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Conclusions of Law and Order

Page 2

i. The OEM Channel

With respect to OEMs, Microsoft's campaign proceeded on three fronts. First, Microsoft bound Internet Explorer to Windows with contractual and, later, technological shackles in order to ensure the prominent (and ultimately permanent) presence of Internet Explorer on every Windows user's PC system, and to increase the costs attendant to installing and using Navigator on any PCs running Windows. Id. ¶¶ 155-74. Second, Microsoft imposed stringent limits on the freedom of OEMs to reconfigure or modify Windows 95 and Windows 98 in ways that might enable OEMs to generate usage for Navigator in spite of the contractual and technological devices that Microsoft had employed to bind Internet Explorer to Windows. Id. ¶¶ 202-29. Finally, Microsoft used incentives and threats to induce especially important OEMs to design their distributional, promotional and technical efforts to favor Internet Explorer to the exclusion of Navigator. Id. ¶¶ 230-38.

Microsoft's actions increased the likelihood that pre-installation of Navigator onto Windows would cause user confusion and system degradation, and therefore lead to higher support costs and reduced sales for the OEMs. Id. ¶¶ 159, 172. Not willing to take actions that would jeopardize their already slender profit margins, OEMs felt compelled by Microsoft's actions to reduce drastically their distribution and promotion of Navigator. Id. ¶¶ 239, 241. The substantial inducements that Microsoft held out to the largest OEMs only further reduced the distribution and promotion of Navigator in the OEM channel. Id. ¶¶ 230, 233. The response of OEMs to Microsoft's efforts had a dramatic, negative impact on Navigator's usage share. Id. ¶ 376. The drop in usage share, in turn, has prevented Navigator from being the vehicle to open the relevant market to competition on the merits. Id. ¶¶ 377-78, 383.

Microsoft fails to advance any legitimate business objectives that actually explain the full extent of this significant exclusionary impact. The Court has already found that no quality-related or technical justifications fully explain Microsoft's refusal to license Windows 95 to OEMs without version 1.0 through 4.0 of Internet Explorer, or its refusal to permit them to uninstall versions 3.0 and 4.0. Id. ¶¶ 175-76. The same lack of justification applies to Microsoft's decision not to offer a browserless version of Windows 98 to consumers and OEMs, id. ¶ 177, as well as to its claim that it could offer "best of breed" implementations of functionalities in Web browsers. With respect to the latter assertion, Internet Explorer is not demonstrably the current "best of breed" Web browser, nor is it likely to be so at any time in the immediate future. The fact that Microsoft itself was aware of this reality only further strengthens the conclusion that Microsoft's decision to tie Internet Explorer to Windows cannot truly be explained as an attempt to benefit consumers and improve the efficiency of the software market generally, but rather as part of a larger campaign to quash innovation that threatened its monopoly position. Id. ¶¶ 195, 198.

To the extent that Microsoft still asserts a copyright defense, relying upon federal copyright law as a justification for its various restrictions on OEMs, that defense neither explains nor operates to immunize Microsoft's conduct under the Sherman Act. As a general proposition, Microsoft argues that the federal Copyright Act, 17 U.S.C. §101 et seq., endows the holder of a valid copyright in software with an absolute right to prevent licensees, in this case the OEMs, from shipping modified versions of its product without its express permission. In truth, Windows 95 and Windows 98 are covered by copyright registrations, Findings ¶ 228, that "constitute prima facie evidence of the validity of the copyright." 17 U.S.C. §410(c). But the validity of Microsoft's copyrights has never been in doubt; the issue is what, precisely, they protect.

Microsoft has presented no evidence that the contractual (or the technological) restrictions it placed on OEMs' ability to alter Windows derive from any of the enumerated rights explicitly granted to a copyright holder under the Copyright Act. Instead, Microsoft argues that the restrictions "simply restate" an expansive right to preserve the "integrity"of its copyrighted software against any "distortion," "truncation," or "alteration," a right nowhere mentioned among the Copyright Act's list of exclusive rights, 17 U.S.C. §106, thus raising some doubt as to its existence. See Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 155 (1973) (not all uses of a work are within copyright holder's control; rights limited to specifically granted "exclusive rights"); cf. 17 U.S.C. § 501(a) (infringement means violating specifically enumerated rights).(2)

It is also well settled that a copyright holder is not by reason thereof entitled to employ the perquisites in ways that directly threaten competition. See, e.g., Eastman Kodak, 504 U.S. at 479 n.29 ("The Court has held many times that power gained through some natural and legal advantage such as a . . . copyright, . . . can give rise to liability if 'a seller exploits his dominant position in one market to expand his empire into the next.'") (quoting Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 611 (1953)); Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409, 421 (1986); Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147, 1186 n.63 (1st Cir. 1994) (a copyright does not exempt its holder from antitrust inquiry where the copyright is used as part of a scheme to monopolize); see also Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1219 (9th Cir. 1997), cert. denied, 523 U.S. 1094 (1998) ("Neither the aims of intellectual property law, nor the antitrust laws justify allowing a monopolist to rely upon a pretextual business justification to mask anticompetitive conduct."). Even constitutional privileges confer no immunity when they are abused for anticompetitive purposes. See Lorain Journal Co. v. United States, 342 U.S. 143, 155-56 (1951). The Court has already found that the true impetus behind Microsoft's restrictions on OEMs was not its desire to maintain a somewhat amorphous quality it refers to as the "integrity" of the Windows platform, nor even to ensure that Windows afforded a uniform and stable platform for applications development. Microsoft itself engendered, or at least countenanced, instability and inconsistency by permitting Microsoft-friendly modifications to the desktop and boot sequence, and by releasing updates to Internet Explorer more frequently than it released new versions of Windows. Findings ¶ 226. Add to this the fact that the modifications OEMs desired to make would not have removed or altered any Windows APIs, and thus would not have disrupted any of Windows' functionalities, and it is apparent that Microsoft's conduct is effectively explained by its foreboding that OEMs would pre-install and give prominent placement to middleware like Navigator that could attract enough developer attention to weaken the applications barrier to entry. Id. ¶ 227. In short, if Microsoft was truly inspired by a genuine concern for maximizing consumer satisfaction, as well as preserving its substantial investment in a worthy product, then it would have relied more on the power of the very competitive PC market, and less on its own market power, to prevent OEMs from making modifications that consumers did not want. Id. ¶¶ 225, 228-29.

ii. The IAP Channel

Microsoft adopted similarly aggressive measures to ensure that the IAP channel would generate browser usage share for Internet Explorer rather than Navigator. To begin with, Microsoft licensed Internet Explorer and the Internet Explorer Access Kit to hundreds of IAPs for no charge. Id. ¶¶ 250-51. Then, Microsoft extended valuable promotional treatment to the ten most important IAPs in exchange for their commitment to promote and distribute Internet Explorer and to exile Navigator from the desktop. Id. ¶¶ 255-58, 261, 272, 288-90, 305-06. Finally, in exchange for efforts to upgrade existing subscribers to client software that came bundled with Internet Explorer instead of Navigator, Microsoft granted rebates - and in some cases made outright payments - to those same IAPs. Id. ¶¶ 259-60, 295. Given the importance of the IAP channel to browser usage share, it is fair to conclude that these inducements and restrictions contributed significantly to the drastic changes that have in fact occurred in Internet Explorer's and Navigator's respective usage shares. Id. ¶¶ 144-47, 309-10. Microsoft's actions in the IAP channel thereby contributed significantly to preserving the applications barrier to entry.

There are no valid reasons to justify the full extent of Microsoft's exclusionary behavior in the IAP channel. A desire to limit free riding on the firm's investment in consumer-oriented features, such as the Referral Server and the Online Services Folder, can, in some circumstances, qualify as a procompetitive business motivation; but that motivation does not explain the full extent of the restrictions that Microsoft actually imposed upon IAPs. Under the terms of the agreements, an IAP's failure to keep Navigator shipments below the specified percentage primed Microsoft's contractual right to dismiss the IAP from its own favored position in the Referral Server or the Online Services Folder. This was true even if the IAP had refrained from promoting Navigator in its client software included with Windows, had purged all mention of Navigator from any Web site directly connected to the Referral Server, and had distributed no browser other than Internet Explorer to the new subscribers it gleaned from the Windows desktop. Id. ¶¶ 258, 262, 289. Thus, Microsoft's restrictions closed off a substantial amount of distribution that would not have constituted a free ride to Navigator.

Nor can an ostensibly procompetitive desire to "foster brand association" explain the full extent of Microsoft's restrictions. If Microsoft's only concern had been brand association, restrictions on the ability of IAPs to promote Navigator likely would have sufficed. It is doubtful that Microsoft would have paid IAPs to induce their existing subscribers to drop Navigator in favor of Internet Explorer unless it was motivated by a desire to extinguish Navigator as a threat. See id. ¶¶ 259, 295. More generally, it is crucial to an understanding of Microsoft's intentions to recognize that Microsoft paid for the fealty of IAPs with large investments in software development for their benefit, conceded opportunities to take a profit, suffered competitive disadvantage to Microsoft's own OLS, and gave outright bounties. Id. ¶¶ 259-60, 277, 284-86, 295. Considering that Microsoft never intended to derive appreciable revenue from Internet Explorer directly, id. ¶¶ 136-37, these sacrifices could only have represented rational business judgments to the extent that they promised to diminish Navigator's share of browser usage and thereby contribute significantly to eliminating a threat to the applications barrier to entry. Id. ¶ 291. Because the full extent of Microsoft's exclusionary initiatives in the IAP channel can only be explained by the desire to hinder competition on the merits in the relevant market, those initiatives must be labeled anticompetitive.

In sum, the efforts Microsoft directed at OEMs and IAPs successfully ostracized Navigator as a practical matter from the two channels that lead most efficiently to browser usage. Even when viewed independently, these two prongs of Microsoft's campaign threatened to "forestall the corrective forces of competition" and thereby perpetuate Microsoft's monopoly power in the relevant market. Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 488 (1992) (Scalia, J., dissenting). Therefore, whether they are viewed separately or together, the OEM and IAP components of Microsoft's anticompetitive campaign merit a finding of liability under § 2.

iii. ICPs, ISVs and Apple

No other distribution channels for browsing software approach the efficiency of OEM pre-installation and IAP bundling. Findings ¶¶ 144-47. Nevertheless, protecting the applications barrier to entry was so critical to Microsoft that the firm was willing to invest substantial resources to enlist ICPs, ISVs, and Apple in its campaign against the browser threat. By extracting from Apple terms that significantly diminished the usage of Navigator on the Mac OS, Microsoft helped to ensure that developers would not view Navigator as truly cross-platform middleware. Id. ¶ 356. By granting ICPs and ISVs free licenses to bundle Internet Explorer with their offerings, and by exchanging other valuable inducements for their agreement to distribute, promote and rely on Internet Explorer rather than Navigator, Microsoft directly induced developers to focus on its own APIs rather than ones exposed by Navigator. Id. ¶¶ 334-35, 340. These measures supplemented Microsoft's efforts in the OEM and IAP channels.

Just as they fail to account for the measures that Microsoft took in the IAP channel, the goals of preventing free riding and preserving brand association fail to explain the full extent of Microsoft's actions in the ICP channel. Id. ¶¶ 329-30. With respect to the ISV agreements, Microsoft has put forward no procompetitive business ends whatsoever to justify their exclusionary terms. See id. ¶¶ 339-40. Finally, Microsoft's willingness to make the sacrifices involved in cancelling Mac Office, and the concessions relating to browsing software that it demanded from Apple, can only be explained by Microsoft's desire to protect the applications barrier to entry from the threat posed by Navigator. Id. ¶ 355. Thus, once again, Microsoft is unable to justify the full extent of its restrictive behavior.

b. Combating the Java Threat

As part of its grand strategy to protect the applications barrier, Microsoft employed an array of tactics designed to maximize the difficulty with which applications written in Java could be ported from Windows to other platforms, and vice versa. The first of these measures was the creation of a Java implementation for Windows that undermined portability and was incompatible with other implementations. Id. ¶¶ 387-93. Microsoft then induced developers to use its implementation of Java rather than Sun-compliant ones. It pursued this tactic directly, by means of subterfuge and barter, and indirectly, through its campaign to minimize Navigator's usage share. Id. ¶¶ 394, 396-97, 399-400, 401-03. In a separate effort to prevent the development of easily portable Java applications, Microsoft used its monopoly power to prevent firms such as Intel from aiding in the creation of cross-platform interfaces. Id. ¶¶ 404-06.

Microsoft's tactics induced many Java developers to write their applications using Microsoft's developer tools and to refrain from distributing Sun-compliant JVMs to Windows users. This stratagem has effectively resulted in fewer applications that are easily portable. Id. ¶ 398. What is more, Microsoft's actions interfered with the development of new cross-platform Java interfaces. Id. ¶ 406. It is not clear whether, absent Microsoft's machinations, Sun's Java efforts would by now have facilitated porting between Windows and other platforms to a degree sufficient to render the applications barrier to entry vulnerable. It is clear, however, that Microsoft's actions markedly impeded Java's progress to that end. Id. ¶ 407. The evidence thus compels the conclusion that Microsoft's actions with respect to Java have restricted significantly the ability of other firms to compete on the merits in the market for Intel-compatible PC operating systems.

Microsoft's actions to counter the Java threat went far beyond the development of an attractive alternative to Sun's implementation of the technology. Specifically, Microsoft successfully pressured Intel, which was dependent in many ways on Microsoft's good graces, to abstain from aiding in Sun's and Netscape's Java development work. Id. ¶¶ 396, 406. Microsoft also deliberately designed its Java development tools so that developers who were opting for portability over performance would nevertheless unwittingly write Java applications that would run only on Windows. Id. ¶ 394. Moreover, Microsoft's means of luring developers to its Java implementation included maximizing Internet Explorer's share of browser usage at Navigator's expense in ways the Court has already held to be anticompetitive. See supra, § I.A.2.a. Finally, Microsoft impelled ISVs, which are dependent upon Microsoft for technical information and certifications relating to Windows, to use and distribute Microsoft's version of the Windows JVM rather than any Sun-compliant version. Id. ¶¶ 401-03.

These actions cannot be described as competition on the merits, and they did not benefit consumers. In fact, Microsoft's actions did not even benefit Microsoft in the short run, for the firm's efforts to create incompatibility between its JVM for Windows and others' JVMs for Windows resulted in fewer total applications being able to run on Windows than otherwise would have been written. Microsoft was willing nevertheless to obstruct the development of Windows-compatible applications if they would be easy to port to other platforms and would thus diminish the applications barrier to entry. Id. ¶ 407.

c. Microsoft's Conduct Taken As a Whole

As the foregoing discussion illustrates, Microsoft's campaign to protect the applications barrier from erosion by network-centric middleware can be broken down into discrete categories of activity, several of which on their own independently satisfy the second element of a § 2 monopoly maintenance claim. But only when the separate categories of conduct are viewed, as they should be, as a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself. See Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962) (counseling that in Sherman Act cases "plaintiffs should be given the full benefit of their proof without tightly compartmentalizing the various factual components and wiping the slate clean after scrutiny of each"). In essence, Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems. Id. ¶ 411. While the evidence does not prove that they would have succeeded absent Microsoft's actions, it does reveal that Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market. More broadly, Microsoft's anticompetitive actions trammeled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers. Id. ¶ 412.

Viewing Microsoft's conduct as a whole also reinforces the conviction that it was predacious. Microsoft paid vast sums of money, and renounced many millions more in lost revenue every year, in order to induce firms to take actions that would help enhance Internet Explorer's share of browser usage at Navigator's expense. Id. ¶ 139. These outlays cannot be explained as subventions to maximize return from Internet Explorer. Microsoft has no intention of ever charging for licenses to use or distribute its browser. Id. ¶¶ 137-38. Moreover, neither the desire to bolster demand for Windows nor the prospect of ancillary revenues from Internet Explorer can explain the lengths to which Microsoft has gone. In fact, Microsoft has expended wealth and foresworn opportunities to realize more in a manner and to an extent that can only represent a rational investment if its purpose was to perpetuate the applications barrier to entry. Id. ¶¶ 136, 139-42. Because Microsoft's business practices "would not be considered profit maximizing except for the expectation that . . . the entry of potential rivals" into the market for Intel-compatible PC operating systems will be "blocked or delayed," Neumann v. Reinforced Earth Co., 786 F.2d 424, 427 (D.C. Cir. 1986), Microsoft's campaign must be termed predatory. Since the Court has already found that Microsoft possesses monopoly power, see supra, § I.A.1, the predatory nature of the firm's conduct compels the Court to hold Microsoft liable under § 2 of the Sherman Act.

B. Attempting to Obtain Monopoly Power in a Second Market by Anticompetitive Means

In addition to condemning actual monopolization, § 2 of the Sherman Act declares that it is unlawful for a person or firm to "attempt to monopolize . . . any part of the trade or commerce among the several States, or with foreign nations . . . ." 15 U.S.C. § 2. Relying on this language, the plaintiffs assert that Microsoft's anticompetitive efforts to maintain its monopoly power in the market for Intel-compatible PC operating systems warrant additional liability as an illegal attempt to amass monopoly power in "the browser market." The Court agrees.

In order for liability to attach for attempted monopolization, a plaintiff generally must prove "(1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize," and (3) that there is a "dangerous probability" that the defendant will succeed in achieving monopoly power. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993). Microsoft's June 1995 proposal that Netscape abandon the field to Microsoft in the market for browsing technology for Windows, and its subsequent, well-documented efforts to overwhelm Navigator's browser usage share with a proliferation of Internet Explorer browsers inextricably attached to Windows, clearly meet the first element of the offense.

The evidence in this record also satisfies the requirement of specific intent. Microsoft's effort to convince Netscape to stop developing platform-level browsing software for the 32-bit versions of Windows was made with full knowledge that Netscape's acquiescence in this market allocation scheme would, without more, have left Internet Explorer with such a large share of browser usage as to endow Microsoft with de facto monopoly power in the browser market. Findings ¶¶ 79-89.

When Netscape refused to abandon the development of browsing software for 32-bit versions of Windows, Microsoft's strategy for protecting the applications barrier became one of expanding Internet Explorer's share of browser usage - and simultaneously depressing Navigator's share - to an extent sufficient to demonstrate to developers that Navigator would never emerge as the standard software employed to browse the Web. Id. ¶ 133. While Microsoft's top executives never expressly declared acquisition of monopoly power in the browser market to be the objective, they knew, or should have known, that the tactics they actually employed were likely to push Internet Explorer's share to those extreme heights. Navigator's slow demise would leave a competitive vacuum for only Internet Explorer to fill. Yet, there is no evidence that Microsoft tried - or even considered trying - to prevent its anticompetitive campaign from achieving overkill. Under these circumstances, it is fair to presume that the wrongdoer intended "the probable consequences of its acts." IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 805b, at 324 (1996); see also Spectrum Sports, 506 U.S. at 459 (proof of "'predatory' tactics . . . may be sufficient to prove the necessary intent to monopolize, which is something more than an intent to compete vigorously"). Therefore, the facts of this case suffice to prove the element of specific intent.

Even if the first two elements of the offense are met, however, a defendant may not be held liable for attempted monopolization absent proof that its anticompetitive conduct created a dangerous probability of achieving the objective of monopoly power in a relevant market. Id. The evidence supports the conclusion that Microsoft's actions did pose such a danger.

At the time Microsoft presented its market allocation proposal to Netscape, Navigator's share of browser usage stood well above seventy percent, and no other browser enjoyed more than a fraction of the remainder. Findings ¶¶ 89, 372. Had Netscape accepted Microsoft's offer, nearly all of its share would have devolved upon Microsoft, because at that point, no potential third-party competitor could either claim to rival Netscape's stature as a browser company or match Microsoft's ability to leverage monopoly power in the market for Intel-compatible PC operating systems. In the time it would have taken an aspiring entrant to launch a serious effort to compete against Internet Explorer, Microsoft could have erected the same type of barrier that protects its existing monopoly power by adding proprietary extensions to the browsing software under its control and by extracting commitments from OEMs, IAPs and others similar to the ones discussed in § I.A.2, supra. In short, Netscape's assent to Microsoft's market division proposal would have, instanter, resulted in Microsoft's attainment of monopoly power in a second market. It follows that the proposal itself created a dangerous probability of that result. See United States v. American Airlines, Inc., 743 F.2d 1114, 1118-19 (5th Cir. 1984) (fact that two executives "arguably" could have implemented market-allocation scheme that would have engendered monopoly power was sufficient for finding of dangerous probability). Although the dangerous probability was no longer imminent with Netscape's rejection of Microsoft's proposal, "the probability of success at the time the acts occur" is the measure by which liability is determined. Id. at 1118.

This conclusion alone is sufficient to support a finding of liability for attempted monopolization. The Court is nonetheless compelled to express its further conclusion that the predatory course of conduct Microsoft has pursued since June of 1995 has revived the dangerous probability that Microsoft will attain monopoly power in a second market. Internet Explorer's share of browser usage has already risen above fifty percent, will exceed sixty percent by January 2001, and the trend continues unabated. Findings ¶¶ 372-73; see M&M Medical Supplies & Serv., Inc. v. Pleasant Valley Hosp., Inc., 981 F.2d 160, 168 (4th Cir. 1992) (en banc) ("A rising share may show more probability of success than a falling share. . . . [C]laims involving greater than 50% share should be treated as attempts at monopolization when the other elements for attempted monopolization are also satisfied.") (citations omitted); see also IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 807d, at 354-55 (1996) (acknowledging the significance of a large, rising market share to the dangerous probability element).

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