs to do so. Simply invoking the phrase "network
effects" without pointing to more evidence does not suffice to carry
plaintiffs' burden in this respect.
Any doubt that we may
have had regarding remand instead of outright reversal on the barriers to
entry question was dispelled by plaintiffs' arguments on attempted
monopolization before this court. Not only did plaintiffs fail to
articulate a website barrier to entry theory in either their brief or at
oral argument, they failed to point the court to evidence in the record
that would support a finding that Microsoft would likely erect significant
barriers to entry upon acquisition of a dominant market share.
Plaintiffs did not
devote the same resources to the attempted monopolization claim as they
did to the monopoly maintenance claim. But both claims require evidentiary
and theoretical rigor. Because plaintiffs failed to make their case on
attempted monopolization both in the District Court and before this court,
there is no reason to give them a second chance to flesh out a claim that
should have been fleshed out the first time around. Accordingly, we
reverse the District Court's determination of 2 liability for attempted
monopolization.
IV. Tying
Microsoft also
contests the District Court's determination of liability under 1 of the
Sherman Act. The District Court concluded that Microsoft's contractual and
technological bundling of the IE web browser (the "tied" product) with its
Windows operating system ("OS") (the "tying" product) resulted in a tying
arrangement that was per se unlawful. Conclusions of Law, at 47-51. We
hold that the rule of reason, rather than per se analysis, should govern
the legality of tying arrangements involving platform software products.
The Supreme Court has warned that " '[i]t is only after considerable
experience with certain business relationships that courts classify them
as per se violations....' " Broad. Music, Inc. v. CBS, 441 U.S. 1, 9 (1979) (quoting United States v. Topco Assocs., 405 U.S. 596, 607-08
(1972)). While every "business relationship" will in some sense have
unique features, some represent entire, novel categories of dealings. As
we shall explain, the arrangement before us is an example of the latter,
offering the first up-close look at the technological integration of added
functionality into software that serves as a platform for third-party
applications. There being no close parallel in prior antitrust cases,
simplistic application of per se tying rules carries a serious risk of
harm. Accordingly, we vacate the District Court's finding of a per se
tying violation and remand the case. Plaintiffs may on remand pursue their
tying claim under the rule of reason.
The facts underlying
the tying allegation substantially overlap with those set forth in Section
II.B in connection with the 2 monopoly maintenance claim. The key District
Court findings are that (1) Microsoft required licensees of Windows 95 and
98 also to license IE as a bundle at a single price, Findings of Fact p p
137, 155, 158; (2) Microsoft refused to allow OEMs to uninstall or remove
IE from the Windows desktop, id. p p 158, 203, 213; (3) Microsoft designed
Windows 98 in a way that withheld from consumers the ability to remove IE
by use of the Add/Remove Programs utility, id. p 170; cf. id. p 165
(stating that IE was subject to Add/Remove Programs utility in Windows
95); and (4) Microsoft
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designed Windows 98 to override the user's choice of default web
browser in certain circumstances, id. p p 171, 172. The court found that
these acts constituted a per se tying violation. Conclusions of Law, at
47-51. Although the District Court also found that Microsoft commingled
operating system-only and browser-only routines in the same library files,
Findings of Fact p p 161, 164, it did not include this as a basis for
tying liability despite plaintiffs' request that it do so, Plaintiffs'
Proposed Findings of Fact, p p 131-32, reprinted in 2 J.A. at 941-47.
There are four
elements to a per se tying violation: (1) the tying and tied goods are two
separate products; (2) the defendant has market power in the tying product
market; (3) the defendant affords consumers no choice but to purchase the
tied product from it; and (4) the tying arrangement forecloses a
substantial volume of commerce. Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451,
461-62 (1992); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2,
12-18 (1984).
Microsoft does not
dispute that it bound Windows and IE in the four ways the District Court
cited. Instead it argues that Windows (the tying good) and IE browsers
(the tied good) are not "separate products," Appellant's Opening Br. at
69-79, and that it did not substantially foreclose competing browsers from
the tied product market, id. at 79-83. (Microsoft also contends that it
does not have monopoly power in the tying product market, id. at 84-96,
but, for reasons given in Section II.A, we uphold the District Court's
finding to the contrary.)
We first address the
separate-products inquiry, a source of much argument between the parties
and of confusion in the cases. Our purpose is to highlight the poor fit
between the separate-products test and the facts of this case. We then
offer further reasons for carving an exception to the per se rule when the
tying product is platform software. In the final section we discuss the
District Court's inquiry if plaintiffs pursue a rule of reason claim on
remand.
A. Separate-Products
Inquiry Under the Per Se Test
The requirement that a
practice involve two separate products before being condemned as an
illegal tie started as a purely linguistic requirement: unless products
are separate, one cannot be "tied" to the other. Indeed, the nature of the
products involved in early tying cases--intuitively distinct items such as
a movie projector and a film, Motion Picture Patents Co. v. Universal Film Mfg. Co., 243
U.S. 502 (1917)-led courts either to disregard the separate-products
question, see, e.g., United Shoe Mach. Corp. v. United States, 258 U.S. 451
(1922), or to discuss it only in passing, see, e.g., Motion Picture
Patents, 243 U.S. at 508, 512, 518. It was not until Times-Picayune Publishing Co. v. United States, 345 U.S. 594
(1953), that the separate-products issue became a distinct element of
the test for an illegal tie. Id. at 614. Even that case engaged in a
rather cursory inquiry into whether ads sold in the morning edition of a
paper were a separate product from ads sold in the evening edition.
The first case to give
content to the separate-products test was Jefferson Parish, 466 U.S. 2.
That case addressed a tying arrangement in which a hospital conditioned
surgical care at its facility on the purchase of anesthesiological
services from an affiliated
Page 86
medical group. The facts were a challenge for casual separate-products
analysis because the tied service--anesthesia--was neither intuitively
distinct from nor intuitively contained within the tying service--surgical
care. A further complication was that, soon after the Court enunciated the
per se rule for tying liability International Salt Co. v. United States, 332 U.S. 392, 396
(1947), and Northern Pacific Railway Co. v. United States, 356 U.S. 1, 57
(1958), new economic research began to cast doubt on the assumption,
voiced by the Court when it established the rule, that " 'tying agreements
serve hardly any purpose beyond the suppression of competition,' " id. at
6 (quoting Standard Oil of Cal. v. United States, 337 U.S. 293, 305-06
(1949)); see also Jefferson Parish, 466 U.S. at 15 n.23 (citing
materials); Fortner Enters. v. U.S. Steel Corp., 394 U.S. 495, 524-25
(1969) (Fortas, J., dissenting) ("Fortner I").
The Jefferson Parish
Court resolved the matter in two steps. First, it clarified that "the
answer to the question whether one or two products are involved" does not
turn "on the functional relation between them...." Jefferson Parish, 466
U.S. at 19; see also id. at 19 n.30. In other words, the mere fact that
two items are complements, that "one ... is useless without the other,"
id., does not make them a single "product" for purposes of tying law.
Accord Eastman Kodak, 504 U.S. at 463. Second, reasoning that the
"definitional question [whether two distinguishable products are involved]
depends on whether the arrangement may have the type of competitive
consequences addressed by the rule [against tying]," Jefferson Parish, 466
U.S. at 21, the Court decreed that "no tying arrangement can exist unless
there is a sufficient demand for the purchase of anesthesiological
services separate from hospital services to identify a distinct product
market in which it is efficient to offer anesthesiological services
separately from hospital service," id. at 21-22 (emphasis added); accord
Eastman Kodak, 504 U.S. at 462.
The Court proceeded to
examine direct and indirect evidence of consumer demand for the tied
product separate from the tying product. Direct evidence addresses the
question whether, when given a choice, consumers purchase the tied good
from the tying good maker, or from other firms. The Court took note, for
example, of testimony that patients and surgeons often requested specific
anesthesiologists not associated with a hospital. Jefferson Parish, 466
U.S. at 22. Indirect evidence includes the behavior of firms without
market power in the tying good market, presumably on the notion that
(competitive) supply follows demand. If competitive firms always bundle
the tying and tied goods, then they are a single product. See id. at 22
n.36; see also Eastman Kodak, 504 U.S. at 462; Fortner I, 394 U.S. at 525
(Fortas, J., dissenting), cited in Jefferson Parish, 466 U.S. at 12, 22
n.35; United States v. Jerrold Elecs. Corp., 187 F. Supp. 545, 559
(E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961); 10 Phillip E.
Areeda et al., Antitrust Law p 1744, at 197-201 (1996). Here the Court
noted that only 27% of anesthesiologists in markets other than the
defendant's had financial relationships with hospitals, and that, unlike
radiologists and pathologists, anesthesiologists were not usually employed
by hospitals, i.e., bundled with hospital services. Jefferson Parish, 466
U.S. at 22 n.36. With
Page 87
both direct and indirect evidence concurring, the Court determined that
hospital surgery and anesthesiological services were distinct goods.
To understand the
logic behind the Court's consumer demand test, consider first the
postulated harms from tying. The core concern is that tying prevents goods
from competing directly for consumer choice on their merits, i.e., being
selected as a result of "buyers' independent judgment," id. at 13
(internal quotes omitted). With a tie, a buyer's "freedom to select the
best bargain in the second market [could be] impaired by his need to
purchase the tying product, and perhaps by an inability to evaluate the
true cost of either product...." Id. at 15. Direct competition on the
merits of the tied product is foreclosed when the tying product either is
sold only in a bundle with the tied product or, though offered separately,
is sold at a bundled price, so that the buyer pays the same price whether
he takes the tied product or not. In both cases, a consumer buying the
tying product becomes entitled to the tied product; he will therefore
likely be unwilling to buy a competitor's version of the tied product even
if, making his own price/quality assessment, that is what he would
prefer.
But not all ties are
bad. Bundling obviously saves distribution and consumer transaction costs.
9 Phillip E. Areeda, Antitrust Law p 1703g2, at 51-52 (1991). This is
likely to be true, to take some examples from the computer industry, with
the integration of math co-processors and memory into microprocessor chips
and the inclusion of spell checkers in word processors. 11/10/98 pm Tr. at
18-19 (trial testimony of Steven McGeady of Intel), reprinted in 9 J.A. at
5581-82 (math co-processor); Cal. Computer Prods., Inc. v. IBM Corp., 613 F.2d 727, 744
& n.29 (9th Cir. 1979) (memory). Bundling can also capitalize on
certain economies of scope. A possible example is the "shared" library
files that perform OS and browser functions with the very same lines of
code and thus may save drive space from the clutter of redundant routines
and memory when consumers use both the OS and browser simultaneously.
11/16/98 pm Tr. at 44 (trial testimony of Glenn Weadock), reprinted in 9
J.A. at 5892; Direct Testimony of Microsoft's James Allchin p p 10, 97,
100, 106116, app. A (excluding p p f, g.vi), reprinted in 5 J.A. at 3292,
3322-30, 3412-17. Indeed, if there were no efficiencies from a tie
(including economizing on consumer transaction costs such as the time and
effort involved in choice), we would expect distinct consumer demand for
each individual component of every good. In a competitive market with zero
transaction costs, the computers on which this opinion was written would
only be sold piecemeal--keyboard, monitor, mouse, central processing unit,
disk drive, and memory all sold in separate transactions and likely by
different manufacturers.
Recognizing the
potential benefits from tying, see Jefferson Parish, 466 U.S. at 21 n.33,
the Court in Jefferson Parish forged a separate-products test that, like
those of market power and substantial foreclosure, attempts to screen out
false positives under per se analysis. The consumer demand test is a rough
proxy for whether a tying arrangement may, on balance, be
welfare-enhancing, and unsuited to per se condemnation. In the abstract,
of course, there is always direct separate demand for products: assuming
choice is available at zero cost, consumers will prefer it to no choice.
Only when the efficiencies from bundling are dominated by the benefits to
choice for enough consumers, however, will we actually observe consumers
making independent purchases. In other words, perceptible separate demand
Page 88
is inversely proportional to net efficiencies. On the supply side,
firms without market power will bundle two goods only when the cost
savings from joint sale outweigh the value consumers place on separate
choice. So bundling by all competitive firms implies strong net
efficiencies. If a court finds either that there is no noticeable separate
demand for the tied product or, there being no convincing direct evidence
of separate demand, that the entire "competitive fringe" engages in the
same behavior as the defendant, 10 Areeda et al., Antitrust Law p 1744c4,
at 200, then the tying and tied products should be declared one product
and per se liability should be rejected.
Before concluding our
exegesis of Jefferson Parish's separate-products test, we should clarify
two things. First, Jefferson Parish does not endorse a direct inquiry into
the efficiencies of a bundle. Rather, it proposes easy-toadminister
proxies for net efficiency. In describing the separate-products test we
discuss efficiencies only to explain the rationale behind the consumer
demand inquiry. To allow the separate-products test to become a detailed
inquiry into possible welfare consequences would turn a screening test
into the very process it is expected to render unnecessary. 10 Areeda et
al., Antitrust Law p p 1741b & c, at 180-85; see also Jefferson
Parish, 466 U.S. at 34-35 (O'Connor, J., concurring).
Second, the
separate-products test is not a one-sided inquiry into the cost savings
from a bundle. Although Jefferson Parish acknowledged that prior lower
court cases looked at cost-savings to decide separate products, see id. at
22 n.35, the Court conspicuously did not adopt that approach in its
disposition of tying arrangement before it. Instead it chose proxies that
balance costs savings against reduction in consumer choice.
With this background,
we now turn to the separateproducts inquiry before us. The District Court
found that many consumers, if given the option, would choose their browser
separately from the OS. Findings of Fact p 151 (noting that "corporate
consumers ... prefer to standardize on the same browser across different
[OSs]" at the workplace). Turning to industry custom, the court found
that, although all major OS vendors bundled browsers with their OSs, these
companies either sold versions without a browser, or allowed OEMs or
end-users either not to install the bundled browser or in any event to
"uninstall" it. Id. p 153. The court did not discuss the record evidence
as to whether OS vendors other than Microsoft sold at a bundled price,
with no discount for a browserless OS, perhaps because the record evidence
on the issue was in conflict. Compare, e.g., Direct Testimony of Richard
Schmalensee p 241, reprinted in 7 J.A. at 4315 ("[A]ll major operating
system vendors do in fact include Web-browsing software with the operating
system at no extra charge.") (emphasis added), with, e.g., 1/6/99 pm Tr.
at 42 (trial testimony of Franklin Fisher of MIT) (suggesting all OSs but
Microsoft offer discounts).
Microsoft does not
dispute that many consumers demand alternative browsers. But on industry
custom Microsoft contends that no other firm requires non-removal because
no other firm has invested the resources to integrate web browsing as
deeply into its OS as Microsoft has. Appellant's Opening Br. at 25; cf.
Direct Testimony of James Allchin p p 262-72, reprinted in 5 J.A. at
3385-89 (Apple, IBM); 11/5/98 pm Tr. at 55-58 (trial testimony of Apple's
Avadis Tevanian, Jr.), reprinted in 9 J.A. at 5507-10 (Apple). (We here
use the term "integrate" in the rather simple sense of converting
individual goods into components of a single physical object
Page 89
(e.g., a computer as it leaves the OEM, or a disk or sets of disks),
without any normative implication that such integration is desirable or
achieves special advantages. United States v. Microsoft Corp., 147 F.3d 935, 950 (D.C. Cir.
1998) ("Microsoft II").) Microsoft contends not only that its
integration of IE into Windows is innovative and beneficial but also that
it requires non-removal of IE. In our discussion of monopoly maintenance
we find that these claims fail the efficiency balancing applicable in that
context. But the separate-products analysis is supposed to perform its
function as a proxy without embarking on any direct analysis of
efficiency. Accordingly, Microsoft's implicit argument--that in this case
looking to a competitive fringe is inadequate to evaluate fully its
potentially innovative technological integration, that such a comparison
is between apples and oranges--poses a legitimate objection to the
operation of Jefferson Parish's separate-products test for the per se
rule.
In fact there is merit
to Microsoft's broader argument that Jefferson Parish's consumer demand
test would "chill innovation to the detriment of consumers by preventing
firms from integrating into their products new functionality previously
provided by standalone products--and hence, by definition, subject to
separate consumer demand." Appellant's Opening Br. at 69. The per se
rule's direct consumer demand and indirect industry custom inquiries are,
as a general matter, backward-looking and therefore systematically poor
proxies for overall efficiency in the presence of new and innovative
integration. See 10 Areeda et al., Antitrust Law p 1746, at 224-29; Amicus
Brief of Lawrence Lessig at 24-25, and sources cited therein (brief
submitted regarding Conclusions of Law). The direct consumer demand test
focuses on historic consumer behavior, likely before integration, and the
indirect industry custom test looks at firms that, unlike the defendant,
may not have integrated the tying and tied goods. Both tests compare
incomparables--the defendant's decision to bundle in the presence of
integration, on the one hand, and consumer and competitor calculations in
its absence, on the other. If integration has efficiency benefits, these
may be ignored by the Jefferson Parish proxies. Because one cannot be sure
beneficial integration will be protected by the other elements of the per
se rule, simple application of that rule's separate-products test may make
consumers worse off.
In light of the
monopoly maintenance section, obviously, we do not find that Microsoft's
integration is welfare-enhancing or that it should be absolved of tying
liability. Rather, we heed Microsoft's warning that the separate-products
element of the per se rule may not give newly integrated products a fair
shake.
B. Per Se Analysis
Inappropriate for this Case.
We now address
directly the larger question as we see it: whether standard per se
analysis should be applied "off the shelf" to evaluate the defendant's
tying arrangement, one which involves software that serves as a platform
for thirdparty applications. There is no doubt that "[i]t is far too late
in the history of our antitrust jurisprudence to question the proposition
that certain tying arrangements pose an unacceptable risk of stifling
competition and therefore are unreasonable 'per se.' " Jefferson Parish,
466 U.S. at 9 (emphasis added). But there are strong reasons to doubt that
the integration of additional software functionality into an OS falls
among these arrangements. Applying per se analysis to such an amalgamation
creates undue risks of
Page 90
error and of deterring welfare-enhancing innovation.
The Supreme Court has
warned that " '[i]t is only after considerable experience with certain
business relationships that courts classify them as per se violations....'
" Broad. Music, 441 U.S. at 9 (quoting Topco Assocs., 405 U.S. at 60708);
accord Cont'l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 47-59
(1977); White Motor Co. v. United States, 372 U.S. 253, 263
(1963); Jerrold Elecs., 187 F. Supp. at 555-58, 56061; see also Frank
H. Easterbrook, Allocating Antitrust Decisionmaking Tasks, 76 Geo. L.J.
305, 308 (1987). Yet the sort of tying arrangement attacked here is unlike
any the Supreme Court has considered. The early Supreme Court cases on
tying dealt with arrangements whereby the sale or lease of a patented
product was conditioned on the purchase of certain unpatented products
from the patentee. See Motion Picture Patents, 243 U.S. 502 (1917); United
Shoe Mach., 258 U.S. 451 (1922); IBM Corp. v. United States, 298 U.S. 131 (1936); Int'l
Salt, 332 U.S. 392 (1947). Later Supreme Court tying cases did not involve
market power derived from patents, but continued to involve contractual
ties. See Times-Picayune, 345 U.S. 594 (1953) (defendant newspaper
conditioned the purchase of ads in its evening edition on the purchase of
ads in its morning edition); N. Pac. Ry., 356 U.S. 1 (1958) (defendant
railroad leased land only on the condition that products manufactured on
the land be shipped on its railways); United States v. Loew's Inc., 371
U.S. 38 (1962) (defendant distributor of copyrighted feature films
conditioned the sale of desired films on the purchase of undesired films);
U.S. Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610
(1977) ("Fortner II") (defendant steel company conditioned access to
low interest loans on the purchase of the defendant's prefabricated
homes); Jefferson Parish, 466 U.S. 2 (1984) (defendant hospital
conditioned use of its operating rooms on the purchase of
anesthesiological services from a medical group associated with the
hospital); Eastman Kodak, 504 U.S. 451 (1992) (defendant photocopying
machine manufacturer conditioned the sale of replacement parts for its
machines on the use of the defendant's repair services).
In none of these cases
was the tied good physically and technologically integrated with the tying
good. Nor did the defendants ever argue that their tie improved the value
of the tying product to users and to makers of complementary goods. In
those cases where the defendant claimed that use of the tied good made the
tying good more valuable to users, the Court ruled that the same result
could be achieved via quality standards for substitutes of the tied good.
See, e.g., Int'l Salt, 332 U.S. at 397-98; IBM, 298 U.S. at 138-40. Here
Microsoft argues that IE and Windows are an integrated physical product
and that the bundling of IE APIs with Windows makes the latter a better
applications platform for third-party software. It is unclear how the
benefits from IE APIs could be achieved by quality standards for different
browser manufacturers. We do not pass judgment on Microsoft's claims
regarding the benefits from integration of its APIs. We merely note that
these and other novel, purported efficiencies suggest that judicial
"experience" provides little basis for believing that, "because of their
pernicious
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effect on competition and lack of any redeeming virtue," a software
firm's decisions to sell multiple functionalities as a package should be
"conclusively presumed to be unreasonable and therefore illegal without
elaborate inquiry as to the precise harm they have caused or the business
excuse for their use." N. Pac. Ry., 356 U.S. at 5 (emphasis added).
Nor have we found much
insight into software integration among the decisions of lower federal
courts. Most tying cases in the computer industry involve bundling with
hardware. See, e.g., Digital Equip. Corp. v. Uniq Digital Techs., Inc., 73 F.3d
756, 761 (7th Cir. 1996) (Easterbrook, J.) (rejecting with little
discussion the notion that bundling of OS with a computer is a tie of two
separate products); Datagate, Inc. v. Hewlett-Packard Co., 941 F.2d 864, 870 (9th
Cir. 1991) (holding that plaintiff's allegation that defendant
conditioned its software on purchase of its hardware was sufficient to
survive summary judgment); Digidyne Corp. v. Data Gen. Corp., 734 F.2d 1336, 1341-47 (9th
Cir. 1984) (holding that defendant's conditioning the sale of its OS
on the purchase of its CPU constitutes a per se tying violation); Cal.
Computer Prods., 613 F.2d at 743-44 (holding that defendant's integration
into its CPU of a disk controller designed for its own disk drives was a
useful innovation and not an impermissible attempt to monopolize); ILC Peripherals Leasing Corp. v. IBM Corp., 448 F. Supp. 228,
233 (N.D. Cal. 1978) (finding that defendant's integration of magnetic
disks and a head/disk assembly was not an unlawful tie), aff'd per curiam
sub. nom. Memorex Corp. v. IBM Corp., 636 F.2d 1188 (9th Cir. 1980);
Transamerica Computer Co. v. IBM Corp., 698 F.2d 1377, 1382-83
(9th Cir. 1983) (finding lawful defendant's design changes that
rendered plaintiff peripheral maker's tape drives incompatible with the
defendant's CPU). The hardware case that most resembles the present one is
Telex Corp. v. IBM Corp., 367 F. Supp. 258 (N.D. Okla.
1973), rev'd on other grounds, 510 F.2d 894 (10th Cir. 1975). Just as
Microsoft integrated web browsing into its OS, IBM in the 1970s integrated
memory into its CPUs, a hardware platform. A peripheral manufacturer
alleged a tying violation, but the District Court dismissed the claim
because it thought it inappropriate to enmesh the courts in product design
decisions. Id. at 347. The court's discussion of the tying claim was brief
and did not dwell on the effects of the integration on competition or
efficiencies. Nor did the court consider whether per se analysis of the
alleged tie was wise.
We have found four
antitrust cases involving arrangements in which a software program is tied
to the purchase of a software platform--two district court cases and two
appellate court cases, including one from this court. The first case, Innovation Data Processing, Inc. v. IBM Corp., 585 F. Supp.
1470 (D.N.J. 1984), involved an allegation that IBM bundled with its
OS a utility used to transfer data from a tape drive to a computer's disk
drive. Although the court mentioned the efficiencies achieved by bundling,
it ultimately dismissed the per se tying claim because IBM sold a
discounted version of the OS without the utility. Id. at 1475-76. The
second case, A.I. Root Co. v. Computer/Dynamics, Inc., 806 F.2d 673 (6th
Cir. 1986), was brought by a business customer who claimed that an OS
manufacturer illegally conditioned the sale of its OS on the purchase of
other software applications. The court quickly disposed of the case on the
ground that defendant Computer/Dynamics had no market power. Id. at
675-77. There was no mention of the efficiencies from the tie. The third
case, Caldera, Inc. v. Microsoft Corp., 72 F. Supp. 2d 1295
Page 92
(D. Utah 1999), involved a complaint that the technological integration
of MS-DOS and Windows 3.1 into Windows 95 constituted a per se tying
violation. The court formulated the "single product" issue in terms of
whether the tie constituted a technological improvement, ultimately
concluding that Microsoft was not entitled to summary judgment on that
issue. Id. at 1322-28.
The software case that
bears the greatest resemblance to that at bar is, not surprisingly,
Microsoft II, 147 F.3d 935, where we examined the bundling of IE with
Windows 95. But the issue there was whether the bundle constituted an
"integrated product" as the term was used in a 1994 consent decree between
the Department of Justice and Microsoft. Id. at 939. We did not consider
whether Microsoft's bundling should be condemned as per se illegal. We
certainly did not make any finding that bundling IE with Windows had "no
purpose except stifling of competition," White Motor, 372 U.S. at 263, an
important consideration in defining the scope of any of antitrust law's
per se rules, see Cont'l T.V., 433 U.S. at 57-59. While we believed our
interpretation of the term "integrated product" was consistent with the
test for separate products under tying law, we made clear that the
"antitrust question is of course distinct." Microsoft II, 147 F.3d at 950
n.14. We even cautioned that our conclusion that IE and Windows 95 were
integrated was "subject to reexamination on a more complete record." Id.
at 952. To the extent that the decision completely disclaimed judicial
capacity to evaluate "high-tech product design," id., it cannot be said to
conform to prevailing antitrust doctrine (as opposed to resolution of the
decree-interpretation issue then before us). In any case, mere review of
asserted breaches of a consent decree hardly constitutes enough
"experience" to warrant application of per se analysis. See Broad. Music,
441 U.S. at 10-16 (refusing to apply per se analysis to defendant's
blanket licenses even though those licenses had been thoroughly
investigated by the
Department of Justice and were the subject of a consent decree that had
been reviewed by numerous courts).
While the paucity of
cases examining software bundling suggests a high risk that per se
analysis may produce inaccurate results, the nature of the platform
software market affirmatively suggests that per se rules might stunt
valuable innovation. We have in mind two reasons.
First, as we explained
in the previous section, the separateproducts test is a poor proxy for net
efficiency from newly integrated products. Under per se analysis the first
firm to merge previously distinct functionalities (e.g., the inclusion of
starter motors in automobiles) or to eliminate entirely the need for a
second function (e.g., the invention of the stainresistant carpet) risks
being condemned as having tied two separate products because at the moment
of integration there will appear to be a robust "distinct" market for the
tied product. See 10 Areeda et al., Antitrust Law p 1746, at 224. Rule of
reason analysis, however, affords the first mover an opportunity to
demonstrate that an efficiency gain from its "tie" adequately offsets any
distortion of consumer choice. Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792,
799 (1st Cir. 1988) (Breyer, J.); Town Sound & Custom Tops, Inc. v. Chrysler Motor Corp.,
959 F.2d 468, 482 (3d Cir. 1992); Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards,
Inc., 677 F.2d 1045, 1048-49 n.5 (5th Cir. 1982).
The failure of the
separate-products test to screen out certain cases of productive
integration is particularly troubling in platform
Page 93
software markets such as that in which the defendant competes. Not only
is integration common in such markets, but it is common among firms
without market power. We have already reviewed evidence that nearly all
competitive OS vendors also bundle browsers. Moreover, plaintiffs do not
dispute that OS vendors can and do incorporate basic internet plumbing and
other useful functionality into their OSs. See Direct Testimony of Richard
Schmalensee p 508, reprinted in 7 J.A. at 4462-64 (disk defragmentation,
memory management, peer-to-peer networking or file sharing); 11/19/98 am
Tr. at 82-83 (trial testimony of Frederick Warren-Boulton), reprinted in
10 J.A. at 6427-28 (TCP/IP stacks). Firms without market power have no
incentive to package different pieces of software together unless there
are efficiency gains from doing so. The ubiquity of bundling in
competitive platform software markets should give courts reason to pause
before condemning such behavior in less competitive markets.
Second, because of the
pervasively innovative character of platform software markets, tying in
such markets may produce efficiencies that courts have not previously
encountered and thus the Supreme Court had not factored into the per se
rule as originally conceived. For example, the bundling of a browser with
OSs enables an independent software developer to count on the presence of
the browser's APIs, if any, on consumers' machines and thus to omit them
from its own package. See Direct Testimony of Richard Schmalensee p p
230-31, 234, reprinted in 7 J.A. at 4309-11, 4312; Direct Testimony of
Michael Devlin p p 12-21, reprinted in 5 J.A. at 3525-29; see also
Findings of Fact p 2. It is true that software developers can bundle the
browser APIs they need with their own products, see id. p 193, but that
may force consumers to pay twice for the same API if it is bundled with
two different software programs. It is also true that OEMs can include
APIs with the computers they sell, id., but diffusion of uniform APIs by
that route may be inferior. First, many OEMs serve special subsets of
Windows consumers, such as home or corporate or academic users. If just
one of these OEMs decides not to bundle an API because it does not benefit
enough of its clients, ISVs that use that API might have to bundle it with
every copy of their program. Second, there may be a substantial lag before
all OEMs bundle the same set of APIs--a lag inevitably aggravated by the
first phenomenon. In a field where programs change very rapidly, delays in
the spread of a necessary element (here, the APIs) may be very costly. Of
course, these arguments may not justify Microsoft's decision to bundle
APIs in this case, particularly because Microsoft did not merely bundle
with Windows the APIs from IE, but an entire browser application
(sometimes even without APIs, see id.). A justification for bundling a
component of software may not be one for bundling the entire software
package, especially given the malleability of software code. See id. p p
162-63; 12/9/98 am Tr. at 17 (trial testimony of David Farber); 1/6/99 am
Tr. at 6-7 (trial testimony of Franklin Fisher), reprinted in 11 J.A. at
7192-93; Direct Testimony of Joachim Kempin p 286, reprinted in 6 J.A. at
3749. Furthermore, the interest in efficient API diffusion obviously
supplies a far stronger justification for simple price-bundling than for
Microsoft's contractual or technological bars to subsequent removal of
functionality. But our qualms about redefining the boundaries of a
defendant's product and the possibility of consumer gains from simplifying
the work of applications developers makes us question any hard and fast
approach to tying in OS software markets.
Page 94
There may also be a
number of efficiencies that, although very real, have been ignored in the
calculations underlying the adoption of a per se rule for tying. We fear
that these efficiencies are common in technologically dynamic markets
where product development is especially unlikely to follow an easily
foreseen linear pattern. Take the following example from ILC Peripherals,
448 F. Supp. 228, a case concerning the evolution of disk drives for
computers. When IBM first introduced such drives in 1956, it sold an
integrated product that contained magnetic disks and disk heads that read
and wrote data onto disks. Id. at 231. Consumers of the drives demanded
two functions--to store data and to access it all at once. In the first
few years consumers' demand for storage increased rapidly, outpacing the
evolution of magnetic disk technology. To satisfy that demand IBM made it
possible for consumers to remove the magnetic disks from drives, even
though that meant consumers would not have access to data on disks removed
from the drive. This componentization enabled makers of computer
peripherals to sell consumers removable disks. Id. at 231-32. Over time,
however, the technology of magnetic disks caught up with demand for
capacity, so that consumers needed few removable disks to store all their
data. At this point IBM reintegrated disks into their drives, enabling
consumers to once again have immediate access to all their data without a
sacrifice in capacity. Id. A manufacturer of removable disks sued. But the
District Court found the tie justified because it satisfied consumer
demand for immediate access to all data, and ruled that disks and disk
heads were one product. Id. at 233. A court hewing more closely to the
truncated analysis contemplated by Northern Pacific Railway would perhaps
have overlooked these consumer benefits.
These arguments all
point to one conclusion: we cannot comfortably say that bundling in
platform software markets has so little "redeeming virtue," N. Pac. Ry.,
356 U.S. at 5, and that there would be so "very little loss to society"
from its ban, that "an inquiry into its costs in the individual case [can
be] considered [ ] unnecessary." Jefferson Parish, 466 U.S. at 33-34
(O'Connor, J., concurring). We do not have enough empirical evidence
regarding the effect of Microsoft's practice on the amount of consumer
surplus created or consumer choice foreclosed by the integration of added
functionality into platform software to exercise sensible judgment
regarding that entire class of behavior. (For some issues we have no
data.) "We need to know more than we do about the actual impact of these
arrangements on competition to decide whether they ... should be
classified as per se violations of the Sherman Act." White Motor, 372 U.S.
at 263. Until then, we will heed the wisdom that "easy labels do not
always supply ready answers," Broad. Music, 441 U.S. at 8, and vacate the
District Court's finding of per se tying liability under Sherman Act 1. We
remand the case for evaluation of Microsoft's tying arrangements under the
rule of reason. Pullman-Standard v. Swint, 456 U.S. 273, 292 (1982)
("[W]here findings are infirm because of an erroneous view of the law, a
remand is the proper course unless the record permits only one resolution
of the factual issue."). That rule more freely permits consideration of
the benefits of bundling in software markets, particularly those for OSs,
and a balancing of these benefits against the costs to consumers whose
ability to make direct price/quality tradeoffs in the tied market may have
been impaired. See Jefferson Parish, 466 U.S. at 25 nn.41-42 (noting
Page 95
that per se rule does not broadly permit consideration of
procompetitive justifications); id. at 34-35 (O'Connor, J., concurring);
N. Pac. Ry., 356 U.S. at 5.
Our judgment regarding
the comparative merits of the per se rule and the rule of reason is
confined to the tying arrangement before us, where the tying product is
software whose major purpose is to serve as a platform for third-party
applications and the tied product is complementary software functionality.
While our reasoning may at times appear to have broader force, we do not
have the confidence to speak to facts outside the record, which contains
scant discussion of software integration generally. Microsoft's primary
justification for bundling IE APIs is that their inclusion with Windows
increases the value of third-party software (and Windows) to consumers.
See Appellant's Opening Br. at 41-43. Because this claim applies with
distinct force when the tying product is platform software, we have no
present basis for finding the per se rule inapplicable to software markets
generally. Nor should we be interpreted as setting a precedent for
switching to the rule of reason every time a court identifies an
efficiency justification for a tying arrangement. Our reading of the
record suggests merely that integration of new functionality into platform
software is a common practice and that wooden application of per se rules
in this litigation may cast a cloud over platform innovation in the market
for PCs, network computers and information appliances.
C. On Remand
Should plaintiffs
choose to pursue a tying claim under the rule of reason, we note the
following for the benefit of the trial court:
First, on remand,
plaintiffs must show that Microsoft's conduct unreasonably restrained
competition. Meeting that burden "involves an inquiry into the actual
effect" of Microsoft's conduct on competition in the tied good market,
Jefferson Parish, 466 U.S. at 29, the putative market for browsers. To the
extent that certain aspects of tying injury may depend on a careful
definition of the tied good market and a showing of barriers to entry
other than the tying arrangement itself, plaintiffs would have to
establish these points. See Jefferson Parish, 466 U.S. at 29 ("This
competition [among anesthesiologists] takes place in a market that has not
been defined."); id. at 29 n.48 ("[N]either the District Court nor the
Court of Appeals made any findings concerning the contract's effect on
entry barriers."). But plaintiffs were required--and had every
incentive--to provide both a definition of the browser market and barriers
to entry to that market as part of their 2 attempted monopolization claim;
yet they failed to do so. See supra Section III. Accordingly, on remand of
the 1 tying claim, plaintiffs will be precluded from arguing any theory of
harm that depends on a precise definition of browsers or barriers to entry
(for example, network effects from Internet protocols and extensions
embedded in a browser) other than what may be implicit in Microsoft's
tying arrangement.
Of the harms left,
plaintiffs must show that Microsoft's conduct was, on balance,
anticompetitive. Microsoft may of course offer procompetitive
justifications, and it is plaintiffs' burden to show that the
anticompetitive effect of the conduct outweighs its benefit.
Second, the fact that
we have already considered some of the behavior plaintiffs allege to
constitute tying violations
Page 96
in the monopoly maintenance section does not resolve the 1 inquiry. The
two practices that plaintiffs have most ardently claimed as tying
violations are, indeed, a basis for liability under plaintiffs' 2 monopoly
maintenance claim. These are Microsoft's refusal to allow OEMs to
uninstall IE or remove it from the Windows desktop, Findings of Fact p p
158, 203, 213, and its removal of the IE entry from the Add/Remove
Programs utility in Windows 98, id. p 170. See supra Section II.B. In
order for the District Court to conclude these practices also constitute 1
tying violations, plaintiffs must demonstrate that their benefits--if any,
see supra Sections II.B.1.b and II.B.2.b; Findings of Fact p p 176, 186,
193--are outweighed by the harms in the tied product market. See Jefferson
Parish, 466 U.S. at 29. If the District Court is convinced of net harm, it
must then consider whether any additional remedy is necessary.
In Section II.B we
also considered another alleged tying violation--the Windows 98 override
of a consumer's choice of default web browser. We concluded that this
behavior does not provide a distinct basis for 2 liability because
plaintiffs failed to rebut Microsoft's proffered justification by
demonstrating that harms in the operating system market outweigh
Microsoft's claimed benefits. See supra Section II.B. On remand, however,
although Microsoft may offer the same procompetitive justification for the
override, plaintiffs must have a new opportunity to rebut this claim, by
demonstrating that the anticompetitive effect in the browser market is
greater than these benefits.
Finally, the District
Court must also consider an alleged tying violation that we did not
consider under 2 monopoly maintenance: price bundling. First, the court
must determine if Microsoft indeed price bundled--that is, was Microsoft's
charge for Windows and IE higher than its charge would have been for
Windows alone? This will require plaintiffs to resolve the tension between
Findings of Fact p p 136-37, which Microsoft interprets as saying that no
part of the bundled price of Windows can be attributed to IE, and
Conclusions of Law, at 50, which says the opposite. Compare Direct
Testimony of Paul Maritz p p 37, 296, reprinted in 6 J.A. at 3656, 3753-54
(Microsoft did not "charge separately" for IE, but like all other major OS
vendors included browsing software at "no extra charge"), with GX 202 at
MS7 004343, esp. 004347, reprinted in 22 J.A. at 14459, esp. 14463 (memo
from Christian Wildfeuer describing focus group test used to price Windows
98 with IE 4), and GX 1371 at MS7 003729-30, 003746, 003748, esp. 003750,
reprinted in 15 J.A. at 10306-07, 10323, 10325, esp. 10327 (Windows 98
pricing and marketing memo), and Findings of Fact p 63 (identifying GX 202
as the basis for Windows 98 pricing).
If there is a positive
price increment in Windows associated with IE (we know there is no claim
of price predation), plaintiffs must demonstrate that the anticompetitive
effects of Microsoft's price bundling outweigh any procompetitive
justifications the company provides for it. In striking this balance, the
District Court should consider, among other things, indirect evidence of
efficiency provided by "the competitive fringe." See supra Section IV.A.
Although this inquiry may overlap with the separate-products screen under
the per se rule, that is not its role here. Because courts applying the
rule of reason are free to look at both direct and indirect evidence of
efficiencies from a tie, there is no need for a screening device as such;
thus the separate-products inquiry serves merely to classify arrangements
as subject to tying law, as opposed to, say,
Page 97
liability for exclusive dealing. See Times-Picayune, 345 U.S. at 614
(finding a single product and then turning to a general rule of reason
analysis under 1, though not using the term "tying"); Foster v. Md. State
Sav. & Loan Ass'n, 590 F.2d 928, 931, 933 (D.C. Cir. 1978), cited in
Jefferson Parish, 466 U.S. at 40 (O'Connor, J., concurring) (same); Chawla v. Shell Oil Co., 75 F. Supp. 2d 626, 635, 643-44 (S.D.
Tex. 1999) (considering a rule of reason tying claim after finding a
single product under the per se rule); Montgomery County Ass'n
of Realtors v. Realty Photo Master Corp., 783 F. Supp. 952, 961 &
n.26 (D. Md. 1992), aff'd mem. 993 F.2d 1538 (4th Cir. 1993) (same).
If OS vendors without
market power also sell their software bundled with a browser, the natural
inference is that sale of the items as a bundle serves consumer demand and
that unbundled sale would not, for otherwise a competitor could profitably
offer the two products separately and capture sales of the tying good from
vendors that bundle. See 10 Areeda et al., Antitrust Law p 1744b, at
197-98. It does appear that most if not all firms have sold a browser with
their OSs at a bundled price, beginning with IBM and its OS/2 Warp OS in
September 1994, Findings of Fact p 140; see also Direct Testimony of
Richard Schmalensee p 212, reprinted in 7 J.A. at 4300-01, and running to
current versions of Apple's Mac OS, Caldera and Red Hat's Linux OS, Sun's
Solaris OS, Be's BeOS, Santa Cruz Operation's UnixWare, Novell's NetWare
OS, and others, see Findings of Fact p 153; Direct Testimony of Richard
Schmalensee p p 215-23, 230, esp. table 5, reprinted in 7 J.A. at 4302-05,
4310; Direct Testimony of James Allchin p p 261-77, reprinted in 5 J.A. at
3384-92.
Of course price
bundling by competitive OS makers would tend to exonerate Microsoft only
if the sellers in question sold their browser/OS combinations exclusively
at a bundled price. If a competitive seller offers a discount for a
browserless version, then--at least as to its OS and browser--the gains
from bundling are outweighed by those from separate choice. The evidence
on discounts appears to be in conflict. Compare Direct Testimony of
Richard Schmalensee p 241, reprinted in 7 J.A. at 4315, with 1/6/99 pm Tr.
at 42 (trial testimony of Franklin Fisher). If Schmalensee is correct that
nearly all OS makers do not offer a discount, then the harm from
tying--obstruction of direct consumer choice--would be theoretically
created by virtually all sellers: a customer who would prefer an alternate
browser is forced to pay the full price of that browser even though its
value to him is only the increment in value over the bundled browser. (The
result is similar to that from non-removal, which forces consumers who
want the alternate browser to surrender disk space taken up by the unused,
bundled browser.) If the failure to offer a price discount were universal,
any impediment to direct consumer choice created by Microsoft's
price-bundled sale of IE with Windows would be matched throughout the
market; yet these OS suppliers on the competitive fringe would have
evidently found this price bundling on balance efficient. If Schmalensee's
assertions are ill-founded, of course, no such inference could be
drawn.
V. Trial Proceedings
and Remedy
Microsoft additionally
challenges the District Court's procedural rulings on two fronts. First,
with respect to the trial phase, Microsoft proposes that the court
mismanaged its docket by adopting an expedited trial schedule and
receiving evidence through summary witnesses. Second,
Page 98
with respect to the remedies decree, Microsoft argues that the court
improperly ordered that it be divided into two separate companies. Only
the latter claim will long detain us. The District Court's trial-phase
procedures were comfortably within the bounds of its broad discretion to
conduct trials as it sees fit. We conclude, however, that the District
Court's remedies decree must be vacated for three independent reasons: (1)
the court failed to hold a remedies-specific evidentiary hearing when
there were disputed facts; (2) the court failed to provide adequate
reasons for its decreed remedies; and (3) this Court has revised the scope
of Microsoft's liability and it is impossible to determine to what extent
that should affect the remedies provisions.
A. Factual
Background
On April 3, 2000, the
District Court concluded the liability phase of the proceedings by the
filing of its Conclusions of Law holding that Microsoft had violated 1 and
2 of the Sherman Act. The court and the parties then began discussions of
the procedures to be followed in the imposition of remedies. Initially,
the District Court signaled that it would enter relief only after
conducting a new round of proceedings. In its Conclusions of Law, the
court stated that it would issue a remedies order "following proceedings
to be established by further Order of the Court." Conclusions of Law, at
57. And, when during a post-trial conference, Microsoft's counsel asked
whether the court "contemplate[d] further proceedings," the judge replied,
"Yes. Yes. I assume that there would be further proceedings." 4/4/00 Tr.
at 8-9, 11, reprinted in 4 J.A. at 2445-46, 2448. The District Court
further speculated that those proceedings might "replicate the procedure
at trial with testimony in written form subject to crossexamination." Id.
at 11, reprinted in 4 J.A. at 2448.
On April 28, 2000,
plaintiffs submitted their proposed final judgment, accompanied by six new
supporting affidavits and several exhibits. In addition to a series of
temporary conduct restrictions, plaintiffs proposed that Microsoft be
split into two independent corporations, with one continuing Microsoft's
operating systems business and the other undertaking the balance of
Microsoft's operations. Plaintiffs' Proposed Final Judgment at 2-3,
reprinted in 4 J.A. at 2473-74. Microsoft filed a "summary response" on
May 10, contending both that the proposed decree was too severe and that
it would be impossible to resolve certain remedies-specific factual
disputes "on a highly expedited basis." Defendant's Summary Response at
6-7, reprinted in 4 J.A. at 2587-88. Another May 10 submission argued that
if the District Court considered imposing plaintiffs' proposed remedy,
"then substantial discovery, adequate time for preparation and a full
trial on relief will be required." Defendant's Position as to Future
Proceedings at 2, reprinted in 4 J.A. at 2646.
After the District
Court revealed during a May 24 hearing that it was prepared to enter a
decree without conducting "any further process," 5/24/00 pm Tr. at 33,
reprinted in 14 J.A. at 9866, Microsoft renewed its argument that the
underlying factual disputes between the parties necessitated a
remedies-specific evidentiary hearing. In two separate offers of proof,
Microsoft offered to produce a number of pieces of evidence, including the
following:
* Testimony from Dr.
Robert Crandall, a Senior Fellow at the Brookings Institution, that
divestiture and dissolution orders historically have "failed to improve
economic welfare by reducing prices or increasing output." Defendant's
Offer of Proof at 2, reprinted in 4 J.A. at 2743.
Page 99
* Testimony from
Professor Kenneth Elzinga, Professor of Economics at the University of
Virginia, that plaintiffs' proposed remedies would not induce entry into
the operating systems market. Id. at 4, reprinted in 4 J.A. at 2745.
* Testimony from Dean
Richard Schmalensee, Dean of MIT's Sloan School of Management, that
dividing Microsoft likely would "harm consumers through higher prices,
lower output, reduced efficiency, and less innovation" and would "produce
immediate, substantial increases in the prices of both Windows and
Office." Id. at 8, reprinted in 4 J.A. at 2749. Indeed, it would cause the
price of Windows to triple. Id. . Testimony from Goldman, Sachs & Co.
and from Morgan Stanley Dean Witter that dissolution would adversely
affect shareholder value. Id. at 17, 19, reprinted in 4 J.A. at 2758,
2760.
* Testimony from
Microsoft Chairman Bill Gates that dividing Microsoft "along the arbitrary
lines proposed by the Government" would devastate the company's proposed
Next Generation Windows Services platform, which would allow software
developers to write web-based applications that users could access from a
wide range of devices. Id. at 21-22, reprinted in 4 J.A. at 2762-63.
* Testimony from Steve
Ballmer, Microsoft's President and CEO, that Microsoft is organized as a
unified company and that "there are no natural lines along which Microsoft
could be broken up without causing serious problems." Id. at 23, reprinted
in 4 J.A. at 2764.
* Testimony from
Michael Capellas, CEO of Compaq, that splitting Microsoft in two "will
make it more difficult for OEMs to provide customers with the tightly
integrated product offerings they demand" in part because "complementary
products created by unrelated companies do not work as well together as
products created by a single company." Defendant's Supplemental Offer of
Proof at 2, reprinted in 4 J.A. at 2823.
Over Microsoft's
objections, the District Court proceeded to consider the merits of the
remedy and on June 7, 2000 entered its final judgment. The court explained
that it would not conduct "extended proceedings on the form a remedy
should take," because it doubted that an evidentiary hearing would "give
any significantly greater assurance that it will be able to identify what
might be generally regarded as an optimum remedy." Final Judgment, at 62.
The bulk of Microsoft's proffered facts were simply conjectures about
future events, and "[i]n its experience the Court has found testimonial
predictions of future events generally less reliable even than testimony
as to historical fact, and crossexamination to be of little use in
enhancing or detracting from their accuracy." Id. Nor was the court swayed
by Microsoft's "profession of surprise" at the possibility of structural
relief. Id. at 61. "From the inception of this case Microsoft knew, from
well-established Supreme Court precedents dating from the beginning of the
last century, that a mandated divestiture was a possibility, if not a
probability, in the event of an adverse result at trial." Id.
The substance of the
District Court's remedies order is nearly identical to plaintiffs'
proposal. The decree's centerpiece is the requirement that Microsoft
submit a proposed plan of divestiture, with the company to be split into
an "Operating Systems
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Business," or "OpsCo," and an "Applications Business," or "AppsCo."
Final Judgment, Decree 1.a, l.c.i, at 64. OpsCo would receive all of
Microsoft's operating systems, such as Windows 98 and Windows 2000, while
AppsCo would receive the remainder of Microsoft's businesses, including IE
and Office. The District Court identified four reasons for its "reluctant[
]" conclusion that "a structural remedy has become imperative." Id. at 62.
First, Microsoft "does not yet concede that any of its business practices
violated the Sherman Act." Id. Second, the company consequently "continues
to do business as it has in the past." Id. Third, Microsoft "has proved
untrustworthy in the past." Id. And fourth, the Government, whose
officials "are by reason of office obliged and expected to consider-and to
act in--the public interest," won the case, "and for that reason alone
have some entitlement to a remedy of their choice." Id. at 62-63.
The decree also
contains a number of interim restrictions on Microsoft's conduct. For
instance, Decree 3.b requires Microsoft to disclose to third-party
developers the APIs and other technical information necessary to ensure
that software effectively interoperates with Windows. Id. at 67. "To
facilitate compliance," 3.b further requires that Microsoft establish "a
secure facility" at which third-party representatives may "study,
interrogate and interact with relevant and necessary portions of
[Microsoft platform software] source code." Id. Section 3.e, entitled "Ban
on Exclusive Dealing," forbids Microsoft from entering contracts which
oblige third parties to restrict their "development, production,
distribution, promotion or use of, or payment for" non-Microsoft
platformlevel software. Id. at 68. Under Decree 3.f--"Ban on Contractual
Tying"--the company may not condition its grant of a Windows license on a
party's agreement "to license, promote, or distribute any other Microsoft
software product." Id. And 3.g imposes a "Restriction on Binding
Middleware Products to Operating System Products" unless Microsoft also
offers consumers "an otherwise identical version" of the operating system
without the middleware. Id.
B. Trial
Proceedings
Microsoft's first
contention--that the District Court erred by adopting an expedited trial
schedule and receiving evidence through summary witnesses--is easily
disposed of. Trial courts have extraordinarily broad discretion to
determine the manner in which they will conduct trials. "This is
particularly true in a case such as the one at bar where the proceedings
are being tried to the court without a jury." Eli Lilly & Co., Inc. v. Generix Drug Sales, Inc., 460
F.2d 1096, 1105 (5th Cir. 1972). In such cases, "[a]n appellate court
will not interfere with the trial court's exercise of its discretion to
control its docket and dispatch its business ... except upon the clearest
showing that the procedures have resulted in actual and substantial
prejudice to the complaining litigant." Id. Microsoft fails to clear this
high hurdle. Although the company claims that setting an early trial date
inhibited its ability to conduct discovery, it never identified a specific
deposition or document it was unable to obtain. And while Microsoft now
argues that the use of summary witnesses made inevitable the improper
introduction of hearsay evidence, the company actually agreed to the
District Court's proposal to limit each side to 12 summary witnesses.
12/2/98 am Tr. at 11, reprinted in 21 J.A. at 14083 (court admonishing
Microsoft's counsel to "[k]eep in mind that both sides agreed to the
number of witnesses"). Even absent Microsoft's agreement, the company's
challenge fails to show that this use of summary
Page 101
witnesses falls outside the trial court's wide latitude to receive
evidence as it sees fit. General Elec. Co. v. Joiner, 522 U.S. 136, 141-42 (1997).
This is particularly true given the presumption that a judge who conducts
a bench trial has ignored any inadmissible evidence, Harris v. Rivera, 454 U.S. 339, 346 (1981)--a presumption
that Microsoft makes no serious attempt to overcome. Indeed, under
appropriate circumstances with appropriate instructions, we have in the
past approved the use of summary witnesses even in jury trials. See, e.g.,
United States v. Lemire, 720 F.2d 1327 (D.C. Cir. 1983).
Therefore, neither the use of the summary witnesses nor any other aspect
of the District Court's conduct of the trial phase amounted to an abuse of
discretion.
C. Failure to Hold an
Evidentiary Hearing
The District Court's
remedies-phase proceedings are a different matter. It is a cardinal
principle of our system of justice that factual disputes must be heard in
open court and resolved through trial-like evidentiary proceedings. Any
other course would be contrary "to the spirit which imbues our judicial
tribunals prohibiting decision without hearing." Sims v. Greene, 161 F.2d 87, 88 (3d Cir. 1947).
A party has the right
to judicial resolution of disputed facts not just as to the liability
phase, but also as to appropriate relief. "Normally, an evidentiary
hearing is required before an injunction may be granted." United States v. McGee, 714 F.2d 607, 613 (6th Cir. 1983);
Charlton v. Estate of Charlton, 841 F.2d 988, 989 (9th Cir.
1988) ("Generally the entry or continuation of an injunction requires
a hearing. Only when the facts are not in dispute, or when the adverse
party has waived its right to a hearing, can that significant procedural
step be eliminated." (citation and internal quotation marks omitted)).
Other than a temporary restraining order, no injunctive relief may be
entered without a hearing. See generally Fed. R. Civ. P. 65. A hearing on
the merits-i.e., a trial on liability--does not substitute for a
relief-specific evidentiary hearing unless the matter of relief was part
of the trial on liability, or unless there are no disputed factual issues
regarding the matter of relief.
This rule is no less
applicable in antitrust cases. The Supreme Court "has recognized that a
'full exploration of facts is usually necessary in order (for the District
Court) properly to draw (an antitrust) decree' so as 'to prevent future
violations and eradicate existing evils.' " United States
v. Ward Baking Co., 376
U.S. 327, 330-31 (1964) (quoting Associated Press v. United States, 326 U.S. 1, 22 (1945)).
Hence a remedies decree must be vacated whenever there is "a bona fide
disagreement concerning substantive items of relief which could be
resolved only by trial." Id. at 334; cf. Sims, 161 F.2d at 89 ("It has
never been supposed that a temporary injunction could issue under the
Clayton Act without giving the party against whom the injunction was
sought an opportunity to present evidence on his behalf.").
Despite plaintiffs'
protestations, there can be no serious doubt that the parties disputed a
number of facts during the remedies phase. In two separate offers of
proof, Microsoft identified 23 witnesses who, had they been permitted to
testify, would have challenged a wide range of plaintiffs' factual
representations, including the feasibility of dividing Microsoft, the
likely impact on consumers, and the effect of divestiture on shareholders.
To take
Page 102
but two examples, where plaintiffs' economists testified that splitting
Microsoft in two would be socially beneficial, the company offered to
prove that the proposed remedy would "cause substantial social harm by
raising software prices, lowering rates of innovation and disrupting the
evolution of Windows as a software development platform." Defendant's
Offer of Proof at 6, reprinted in 4 J.A. at 2747. And where plaintiffs'
investment banking experts proposed that divestiture might actually
increase shareholder value, Microsoft proffered evidence that structural
relief "would inevitably result in a significant loss of shareholder
value," a loss that could reach "tens--possibly hundreds--of billions of
dollars." Id. at 19, reprinted in 4 J.A. at 2760.
Indeed, the District
Court itself appears to have conceded the existence of acute factual
disagreements between Microsoft and plaintiffs. The court acknowledged
that the parties were "sharply divided" and held "divergent opinions" on
the likely results of its remedies decree. Final Judgment, at 62. The
reason the court declined to conduct an evidentiary hearing was not
because of the absence of disputed facts, but because it believed that
those disputes could be resolved only through "actual experience," not
further proceedings. Id. But a prediction about future events is not, as a
prediction, any less a factual issue. Indeed, the Supreme Court has
acknowledged that drafting an antitrust decree by necessity "involves
predictions and assumptions concerning future economic and business
events." Ford Motor Co. v. United States, 405 U.S. 562, 578 (1972).
Trial courts are not excused from their obligation to resolve such matters
through evidentiary hearings simply because they consider the bedrock
procedures of our justice system to be "of little use." Final Judgment, at
62.
The presence of
factual disputes thus distinguishes this case from the decisions
plaintiffs cite for the proposition that Microsoft was not entitled to an
evidentiary hearing. Indeed, far from assisting plaintiffs, these cases
actually confirm the proposition that courts must hold evidentiary
hearings when they are confronted with disputed facts. In Ford Motor Co.,
the Supreme Court affirmed a divestiture order after emphasizing that the
District Court had "held nine days of hearings on the remedy." 405 U.S. at
571. Davoll v. Webb, 194 F.3d 1116 (10th Cir. 1999), the
defendant both failed to submit any offers of proof, and waived its right
to an evidentiary hearing by expressly agreeing that relief should be
determined based solely on written submissions. Id. at 114243. The
defendants American Can Co. v. Mansukhani, 814 F.2d 421 (7th Cir.
1987), were not entitled to a hearing on remedies because they failed
"to explain to the district court what new proof they would present to
show" that the proposed remedy was unwarranted. Id. at 425. And in Socialist Workers Party v. Illinois State Board of
Elections, 566 F.2d 586 (7th Cir. 1977), aff'd, 440 U.S. 173 (1979),
the Seventh Circuit held that a remedies-specific hearing was unnecessary
because that case involved a pure question of legal interpretation and
hence "[t]here was no factual dispute as to the ground on which the
injunction was ordered." Id. at 587.
Unlike the parties in
Davoll, American Can, and Socialist Workers Party, Microsoft both
repeatedly asserted its right to an evidentiary hearing and submitted two
offers of proof. The company's "summary response" to the proposed remedy
argued that it would be "impossible" to address underlying factual issues
"on a highly expedited basis," Defendant's Summary Response at 6-7,
reprinted in 4 J.A. at 2587-88,
Page 103
and Microsoft further maintained that the court could not issue a
decree unless it first permitted "substantial discovery, adequate time for
preparation and a full trial on relief." Defendant's Position as to Future
Proceedings at 2, reprinted in 4 J.A. at 2646. And in 53 pages of
submissions, Microsoft identified the specific evidence it would introduce
to challenge plaintiffs' representations.
Plaintiffs further
argue--and the District Court held--that no evidentiary hearing was
necessary given that Microsoft long had been on notice that structural
relief was a distinct possibility. It is difficult to see why this
matters. Whether Microsoft had advance notice that dissolution was in the
works is immaterial to whether the District Court violated the company's
procedural rights by ordering it without an evidentiary hearing. To be
sure, "claimed surprise at the district court's decision to consider
permanent injunctive relief does not, alone, merit reversal." Socialist
Workers, 566 F.2d at 587. But in this case, Microsoft's professed surprise
does not stand "alone." There is something more: the company's basic
procedural right to have disputed facts resolved through an evidentiary
hearing.
In sum, the District
Court erred when it resolved the parties' remedies-phase factual disputes
by consulting only the evidence introduced during trial and plaintiffs'
remediesphase submissions, without considering the evidence Microsoft
sought to introduce. We therefore vacate the District Court's final
judgment, and remand with instructions to conduct a remedies-specific
evidentiary hearing.
D. Failure to Provide
an Adequate Explanation
We vacate the District
Court's remedies decree for the additional reason that the court has
failed to provide an adequate explanation for the relief it ordered. The
Supreme Court has explained that a remedies decree in an antitrust case
must seek to "unfetter a market from anticompetitive conduct," Ford Motor
Co., 405 U.S. at 577, to "terminate the illegal monopoly, deny to the
defendant the fruits of its statutory violation, and ensure that there
remain no practices likely to result in monopolization in the future," United States v. United Shoe Mach. Corp., 391 U.S. 244, 250
(1968); United States v. Grinnell Corp., 384 U.S. 563, 577
(1966).
The District Court has
not explained how its remedies decree would accomplish those objectives.
Indeed, the court devoted a mere four paragraphs of its order to
explaining its reasons for the remedy. They are: (1) Microsoft "does not
yet concede that any of its business practices violated the Sherman Act";
(2) Microsoft "continues to do business as it has in the past"; (3)
Microsoft "has proved untrustworthy in the past"; and (4) the Government,
whose officials "are by reason of office obliged and expected to
consider--and to act in--the public interest," won the case, "and for that
reason alone have some entitlement to a remedy of their choice." Final
Judgment, at 62-63. Nowhere did the District Court discuss the objectives
the Supreme Court deems relevant.
E. Modification of
Liability
Quite apart from its
procedural difficulties, we vacate the District Court's final judgment in
its entirety for the additional, independent reason that we have modified
the underlying bases of liability. Of the three antitrust violations
originally identified by the District Court, one is no longer viable:
attempted monopolization of the browser market in violation of Sherman Act
2. One will be remanded for
Page 104
liability proceedings under a different legal standard: unlawful tying
in violation of 1. Only liability for the 2 monopolymaintenance violation
has been affirmed--and even that we have revised. Ordinarily, of course,
we review the grant or denial of equitable relief under the abuse of
discretion standard. See, e.g., Doran v. Salem Inn, Inc., 422 U.S. 922, 93132 (1975)
("[T]he standard of appellate review is simply whether the issuance of the
injunction, in the light of the applicable standard, constituted an abuse
of discretion."). For obvious reasons, the application of that standard is
not sufficient to sustain the remedy in the case before us. We cannot
determine whether the District Court has abused its discretion in
remedying a wrong where the court did not exercise that discretion in
order to remedy the properly determined wrong. That is, the District Court
determined that the conduct restrictions and the pervasive structural
remedy were together appropriate to remedy the three antitrust violations
set forth above. The court did not exercise its discretion to determine
whether all, or for that matter, any, of those equitable remedies were
required to rectify a 2 monopoly maintenance violation taken alone. We
therefore cannot sustain an exercise of discretion not yet made.
By way of comparison,
Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993),
the Supreme Court reviewed a damages award in a Sherman Act case. In that
case, the trial court entered judgment upon a jury verdict which did not
differentiate among multiple possible theories of liability under 2. The
Supreme Court ultimately determined that the trial record could not
legally support a finding that the defendant had committed an illegal
attempt to monopolize, and that "the trial instructions allowed the jury
to infer specific intent and dangerous probability of success from the
defendants' predatory conduct, without any proof of the relevant market or
of a realistic probability that the defendants could achieve monopoly
power in that market." Id. at 459. Therefore, the High Court reversed the
Ninth Circuit's judgment affirming the District Court and remanded for
further proceedings, expressly because "the jury's verdict did not negate
the possibility that the 2 verdict rested on the attempt to monopolize
grounds alone...." Id. Similarly, here, we cannot presume that a District
Court would exercise its discretion to fashion the same remedy where the
erroneous grounds of liability were stripped from its consideration.
The Eighth Circuit
confronted a similar problem Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039 (8th
Cir.), cert. denied, 121 S. Ct. 428 (2000). In that case, a group of boat
builders brought an action against an engine manufacturer alleging
violations of Sherman Act 1 and 2, and Clayton Act 7. After a 10-week
trial, the jury found Brunswick liable on all three counts and returned a
verdict for over $44 million. On appeal, the Eighth Circuit reversed the
Clayton Act claim. Id. at 1053. That court held that, as a consequence, it
was required to vacate the jury's remedy in its entirety. Because the
"verdict form did not require the jury to consider what damages resulted
from each type of violation," the court could not "know what damages it
found to have been caused by the acquisitions upon which the Section 7
claims were based." Id. at 1054. The court rejected the proposition that
"the entire damage award may be upheld based on Brunswick's Sherman Act
liability alone," id. at 1053, holding that, because "there is no way to
know what damages the jury assigned to the Section 7 claims," the
defendant
Page 105
"would be entitled at the very least to a new damages trial on the boat
builders' Sherman Act claims," id. at 1054.
Spectrum Sports and
Concord Boat are distinguishable from the case before us in that both
involved the award of money damages rather than equitable relief.
Nonetheless, their reasoning is instructive. A court in both contexts must
base its relief on some clear "indication of a significant causal
connection between the conduct enjoined or mandated and the violation
found directed toward the remedial goal intended." 3 Phillip E. Areeda
& Herbert Hovenkamp, Antitrust Law p 653(b), at 91-92 (1996). In a
case such as the one before us where sweeping equitable relief is employed
to remedy multiple violations, and some--indeed most--of the findings of
remediable violations do not withstand appellate scrutiny, it is necessary
to vacate the remedy decree since the implicit findings of causal
connection no longer exist to warrant our deferential affirmance.
In short, we must
vacate the remedies decree in its entirety and remand the case for a new
determination. This court has drastically altered the District Court's
conclusions on liability. On remand, the District Court, after affording
the parties a proper opportunity to be heard, can fashion an appropriate
remedy for Microsoft's antitrust violations. In particular, the court
should consider which of the decree's conduct restrictions remain viable
in light of our modification of the original liability decision. While the
task of drafting the remedies decree is for the District Court in the
first instance, because of the unusually convoluted nature of the
proceedings thus far, and a desire to advance the ultimate resolution of
this important controversy, we offer some further guidance for the
exercise of that discretion.
F. On Remand
As a general matter, a
district court is afforded broad discretion to enter that relief it
calculates will best remedy the conduct it has found to be unlawful. See,
e.g., Woerner v. United States Small Bus. Admin., 934 F.2d 1277,
1279 (D.C. Cir. 1991) (recognizing that an appellate court reviews a
trial court's decision whether or not to grant equitable relief only for
an abuse of discretion). This is no less true in antitrust cases. See,
e.g., Ford Motor Co., 405 U.S. at 573 ("The District Court is clothed with
'large discretion' to fit the decree to the special needs of the
individual case."); Md. & Va. Milk Producers Ass'n, Inc. v. United States, 362 U.S. 458, 473 (1960) ("The
formulation of decrees is largely left to the discretion of the trial
court...."). And divestiture is a common form of relief in successful
antitrust prosecutions: it is indeed "the most important of antitrust
remedies." See, e.g., United States v. E.I. du Pont de Nemours & Co.,
366 U.S. 316, 331 (1961).
On remand, the
District Court must reconsider whether the use of the structural remedy of
divestiture is appropriate with respect to Microsoft, which argues that it
is a unitary company. By and large, cases upon which plaintiffs rely in
arguing for the split of Microsoft have involved the dissolution of
entities formed by mergers and acquisitions. On the contrary, the Supreme
Court has clarified that divestiture "has traditionally been the remedy
for Sherman Act violations whose heart is intercorporate combination and
control," du Pont, 366 U.S. at 329 (emphasis added), and that "[c]omplete
divestiture is particularly appropriate where asset or stock acquisitions
violate the antitrust laws," Ford Motor Co., 405 U.S. at 573 (emphasis
added).
Page 106
One apparent reason
why courts have not ordered the dissolution of unitary companies is
logistical difficulty. As the court explained United States v. ALCOA, 91 F. Supp. 333, 416 (S.D.N.Y.
1950), a "corporation, designed to operate effectively as a single
entity, cannot readily be dismembered of parts of its various operations
without a marked loss of efficiency." A corporation that has expanded by
acquiring its competitors often has preexisting internal lines of division
along which it may more easily be split than a corporation that has
expanded from natural growth. Although time and corporate modifications
and developments may eventually fade those lines, at least the
identifiable entities preexisted to create a template for such division as
the court might later decree. With reference to those corporations that
are not acquired by merger and acquisition, Judge Wyzanski accurately
opined in United Shoe:
United conducts all
machine manufacture at one plant in Beverly, with one set of jigs and
tools, one foundry, one laboratory for machinery problems, one managerial
staff, and one labor force. It takes no Solomon to see that this organism
cannot be cut into three equal and viable parts.
United States v. United Shoe Machine Co., 110 F. Supp. 295,
348 (D. Mass. 1953).
Depending upon the
evidence, the District Court may find in a remedies proceeding that it
would be no easier to split Microsoft in two than United Shoe in three.
Microsoft's Offer of Proof in response to the court's denial of an
evidentiary hearing included proffered testimony from its President and
CEO Steve Ballmer that the company "is, and always has been, a unified
company without free-standing business units. Microsoft is not the result
of mergers or acquisitions." Microsoft further offered evidence that it is
"not organized along product lines," but rather is housed in a single
corporate headquarters and that it has
only one sales and
marketing organization which is responsible for selling all of the
company's products, one basic research organization, one product support
organization, one operations department, one information technology
department, one facilities department, one purchasing department, one
human resources department, one finance department, one legal department
and one public relations department.
Defendant's Offer of
Proof at 23-26, reprinted in 4 J.A. at 2764-67. If indeed Microsoft is a
unitary company, division might very well require Microsoft to reproduce
each of these departments in each new entity rather than simply allocate
the differing departments among them.
In devising an
appropriate remedy, the District Court also should consider whether
plaintiffs have established a sufficient causal connection between
Microsoft's anticompetitive conduct and its dominant position in the OS
market. "Mere existence of an exclusionary act does not itself justify
full feasible relief against the monopolist to create maximum
competition." 3 Areeda & Hovenkamp, Antitrust Law p 650a, at 67.
Rather, structural relief, which is "designed to eliminate the monopoly
altogether ... require[s] a clearer indication of a significant causal
connection between the conduct and creation or maintenance of the market
power." Id. p 653b, at 91-92 (emphasis added). Absent such causation, the
antitrust defendant's unlawful behavior should be remedied by "an
injunction against continuation of that conduct." Id. p 650a, at 67.
As noted above, see
supra Section II.C, we have found a causal connection between Microsoft's
exclusionary conduct and its continuing position in the operating systems
Page 107
market only through inference. See 3 Areeda & Hovenkamp, Antitrust
Law p 653(b), at 91-92 (suggesting that "more extensive equitable relief,
particularly remedies such as divestiture designed to eliminate the
monopoly altogether, ... require a clearer indication of significant
causal connection between the conduct and creation or maintenance of the
market power"). Indeed, the District Court expressly did not adopt the
position that Microsoft would have lost its position in the OS market but
for its anticompetitive behavior. Findings of Fact p 411 ("There is
insufficient evidence to find that, absent Microsoft's actions, Navigator
and Java already would have ignited genuine competition in the market for
Intelcompatible PC operating systems."). If the court on remand is
unconvinced of the causal connection between Microsoft's exclusionary
conduct and the company's position in the OS market, it may well conclude
that divestiture is not an appropriate remedy.
While we do not
undertake to dictate to the District Court the precise form that relief
should take on remand, we note again that it should be tailored to fit the
wrong creating the occasion for the remedy.
G. Conclusion
In sum, we vacate the
District Court's remedies decree for three reasons. First, the District
Court failed to hold an evidentiary hearing despite the presence of
remedies-specific factual disputes. Second, the court did not provide
adequate reasons for its decreed remedies. Finally, we have drastically
altered the scope of Microsoft's liability, and it is for the District
Court in the first instance to determine the propriety of a specific
remedy for the limited ground of liability which we have upheld.
VI. Judicial
Misconduct
Canon 3A(6) of the
Code of Conduct for United States Judges requires federal judges to "avoid
public comment on the merits of [ ] pending or impending" cases. Canon 2
tells judges to "avoid impropriety and the appearance of impropriety in
all activities," on the bench and off. Canon 3A(4) forbids judges to
initiate or consider ex parte communications on the merits of pending or
impending proceedings. Section 455(a) of the Judicial Code requires judges
to recuse themselves when their "impartiality might reasonably be
questioned." 28 U.S.C. 455(a).
All indications are
that the District Judge violated each of these ethical precepts by talking
about the case with reporters. The violations were deliberate, repeated,
egregious, and flagrant. The only serious question is what consequences
should follow. Microsoft urges us to disqualify the District Judge, vacate
the judgment in its entirety and toss out the findings of fact, and remand
for a new trial before a different District Judge. At the other extreme,
plaintiffs ask us to do nothing. We agree with neither position.
A. The District Judge's
Communications with the Press
Immediately after the
District Judge entered final judgment on June 7, 2000, accounts of
interviews with him began appearing in the press. Some of the interviews
were held after he entered final judgment. See Peter Spiegel, Microsoft
Judge Defends Post-trial Comments, Fin. Times (London), Oct. 7, 2000, at
4; John R. Wilke, For Antitrust Judge, Trust, or Lack of It, Really Was
the Issue--In an Interview, Jackson Says Microsoft Did the Damage to Its
Credibility in Court, Wall St. J., June 8, 2000, at A1. The District Judge
also aired his views about the case to larger audiences, giving
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speeches at a college and at an antitrust seminar. See James V.
Grimaldi, Microsoft Judge Says Ruling at Risk; Every Trial Decision Called
'Vulnerable', Wash. Post, Sept. 29, 2000, at E1; Alison Schmauch,
Microsoft Judge Shares Experiences, The Dartmouth Online, Oct. 3,
2000.
From the published
accounts, it is apparent that the Judge also had been giving secret
interviews to select reporters before entering final judgment--in some
instances long before. The earliest interviews we know of began in
September 1999, shortly after the parties finished presenting evidence but
two months before the court issued its Findings of Fact. See Joel Brinkley
& Steve Lohr, U.S. vs. Microsoft: Pursuing a Giant; Retracing the
Missteps in the Microsoft Defense, N.Y. Times, June 9, 2000, at A1.
Interviews with reporters from the New York Times and Ken Auletta, another
reporter who later wrote a book on the Microsoft case, continued
throughout late 1999 and the first half of 2000, during which time the
Judge issued his Findings of Fact, Conclusions of Law, and Final Judgment.
See id.; Ken Auletta, Final Offer, The New Yorker, Jan. 15, 2001, at 40.
The Judge "embargoed" these interviews; that is, he insisted that the fact
and content of the interviews remain secret until he issued the Final
Judgment.
Before we recount the
statements attributed to the District Judge, we need to say a few words
about the state of the record. All we have are the published accounts and
what the reporters say the Judge said. Those accounts were not admitted in
evidence. They may be hearsay. See Fed. R. Evid. 801(c); Metro. Council of NAACP Branches v. FCC, 46 F.3d 1154, 1165
(D.C. Cir. 1995) ("We seriously question whether a New York Times
article is admissible evidence of the truthfulness of its contents.").
We are of course
concerned about granting a request to disqualify a federal judge when the
material supporting it has not been admitted in evidence. Disqualification
is never taken lightly. In the wrong hands, a disqualification motion is a
procedural weapon to harass opponents and delay proceedings. If supported
only by rumor, speculation, or innuendo, it is also a means to tarnish the
reputation of a federal judge.
But the circumstances
of this case are most unusual. By placing an embargo on the interviews,
the District Judge ensured that the full extent of his actions would not
be revealed until this case was on appeal. Plaintiffs, in defending the
judgment, do not dispute the statements attributed to him in the press;
they do not request an evidentiary hearing; and they do not argue that
Microsoft should have filed a motion in the District Court before raising
the matter on appeal. At oral argument, plaintiffs all but conceded that
the Judge violated ethical restrictions by discussing the case in public:
"On behalf of the governments, I have no brief to defend the District
Judge's decision to discuss this case publicly while it was pending on
appeal, and I have no brief to defend the judge's decision to discuss the
case with reporters while the trial was proceeding, even given the embargo
on any reporting concerning those conversations until after the trial."
02/27/01 Ct. Appeals Tr. at 326.
We must consider too
that the federal disqualification provisions reflect a strong federal
policy to preserve the actual and apparent impartiality of the federal
judiciary. Judicial misconduct may implicate that policy regardless of the
means by which it is disclosed to the public. The Washington Post v. Robinson, 935 F.2d 282, 291 (D.C. Cir.
1991) (taking judicial
Page 109
notice of newspaper articles to ascertain whether a fact was within
public knowledge). Also, in our analysis of the arguments presented by the
parties, the specifics of particular conversations are less important than
their cumulative effect.
For these reasons we
have decided to adjudicate Microsoft's disqualification request
notwithstanding the state of the record. The same reasons also warrant a
departure from our usual practice of declining to address issues raised
for the first time on appeal: the "matter of what questions may be taken
up and resolved for the first time on appeal is one left primarily to the
discretion of the courts of appeals, to be exercised on the facts of
individual cases." Singleton v. Wulff, 428 U.S. 106, 121 (1976); Hormel v. Helvering, 312 U.S. 552, 556-57 (1941); Nat'l
Ass'n of Mfrs. v. Dep't of Labor, 159 F.3d 597, 605-06 (D.C. Cir. 1998).
We will assume the truth of the press accounts and not send the case back
for an evidentiary hearing on this subject. We reach no judgment on
whether the details of the interviews were accurately recounted.
The published accounts
indicate that the District Judge discussed numerous topics relating to the
case. Among them was his distaste for the defense of technological
integration-one of the central issues in the lawsuit. In September 1999,
two months before his Findings of Fact and six months before his
Conclusions of Law, and in remarks that were kept secret until after the
Final Judgment, the Judge told reporters from the New York Times that he
questioned Microsoft's integration of a web browser into Windows. Stating
that he was "not a fan of integration," he drew an analogy to a
35millimeter camera with an integrated light meter that in his view should
also be offered separately: "You like the convenience of having a light
meter built in, integrated, so all you have to do is press a button to get
a reading. But do you think camera makers should also serve photographers
who want to use a separate light meter, so they can hold it up, move it
around?" Joel Brinkley & Steve Lohr, U.S. v. Microsoft 263 (2001). In
other remarks, the Judge commented on the integration at the heart of the
case: "[I]t was quite clear to me that the motive of Microsoft in bundling
the Internet browser was not one of consumer convenience. The evidence
that this was done for the consumer was not credible.... The evidence was
so compelling that there was an ulterior motive." Wilke, Wall St. J. As
for tying law in general, he criticized this court's ruling in the consent
decree case, saying it "was wrongheaded on several counts" and would
exempt the software industry from the antitrust laws. Brinkley & Lohr,
U.S. v. Microsoft 78, 295; Brinkley & Lohr, N.Y. Times.
Reports of the
interviews have the District Judge describing Microsoft's conduct, with
particular emphasis on what he regarded as the company's prevarication,
hubris, and impenitence. In some of his secret meetings with reporters,
the Judge offered his contemporaneous impressions of testimony. He
permitted at least one reporter to see an entry concerning Bill Gates in
his "oversized green notebook." Ken Auletta, World War 3.0, at 112 (2001).
He also provided numerous after-the-fact credibility assessments. He told
reporters that Bill Gates' "testimony is inherently without credibility"
and "[i]f you can't believe this guy, who else can you believe?" Brinkley
& Lohr, U.S. v. Microsoft 278; Brinkley & Lohr, N.Y. Times; see
also Auletta, The New Yorker, at 40. As for the company's other witnesses,
the Judge is reported as saying that there
Page 110
"were times when I became impatient with Microsoft witnesses who were
giving speeches." "[T]hey were telling me things I just flatly could not
credit." Brinkley & Lohr, N.Y. Times. In an interview given the day he
entered the break-up order, he summed things up: "Falsus in uno, falsus in
omnibus": "Untrue in one thing, untrue in everything." "I don't subscribe
to that as absolutely true. But it does lead one to suspicion. It's a
universal human experience. If someone lies to you once, how much else can
you credit as the truth?" Wilke, Wall St. J.
According to reporter
Auletta, the District Judge told him in private that, "I thought they
[Microsoft and its executives] didn't think they were regarded as adult
members of the community. I thought they would learn." Auletta, World War
3.0, at 14. The Judge told a college audience that "Bill Gates is an
ingenious engineer, but I don't think he is that adept at business ethics.
He has not yet come to realise things he did (when Microsoft was smaller)
he should not have done when he became a monopoly." Spiegel, Fin. Times.
Characterizing Gates' and his company's "crime" as hubris, the Judge
stated that "[i]f I were able to propose a remedy of my devising, I'd
require Mr. Gates to write a book report" on Napoleon Bonaparte,
"[b]ecause I think [Gates] has a Napoleonic concept of himself and his
company, an arrogance that derives from power and unalloyed success, with
no leavening hard experience, no reverses." Auletta, The New Yorker, at
41; see also Auletta, World War 3.0, at 397. The Judge apparently became,
in Auletta's words, "increasingly troubled by what he learned about Bill
Gates and couldn't get out of his mind the group picture he had seen of
Bill Gates and Paul Allen and their shaggy-haired first employees at
Microsoft." The reporter wrote that the Judge said he saw in the picture
"a smart-mouthed young kid who has extraordinary ability and needs a
little discipline. I've often said to colleagues that Gates would be
better off if he had finished Harvard." Auletta, World War 3.0, at 168-69;
see also Auletta, The New Yorker, at 46 (reporting the District Judge's
statement that "they [Microsoft and its executives] don't act like
grownups!" "[T]o this day they continue to deny they did anything
wrong.").
The District Judge
likened Microsoft's writing of incriminating documents to drug traffickers
who "never figure out that they shouldn't be saying certain things on the
phone." Brinkley & Lohr, U.S. v. Microsoft 6; Brinkley & Lohr,
N.Y. Times. He invoked the drug trafficker analogy again to denounce
Microsoft's protestations of innocence, this time with a reference to the
notorious Newton Street Crew that terrorized parts of Washington, D.C.
Reporter Auletta wrote in The New Yorker that the Judge
went as far as to
compare the company's declaration of innocence to the protestations of
gangland killers. He was referring to five gang members in a racketeering,
drug-dealing, and murder trial that he had presided over four years
earlier. In that case, the three victims had had their heads bound with
duct tape before they were riddled with bullets from semi-automatic
weapons. "On the day of the sentencing, the gang members maintained that
they had done nothing wrong, saying that the whole case was a conspiracy
by the white power structure to destroy them," Jackson recalled. "I am now
under no illusions that miscreants will realize that other parts of
society will view them that way."
Auletta, The New
Yorker, at 40-41; Auletta, World War 3.0, at 369-70 (same); see also
Auletta, The New Yorker, at 46.
Page 111
The District Judge
also secretly divulged to reporters his views on the remedy for
Microsoft's antitrust violations. On the question whether Microsoft was
entitled to any process at the remedy stage, the Judge told reporters in
May 2000 that he was "not aware of any case authority that says I have to
give them any due process at all. The case is over. They lost." Brinkley
& Lohr, N.Y. Times. Another reporter has the Judge asking "[w]ere the
Japanese allowed to propose terms of their surrender?" Spiegel, Fin.
Times. The District Judge also told reporters the month before he issued
his break-up order that "[a]ssuming, as I think they are, [ ] the Justice
Department and the states are genuinely concerned about the public
interest," "I know they have carefully studied all the possible options.
This isn't a bunch of amateurs. They have consulted with some of the best
minds in America over a long period of time." "I am not in a position to
duplicate that and re-engineer their work. There's no way I can equip
myself to do a better job than they have done." Brinkley & Lohr, N.Y.
Times; cf. Final Judgment, at 62-63.
In February 2000, four
months before his final order splitting the company in two, the District
Judge reportedly told New York Times reporters that he was "not at all
comfortable with restructuring the company," because he was unsure whether
he was "competent to do that." Brinkley & Lohr, N.Y. Times; see also
Brinkley & Lohr, U.S. v. Microsoft 277-78 (same); cf. Auletta, World
War 3.0, at 370 (comment by the Judge in April 2000 that he was inclining
toward behavioral rather than structural remedies). A few months later, he
had a change of heart. He told the same reporters that "with what looks
like Microsoft intransigence, a breakup is inevitable." Brinkley &
Lohr, N.Y. Times; see also Brinkley & Lohr, U.S. v. Microsoft 315. The
Judge recited a "North Carolina mule trainer" story to explain his change
in thinking from "[i]f it ain't broken, don't try to fix it" and "I just
don't think that [restructuring the company] is something I want to try to
do on my own" to ordering Microsoft broken in two:
He had a trained mule
who could do all kinds of wonderful tricks. One day somebody asked him:
"How do you do it? How do you train the mule to do all these amazing
things?" "Well," he answered, "I'll show you." He took a 2-by-4 and
whopped him upside the head. The mule was reeling and fell to his knees,
and the trainer said: "You just have to get his attention."
Brinkley & Lohr,
U.S. v. Microsoft 278. The Judge added: "I hope I've got Microsoft's
attention." Id.; see also Grimaldi, Wash. Post (comments by the Judge
blaming the break-up on Microsoft's intransigence and on what he perceived
to be Microsoft's responsibility for the failure of settlement talks);
Spiegel, Fin. Times (the Judge blaming break-up on Microsoft's
intransigence).
B. Violations of the
Code of Conduct for United States Judges
The Code of Conduct
for United States Judges was adopted by the Judicial Conference of the
United States in 1973. It prescribes ethical norms for federal judges as a
means to preserve the actual and apparent integrity of the federal
judiciary. Every federal judge receives a copy of the Code, the Commentary
to the Code, the Advisory Opinions of the Judicial Conference's Committee
on Codes of Conduct, and digests of the Committee's informal, unpublished
opinions. See II Guide to Judiciary Policies and Procedures (1973). The
material is periodically updated. Judges who have questions about whether
their conduct would be consistent with the
Page 112
Code may write to the Codes of Conduct Committee for a written,
confidential opinion. See Introduction, Code of Conduct. The Committee
traditionally responds promptly. A judge may also seek informal advice
from the Committee's circuit representative.
While some of the
Code's Canons frequently generate questions about their application,
others are straightforward and easily understood. Canon 3A(6) is an
example of the latter. In forbidding federal judges to comment publicly
"on the merits of a pending or impending action," Canon 3A(6) applies to
cases pending before any court, state or federal, trial or appellate. See
Jeffrey M. Shaman et al., Judicial Conduct and Ethics 10.34, at 353 (3d
ed. 2000). As "impending" indicates, the prohibition begins even before a
case enters the court system, when there is reason to believe a case may
be filed. Cf. E. Wayne Thode, Reporter's Notes to Code of Judicial Conduct
54 (1973). An action remains "pending" until "completion of the appellate
process." Code of Conduct Canon 3A(6) cmt.; Comm. on Codes of Conduct,
Adv. Op. No. 55 (1998).
The Microsoft case was
"pending" during every one of the District Judge's meetings with
reporters; the case is "pending" now; and even after our decision issues,
it will remain pending for some time. The District Judge breached his
ethical duty under Canon 3A(6) each time he spoke to a reporter about the
merits of the case. Although the reporters interviewed him in private, his
comments were public. Court was not in session and his discussion of the
case took place outside the presence of the parties. He provided his views
not to court personnel assisting him in the case, but to members of the
public. And these were not just any members of the public. Because he was
talking to reporters, the Judge knew his comments would eventually receive
widespread dissemination.
It is clear that the
District Judge was not discussing purely procedural matters, which are a
permissible subject of public comment under one of the Canon's three
narrowly drawn exceptions. He disclosed his views on the factual and legal
matters at the heart of the case. His opinions about the credibility of
witnesses, the validity of legal theories, the culpability of the
defendant, the choice of remedy, and so forth all dealt with the merits of
the action. It is no excuse that the Judge may have intended to "educate"
the public about the case or to rebut "public misperceptions" purportedly
caused by the parties. See Grimaldi, Wash. Post; Microsoft Judge Says He
May Step down from Case on Appeal, Wall St. J., Oct. 30, 2000. If those
were his intentions, he could have addressed the factual and legal issues
as he saw them--and thought the public should see them--in his Findings of
Fact, Conclusions of Law, Final Judgment, or in a written opinion. Or he
could have held his tongue until all appeals were concluded.
Far from mitigating
his conduct, the District Judge's insistence on secrecy--his embargo--made
matters worse. Concealment of the interviews suggests knowledge of their
impropriety. Concealment also prevented the parties from nipping his
improprieties in the bud. Without any knowledge of the interviews, neither
the plaintiffs nor the defendant had a chance to object or to seek the
Judge's removal before he issued his Final Judgment.
Other federal judges
have been disqualified for making limited public comments about cases
pending before them. See In re Boston's Children First, 244 F.3d 164 (1st
Cir. 2001); In re IBM Corp., 45 F.3d 641 (2d Cir. 1995); United States v. Cooley, 1 F.3d 985 (10th Cir. 1993).
Given the
Page 113
extent of the Judge's transgressions in this case, we have little doubt
that if the parties had discovered his secret liaisons with the press, he
would have been disqualified, voluntarily or by court order. In re Barry, 946 F.2d 913 (D.C. Cir. 1991) (per curiam);
id. at 915 (Edwards, J., dissenting).
In addition to
violating the rule prohibiting public comment, the District Judge's
reported conduct raises serious questions under Canon 3A(4). That Canon
states that a "judge should accord to every person who is legally
interested in a proceeding, or the person's lawyer, full right to be heard
according to law, and,
except as authorized by law, neither initiate nor consider ex parte
communications on the merits, or procedures affecting the merits, of a
pending or impending proceeding." Code of Conduct Canon 3A(4).
What did the reporters
convey to the District Judge during their secret sessions? By one account,
the Judge spent a total of ten hours giving taped interviews to one
reporter. Auletta, World War 3.0, at 14 n.*. We do not know whether he
spent even more time in untaped conversations with the same reporter, nor
do we know how much time he spent with others. But we think it safe to
assume that these interviews were not monologues. Interviews often become
conversations. When reporters pose questions or make assertions, they may
be furnishing information, information that may reflect their personal
views of the case. The published accounts indicate this happened on at
least one occasion. Ken Auletta reported, for example, that he told the
Judge "that Microsoft employees professed shock that he thought they had
violated the law and behaved unethically," at which time the Judge became
"agitated" by "Microsoft's 'obstinacy'." Id. at 369. It is clear that
Auletta had views of the case. As he wrote in a Washington Post editorial,
"[a]nyone who sat in [the District Judge's] courtroom during the trial had
seen ample evidence of Microsoft's sometimes thuggish tactics." Ken
Auletta, Maligning the Microsoft Judge, Wash. Post, Mar. 7, 2001, at
A23.
The District Judge's
repeated violations of Canons 3A(6) and 3A(4) also violated Canon 2, which
provides that "a judge should avoid impropriety and the appearance of
impropriety in all activities." Code of Conduct Canon 2; In re Charge of Judicial Misconduct, 47 F.3d 399, 400 (10th
Cir. Jud. Council 1995) ("The allegations of extra-judicial comments
cause the Council substantial concern under both Canon 3A(6) and Canon 2
of the Judicial Code of Conduct."). Canon 2A requires federal judges to
"respect and comply with the law" and to "act at all times in a manner
that promotes public confidence in the integrity and impartiality of the
judiciary." Code of Conduct Canon 2A. The Code of Conduct is the law with
respect to the ethical obligations of federal judges, and it is clear the
District Judge violated it on multiple occasions in this case. The rampant
disregard for the judiciary's ethical obligations that the public
witnessed in this case undoubtedly jeopardizes "public confidence in the
integrity" of the District Court proceedings.
Another point needs to
be stressed. Rulings in this case have potentially huge financial
consequences for one of the nation's largest publicly-traded companies and
its investors. The District Judge's secret interviews during the trial
provided a select few with inside information about the case, information
that enabled them and anyone they shared it with to anticipate rulings
before the Judge announced them to the world. Although he "embargoed" his
comments, the Judge had no way of policing the reporters. For all he knew
there may have been trading on the basis
Page 114
of the information he secretly conveyed. The public cannot be expected
to maintain confidence in the integrity and impartiality of the federal
judiciary in the face of such conduct.
C. Appearance of
Partiality
The Code of Conduct
contains no enforcement mechanism. See Thode, Reporter's Notes to Code of
Judicial Conduct 43. The Canons, including the one that requires a judge
to disqualify himself in certain circumstances, see Code of Conduct Canon
3C, are self-enforcing. There are, however, remedies extrinsic to the
Code. One is an internal disciplinary proceeding, begun with the filing of
a complaint with the clerk of the court of appeals pursuant to 28 U.S.C.
372(c). Another is disqualification of the offending judge under either 28
U.S.C. 144, which requires the filing of an affidavit while the case is in
the District Court, or 28 U.S.C. 455, which does not. Microsoft urges the
District Judge's disqualification under 455(a): a judge "shall disqualify
himself in any proceeding in which his impartiality might reasonably be
questioned." 28 U.S.C. 455(a). The standard for disqualification under
455(a) is an objective one. The question is whether a reasonable and
informed observer would question the judge's impartiality. In re Barry, 946 F.2d at 914; In re Aguinda, 241 F.3d 194, 201 (2d Cir. 2001); Richard
E. Flamm, Judicial Disqualification 24.2.1 (1996).
"The very purpose of
455(a) is to promote confidence in the judiciary by avoiding even the
appearance of impropriety whenever possible." Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847,
865 (1988). As such, violations of the Code of Conduct may give rise
to a violation of 455(a) if doubt is cast on the integrity of the judicial
process. It has been argued that any "public comment by a judge concerning
the facts, applicable law, or merits of a case that is sub judice in his
court or any comment concerning the parties or their attorneys would raise
grave doubts about the judge's objectivity and his willingness to reserve
judgment until the close of the proceeding." William G. Ross,
Extrajudicial Speech: Charting the Boundaries of Propriety, 2 Geo. J.
Legal Ethics 589, 598 (1989). Some courts of appeals have taken a hard
line on public comments, finding violations of 455(a) for judicial
commentary on pending cases that seems mild in comparison to what we are
confronting in this case. See Boston's Children First, 244 F.3d 164
(granting writ of mandamus ordering district judge to recuse herself under
455(a) because of public comments on class certification and standing in a
pending case); In re IBM Corp., 45 F.3d 641 (granting writ of mandamus
ordering district judge to recuse himself based in part on the appearance
of partiality caused by his giving newspaper interviews); Cooley, 1 F.3d
985 (vacating convictions and disqualifying district judge for appearance
of partiality because he appeared on television program Nightline and
stated that abortion protestors in a case before him were breaking the law
and that his injunction would be obeyed).
While 455(a) is
concerned with actual and apparent impropriety, the statute requires
disqualification only when a judge's "impartiality might reasonably be
questioned." 28 U.S.C. 455(a). Although this court has condemned public
judicial comments on pending cases, we have not gone so far as to hold
that every violation of Canon 3A(6) or every impropriety under the Code of
Conduct inevitably destroys the appearance of impartiality and thus
violates 455(a). In re Barry, 946 F.2d at 914; see also Boston's Children
First, 244 F.3d at 168; United States v.
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Fortier, 242 F.3d 1224, 1229 (10th Cir. 2001).
In this case, however,
we believe the line has been crossed. The public comments were not only
improper, but also would lead a reasonable, informed observer to question
the District Judge's impartiality. Public confidence in the integrity and
impartiality of the judiciary is seriously jeopardized when judges
secretly share their thoughts about the merits of pending cases with the
press. Judges who covet publicity, or convey the appearance that they do,
lead any objective observer to wonder whether their judgments are being
influenced by the prospect of favorable coverage in the media. Discreet
and limited public comments may not compromise a judge's apparent
impartiality, but we have little doubt that the District Judge's conduct
had that effect. Appearance may be all there is, but that is enough to
invoke the Canons and 455(a).
Judge Learned Hand
spoke of "this America of ours where the passion for publicity is a
disease, and where swarms of foolish, tawdry moths dash with rapture into
its consuming fire...." Learned Hand, The Spirit of Liberty 132-33 (2d ed.
1953). Judges are obligated to resist this passion. Indulging it
compromises what Edmund Burke justly regarded as the "cold neutrality of
an impartial judge." Cold or not, federal judges must maintain the
appearance of impartiality. What was true two centuries ago is true today:
"Deference to the judgments and rulings of courts depends upon public
confidence in the integrity and independence of judges." Code of Conduct
Canon 1 cmt. Public confidence in judicial impartiality cannot survive if
judges, in disregard of their ethical obligations, pander to the
press.
We recognize that it
would be extraordinary to disqualify a judge for bias or appearance of
partiality when his remarks arguably reflected what he learned, or what he
thought he learned, during the proceedings. Liteky v. United States, 510 U.S. 540, 554-55 (1994); United States v. Barry, 961 F.2d 260, 263 (D.C. Cir.
1992). But this "extrajudicial source" rule has no bearing on the case
before us. The problem here is not just what the District Judge said, but
to whom he said it and when. His crude characterizations of Microsoft, his
frequent denigrations of Bill Gates, his mule trainer analogy as a reason
for his remedy--all of these remarks and others might not have given rise
to a violation of the Canons or of 455(a) had he uttered them from the
bench. See Liteky, 510 U.S. at 555-56; Code of Conduct Canon 3A(6)
(exception to prohibition on public comments for "statements made in the
course of the judge's official duties"). But then Microsoft would have had
an opportunity to object, perhaps even to persuade, and the Judge would
have made a record for review on appeal. It is an altogether different
matter when the statements are made outside the courtroom, in private
meetings unknown to the parties, in anticipation that ultimately the
Judge's remarks would be reported. Rather than manifesting neutrality and
impartiality, the reports of the interviews with the District Judge convey
the impression of a judge posturing for posterity, trying to please the
reporters with colorful analogies and observations bound to wind up in the
stories they write. Members of the public may reasonably question whether
the District Judge's desire for press coverage influenced his judgments,
indeed whether a publicity-seeking judge might consciously or
subconsciously seek the publicity-maximizing outcome. We believe,
therefore, that the District Judge's interviews with reporters created an
appearance that he was not acting impartially,
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as the Code of Conduct and 455(a) require.
D. Remedies for
Judicial Misconduct and Appearance of Partiality
1. Disqualification
Disqualification is
mandatory for conduct that calls a judge's impartiality into question. See
28 U.S.C. 455(a); In re School Asbestos Litig., 977 F.2d 764, 783 (3d Cir.
1992). Section 455 does not prescribe the scope of disqualification.
Rather, Congress "delegated to the judiciary the task of fashioning the
remedies that will best serve the purpose" of the disqualification
statute. Liljeberg, 486 U.S. at 862.
At a minimum, 455(a)
requires prospective disqualification of the offending judge, that is,
disqualification from the judge's hearing any further proceedings in the
case. United States v. Microsoft Corp., 56 F.3d 1448, 1463-65 (D.C.
Cir. 1995) (per curiam) ("Microsoft I"). Microsoft urges retroactive
disqualification of the District Judge, which would entail
disqualification antedated to an earlier part of the proceedings and
vacatur of all subsequent acts. In re School Asbestos Litig., 977 F.2d at 786 (discussing
remedy options).
"There need not be a
draconian remedy for every violation of 455(a)." Liljeberg, 486 U.S. at
862. Liljeberg held that a district judge could be disqualified under
455(a) after entering final judgment in a case, even though the judge was
not (but should have been) aware of the grounds for disqualification
before final judgment. The Court identified three factors relevant to the
question whether vacatur is appropriate: "in determining whether a
judgment should be vacated for a violation of 455(a), it is appropriate to
consider the risk of injustice to the parties in the particular case, the
risk that the denial of relief will produce injustice in other cases, and
the risk of undermining the public's confidence in the judicial process."
Id. at 864. Although the Court was discussing 455(a) in a slightly
different context (the judgment there had become final after appeal and
the movant sought to have it vacated under Rule 60(b)), we believe the
test it propounded applies as well to cases such as this in which the full
extent of the disqualifying circumstances came to light only while the
appeal was pending. In re School Asbestos Litig., 977 F.2d at 785.
Our application of
Liljeberg leads us to conclude that the appropriate remedy for the
violations of 455(a) is disqualification of the District Judge retroactive
only to the date he entered the order breaking up Microsoft. We therefore
will vacate that order in its entirety and remand this case to a different
District Judge, but will not set aside the existing Findings of Fact or
Conclusions of Law (except insofar as specific findings are clearly
erroneous or legal conclusions are incorrect).
This partially
retroactive disqualification minimizes the risk of injustice to the
parties and the damage to public confidence in the judicial process.
Although the violations of the Code of Conduct and 455(a) were serious,
full retroactive disqualification is unnecessary. It would unduly penalize
plaintiffs, who were innocent and unaware of the misconduct, and would
have only slight marginal deterrent effect.
Most important, full
retroactive disqualification is unnecessary to protect Microsoft's right
to an impartial adjudication. The District Judge's conduct destroyed the
appearance of impartiality. Microsoft neither alleged nor demonstrated
that it rose to the level of actual bias or prejudice. There is no reason
to presume that everything the District Judge did is suspect.
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In re Allied-Signal Inc., 891 F.2d 974, 975-76 (1st Cir.
1989); Liberty Lobby, Inc. v. Dow Jones & Co., 838 F.2d 1287,
1301-02 (D.C. Cir. 1988). Although Microsoft challenged very few of
the findings as clearly erroneous, we have carefully reviewed the entire
record and discern no basis to suppose that actual bias infected his
factual findings.
The most serious
judicial misconduct occurred near or during the remedial stage. It is
therefore commensurate that our remedy focus on that stage of the case.
The District Judge's impatience with what he viewed as intransigence on
the part of the company; his refusal to allow an evidentiary hearing; his
analogizing Microsoft to Japan at the end of World War II; his story about
the mule--all of these out-ofcourt remarks and others, plus the Judge's
evident efforts to please the press, would give a reasonable, informed
observer cause to question his impartiality in ordering the company split
in two.
To repeat, we
disqualify the District Judge retroactive only to the imposition of the
remedy, and thus vacate the remedy order for the reasons given in Section
V and because of the appearance of partiality created by the District
Judge's misconduct.
2. Review of Findings
of Fact and Conclusions of Law
Given the limited
scope of our disqualification of the District Judge, we have let stand for
review his Findings of Fact and Conclusions of Law. The severity of the
District Judge's misconduct and the appearance of partiality it created
have led us to consider whether we can and should subject his factfindings
to greater scrutiny. For a number of reasons we have rejected any such
approach.
The Federal Rules
require that district court findings of fact not be set aside unless they
are clearly erroneous. See Fed. R. Civ. P. 52(a). Ordinarily, there is no
basis for doubting that the District Court's factual findings are entitled
to the substantial deference the clearly erroneous standard entails. But
of course this is no ordinary case. Deference to a district court's
factfindings presumes impartiality on the lower court's part. When
impartiality is called into question, how much deference is due?
The question implies
that there is some middle ground, but we believe there is none. As the
rules are written, district court factfindings receive either full
deference under the clearly erroneous standard or they must be vacated.
There is no de novo appellate review of factfindings and no intermediate
level between de novo and clear error, not even for findings the court of
appeals may consider sub-par. Amadeo v. Zant, 486 U.S. 214, 228 (1988) ("The District
Court's lack of precision, however, is no excuse for the Court of Appeals
to ignore the dictates of Rule 52(a) and engage in impermissible appellate
factfinding."); Anderson v. City of Bessemer City, 470 U.S. 564, 571-75
(1985) (criticizing district court practice of adopting a party's
proposed factfindings but overturning court of appeals' application of
"close scrutiny" to such findings).
Rule 52(a) mandates
clearly erroneous review of all district court factfindings: "Findings of
fact, whether based on oral or documentary evidence, shall not be set
aside unless clearly erroneous, and due regard shall be given to the
opportunity of the trial court to judge of the credibility of the
witnesses." Fed. R. Civ. P. 52(a). The rule "does not make exceptions or
purport to exclude certain categories of factual findings from the
obligation of a court of
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appeals to accept a district court's findings unless clearly
erroneous." Pullman-Standard v. Swint, 456 U.S. 273, 287 (1982); see
also Anderson, 470 U.S. at 574-75; Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 855-58
(1982). The Supreme Court has emphasized on multiple occasions that
"[i]n applying the clearly erroneous standard to the findings of a
district court sitting without a jury, appellate courts must constantly
have in mind that their function is not to decide factual issues de novo."
Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100,
123 (1969); Anderson, 470 U.S. at 573 (quoting Zenith).
The mandatory nature
of Rule 52(a) does not compel us to accept factfindings that result from
the District Court's misapplication of governing law or that otherwise do
not permit meaningful appellate review. See Pullman-Standard, 456 U.S. at
292; Inwood Labs., 456 U.S. at 855 n.15. Nor must we accept findings that
are utterly deficient in other ways. In such a case, we vacate and remand
for further factfinding. See 9 Moore's Federal Practice 52.12[1] (Matthew
Bender 3d ed. 2000); 9A Charles A. Wright & Arthur R. Miller, Federal
Practice and Procedure 2577, at 514-22 (2d ed. 1995); Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709, 714
(1986); Pullman-Standard, 456 U.S. at 291-92.
When there is fair
room for argument that the District Court's factfindings should be vacated
in toto, the court of appeals should be especially careful in determining
that the findings are worthy of the deference Rule 52(a) prescribes. See,
e.g., Thermo Electron Corp. v. Schiavone Constr. Co., 915 F.2d 770,
773 (1st Cir. 1990); Bose Corp. v. Consumers Union of United States, Inc., 466 U.S.
485, 499 (1984). Thus, although Microsoft alleged only appearance of
bias, not actual bias, we have reviewed the record with painstaking care
and have discerned no evidence of actual bias. S. Pac. Communications Co. v. AT & T, 740 F.2d 980, 984
(D.C. Cir. 1984); Cooley, 1 F.3d at 996 (disqualifying district judge
for appearance of partiality but noting that "the record of the
proceedings below ... discloses no bias").
In light of this
conclusion, the District Judge's factual findings both warrant deference
under the clear error standard of review and, though exceedingly sparing
in citations to the record, permit meaningful appellate review. In
reaching these conclusions, we have not ignored the District Judge's
reported intention to craft his factfindings and Conclusions of Law to
minimize the breadth of our review. The Judge reportedly told Ken Auletta
that "[w]hat I want to do is confront the Court of Appeals with an
established factual record which is a fait accompli." Auletta, World War
3.0, at 230. He explained: "part of the inspiration for doing that is that
I take mild offense at their reversal of my preliminary injunction in the
consent-decree case, where they went ahead and made up about ninety
percent of the facts on their own." Id. Whether the District Judge takes
offense, mild or severe, is beside the point. Appellate decisions command
compliance, not agreement. We do not view the District Judge's remarks as
anything other than his expression of disagreement with this court's
decision, and his desire to provide extensive factual findings in this
case, which he did.
VII. Conclusion
The judgment of the
District Court is affirmed in part, reversed in part, and
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remanded in part. We vacate in full the Final Judgment embodying the
remedial order, and remand the case to the District Court for reassignment
to a different trial judge for further proceedings consistent with this
opinion.