Conclusions of Law and Order
April 3, 2000
U.S. District Judge Thomas Penfield Jackson issued his verdict in the Microsoft antitrust trial.
FOR THE DISTRICT OF COLUMBIA
CONCLUSIONS OF LAW
The United States, nineteen individual states, and the District of Columbia ("the plaintiffs") bring these consolidated civil enforcement actions against defendant Microsoft Corporation ("Microsoft") under the Sherman Antitrust Act, 15 U.S.C. §§ 1 and 2. The plaintiffs charge, in essence, that Microsoft has waged an unlawful campaign in defense of its monopoly position in the market for operating systems designed to run on Intel-compatible personal computers ("PCs"). Specifically, the plaintiffs contend that Microsoft violated §2 of the Sherman Act by engaging in a series of exclusionary, anticompetitive, and predatory acts to maintain its monopoly power. They also assert that Microsoft attempted, albeit unsuccessfully to date, to monopolize the Web browser market, likewise in violation of §2. Finally, they contend that certain steps taken by Microsoft as part of its campaign to protect its monopoly power, namely tying its browser to its operating system and entering into exclusive dealing arrangements, violated § 1 of the Act.
Upon consideration of the Court's Findings of Fact ("Findings"), filed herein on November 5, 1999, as amended on December 21, 1999, the proposed conclusions of law submitted by the parties, the briefs of amici curiae, and the argument of counsel thereon, the Court concludes that Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market, both in violation of § 2. Microsoft also violated § 1 of the Sherman Act by unlawfully tying its Web browser to its operating system. The facts found do not support the conclusion, however, that the effect of Microsoft's marketing arrangements with other companies constituted unlawful exclusive dealing under criteria established by leading decisions under § 1.
The nineteen states and the District of Columbia ("the plaintiff states") seek to ground liability additionally under their respective antitrust laws. The Court is persuaded that the evidence in the record proving violations of the Sherman Act also satisfies the elements of analogous causes of action arising under the laws of each plaintiff state. For this reason, and for others stated below, the Court holds Microsoft liable under those particular state laws as well.
I. SECTION TWO OF THE SHERMAN ACT
A. Maintenance of Monopoly Power by Anticompetitive Means
Section 2 of the Sherman Act declares that it is unlawful for a person or firm to "monopolize . . . any part of the trade or commerce among the several States, or with foreign nations . . . ." 15 U.S.C. § 2. This language operates to limit the means by which a firm may lawfully either acquire or perpetuate monopoly power. Specifically, a firm violates § 2 if it attains or preserves monopoly power through anticompetitive acts. See United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966) ("The offense of monopoly power under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident."); Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 488 (1992) (Scalia, J., dissenting) ("Our § 2 monopolization doctrines are . . . directed to discrete situations in which a defendant's possession of substantial market power, combined with his exclusionary or anticompetitive behavior, threatens to defeat or forestall the corrective forces of competition and thereby sustain or extend the defendant's agglomeration of power.").
1. Monopoly Power
The threshold element of a § 2 monopolization offense being "the possession of monopoly power in the relevant market," Grinnell, 384 U.S. at 570, the Court must first ascertain the boundaries of the commercial activity that can be termed the "relevant market." See Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965) ("Without a definition of [the relevant] market there is no way to measure [defendant's] ability to lessen or destroy competition."). Next, the Court must assess the defendant's actual power to control prices in - or to exclude competition from - that market. See United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956) ("Monopoly power is the power to control prices or exclude competition.").
In this case, the plaintiffs postulated the relevant market as being the worldwide licensing of Intel-compatible PC operating systems. Whether this zone of commercial activity actually qualifies as a market, "monopolization of which may be illegal," depends on whether it includes all products "reasonably interchangeable by consumers for the same purposes." du Pont, 351 U.S. at 395. SeeRothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986) ("Because the ability of consumers to turn to other suppliers restrains a firm from raising prices above the competitive level, the definition of the 'relevant market' rests on a determination of available substitutes.").
The Court has already found, based on the evidence in this record, that there are currently no products - and that there are not likely to be any in the near future - that a significant percentage of computer users worldwide could substitute for Intel-compatible PC operating systems without incurring substantial costs. Findings ¶¶ 18-29. The Court has further found that no firm not currently marketing Intel-compatible PC operating systems could start doing so in a way that would, within a reasonably short period of time, present a significant percentage of such consumers with a viable alternative to existing Intel-compatible PC operating systems. Id. ¶¶ 18, 30-32. From these facts, the Court has inferred that if a single firm or cartel controlled the licensing of all Intel-compatible PC operating systems worldwide, it could set the price of a license substantially above that which would be charged in a competitive market - and leave the price there for a significant period of time - without losing so many customers as to make the action unprofitable. Id. ¶ 18. This inference, in turn, has led the Court to find that the licensing of all Intel-compatible PC operating systems worldwide does in fact constitute the relevant market in the context of the plaintiffs' monopoly maintenance claim. Id.
The plaintiffs proved at trial that Microsoft possesses a dominant, persistent, and increasing share of the relevant market. Microsoft's share of the worldwide market for Intel-compatible PC operating systems currently exceeds ninety-five percent, and the firm's share would stand well above eighty percent even if the Mac OS were included in the market. Id. ¶ 35. The plaintiffs also proved that the applications barrier to entry protects Microsoft's dominant market share. Id. ¶¶ 36-52. This barrier ensures that no Intel-compatible PC operating system other than Windows can attract significant consumer demand, and the barrier would operate to the same effect even if Microsoft held its prices substantially above the competitive level for a protracted period of time. Id. Together, the proof of dominant market share and the existence of a substantial barrier to effective entry create the presumption that Microsoft enjoys monopoly power. See United States v. AT&T Co., 524 F. Supp. 1336, 1347-48 (D.D.C. 1981) ("a persuasive showing . . . that defendants have monopoly power . . . through various barriers to entry, . . . in combination with the evidence of market shares, suffice[s] at least to meet the government's initial burden, and the burden is then appropriately placed upon defendants to rebut the existence and significance of barriers to entry"), quoted with approval inSouthern Pac. Communications Co. v. AT&T Co., 740 F.2d 980, 1001-02 (D.C. Cir. 1984).
At trial, Microsoft attempted to rebut the presumption of monopoly power with evidence of both putative constraints on its ability to exercise such power and behavior of its own that is supposedly inconsistent with the possession of monopoly power. None of the purported constraints, however, actually deprive Microsoft of "the ability (1) to price substantially above the competitive level and (2) to persist in doing so for a significant period without erosion by new entry or expansion." IIA Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law ¶ 501, at 86 (1995) (emphasis in original); see Findings ¶¶ 57-60. Furthermore, neither Microsoft's efforts at technical innovation nor its pricing behavior is inconsistent with the possession of monopoly power. Id. ¶¶ 61-66.
Even if Microsoft's rebuttal had attenuated the presumption created by the prima facie showing of monopoly power, corroborative evidence of monopoly power abounds in this record: Neither Microsoft nor its OEM customers believe that the latter have - or will have anytime soon - even a single, commercially viable alternative to licensing Windows for pre-installation on their PCs. Id. ¶¶ 53-55; cf. Rothery, 792 F.2d at 219 n.4 ("we assume that economic actors usually have accurate perceptions of economic realities"). Moreover, over the past several years, Microsoft has comported itself in a way that could only be consistent with rational behavior for a profit-maximizing firm if the firm knew that it possessed monopoly power, and if it was motivated by a desire to preserve the barrier to entry protecting that power. Findings ¶¶ 67, 99, 136, 141, 215-16, 241, 261-62, 286, 291, 330, 355, 393, 407.
In short, the proof of Microsoft's dominant, persistent market share protected by a substantial barrier to entry, together with Microsoft's failure to rebut that prima facie showing effectively and the additional indicia of monopoly power, have compelled the Court to find as fact that Microsoft enjoys monopoly power in the relevant market. Id. ¶ 33.
2. Maintenance of Monopoly Power by Anticompetitive Means
In a § 2 case, once it is proved that the defendant possesses monopoly power in a relevant market, liability for monopolization depends on a showing that the defendant used anticompetitive methods to achieve or maintain its position. See United States v. Grinnell, 384 U.S. 563, 570-71 (1966); Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 488 (1992) (Scalia, J., dissenting); Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1353 (Fed. Cir. 1999). Prior cases have established an analytical approach to determining whether challenged conduct should be deemed anticompetitive in the context of a monopoly maintenance claim. The threshold question in this analysis is whether the defendant's conduct is "exclusionary" - that is, whether it has restricted significantly, or threatens to restrict significantly, the ability of other firms to compete in the relevant market on the merits of what they offer customers. See Eastman Kodak, 504 U.S. at 488 (Scalia, J., dissenting) (§ 2 is "directed to discrete situations" in which the behavior of firms with monopoly power "threatens to defeat or forestall the corrective forces of competition").(1)
If the evidence reveals a significant exclusionary impact in the relevant market, the defendant's conduct will be labeled "anticompetitive" - and liability will attach - unless the defendant comes forward with specific, procompetitive business motivations that explain the full extent of its exclusionary conduct. See Eastman Kodak, 504 U.S. at 483 (declining to grant defendant's motion for summary judgment because factual questions remained as to whether defendant's asserted justifications were sufficient to explain the exclusionary conduct or were instead merely pretextual); see also Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 n.32 (1985) (holding that the second element of a monopoly maintenance claim is satisfied by proof of "'behavior that not only (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way'") (quoting III Phillip E. Areeda & Donald F. Turner, Antitrust Law ¶ 626b, at 78 (1978)).
If the defendant with monopoly power consciously antagonized its customers by making its products less attractive to them - or if it incurred other costs, such as large outlays of development capital and forfeited opportunities to derive revenue from it - with no prospect of compensation other than the erection or preservation of barriers against competition by equally efficient firms, the Court may deem the defendant's conduct "predatory." As the D.C. Circuit stated in Neumann v. Reinforced Earth Co.,
[P]redation involves aggression against business rivals through the
use of business practices that would not be considered profit maximizing
except for the expectation that (1) actual rivals will be driven from the
market, or the entry of potential rivals blocked or delayed, so that the
predator will gain or retain a market share sufficient to command monopoly
profits, or (2) rivals will be chastened sufficiently to abandon competitive
behavior the predator finds threatening to its realization of monopoly
786 F.2d 424, 427 (D.C. Cir. 1986).
Proof that a profit-maximizing firm took predatory action should suffice to demonstrate the threat of substantial exclusionary effect; to hold otherwise would be to ascribe irrational behavior to the defendant. Moreover, predatory conduct, by definition as well as by nature, lacks procompetitive business motivation. See Aspen Skiing, 472 U.S. at 610-11 (evidence indicating that defendant's conduct was "motivated entirely by a decision to avoid providing any benefits" to a rival supported the inference that defendant's conduct "was not motivated by efficiency concerns"). In other words, predatory behavior is patently anticompetitive. Proof that a firm with monopoly power engaged in such behavior thus necessitates a finding of liability under § 2.
In this case, Microsoft early on recognized middleware as the Trojan horse that, once having, in effect, infiltrated the applications barrier, could enable rival operating systems to enter the market for Intel-compatible PC operating systems unimpeded. Simply put, middleware threatened to demolish Microsoft's coveted monopoly power. Alerted to the threat, Microsoft strove over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured, cross-platform applications to erode the applications barrier. In pursuit of this goal, Microsoft sought to convince developers to concentrate on Windows-specific APIs and ignore interfaces exposed by the two incarnations of middleware that posed the greatest threat, namely, Netscape's Navigator Web browser and Sun's implementation of the Java technology. Microsoft's campaign succeeded in preventing - for several years, and perhaps permanently - Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits. Findings ¶¶ 133, 378. Because Microsoft achieved this result through exclusionary acts that lacked procompetitive justification, the Court deems Microsoft's conduct the maintenance of monopoly power by anticompetitive means.
a. Combating the Browser Threat
The same ambition that inspired Microsoft's efforts to induce Intel, Apple, RealNetworks and IBM to desist from certain technological innovations and business initiatives - namely, the desire to preserve the applications barrier - motivated the firm's June 1995 proposal that Netscape abstain from releasing platform-level browsing software for 32-bit versions of Windows. See id. ¶¶ 79-80, 93-132. This proposal, together with the punitive measures that Microsoft inflicted on Netscape when it rebuffed the overture, illuminates the context in which Microsoft's subsequent behavior toward PC manufacturers ("OEMs"), Internet access providers ("IAPs"), and other firms must be viewed.
When Netscape refused to abandon its efforts to develop Navigator into
a substantial platform for applications development, Microsoft focused
its efforts on minimizing the extent to which developers would avail themselves
of interfaces exposed by that nascent platform. Microsoft realized that
the extent of developers' reliance on Netscape's browser platform would
depend largely on the size and trajectory of Navigator's share of browser
usage. Microsoft thus set out to maximize Internet Explorer's share of
browser usage at Navigator's expense. Id. ¶¶ 133, 359-61.
The core of this strategy was ensuring that the firms comprising the most
effective channels for the generation of browser usage would devote their
distributional and promotional efforts to Internet Explorer rather than
Navigator. Recognizing that pre-installation by OEMs and bundling with
the proprietary software of IAPs led more directly and efficiently to browser
usage than any other practices in the industry, Microsoft devoted major
efforts to usurping those two channels. Id. ¶ 143.