United States Court of
Appeals
FOR
THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 26 and 27, 2001
Decided June 28,
2001
No. 00-5212
United States of America,
Appellee
v.
Microsoft Corporation,
Appellant
Consolidated with
00-5213
Appeals from the United States
District Court
for the District of Columbia
(No. 98cv01232)
(No. 98cv01233)
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 Gen-
eral, 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 Gen-
eral, 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.
Table of Contents
Summary 5
I. Introduction 7
A.
Background 7
B.
Overview 10
II.
Monopolization 13
A. Monopoly Power 14
1. Market Structure
15
a.
Market definition 15
b. Market power 19
2. Direct Proof 23
B.
Anticompetitive Conduct 25
1. Licenses Issued to Original Equip-
ment Manufacturers 28
a.
Anticompetitive effect of the li-
cense restrictions 29
b.
Microsoft's justifications for the
license restrictions 33
2.
Integration of IE and Windows 36
a.
Anticompetitive effect of inte-
gration 36
b. Microsoft's justifications
for inte-
gration 39
3. Agreements with
Internet Access
Providers 40
4. Dealings with Internet Content Pro-
viders, Independent
Software Ven-
dors, and Apple Computer 47
5. Java 52
a. The
incompatible JVM 52
b. The First Wave Agreements 53
c.
Deception of Java developers
55
d. The threat to Intel 56
6. Course of Conduct
58
C. Causation 59
III. Attempted Monopolization 62
A.
Relevant Market 63
B.
Barriers to Entry 65
IV.
Tying 68
A.
Separate-Products Inquiry Under the
Per Se Test
70
B. Per Se Analysis Inappropriate for this
Case 77
C.
On Remand 86
V. Trial Proceedings and Remedy 90
A. Factual
Background 91
B.
Trial Proceedings 95
C.
Failure to Hold an Evidentiary Hearing
96
D. Failure to Provide an Adequate
Explana-
tion
99
E. Modification of Liability 100
F. On Remand
103
G. Conclusion 106
VI. Judicial Misconduct 106
A.
The District Judge's Communications
with the Press 107
B. Violations of the Code of
Conduct for
United States Judges 113
C.
Appearance of Partiality
117
D. Remedies for Judicial Misconduct and
Appearance of
Partiality 120
1. Disqualification
120
2. Review of Findings of Fact and Con-
clusions of Law
123
VII.
Conclusion 125
Before: Edwards, Chief Judge, Williams, Ginsburg,
Sentelle,
Randolph, Rogers and Tatel, Circuit Judges.
Opinion for the Court filed Per
Curiam.
Per Curiam: Microsoft Corporation appeals from
judg-
ments of the District Court finding the company in violation
of
ss 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 Micro-
soft had maintained a monopoly in
the market for Intel-
compatible PC operating systems in violation of s
2; attempt-
ed to gain a monopoly
in the market for internet browsers in
violation of s 2; and illegally tied two purportedly separate
products, Windows and Internet Explorer ("IE"), in violation
of s 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
ss 1 and 2 of
the Sherman Act mandated findings of liability
under analogous state law
antitrust provisions. Id. To rem-
edy 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 re-
medial order
also contains a number of interim restrictions on
Microsoft's
conduct. Id. at 66-69.
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 Dis-
trict 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 com-
promised 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 ap-
peal--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
s 2 of the Sherman Act by employing anticompetitive
means to maintain a
monopoly in the operating system mar-
ket; we reverse the District Court's determination that Mi-
crosoft
violated s 2 of the Sherman Act by illegally attempt-
ing to monopolize
the internet browser market; and we
remand the District Court's finding that Microsoft violated
s 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 reme-
dial 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 reme-
dies-specific
factual disputes.
Finally, we vacate the Final Judgment on remedies, be-
cause the
trial judge engaged in impermissible ex parte
contacts by holding secret
interviews with members of the
media and made numerous offensive comments
about Micro-
soft 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 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. See 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 Mi-
crosoft 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 ss 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 pre-
liminary 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 ef-
forts to unseat Netscape Navigator as the preeminent
inter-
net browser, plaintiffs charged four distinct violations of the
Sherman Act: (1) unlawful
exclusive dealing arrangements in
violation of s 1; (2) unlawful tying of IE to Windows 95 and
Windows 98 in violation of s 1;
(3) unlawful maintenance of a
monopoly in the PC operating system
market in violation of
s 2; and
(4) unlawful attempted monopolization of the inter-
net browser market in
violation of s 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 con-
tinuances, 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 Dis-
trict
Court established a schedule for briefing on possible
legal conclusions,
inviting Professor Lawrence Lessig to par-
ticipate as amicus curiae. Second, the District Court re-
ferred the case to mediation to afford the parties an opportu-
nity to
settle their differences. The 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 s 1 tying and s 2 monopoly
mainte-
nance and attempted monopolization claims, Conclusions of
Law,
at 35-51, while ruling that there was insufficient evi-
dence to support a
s 1 exclusive dealing violation, id. at 51-
54. As to the pendent State actions, the District Court found
the
State antitrust laws conterminous with ss 1 and 2 of the
Sherman Act,
thereby obviating the need for further State-
specific analysis. Id. at 54-56. In those few cases where a
State's law required an
additional showing of intrastate im-
pact 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 subse-
quently 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 proceed-
ings 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 with-
out 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 ad-
dressed 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. s 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 Govern-
ment'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 argu-
ments, 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).
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 review-
ing 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 serious-
ly 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" s 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 con-
sumption of the
good increases with the number of other
agents consuming the
good." Michael L. Katz & Carl
Shapi-
ro, 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
en-
trenched. 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 en-
trenchment 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 "se-
quentially over time rather than
simultaneously across a
market").
Microsoft argues that the operating system mar-
ket is just such a
market.
Whether or not
Microsoft's characterization of the operat-
ing 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 dynam-
ic markets characterized by network effects. Compare Ste-
ven 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 de-
serves heightened antitrust scrutiny in
part because it may
threaten to deter innovation), with Ronald A. Cass
& Keith
N. Hylton, Preserving Competition: Economic Analysis, Le-
gal 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
invest-
ment returns in a Schumpeterian framework, but they might
represent
exploitation of customer lock-in and monopoly pow-
er when viewed through
the lens of network economics....
The issue is particularly complex because, in network indus-
tries
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
chal-
lenges 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. s 2. The offense of monopoliza-
tion 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 ap-
plied this test and found that
Microsoft possesses monopoly
power in the market for Intel-compatible PC
operating sys-
tems. Focusing
primarily on Microsoft's efforts to suppress
Netscape Navigator's threat
to its operating system monopo-
ly, 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 Elec., Inc.
v. Ideal Elec. Sec. Co., 81 F.3d 240, 244 (D.C.
Cir. 1996).
We begin by
considering whether Microsoft possesses mo-
nopoly 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 mainte-
nance 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, see
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. See 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 s 1 unreasonable restraint of trade action).
Because such direct proof is only
rarely available, courts
more typically examine market structure in
search of circum-
stantial 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. See 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 Micro-
soft has a greater than 95%
share. It also found the compa-
ny'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 appropriate-
ly 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 (D.C. Cir. 1986), the relevant market must
include
all products "reasonably interchangeable by consum-
ers 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 world-
wide," 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 oper-
ating 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 consider-
ably
more and supports fewer applications.
Id. p 21. Micro-
soft
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); see also 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 contradict-
ing 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 server-
based 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 Dis-
trict 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 appli-
ances and portal websites are outside the relevant
market, we
adhere to that conclusion.
This brings us to Microsoft's main
challenge to the District
Court's market definition: the exclusion of middleware. Be-
cause 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 allo-
cating
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. Oper-
ating systems also function as
platforms for software applica-
tions.
They do this by "exposing"--i.e., making available to
software
developers--routines or protocols that perform cer-
tain 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 develop-
ers 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.
Win-
dows contains thousands of APIs, controlling everything from
data storage to font display. See
Direct Testimony of Mi-
chael 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 operat-
ing
system. Findings of Fact p 4. This process is both time-
consuming
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 oper-
ating
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 com-
petitor.
Appellant's Opening Br. at 86.
The test of reason-
able interchangeability, however, required the
District Court
to consider only substitutes that constrain pricing in the
reasonably foreseeable 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 substi-
tutes."); 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
operat-
ing 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
mar-
ket because the primary focus of the plaintiffs' s 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' s 2 theo-
ry, under which Microsoft preserved its
monopoly against
middleware technologies that threatened to become viable
substitutes for Windows, and its theory of the relevant mar-
ket,
under which middleware is not presently a viable substi-
tute for
Windows. Because middleware's threat is
only nas-
cent, however, no contradiction exists. Nothing in s 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 inter-
changeable by consumers," du
Pont, 351 U.S. at 395, and
because middleware is not now interchangeable
with Win-
dows, 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 predomi-
nant. 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 in-
ferred 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,
howev-
er, the District Court was not misled. Considering the
possibility of new rivals, the court
focused not only on Micro-
soft'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 en-
try"--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
applica-
tions. Id. p 46. This misses the point. That some develop-
ers 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 ar-
gues 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 ver-
sions.
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 Win-
dows, 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 foresee-
able future. See id.
p p 28-29.
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 monopo-
ly
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 invest-
ments to convince software developers to
write for its new
operating system, and it continues to
"evangelize" the Win-
dows platform today. Whether costs borne by all market
participants
should be considered entry barriers is the sub-
ject of much debate. Compare 2A Areeda & Hovenkamp,
Antitrust
Law s 420c, at 61 (arguing that these costs are
entry barriers), and Joe
S. Bain, Barriers to New Competi-
tion:
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 mas-
sive 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 ver-
sion 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 cir-
cumstantial evidence
proves that Microsoft possesses monop-
oly 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 demon-
strates
the absence of monopoly power. The
company claims
that it invests heavily in research and development, id.
at 88-
89 (citing 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 Intel-
compatible 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 s
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. Be-
cause 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, Micro-
soft'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 pow-
er.
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
monopo-
ly 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. Cf. 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 monopo-
list.").
Microsoft never claims that it did not charge the long-
term
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 to the District
Court, the company set the price of Windows
without consid-
ering 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 exclu-
sionary 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 s 2. A firm violates s 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 prod-
uct,
business acumen, or historic accident."
Grinnell, 384
U.S. at 571;
see also 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 s 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 s 2,
however, several principles do emerge. First, to be con-
demned as
exclusionary, a monopolist's act must have an
"anticompetitive
effect." That is, it must harm the
competi-
tive 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. McQuil-
lan, 506 U.S. 447, 458 (1993); see also 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); see also United States v.
Arnold,
Schwinn & Co., 388 U.S. 365, 374 n.5 (1967), over-
ruled on other
grounds, Cont'l T.V., Inc. v. GTE Sylvania
Inc., 433 U.S. 36 (1977), must
demonstrate that the monopo-
list's conduct indeed has the requisite
anticompetitive 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 s 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
nonpre-
textual claim that its conduct is indeed a form of competition
on the merits because it involves, for example, greater effi-
ciency
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 pro-
competitive benefit. In cases arising under s 1 of the
Sher-
man 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 s 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 conse-
quences"); 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 vio-
lated s 2 of the
Sherman Act in a variety of ways.
1. Licenses Issued to Original Equipment Manufac-
turers
The District Court condemned a number of
provisions in
Microsoft's agreements licensing Windows to OEMs, because
it 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 brow-
ser,
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 relative-
ly 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 sys-
tem 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 neces-
sary 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 mar-
ket--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 operat-
ing system so as to
foreclose competition in the browser
market. In evaluating the s 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 plain-
tiffs 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
distrib-
uted by an IAP.) Findings of Fact p
145. The District
Court found
that the restrictions Microsoft imposed in licens-
ing Windows to OEMs
prevented many OEMs from distribut-
ing browsers other than IE. Conclusions of Law, at 39-40.
In particular, the District Court
condemned the license provi-
sions 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 restric-
tion--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 confu-
sion 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 ob-
serves
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 represent-
ed that having only one
icon in a particular category would be
"less confusing for
endusers." See Government's Trial
Ex-
hibit ("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
confu-
sion.
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 pres-
ent.
Therefore, we conclude that the license restriction at
issue is
anticompetitive. We defer for the
moment the ques-
tion 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 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 rath-
er 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 offer-
ings together with [IAPs] that get displayed on
their ma-
chines in a FAR more prominent way than MSN or our
Internet browser."). Microsoft does not deny that the
prohi-
bition 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
sig-
nificant costs upon the OEMs;
prior to Microsoft's prohibit-
ing 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 anti-
competitive 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 inter-
net 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 re-
duced 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 restric-
tions
Microsoft argues that the license restrictions are legally
justified
because, in imposing them, Microsoft is simply "exer-
cising its
rights as the holder of valid copyrights." Appel-
lant's Opening Br. at 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 person-
al property, such
as a baseball bat, cannot give rise to tort
liability. As the Federal Circuit succinctly
stated: "Intellec-
tual
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
unrea-
sonable 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. See 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 assert-
ing its rights, violating the antitrust laws, see WGN
Cont'l
Broad., 693 F.2d at 626;
see also Cmty. for Creative Non-
Violence 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 "excessive-
ly mutilated or altered" the copyrighted
work).
The only license
restriction Microsoft seriously defends as
necessary to prevent a
"substantial alteration" of its copy-
righted 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 pre-
vents 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 automatical-
ly upon completion of the initial boot
process. We therefore
hold that
this particular restriction is not an exclusionary
practice that violates
s 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 princi-
pal 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 alter-
ing 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 Conclu-
sions 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, re-
printed 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 justifica-
tion
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 insuffi-
cient 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 restric-
tion prohibiting
automatically launched alternative interfaces,
all the OEM license
restrictions at issue represent uses of
Microsoft's market power to
protect its monopoly, unre-
deemed by any legitimate justification. The restrictions
therefore violate s 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 "Micro-
soft's executives believed ...
its contractual restrictions
placed on OEMs would not be sufficient in
themselves to
reverse the direction of Navigator's usage share. Conse-
quently, 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 brow-
sers 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;
more-
over, 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," Con-
clusions 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 cir-
cumstances to override the user's choice of a default browser
other than IE; and commingling
code related 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 consid-
er first whether the suspect
actions had an anticompetitive
effect, and then whether Microsoft has
provided a procompet-
itive 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 Mi-
crosoft's decision to exclude IE from the
"Add/Remove Pro-
grams" utility in Windows 98. Findings of Fact p 170. Mi-
crosoft 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 us-
age share of rival browsers not by making
Microsoft's own
browser more attractive to consumers but, rather, by
discour-
aging 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 circum-
stances,
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. Put-
ting 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, preventing
an OEM from removing IE deters it from installing a
second
browser because doing so increases the OEM's product test-
ing
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 Dis-
trict Court's findings to the contrary are
clearly erroneous.
According to
Microsoft, its expert "testified without contra-
diction that '[t]he
very same code in Windows 98 that pro-
vides 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
Wea-
dock, 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 func-
tions. It contains some functions that have to do
specifically
with Web browsing, and it contains some general user
inter-
face 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 func-
tions 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 con-
clude
that the finding was clearly erroneous.
See 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 different-
ly."). Accordingly, we reject Microsoft's argument
that we
should vacate Finding of Fact 159 as it relates to the com-
mingling
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 re-
ducing
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 Win-
dows--excluding IE from
the Add/Remove Programs utility
and commingling browser and operating
system code. Al-
though 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 substan-
tial
benefits to customers and developers."), it neither speci-
fies nor
substantiates those claims. Nor does it
argue that
either excluding IE from the Add/Remove Programs utility or
commingling code achieves any integrative benefit. Plaintiffs
plainly made out a prima
facie case of harm to competition in
the operating system market by
demonstrating that Micro-
soft'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 protect-
ing its operating
system monopoly. Accordingly, we hold
that Microsoft's exclusion of IE from the Add/Remove Pro-
grams
utility and its commingling of browser and operating
system code
constitute exclusionary conduct, in violation of
s 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 circum-
stances--Microsoft
argues that it has "valid technical rea-
sons." 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 uti-
lized Microsoft's Channel Definition Format, which Navi-
gator 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
bur-
den not only of rebutting a proffered justification but also of
demonstrating that the anticompetitive effect of the chal-
lenged
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.
Accord-
ingly, 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 Micro-
soft'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 inter-
net 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 impor-
tant 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. Final-
ly, in
exchange for efforts to upgrade existing subscrib-
ers to client software that came bundled
with [IE] in-
stead 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 acting to preserve its monopoly by offering IE to IAPs
at
an attractive price.
Similarly, the District Court held Micro-
soft 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 customiz-
ing 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.
Final-
ly, 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--Micro-
soft'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 pre-
dator 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 con-
demn 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 subscrip-
tions
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 in Tampa
Electric Co. v.
Nashville Coal Co., 365 U.S. 320 (1961). That case, which
involved a challenge
to a requirements contract, was brought
under s 3 of the Clayton Act and
ss 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 "fore-
close competition
in a substantial share of the line of com-
merce 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 s 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 indi-
cated that s 3 of the Clayton Act and
s 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 chal-
lenged, it is clear that in all cases the plaintiff must
both
define the relevant market and prove the degree of foreclo-
sure. This is a prudential requirement; exclusivity provi-
sions 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."). Permit-
ting 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,
21-
23 (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).
In this case, plaintiffs challenged
Microsoft's exclusive deal-
ing arrangements with the IAPs under both ss 1
and 2 of the
Sherman Act. The
District Court, in analyzing the s 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 s
1."
Conclusions of Law, at
52. The court recognized that
Micro-
soft 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 s 1. Conclu-
sions of
Law, at 53. Plaintiffs did not
cross-appeal this
holding.
Turning to s 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 s 1
violation in no way detracts from the Court's assignment
of
liability for the same arrangements under s 2.... [A]ll of
Microsoft's agreements,
including the non-exclusive ones, se-
verely restricted Netscape's access
to those distribution chan-
nels 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 s 1
necessarily precludes holding it liable under s 2.
The District Court appears to have based its holding with
respect to s 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 ss 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 circum-
stances, may give rise to a s 2 violation even though the
contracts
foreclose less than the roughly 40% or 50% share
usually required in
order to establish a s 1 violation. See
generally Dennis W. Carlton, A General Analysis of Exclu-
sionary
Conduct and Refusal to Deal--Why Aspen and
Kodak Are Misguided, 68
Antitrust L.J. 659 (2001) (explain-
ing various scenarios under which
exclusive dealing, particu-
larly 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 brow-
ser 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 "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 Micro-
soft'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 justifica-
tion 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 deci-
sion holding that Microsoft's exclusive contracts with IAPs
are
exclusionary devices, in violation of s 2 of the Sherman
Act.
4. Dealings with Internet Content
Providers, Inde-
pendent Software Vendors, and Apple Computer
The District Court held that Microsoft
engages in exclu-
sionary 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
"supple-
mented 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, pro-
mote[,]
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,
deleteri-
ous impact on Navigator's usage share." Findings of Fact
p 332. Because
plaintiffs failed to demonstrate that Micro-
soft's deals with the ICPs
have a substantial effect upon
competition, they have not proved the
violation of the Sher-
man 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 techni-
cal 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. Another condition is
that the ISVs use Micro-
soft's "HTML Help," which is accessible only with Inter-
net Explorer, to implement their
applications' help sys-
tems.
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 mil-
lions 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 large-
ly 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 ex-
clusive deals with the
ISVs had a substantial effect in further
foreclosing rival browsers from
the market. (Data intro-
duced by
Microsoft, see Direct Testimony of Cameron Myhr-
vold 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
agree-
ments, there were 40 million new users of the internet.)
Because, by keeping rival browsers
from gaining widespread
distribution (and potentially attracting the
attention of devel-
opers 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 anti-
competitive 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.
Ac-
cordingly, 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 arrange-
ments with the ISVs, we
hold that those arrangements violate
s 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 hard-
ware (the Macintosh line of
computers). Microsoft primarily
makes
software, including, in addition to its operating system,
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 continu-
ing 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, custom-
ers, 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]
every-
where 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 non-
Microsoft
browsing software on the desktop of new Ma-
cintosh 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 brow-
ser 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 has a
substantial
effect in restricting distribution of rival browsers, and
be-
cause (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 anticom-
petitive. See Conclusions of Law, at 42 (citing
Findings of
Fact p 356) ("By extracting from Apple terms that
significant-
ly diminished the usage of Navigator on the Mac OS,
Micro-
soft helped to ensure that developers would not view Naviga-
tor
as truly cross-platform middleware.").
Microsoft offers no procompetitive
justification for the ex-
clusive 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 obli-
gation[;] ... all of the various obligations ... were part of
one
'overall agreement' between the two companies."); that
does not mean it has any
procompetitive justification. Ac-
cordingly,
we hold that the exclusive deal with Apple is
exclusionary, in violation
of s 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
Naviga-
tor, 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) enter-
ing into contracts, the
so-called "First Wave Agreements,"
requiring major ISVs to
promote Microsoft's JVM exclusive-
ly;
(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 exclu-
sionary 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
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 incom-
patible
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 pro-
competitive 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 applica-
tions 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 Micro-
soft'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 applica-
tions 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
exclu-
sively, they raise a different competitive concern. The Dis-
trict Court found that, although not literally
exclusive, the
deals were exclusive in practice because they required
devel-
opers 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
Micro-
soft'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
9994-
10000, "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,"
De-
fendant's Proposed Findings of Fact p 276, reprinted in 3 J.A.
at 1689. Moreover, Microsoft's
exclusive deals with the lead-
ing 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 Naviga-
tor 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 under-
took a number of anticompetitive
actions that seriously re-
duced the distribution of Navigator, and the
District Court
found that those actions thereby seriously impeded
distribu-
tion 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 exclu-
sive 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 Agree-
ments 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 Win-
dows-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 applica-
tions ended up producing applications that would
run only on
the Windows operating system.
When specifically accused by a PC Week
reporter of frag-
menting 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 cross-
platform
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 [(com-
monly 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 lay-
er.... 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
Micro-
soft's ultimate objective was to thwart Java's threat to
Micro-
soft's monopoly in the market for operating systems. One
Microsoft document, for example,
states as a strategic goal:
"Kill
cross-platform 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 there-
fore was anticompetitive. Unsurprisingly, Microsoft offers no
procompetitive
explanation for its campaign to deceive devel-
opers. Accordingly, we conclude this conduct is
exclusionary,
in violation of s 2 of the Sherman Act.
d. The threat to Intel
The District Court held that Microsoft
also acted unlawful-
ly 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 high-
performance,
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 stan-
dards." Id. p 396.
In April of that year, Microsoft again
urged Intel not to help Sun
by distributing Intel's fast, Sun-
compliant 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 bun-
dled 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 sup-
port from Microsoft for its "3DX"
technology.... Mi-
crosoft'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 Micro-
soft's
goals for Intel: "Intel to stop
helping Sun create Java
Multimedia APIs, especially ones that run well ... on Win-
dows."); 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.
Micro-
soft lamely characterizes its threat to Intel as
"advice." The
District
Court, 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 viola-
tion of s 2 of
the Sherman Act.
6.
Course of Conduct
The
District Court held that, apart from Microsoft's specif-
ic acts,
Microsoft was liable under s 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 compartmentaliz-
ing 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 82-
83.
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
cumula-
tive effect of which is significant enough to form an
indepen-
dent 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 pro-
moting 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 s 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 Micro-
soft'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
middle-
ware is not a reasonable substitute and that Microsoft's
exclusionary
conduct contributed to the maintenance of mo-
nopoly 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 second finding required the
court to find that Navigator and Java
would have developed
into serious enough cross-platform threats to erode
the appli-
cations barrier to entry.
We disagree.
Microsoft points to no case, and we
can find none, standing
for the proposition that, as to s 2 liability in
an equitable
enforcement action, plaintiffs must present direct proof
that a
defendant's continued monopoly power is precisely attribut-
able
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 prepon-
derance of the evidence that
reprehensible behavior has
contributed significantly to the ... maintenance
of the mo-
nopoly." 3 Phillip
E. Areeda & Herbert Hovenkamp, Anti-
trust 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 mo-
nopoly power." Id. p 651c, at 78; see also Morgan v. Ponder,
892 F.2d 1355, 1363 (8th Cir.
1989); Barry Wright, 724 F.2d
at
230. To require that s 2 liability turn
on a plaintiff's
ability or inability to reconstruct the hypothetical
marketplace
absent a defendant's anticompetitive conduct would only
en-
courage 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 plain-
tiffs 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 de-
fendant
is made to suffer the uncertain consequences of its
own undesirable
conduct." 3 Areeda &
Hovenkamp, Anti-
trust Law p 651c, at 78.
Given this rather edentulous test for
causation, the ques-
tion 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 consti-
tuted 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 para-
digm
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.").
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, Anti-
trust
Law p 653b, at 91-92 ("[M]ore extensive equitable relief,
particularly
remedies such as divestiture designed to elimi-
nate the monopoly
altogether, raise more serious questions
and require a clearer indication
of a significant causal connec-
tion between the conduct and creation or
maintenance of the
market power.").
But these queries go to questions of reme-
dy, 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 determi-
nation of liability for "attempt[ing] to monopolize
... any part
of the trade or commerce among the several
States." 15
U.S.C. s 2
(1997). To establish a s 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); see also 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 monopo-
ly power in the
putative browser market.
The determination whether a dangerous probability of suc-
cess
exists is a particularly fact-intensive inquiry. Because
the Sherman Act does not identify the activities
that consti-
tute 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 Micro-
soft'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 (cita-
tion 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 attempt-
ed
monopolization. They have relied upon
Microsoft's 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 ac-
cepted this approach: It agreed with plaintiffs that the events
that formed the basis for the s 2 monopolization claim "war-
rant[ed]
additional liability as an illegal attempt to amass
monopoly power in
'the browser market.' " Id. at 45
(empha-
sis 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 demon-
strate 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 Spec-
trum Sports, 506 U.S. at 455-56. Such a definition estab-
lishes 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 Dis-
trict 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
pur-
pose 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 monopoli-
zation 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);
West-
man 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.
See 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, be-
cause 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 provid-
ed 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 Find-
ings of Fact, at 817-19, reprinted in 2 J.A. at
1480-82;
Plaintiffs' Joint
Proposed Conclusions of Law s IV (No. 98-
1232); see also 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 Pro-
posed 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
amelio-
rate 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); see also 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
"signifi-
cant." See
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 graphi-
cal 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 consti-
tutes 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 Netscape to
accept its offer of a "special
relationship," Microsoft quickly would have gained such
control over the extensions and standards
that network-
centric
applications (including Web sites) employ as to
make it all but impossible for any future
browser rival to
lure
appreciable developer interest away from Micro-
soft's platform.
This finding is far
too speculative to establish that compet-
ing 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 ac-
tions to eliminate the platform
threat posed by Netscape
Navigator.
This finding simply describes Microsoft's reliance
on studies indicating consumers' reluctance to switch brow-
sers, 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 suggest-
ing that the possibility of
network effects could potentially
create barriers to entry into the
browser market. See Plain-
tiffs'
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 possi-
bility 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 Ex-
plorer, 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
War-
ren-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, reprint-
ed in 2 J.A. at 1485-90. The proffered testimony contains no
evidence
regarding the cost of "porting" websites to different
browsers
or the potentially different economic incentives fac-
ing 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 monopoliza-
tion 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 attempt-
ed monopolization claim as
they did to the monopoly mainte-
nance claim. But both claims require evidentiary and theo-
retical
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 s 2 liability for attempted
monopoli-
zation.
IV. Tying
Microsoft also contests the District
Court's determination
of liability under s 1 of the Sherman Act. The District Court
concluded that
Microsoft's contractual and technological bun-
dling of the IE web browser (the "tied" product) with its
Windows
operating system ("OS") (the "tying" product) re-
sulted
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 technologi-
cal 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.
According-
ly, 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 over-
lap with those set
forth in Section II.B in connection with the
s 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
Win-
dows 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/Re-
move Programs utility in Windows 95); and (4) Microsoft
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 viola-
tion. Conclusions of Law, at 47-51. Although the District
Court also found
that Microsoft commingled operating sys-
tem-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. See
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. (Micro-
soft 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 plain-
tiffs 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 prod-
ucts 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 ser-
vices from an affiliated 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 in International
Salt Co. v. United States, 332 U.S. 392, 396 (1947), and
Northern
Pacific Railway Co. v. United States, 356 U.S. 1, 5-
7 (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); Fort-
ner 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 Ko-
dak, 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 ty-
ing]," 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
sepa-
rate from hospital services to identify a distinct product
market
in which it is efficient to offer anesthesiological ser-
vices 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 evi-
dence 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 associ-
ated 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 competi-
tive 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
anesthesiolo-
gists 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 Par-
ish,
466 U.S. at 22 n.36. With both direct
and indirect
evidence concurring, the Court determined that hospital sur-
gery and
anesthesiological services were distinct goods.
To understand the logic behind the
Court's consumer de-
mand 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 select-
ed 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 distribu-
tion
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 micro-
processor 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 testimo-
ny
of Glenn Weadock), reprinted in 9 J.A. at 5892; Direct
Testimony of Microsoft's James Allchin p p 10, 97,
100, 106-
116, 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 compo-
nent 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 manufac-
turers.
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 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"
en-
gages 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-to-
administer proxies for net efficiency. In describing the sepa-
rate-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., con-
curring).
Second, the separate-products test is not a one-sided
inqui-
ry 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 con-
sumer choice.
With this background, we now turn to the separate-
products
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
work-
place). 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 con-
tends that no other firm
requires non-removal because no
other firm has invested the resources to
integrate web brows-
ing 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 physi-
cal object (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. Cf.
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 sepa-
rate-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 legiti-
mate 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 innova-
tion 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 histor-
ic consumer behavior, likely before integration, and
the indi-
rect 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 third-
party
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
unaccep-
table risk of stifling competition and therefore are
unreason-
able '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 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 607-
08); 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,
560-
61; 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
Mo-
tion 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
manu-
facturer 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 integrat-
ed 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 Micro-
soft'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 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 hard-
ware. 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 inte-
gration 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);
see
also 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 deci-
sions. 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
(D. Utah 1999), involved a complaint that the technologi-
cal 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 Mi-
crosoft
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 evalu-
ate "high-tech
product design," id., it cannot be said to
conform to prevailing
antitrust doctrine (as opposed to resolu-
tion 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
blan-
ket 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
inaccu-
rate 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 separate-
products 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 stain-
resistant 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.
See
Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d
792, 799 (1st
Cir. 1988) (Breyer, J.); see also 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 trou-
bling in platform
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 incorpo-
rate basic internet plumbing and other
useful functionality
into their OSs.
See Direct Testimony of Richard Schmalen-
see p 508, reprinted in 7
J.A. at 4462-64 (disk defragmenta-
tion, memory management, peer-to-peer
networking or file
sharing);
11/19/98 am Tr. at 82-83 (trial testimony of Freder-
ick Warren-Boulton), reprinted in 10 J.A. at 6427-28
(TCP/IP
stacks). Firms without market power
have no in-
centive to package different pieces of software together
un-
less 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 pro-
duce 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 consum-
ers, 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
bound-
aries 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.
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 contem-
plated 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 con-
sumer choice foreclosed by the
integration of added function-
ality 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 s 1. We remand the case for evaluation
of
Microsoft's tying arrangements under the rule of reason.
See 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 balanc-
ing 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 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 justifica-
tion for bundling IE APIs is
that their inclusion with Win-
dows increases the value of third-party
software (and Win-
dows) 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
prece-
dent 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 Micro-
soft's conduct on
competition in the tied good market, Jeffer-
son 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 anesthesiol-
ogists] 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
s 2 attempted monopolization claim;
yet they failed to do so.
See
supra Section III. Accordingly, on
remand of the s 1
tying claim, plaintiffs will be precluded from arguing
any
theory of harm that depends on a precise definition of brow-
sers
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 arrange-
ment.
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 in
the monopoly maintenance section does not resolve the s 1
inquiry. The two practices that
plaintiffs have most ardently
claimed as tying violations are, indeed, a
basis for liability
under plaintiffs' s 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 s 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 s 2
liability because plaintiffs
failed to rebut Microsoft's proffered
justification by demon-
strating 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 pro-
competitive
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 s 2
monopoly
maintenance: price
bundling. First, the court must
deter-
mine if Microsoft indeed price bundled--that is, was Micro-
soft'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. Com-
pare
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 justi-
fications the company provides for it. In striking this bal-
ance, 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, 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
s 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); see also 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 soft-
ware 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, reprint-
ed 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 theo-
retically 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 proce-
dural 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, 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 rea-
sons: (1) the court failed to hold a
remedies-specific eviden-
tiary 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 ss 1 and 2 of the
Sherman Act. The court and the parties then began
discus-
sions 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 proceed-
ings," the judge replied,
"Yes. Yes. I assume that there
would be further
proceedings." 4/4/00 Tr. at 8-9,
11, reprint-
ed in 4 J.A. at 2445-46, 2448. The District Court further
speculated that those
proceedings might "replicate the proce-
dure at trial with testimony
in written form subject to cross-
examination." 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 dis-
putes
"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
consid-
ered 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 under-
lying 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.
. Testimony from
Professor Kenneth Elzinga, Profes-
sor of Economics at the University of Virginia, that
plaintiffs' proposed
remedies would not induce entry
into the operating systems market.
Id. at 4, reprint-
ed 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,
sub-
stantial increases
in the prices of both Windows and
Office." Id.
at 8, reprinted in 4 J.A. at 2749.
In-
deed, 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 plat-
form,
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 cross-
examination to be of little use in
enhancing or detracting from
their accuracy." Id.
Nor was the court swayed by Micro-
soft'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 dat-
ing 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 center-
piece is the
requirement that Microsoft submit a proposed
plan of divestiture, with
the company to be split into an
"Operating Systems Business,"
or "OpsCo," and an "Applica-
tions Business," or
"AppsCo." Final Judgment,
Decree
ss 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 com-
pany 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 s 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 facili-
tate compliance,"
s 3.b further requires that Microsoft estab-
lish "a secure
facility" at which third-party representatives
may "study,
interrogate and interact with relevant and neces-
sary 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, pro-
motion or use of, or
payment for" non-Microsoft platform-
level software. Id. at 68.
Under Decree s 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 s 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 evi-
dence through summary witnesses--is easily disposed
of.
Trial courts have
extraordinarily broad discretion to deter-
mine 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 evi-
dence, 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 admonish-
ing Microsoft's counsel to "[k]eep in
mind that both sides
agreed to the number of witnesses"). Even absent Micro-
soft's agreement,
the company's challenge fails to show that
this use of summary 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 particular-
ly 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 Micro-
soft 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 oth-
er 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); see also 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 quota-
tion 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 with-
out 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 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 evi-
dence
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
Micro-
soft 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 eco-
nomic
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 eviden-
tiary 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 empha-
sizing that the District Court
had "held nine days of hearings
on the remedy." 405 U.S. at 571. In 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 eviden-
tiary hearing by expressly agreeing that relief should be
determined based solely on written submissions. Id. at 1142-
43. The
defendants in 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 pro-
posed 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 interpreta-
tion
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,
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 eviden-
tiary 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' remedies-
phase
submissions, without considering the evidence Micro-
soft sought to
introduce. We therefore vacate the
District
Court's final judgment, and remand with instructions to
con-
duct 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);
see
also 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 addition-
al, 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 s 2. One will be remanded for liability
proceedings under a
different legal standard: unlawful
tying
in violation of s 1. Only
liability for the s 2 monopoly-
maintenance 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 stan-
dard. See, e.g., Doran v. Salem Inn, Inc., 422 U.S. 922, 931-
32
(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 anti-
trust 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
s 2 monopoly
maintenance violation taken alone. We
there-
fore cannot sustain an exercise of discretion not yet made.
By way of comparison, in Spectrum Sports,
Inc. v. McQuil-
lan, 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
un-
der s 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 rele-
vant
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 judg-
ment affirming the District
Court and remanded for further
proceedings, expressly because "the
jury's verdict did not
negate the possibility that the s 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 errone-
ous grounds of liability were stripped from its
consideration.
The
Eighth Circuit confronted a similar problem in Con-
cord 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 manufac-
turer alleging
violations of Sherman Act ss 1 and 2, and
Clayton Act s 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 "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 intend-
ed." 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 war-
rant 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 restric-
tions 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
compa-
ny. 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 con-
trary,
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).
One apparent reason why courts have not
ordered the
dissolution of unitary companies is logistical
difficulty. As
the court
explained in 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 accu-
rately
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 eviden-
tiary 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."
Mi-
crosoft 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 re-
sponsible for selling all of the
company's products, one
basic
research organization, one product support organi-
zation, one operations department, one
information tech-
nology
department, one facilities department, one pur-
chasing 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 suffi-
cient
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 elimi-
nate
the monopoly altogether ... require[s] a clearer indica-
tion 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 remed-
ied 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 market
only through inference. See 3 Areeda & Hovenkamp, Anti-
trust
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 posi-
tion 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 Intel-
compatible 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
drastical-
ly 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 impro-
priety 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 them-
selves when their
"impartiality might reasonably be ques-
tioned." 28 U.S.C. s 455(a).
All indications are that the District
Judge violated each of
these ethical precepts by talking about the case
with report-
ers. 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 judg-
ment 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,
Micro-
soft 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
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
Experi-
ences, 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
be-
fore. 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:
Pursu-
ing a Giant;
Retracing the Missteps in the Microsoft De-
fense, N.Y. Times, June
9, 2000, at A1. Interviews with
reporters
from the New York Times and Ken Auletta, anoth-
er 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 pro-
ceedings.
If supported only by rumor, speculation, or innu-
endo, 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 defend-
ing
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. Cf. The
Washington Post
v. Robinson, 935 F.2d 282, 291 (D.C. Cir.
1991) (taking judicial 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 Micro-
soft'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); accord 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
judg-
ment 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 report-
ers 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 35-
millimeter camera with an
integrated light meter that in his
view should also be offered
separately: "You like the
conve-
nience 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 com-
mented
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
credi-
ble.... 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 describ-
ing
Microsoft's conduct, with particular emphasis on what he
regarded as the
company's prevarication, hubris, and impeni-
tence. 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
"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." Brink-
ley & 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 Napole-
onic 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 grown-
ups!" "[T]o this day they continue to deny
they did anything
wrong.").
The District Judge likened Microsoft's writing of
incrimina-
ting 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.
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 stud-
ied 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. Micro-
soft 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 wonder-
ful
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 Grimal-
di, 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 Micro-
soft'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
opin-
ions. See II Guide to
Judiciary Policies and Procedures
(1973). The material is periodically updated. Judges who
have questions about whether their conduct would
be consis-
tent with the Code may write to the Codes of Conduct
Committee for a
written, confidential opinion. See
Introduc-
tion, Code of Conduct.
The Committee traditionally re-
sponds 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 s
10.34, at 353 (3d ed. 2000). As
"im-
pending" 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 "pend-
ing" 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 report-
ers 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
mem-
bers of the public. Because
he was talking to reporters, the
Judge knew his comments would eventually
receive wide-
spread 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" purported-
ly caused by the parties. See Grimaldi, Wash. Post; Micro-
soft 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 Find-
ings 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 insis-
tence on secrecy--his
embargo--made matters worse. Con-
cealment
of the interviews suggests knowledge of their impro-
priety. 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
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. Cf. In re Barry, 946 F.2d 913
(D.C.
Cir. 1991) (per curiam); id. at 915
(Edwards, J., dis-
senting).
In addition to violating the rule prohibiting public
com-
ment, 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 conversa-
tions. 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 'obstina-
cy'." 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; see also In re
Charge of
Judicial Misconduct, 47 F.3d 399, 400 (10th Cir.
Jud. Council 1995)
("The allegations of extra-judicial com-
ments 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
provid-
ed 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 of the information
he
secretly conveyed. The public
cannot be expected to main-
tain 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 Con-
duct
Canon 3C, are self-enforcing. There
are, however,
remedies extrinsic to the Code. One is an internal disciplin-
ary proceeding, begun with the
filing of a complaint with the
clerk of the court of appeals pursuant to
28 U.S.C. s 372(c).
Another is
disqualification of the offending judge under either
28 U.S.C. s 144,
which requires the filing of an affidavit while
the case is in the
District Court, or 28 U.S.C. s 455, which
does not. Microsoft urges the District Judge's
disqualifica-
tion under s 455(a):
a judge "shall disqualify himself in any
proceeding in which
his impartiality might reasonably be
questioned." 28 U.S.C. s 455(a). The standard for disquali-
fication
under s 455(a) is an objective one. The
question is
whether a reasonable and informed observer would question
the judge's impartiality. See In
re Barry, 946 F.2d at 914;
see also In re Aguinda, 241 F.3d 194, 201 (2d Cir. 2001);
Richard E. Flamm, Judicial
Disqualification s 24.2.1 (1996).
"The very purpose of s 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 s 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 objectiv-
ity 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 s 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
s 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 ap-
pearance 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 s 455(a) is concerned with actual
and apparent im-
propriety, the statute requires disqualification only
when a
judge's "impartiality might reasonably be
questioned." 28
U.S.C. s
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 s 455(a).
See In re Barry, 946 F.2d at 914; see
also Boston's Children
First, 244 F.3d at 168; United States v. 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
ob-
server to wonder whether their judgments are being influ-
enced
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 s 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.
In-
dulging 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.
See 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
s 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 meet-
ings unknown to the parties, in anticipation
that ultimately
the Judge's remarks would be reported. Rather than mani-
festing neutrality
and impartiality, the reports of the inter-
views 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 reason-
ably 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, there-
fore, that the
District Judge's interviews with reporters creat-
ed an appearance that he
was not acting impartially, as the
Code of Conduct and s 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.
s 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, s 455(a) requires
prospective disqualifica-
tion of the offending judge, that is,
disqualification from the
judge's hearing any further proceedings in the
case. See
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. Cf.
In re
School Asbestos Litig., 977 F.2d at 786 (discussing remedy
options).
"There need not be a draconian
remedy for every violation
of s 455(a)." Liljeberg, 486 U.S. at 862.
Liljeberg held that
a district judge could be disqualified under s
455(a) after
entering final judgment in a case, even though the judge was
not (but should have been) aware of the grounds for disquali-
fication
before final judgment. The Court identified three
factors relevant to the
question whether vacatur is appropri-
ate: "in determining whether a judgment should be vacated
for
a violation of s 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 dis-
cussing s 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. See 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 s 455(a) is
disqualifi-
cation 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 s 455(a) were serious, full retroactive disqualifi-
cation
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 unneces-
sary 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. See In re Allied-Signal Inc., 891 F.2d 974, 975-76
(1st
Cir. 1989); cf. 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-of-
court 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 mis-
conduct.
2. Review of Findings of Fact and
Conclusions of
Law
Given the limited scope of our disqualification of the Dis-
trict
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 intermedi-
ate level
between de novo and clear error, not even for
findings the court of
appeals may consider sub-par. See
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 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 mis-
application 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 s
52.12[1] (Matthew Bender
3d ed. 2000);
9A Charles A. Wright & Arthur R. Miller,
Federal Practice and
Procedure s 2577, at 514-22 (2d ed.
1995); cf. 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); cf. 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. See 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 stan-
dard 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 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 opin-
ion.