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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA, )
Plaintiff )
)
v. ) Civil Action No. 94-1564
) (Stanley Sporkin)
MICROSOFT CORPORATION, )
Defendant )
___________________________________)
MEMORANDUM OPINION
The issue before this Court is whether the entry of a
proposed antitrust consent decree between Microsoft Corporation
and the United States is in "the public interest." Microsoft is
the world's largest developer of computer software. On July 15,
1994, the Government filed a complaint charging Microsoft with
violating Sections 1 and 2 of the Sherman Anti-Trust Act. 15
U.S.C. 1-7 (1973). On the same day the parties filed a
proposed consent judgment.
I. Background
The Government filed the complaint and proposed judgment after
a four-year investigation of Microsoft. The Federal Trade
Commission ("FTC") initiated the investigation in 1990. According
to Microsoft, but not confirmed by the Government, the FTC
considered a wide range of practices including: (1) that Microsoft
gave its developers of applications software information about its
operating systems software before providing it to other
applications developers; (2) that Microsoft announced that it was
developing a non-existent version of operating software to dissuade
Original Equipment Manufacturers ("OEMs") from leasing a
competitor's operating system; (3) that Microsoft required OEMs
that licensed its operating system software also to license
Microsoft applications; and (4) that Microsoft licensed its
operating systems to OEMs on a per processor basis. Microsoft
asserts that before the FTC investigation was completed, it was
expanded to include every aspect of Microsoft's business. There
was never a majority vote among the FTC commissioners to file an
administrative complaint against Microsoft. In late 1993, after
a 2-2 deadlock by the commissioners, no administrative action was
filed, and the FTC suspended its investigation of Microsoft.
Following the suspension of the FTC investigation, Assistant
Attorney General Bingaman, the head of the Antitrust Division of
the Department of Justice, decided to revive the investigation. In
June, 1994 Microsoft and the Department of Justice initiated
settlement negotiations. Approximately a month later the parties
came to agreement and filed a proposed judgment with the Court.
II. The Complaint
The complaint alleges that Microsoft violated Sections 1 and
2 of the Sherman Anti-Trust Act. 15 U.S.C. 1-7. The primary
allegations in the complaint concern licensing agreements between
Microsoft and OEMs of personal computers ("PCs"). The complaint
also addresses provisions of non-disclosure agreements ("NDAs")
between Microsoft and other developers of applications software,
known as independent software developers ("ISVs"). The complaint
narrowly tailors the relevant product market to the market for
certain operating systems software for x86 microprocessors. The
geographic market is not limited.
In order to understand the complaint, one must understand
something about computers, microprocessors, and operations and
applications software. A microprocessor is the "brain" of the
computer. The x86 microprocessor, or chip, runs IBM and IBM-clone
PCs. These chips are primarily, but not exclusively, made by
Intel. Operating systems software acts as the central nervous
system for a personal computer, linking up the keyboard, monitor,
disk drive and other components. Applications software enables the
PC user to perform a variety of tasks including word processing and
database management. Applications software operates on top of the
PC's operating system and must be designed to function with that
operating system. As a result, ISVs who design applications
software need information about an operating system's codes in
order to design their software. Microsoft designs both operating
systems (e.g., MS-DOS) and applications (e.g., Microsoft Word, a
word processing program).
Microsoft has a monopoly on the market for PC operating
systems. Microsoft's share of the operating systems market
identified in the complaint is consistently well above 70%.
According to Microsoft's 1993 Annual Report, as of June 30, 1993,
120 million PCs ran on Microsoft's MS-DOS. Microsoft also
developed and sells Windows, a sophisticated operating system that
runs on top of MS-DOS or a similar operating system. Windows
allows a PC user to run more than one application at a time and
shift between them. Windows is known as a "graphical user
interface." Approximately 50 million PCs now use Windows.
Microsoft generally does not sell its operating systems directly to
consumers. Instead, it licenses its operating systems to OEMs for
inclusion in the PCs they make.
Microsoft, the Justice Department, and a number of competitors
who oppose the entry of the decree all agree that it is very
difficult to enter the operating systems market. There are two
main reasons for this, each of which reinforces the other. First,
consumers do not want to buy PCs with an operating system that does
not already have a large installed base because of their concern
that there will not be a wide range of applications software
available for that operating system. The second, complementary
reason why there are large barriers to entry into the operating
systems market is that ISVs do not want to spend time and money
developing applications for operating systems that do not have a
large installed base. They perceive that demand for that software
will be low. As a result, OEMs have little incentive to license an
operating system that does not have a large installed base and
include it in their PCs.
In addition to these "natural" barriers to entry, the
complaint identifies Microsoft's use of per processor licenses and
long term commitments as "exclusionary and anti-competitive
contract terms to maintain its monopoly." A per processor license
means that Microsoft licenses an operating system to an OEM which
pays a royalty to Microsoft for each PC sold regardless of whether
a Microsoft operating system is included in that PC. In other
words, under a per processor license, if an OEM sells some PCs with
a competitor's operating system installed (e.g., IBM's OS/2), and
others with MS-DOS installed, the OEM would pay Microsoft royalties
for all PCs sold. In effect, the OEM pays twice every time it
sells a PC with a non-Microsoft operating system -- once to the
company that licensed the operating system to the OEM and once to
Microsoft. The complaint charges that per processor licenses
discourage OEMs from licensing competing operating systems and/or
cause OEMs to raise the price for PCs with a competing operating
system to recoup the fee paid to Microsoft.
The complaint further alleges that Microsoft's use of long
term licensing agreements with or without minimum commitments, and
the rolling over of unused commitments unreasonably extended some
licensing agreements with Microsoft. These practices allegedly
foreclosed OEMs from licensing operating systems from Microsoft's
competitors. The other anticompetitive practice cited in the
complaint is the structure of Microsoft's non-disclosure
agreements ("NDAs") with ISVs during the development of its new
Windows operating system. ISVs work with Microsoft during the
development and testing of new operating systems so they can
produce applications that run with that operating system and
release them around the time the operating system is released.
This collaboration benefits Microsoft in two ways. First,
Microsoft receives input from the ISVs on how to improve the
operating system. Second, a new operating system is more
attractive to consumers if there are compatible applications
programs immediately available. In order to protect confidential
information about its new software, Microsoft requires ISVs to
sign NDAs in order to obtain product information.
The complaint alleges that the recent NDAs Microsoft has
executed with ISVs are overly restrictive and anti-competitive.
The Government alleges that the NDAs not only legitimately protect
against the disclosure of confidential information to competing
developers of operating systems but also discourage ISVs from
developing their own competing operating systems and/or from
developing applications for competing operating systems.
In sum, the Government alleges that the practices outlined
above deprive competitors of substantial opportunities to license
their operating systems to OEMs, preventing them from developing a
large installed base. This discourages both ISVs from designing
software for competing operating systems and consumers from buying
PCs with these competing operating systems. These practices also
harm consumers by limiting the variety of available operating
systems and raising the prices for non-Microsoft operating systems.
Based on the allegations in the complaint, the Government
sought the following relief:
(1) That the Court adjudge and decree that Microsoft has
monopolized the interstate trade and commerce in the market for PC
operating systems in violation of Section 2 of the Sherman Act.
(2) That the Court adjudge and decree that Microsoft has
entered into unlawful contracts and combinations which unreasonably
restrain the trade in interstate commerce in PC operating systems,
in violation of Section 1 of the Sherman Act.
(3) That Microsoft and all persons, firms and corporations
acting on its behalf and under its direction or control be
permanently enjoined from engaging in, carrying out, renewing or
attempting to engage, carry out or renew, any contracts,
agreements, practices, or understandings in violation of the
Sherman Act.
(4) That plaintiff have such other relief that the Court may
consider necessary or appropriate to restore competitive conditions
in the markets affected by Microsoft's unlawful conduct.
III. The Proposed Decree
The proposed decree negotiated and entered into by the parties
is significantly and substantially narrower than the requests
contained in the prayer for relief in the complaint. The consent
decree limits certain of Microsoft's contract and NDA practices.
The prohibitions concern licensing agreements and NDAs for certain
operating systems software; operating systems software for
workstations are not covered. The decree does not address any of
Microsoft's applications software.
The decree enjoins Microsoft from entering into any licensing
agreement longer than one year, though OEMs may at their discretion
include in the licensing agreement a one year option to renew.
Microsoft can impose no penalty or charge on an OEM for its choice
not to renew the licensing agreement, nor can it require an OEM to
commit not to license a competitor's operating system.
Microsoft may only license the operating systems covered by
the decree on a per copy basis, with one exception. Microsoft
cannot include minimum commitments in its covered licensing
agreements. The agreements cannot be structured so that the OEM
pays royalties for including MS-DOS in a fixed number of PCs,
whether or not the OEM actually sells that number of PCs with a
Microsoft operating system included.
The decree restricts the scope of the NDAs that Microsoft may
negotiate with ISVs. Microsoft cannot enter into an NDA whose
duration extends beyond, (i) commercial release of the operating
system, (ii) an earlier public disclosure by Microsoft, or (iii)
one year from the date of the disclosure of information covered by
the NDA to a person subject to the NDA, whichever comes first. The
decree also prohibits the use of NDAs that would prevent persons
covered by that NDA from developing applications for competing
operating systems unless the application entailed use of
proprietary Microsoft information.
The decree explicitly states that it does not constitute "any
evidence or admission by any party with respect to any issue of
fact or law. Indeed, Microsoft has denied in its submissions to
the Court that any of the allegations set forth in the complaint
constitute violations of the antitrust laws.
IV. Motions To Participate
Before addressing the question of whether the proposed decree
is in the public interest, the Court must decide whether to approve
three opposed motions to participate in this Tunney Act proceeding.
I.D.E. Corporation ("IDEA") has moved to intervene under Fed. R.
Civ. P. 24. Anonymous persons, represented by Gary Reback of the
law firm of Wilson, Sonsini, Goodrich & Rosati ("Wilson, Sonsini"),
have made a motion to file an amicus curiae memorandum in
opposition to the proposed final judgment. The Computer &
Communications Industry Association ("CCIA") has moved to
intervene, or in the alternative, moved to participate as amicus
curiae.
IV.A. Tunnev Act - Participation bv Interested Persons
Section 16(f) of the Tunney Act gives the Court wide latitude
to gather relevant information to make its public interest
determination. In order to exercise properly its independent role
as mandated by Congress, the Court must ensure that it is
adequately informed about the intricacies and complexities of the
industry affected by the consent decree. Section 16(f)(3)
specifically empowers the Court to gather relevant information by
means of authorizing intervention and amicus curiae participation:
(f) In making its determination under subsection (e) of this
section, the court may
(3) authorize full or limited participation in proceedings
before the court by interested persons or agencies,
including appearance amicus curiae, intervention as a
party pursuant to the Federal Rules of Civil Procedure,
examination of witnesses or documentary materials, or
participation in any other manner and extent which serves
the public interest as the court may deem appropriate.
16(f)(3).
The Act also encourages participation by interested persons by
setting forth a procedure for written public comments on the
proposed consent decree. 16(b). The United States is required to
publish in the Federal Register the proposed consent decree as well
as a competitive impact statement. Id. The public has 60 days to
submit written comments relating to the consent decree. The United
States is required to file such comments with the District Court
and publish such comments in the Federal Register. Id. At the
expiration of the 60 day period, the United States must file a
response with the Court and publish such response in the Federal
Register. 16(d).
In Senate hearings before the Subcommittee on Antitrust and
Monopoly, Judge J. Skelly Wright, U.S. Court of Appeals for the
District of Columbia Circuit, emphasized the vital role of
participation in the consent decree approval process by outside
persons:
The Antitrust Division of the Department of Justice, while no
doubt among the most competent and dedicated groups of
professionals in Government service, nevertheless is made up
of human beings and, unfortunately, human beings occasionally
make mistakes.
In approving a particular decree, the Justice Department
attorneys may overlook certain issues, ignore certain
concerns, or misunderstand certain facts. The participation
of additional interested parties in the consent decree
approval process helps to correct these oversights.
Senate Hearings, at 146.
Only five public comments were received pursuant to the
procedures outlined in 16(b). These public comments did not
provide much enlightenment about the proposed settlement.
Since receipt of these public comments, the Court has received
motions to intervene and appear as amici in the proceeding.
IV.B. Timeliness of Motions to Participate
Both the Justice Department and Microsoft argue that the
motions to intervene and the motion to appear as amicus curiae
(hereinafter "motions to participate") are untimely because they
were served three months after the close of the Tunney Act's 60 day
public comment period pursuant to 16(b), and were served only
days before the scheduled final hearing held on January 20, 1995.
These motions to participate were brought under 16(f) which
specifically gives the court a wide variety of alternatives to
gather information necessary to its public interest determination.
Section 16(f) and 16(b), while complementing each other in the
sense that they both help to insure that the proposed consent
decree receives a thorough public airing, are wholly separate
provisions. The Justice Department and Microsoft suggest that
granting the "late" motions to participate would be prejudicial
because it would delay the approval process. The Court is
well-aware that Congress directed that the public interest inquiry
should be conducted in "the least complicated and least
time-consuming means possible." S. Rep. No. 296, 93d Cong., lQt
Sess. 6 (1973)[hereinafter "S. Rep."]; accord H.R. Rep. No. 1463,
93d Cong., 2d Sess. at 12 (1974) [hereinafter "H.R. Rep."]
"Extended proceedings" might "have the effect of vitiating the
benefits of prompt and less costly settlement through the
consent decree process." 119 Cong. Rec. 24,598 (1973) (statement
of Sen. Tunney).
But the Court cannot sacrifice the thoroughness of its
inquiry, and hence, the validity of its determination that the
consent decree is in the public interest in order to increase the
speed with which the decree is approved. Judge J. Skelly Wright
aptly recognized that in cases of national import the Tunney Act
process would be turned on its head if the Court considered the
speed of review to be more important than the accuracy of review:
[I]n many cases, I would think, and have seen, no opposition
filed, where the case is of great national importance, then
time should be taken -- court's time and counsels' time should
be taken to study the decree, to get information from the
public concerning the ramification of the decree, the
anticipated results of the decree and, in my judgment, this
time is well spent, even though it may take day, even though
it might take weeks; it could have a trial that would last
months and months.
So, to suggest that S. 782 will not require judicial time and
counsel time would be misleading. In important cases, S. 782
would require judicial time, necessarily so, and I believe
rightfully so.
Senate Hearings, at 151.
The Court is simply not willing to find that because the
motions were made days before the scheduled final hearing on
January 20, 1995 that the motions should be denied on timeliness
grounds. The lack of any demonstrated prejudice to the parties,
along with the need for a thorough review of the proposed decree
are factors that weigh against denying these late filings. Despite
the complexity and the national importance of this case, until
these new motions to participate were filed, there was a severe
lack of information regarding the proposed consent decree. Only
five public comments were filed during the public comment period.
Neither the Justice Department nor Microsoft provided the Court
with affidavits of experts. Moreover, the Justice Department
failed to make available to the Court and to the public "any other
materials and documents [in addition to the proposed consent
decree] which the United States considered determinative in
formulating" the proposed consent decree. 16(b). At the hearings
held prior to receipt of the motions to participate, the Court
expressed its concern over the lack of meaningful information.
The Government has declined to provide the Court any
meaningful information concerning the substance of its
investigation, i.e., what it investigated and the findings it made.
Microsoft has gone a little further than the Government and tried
to allay certain of the Court's concerns. However, based on
information received from the law firm of Wilson, Sonsini, some of
the assurances provided by Microsoft have proved to be unreliable
and contrary to fact.
If a Court is asked to approve a decree without information
regarding the effect of the decree, then the Court's role becomes
a nullity, exactly what the Tunney Act sought to prevent. The
Justice Department and Microsoft's attempt to prevent the Court
from considering information provided by third parties when they
have not been forthcoming serves to thwart the Court's inquiry
mandated by the Tunney Act. It was not until the third party
motions were received that the Justice Department even filed an
affidavit by an economist regarding whether the proposed decree
will restore competitive balance to the operating systems market.
The Court will invoke the procedures found in 16(f). In
such an important and complex case, if the Court were not to invoke
16(f) procedures for gathering relevant information, the proper
exercise of the Court's discretion could be questioned. As Senator
Tunney observed:
[A]ll of the procedural devices cont[contained]ed in this
subsection are discretionary in nature. They are tools
available to the district court for its use, but use of a
particular procedure is not required . . . . There are some
cases in which none of these procedures may be needed. On the
other hand, there have been and will continue to be cases
where the use of many or even all of them may be necessary.
In fact, in a very few complex cases, failure to use some of
the procedures might give rise to an indication that the
district court had failed to exercise its discretion properly.
119 Cong. Rec. 3453 (statement of Sen. Tunney).
All third party submissions received prior to the January 20,
1995 hearing will be made part of the record and have been
considered in the Court's decision. Submissions by outside
participants after the January 20, 1995 hearings were only
considered if they had already been permitted by the Court (IDEA's
January 24, 1995 and related filings) and to the extent that they
offered legal arguments on the record already before the Court
(Wilson, Sonsini's February 1, 1995 filing). The Court
specifically did not consider the section of the February 1, 1995
filing by the law firm of Wilson, Sonsini that dealt with a certain
redacted document. Nor did the Court consider recent comments
(dated February 13, 1995) submitted by Apple Computer, Inc.
While untimely filings ordinarily should not be condoned, the
Court has allowed them in this case for two reasons. First and
foremost, the information and arguments submitted are helpful,
particularly the submissions received from Wilson, Sonsini.
Second, the parties have not provided the Court with adequate,
meaningful information. The Government, time after time, has
refused to provide the Court with information concerning the
substance of its investigation, i.e., what it investigated and the
findings it made.
The next question presented to the Court is whether the
motions to participate as intervenors and/or amici curiae should be
granted in the form requested.
IV.D. Intervention
Both IDEA and CCIA have filed motions to intervene under Rule
24 of the Federal Rules of Civil Procedure. Intervention is not
a matter of right under the Tunney Act, as IDEA concedes. United
States v. Airline Tariff Publishing Co., 1993-1 Trade Cas. (CCH)
70,191, at 69,894 (D.D.C. Mar. 8, 1993) ("there is no right to
intervene in a Tunney Act proceeding to determine whether a
proposed consent decree is in the public interest."). As such, it
is within the Court's discretion to grant or withhold
intervention.
The Court declines to confer party status on IDEA and CCIA,
with the concomitant right to participate fully in the proceeding,
including the right to file an appeal. Pursuant to Rule 24(b),
"[i]n exercising its discretion the court shall consider whether
the intervention will unduly delay or prejudice the adjudication of
the rights of the original parties." The Tunney Act allows for a
variety of alternatives for the Court to receive relevant
information in making its public interest determination.
Intervention, while one method for gathering such information,
would be too cumbersome and would unduly complicate these
proceedings. Although the Court welcomes the submissions by IDEA
and CCIA and will consider them in making its public interest
determination, the Court does not find that allowing IDEA and CCIA
to intervene would enhance the Court's inquiry. Moreover, such
intervention could serve unduly to delay the resolution of this
case. The rights of IDEA and CCIA to proceed as private litigants
remain unaffected.
The Court will deny the motions by IDEA and CCIA to intervene.
In the alternative, the Court will permit IDEA and CCIA to
participate in the proceedings under the Court's authority pursuant
to 16(f)(3) to allow "participation in any other manner and
extent which serves the public interest as the court may deem
appropriate."
IV. Participation as Amicus
The law firm of Wilson, Sonsini, Goodrich & Rosati by its
partner, Gary Reback, filed a motion to enter an appearance
amicus curiae on behalf of certain clients in the computer
industry, who wish to remain anonymous. Both the Government and
Microsoft argue that amici's request to appear anonymously is
inappropriate. Section 16(f), however, authorizes the Court to
accept submissions by "any interested persons or agencies."
Thus, the Court could accept the submission directly from the law
firm or the economists identified in the submission. The Tunney Act confers broad powers to gather information.
There is nothing in the statute that would preclude the Court from
receiving information from those unwilling to identify themselves.
It is preferable for persons to identify themselves to permit the
Court to ascertain any bias on their part. However, there could be
instances where the fear of retaliation by an alleged monopolist
could deprive the public of relevant, material information.
Indeed, Mr. Reback's clients have asserted the fear of retaliation
as their reason for requesting anonymity. Nothing has been
presented that would put into question the sincerity of their
position. Microsoft argues that to allow the amici to appear
anonymously stymies the efforts of the parties and the Court to
determine if there would be grounds for the Court's recusal. The
Court does not know the identity of Mr. Reback's clients, whom Mr.
Reback has identified as competitors of Microsoft. As a member of
the Bar, it clearly would be incumbent on Mr. Reback to bring any
disqualifying information to the Court's attention.
Microsoft's next challenge is that the submission goes beyond
an analysis of the legal issues presented and seeks to introduce
factual matters into the record. Microsoft contends that it is not
the function of an amicus curiae to seek to introduce factual
matters or to present the opinions of experts.
The actual label of "amicus curiae" on the submission is not
relevant. Section 16(f) specifically permits the Court to
authorize "participation in any other manner and extent which
serves the public interest as the court may deem appropriate." To
argue that the Court should not consider the amici submission
because it goes beyond the role of the usual amici submission runs
counter to the plain language and purpose of the statute. That the
law enables this Court to consider a brief such as was submitted by
amici is without question. Accordingly, the Court hereby grants
the motion to file the memorandum of amici curiae in opposition to
the proposed final judgment.
The Tunney Act envisions participation by interested persons
in the consent decree approval process, and such participation is
meant to ensure that the Court's public interest determination is
fully informed. The Court as well as the parties would have
preferred to receive these motions to participate at an earlier
date during these proceedings. However, the substantive comments
received from these third parties provide the process with the
information necessary to foster an appropriate public airing of the
issues. If the Court is to serve its role as an independent check,
then it is vital that the Court receive responsible information
from the public. The delay caused, which was minimal, certainly is
justified by the need to consider the important issues presented.
V. The Public Interest Determination
V.A. Standard and Scope of Review
The Tunney Act requires that "before entering any consent
judgment proposed by the United States . . ., the court shall
determine that entry of such judgment is in the public interest."
15 U.S.C. 16(e). Congress passed the Tunney Act so that the
courts would play an independent role in the review of consent
decrees as opposed to serving as a mere rubber stamp. See S. Rep.,
at 4; H.R. Rep., at 8. In determining whether to approve or reject
a consent decree, the Court must consider that "[t]he balancing of
competing social and political interests affected by a proposed
antitrust decree must be left, in the first instance, to the
discretion of the Attorney General." United States v. Western
Electric Co., 993 F.2d 1572, l577 (D.C. Cir. 1993) (quoting United
States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir. l981)). It is
not for the Court to determine whether the settlement is the best
possible in the Court's view, but instead, whether it is "within
the reaches of the public interest." United States v. Gillette
Co., 406 F. Supp. 713, 716 (D. Mass. 1975).
In passing the Tunney Act Congress was concerned with the
secrecy of corporations' dealings with the Government and the
immense power that such corporations may wield. Senate Hearings,
at 1 (statement of Sen. Tunney). Therefore, it would be an
abdication of the Court's responsibility, as mandated by Congress,
not to conduct a thorough review of this proposed decree. The role
of the Court is to scrutinize the exercise not only of the
Government's expertise but also of its good faith. See Gillette,
406 F. Supp. at 715. Approval should not automatically follow the
review process no matter how incomplete or ineffective the Court
finds the decree to be. See United States v. American Tel. and
Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982) aff'd sub nom
Marvland v. United States, 460 U.S. 1001 (1983) ("It does not
follow from these principles, however, that courts must
unquestioningly accept a proffered decree as long as it somehow,
and however inadequately, deals with the antitrust and other public
policy problems implicated in the lawsuit.")
The Department of Justice argues that the scope of the Court's
review is limited to both the alleged anticompetitive practices and
the relevant markets set forth in the complaint. This position is
not supported by the language of the statute, its legislative
history, precedent or common sense.
The Justice Department relies on the Act's reference to both
"termination of the alleged violations" and the "violation set
forth in the complaint" to support its position. 15 U.S.C.
16(e)(1)-(2). In citing small portions of the Act's language, the
Government fails to consider the language of the statute as a
whole:
Before entering any consent judgment proposed by the United
States under this section, the court shall determine that the
entry of such judgment is in the public interest. For the
purpose of such determination, the court may consider-- (1)
the competitive impact of such judgment, including termination
of alleged violations, provisions for enforcement and
modification, duration or relief sought, anticipated effects
of alternative remedies actually considered, and any other
considerations bearing upon the adequacy of such judgment;
(2) the impact of entry of such judgment upon the public
generally and individuals alleging specific injury from the
violations set forth in the complaint including consideration
of the public benefit, if any, to be derived from a
determination of the issues at trial.
15 U.S.C. 16(e)(1-2). Fifteen U.S.C. 16(e)(1) merely informs
the Court that the "termination of alleged violations" is one
factor the Court "may consider" in making its determination.
Section 16(e)(1) also explicitly states that the Court "may
consider . . . any other considerations bearing upon the adequacy
of such judgment." The broad language of this last provision
clearly shows that the court is not limited in its inquiry to the
more specific provisions set forth in the same section.
The Justice Department also narrowly focuses on the wording in
one part of Section 16(e)(2) (i.e. "violations set forth in the
complaint."). In so doing, it ignores the language of the rest of
the provision and therefore misreads its meaning. Section
16(e)(2) states "the court may consider . . . the impact of entry
of such judgment upon the public generally and individuals alleging
specific injury from the violation set forth in the complaint."
U.S.C. 16(e)(2). This section gives the Court the authority
to consider not only the effect of the entry of the decree on those
claiming to be hurt by the violations alleged in the complaint, but
also the effect on the public. The language of the Act does not
restrict the scope of inquiry into the effect of the decree on the
public to the specific injuries alleged in the complaint.
The legislative history supports the position that the Court
may look beyond the face of the complaint in evaluating the public
interest. In hearings on the Tunney Act, the then Deputy
Assistant Attorney General of the Antitrust Division made clear
that the Justice Department's interpretation of the bill was that
the Court, in certain circumstances, would look not only at whether
the decree adequately addressed the complaint, but also at whether
the complaint itself was adequate. "[T]his inquiry apparently
would encompass not only whether the relief is adequate in view of
that sought in the complaint, but whether the Government sought
appropriate relief in the complaint itself." Consent Decree Bills:
Hearings Before the Subcommittee on Monopolies and Commercial Law
of the Committee on the Judiciary. House of Representatives, 93d
Cong., 1st Sess. 87 (1973) (statement of Hon. Bruce B. Wilson,
Deputy Assistant Attorney General, Antitrust Division, United
States Department of Justice).
In some instances, courts evaluating consent decrees under the
provisions of the Tunney Act have considered markets and practices
outside the scope of the complaint. For example, in AT&T, Judge
Harold Greene conditioned the Court's approval of the decree, in
part, on the addition of a provision that would bar AT&T's entry
into the nascent electronic publishing market. AT&T, 552 F. Supp.
at 181-83. Judge Greene did this even though the Government had
not alleged any anticompetitive practices by AT&T in this market.
In addition, the electronic publishing market is arguably not part
of the relevant market identified in the complaint.
Judge Greene's opinion in AT&T clearly explained why, in some
instances, the Court cannot limit itself to the decree's effect on
the practices alleged in the complaint. In order to determine
whether a decree is in the public interest, the Court must evaluate
whether it meets the test of a valid antitrust remedy, to
"effectively pry open to competition a market that has been closed
by defendant['s] illegal restraints." AT&T, 552 F.Supp. at 150
(quoting International Salt Co. v. United States, 332 U.S. 392, 401
(1947)). Simply prohibiting repetition of the specific conduct in
the complaint may not in all cases achieve that goal. Therefore,
the Court cannot limit the scope of its considerations in the way
the Government has suggested.
While the Court must show some deference to the discretion of
the Justice Department, see Western Electric, 993 F.2d at 1577,
such deference does not preclude the Court's taking into
consideration practices and markets that the Government has failed
to address. Cf. Gillette, 406 F. Supp. at 715 ("Congress did not
intend the court's action to be merely pro forma, or to be limited
to what appears on the surface.").
Senator Tunney, the law's co-sponsor, recognized the possible
adverse consequences from entry of a consent decree that fails to
address anticompetitive practices outside the scope of the decree.
"[A] bad or inadequate consent decree may as a practical matter
foreclose further review of a defendant's practices both inside and
outside the scope of the decree." 119 Cong. Rec. 3451 (statement
of Sen. Tunney). The public interest may be ill-served if the
Court can look only at the market and practices alleged in the
complaint because of the opportunity costs of failing to address
severe anticompetitive practices that do not appear in the
complaint.
If the Court's scope of review is as narrow as the Government
claims, the Government could effectively foreclose judicial review
of the decree. For example, the Government could initiate a
massive antitrust probe and find significant violations in a large
market. Then, bowing to political or other pressures, the
Government could write a complaint that alleges only minor
anticompetitive practices in a very small market and file it
contemporaneously with a decree that addresses those limited
violations. Under the Government's rationale, the Court could only
consider whether the decree adequately addressed the alleged
violations. If its scope of review were so limited, the Court
would have to approve the decree. The Tunney Act as well as common
sense dictate that entry of such a decree would not be in the
public interest.
V.B. Public Interest Determination
The Court cannot find the proposed decree to be in the public
interest for four reasons. First, the Government has declined to
provide the Court with the information it needs to make a proper
public interest determination. Second, the scope of the decree is
too narrow. Third, the parties have been unable and unwilling
adequately to address certain anticompetitive practices, which
Microsoft states it will continue to employ in the future and with
respect to which the decree is silent. Thus, the decree does not
constitute an effective antitrust remedy. Fourth, the Court is not
satisfied that the enforcement and compliance mechanisms in the
decree are satisfactory.
V.B.l. Insufficient Information
The parties did not create the necessary record to enable the
Court to make its public interest determination. While the
scrutiny that a proposed consent decree requires is dependent upon
the particular facts of the case, at a minimum, the Court should be
apprised of the following:
(1) The broad contours of the investigation i.e., the
particular practices and conduct of the defendant that
were under investigation along with the nature, scope and
intensity of the inquiry;
(2) With respect to such particular practices and conduct,
what were the conclusions reached by the Government;
(3) In the settlement discussions between the Government and
defendant: (a) what were the areas that were discussed,
and (b) what, if any, areas were bargained away and the
reasons for their non-inclusion in the decree;
(4) With respect to the areas not discussed at the bargaining
table or not bargained away, what are the plans for the
Government to deal with them i.e.. is the investigation
to continue, and, if so, at what intensity, or if the
investigation is to be closed, then the Government must
explain why it is in the public interest to do so.
Basically, other than being told the Government spent a great
deal of time on a wide ranging inquiry and that the defendant is a
tough bargainer, the Court has not been provided with the essential
information it needs to make its public interest finding. To
make an objective determination, a court must know not only what is
included in the decree but also what has been negotiated out,
directly as well as indirectly i.e., what is the understanding of
the parties as to what, if any, additional action the Government
will or will not take with respect to matters that were inquired
into, but with respect to which the decree is silent.
One of the main purposes of the Tunney Act was to bring the
consent decree process into the open. Senate Hearings, at 1
(statement of Sen. Tunney). In this case, the Government has filed
its complaint and decree contemporaneously so the Court has no
insight into what charges the Government originally intended to
file. The Court does not know whether the Government has bargained
away other pernicious practices that were deleterious to the
public. The Government has steadfastly refused to address any
conduct of the defendant beyond that presented in the four corners
of the decree. The Government has taken the position that the
Tunney Act limits the Court's review to only those matters
contained in the decree and the Court is not permitted to explore
any other areas and cannot even consider evidence received from
third parties (i.e., pursuant to their comments) that legitimately
raise questions as to whether the defendant has been engaged in
anticompetitive practices not included in the decree. The Tunney
Act does not dictate this kind of sterile review nor does it
justify the stonewalling that has taken place in these proceedings.
There is absolutely nothing in the Tunney Act that would
circumscribe the Court's review as the Government suggests. See
Section V. A., supra. To so hold would render the Act a nullity.
"Tunney Act courts" are not mushrooms to be placed in a dark corner
and sprinkled with fertilizer.
V.B.2. Scope of the Decree
The Court finds the decree on its face to be too narrow. Its
coverage is restricted to PCs with x86 or Intel x86 compatible
microprocessors. The decree covers only MS-DOS and Windows and its
predecessor and successor products. Neither party has even
addressed the Court's concern that the decree be expanded to cover
all of Microsoft's commercially marketed operating systems. Given
the pace of technological change, the decree must anticipate
covering operating systems developed for new microprocessors. In
addition, taking into account Microsoft's penchant for narrowly
defining the antitrust laws, the Court fears there may be endless
debate as to whether a new operating system is covered by the
decree.
V.B.3. Ineffective Remedy
The Court cannot find the proposed decree to be in the public
interest because it does not find that the decree will "effectively
pry open to competition a market that has been closed by
defendant['s] illegal restraints." AT&T, 552 F.Supp. at 150.
During the period in which this matter was before the Court the
Government did little to show that the decree would meet this test
beyond telling the Court that it had labored hard, that the decree
was good, and that it should be approved. At the eleventh hour,
only after the Court again requested information to allay its
concerns, did the Government finally produce an affidavit from
Nobel Laureate economist, Professor Kenneth Arrow.
The affidavit made three main points: 1) that the market is an
increasing returns market with large barriers to entry; 2) that the
violations set forth in the complaint contributed in some part to
Microsoft's monopoly position; and 3) that the decree will
eliminate "artificial barriers that Microsoft had erected to
prevent or slow the entry of competing suppliers of operating
system software products."
The Court does not doubt the Government's position that the
practices alleged in the complaint are artificial barriers." Nor
does it doubt that the decree does address those practices. But
what the Government fails to show is that the proposed decree will
open the market and remedy the unfair advantage Microsoft gained in
the market through its anticompetitive practices.
Professor Arrow's affidavit states that the operating systems
market is an increasing returns market. In layman's terms that
means that once a company has a monopoly position, it is extremely
hard to dislodge it. Professor Arrow and the Government also
concur that part of Microsoft's monopoly position is attributable
to the artificial barriers it erected. Professor Arrow only argues
that the decree prospectively removes these artificial barriers.
He does not explain how the decree remedies the monopolist position
Microsoft has achieved through alleged illegal means in an
increasing returns market. If it is concededly difficult to open
up an increasing returns market to competition once a company has
obtained a monopoly position, the Government has not shown how
prospectively prohibiting violative conduct that contributed to
defendant's achieving its monopoly position will serve to return
the market to where it should have been absent its anticompetitive
practices. Simply telling a defendant to go forth and sin no more
does little or nothing to address the unfair advantage it has
already gained. In short, given the Government's expert's own
analysis of this market, the decree is "too little, too late."
The proposed decree without going further, is not in the
public interest because it does not meet the test of an effective
antitrust remedy. The decree deals with licensing and nondisclosure practices that the Government found to be
anticompetitive and detrimental to a free and open market. What
the decree does not address are a number of other anticompetitive
practices that from time to time Microsoft has been accused of
engaging in by others in the industry. Since a Court cannot shut
its eyes to the obvious, it has asked the parties to discuss these
widespread public allegations. The Government has refused, and
Microsoft has claimed that the accusations are false.
The accusations range from charges that Microsoft engages in
the practice of vaporware i.e., the public announcement of a
computer product before it is ready for market for the sole purpose
of causing consumers not to purchase a competitor's product that
has been developed and is either currently available for sale or
momentarily about to enter the market. Other allegations include
charges that Microsoft uses its dominant position in operating
systems to give it an undue advantage in developing applications
software and that it manipulates its operating systems so
competitors' applications software are inoperable or more difficult
for the consumers to utilize effectively.
Throughout these proceedings, this Court has expressed
repeated concern about these allegations, in part, because it is
concerned that if they are true and defendant continues to engage
in them, it will continue to hold and possibly expand its monopoly
position, even if it ceases the practices alleged in the complaint.
The Court has been particularly concerned about the accusations of
"vaporware." Microsoft has a dominant position in the operating
systems market, from which the Government's expert concedes it
would be very hard to dislodge it. Given this fact, Microsoft
could unfairly hold onto this position with aggressive
preannouncements of new products in the face of the introduction of
possibly superior competitive products. In other words, all
participants concede that consumers and OEMs will be reluctant to
shift to a new operating system, even a superior one, because it
will mean not only giving up on both its old operating systems and
applications, but also risking the possibility that there will not
be adequate applications to run on the superior product. If this
is true, Microsoft can hold onto its market share gained allegedly
illegally, even with the introduction of a competitor's operating
system superior to its own. By telling the public, "we have
developed a product that we are about to introduce into the market
(when such is not the case) that is just as good and is compatible
with all your old applications," Microsoft can discourage consumers
and OEMS from considering switching to the new product. It is for
this reason that courts may consider practices outside the
complaint. See AT&T, 552 F.Supp at l50.
With respect to the vaporware claim when this matter was
raised at the November 2, 1994 status call, counsel for Microsoft
stated the charge was false. The colloquy with the Court was as
follows:
The Court: Well how do you answer those charges?
Counsel for Microsoft: Those charges we believe are entirely
false. The Court: In other words, the vaporware charge is
false?
Counsel for Microsoft: That's correct.
Transcript of Hearing, September 29, 1994, p. 15.
When questioned about the practice, the Government refused to
disclose what it knew about the practice or what investigation it
had conducted with respect to it.
This was the state of the record until Mr. Reback submitted
two documents to the Court (Court Exhibits 1 and 2). Both of
these documents are internal Microsoft records. They are part of
two Microsoft employee evaluation forms. In the first, the
Microsoft employee writes that during the past six months he
engaged in the following beneficial activities for Microsoft, "QB3
preannounce to hold off Turbo buyers."
The second document is even more specific. In a self-
evaluation, a Microsoft employee wrote, "I developed a rollout plan
for QuickC and CS that focused on minimizing Borland's first mover
advantage by preannouncing with an aggressive communications
campaign." (emphasis added) These documents indicate that the
highest officials of the company knew of the practices that were
utilized to impact adversely on the market plans of a competitor.
Whether the documents are actionable or not, certainly at a minimum
they require explanation from the parties. No satisfactory explanation has been given.
Although Microsoft acknowledges the authenticity of the
documents, it denies they describe the practice of vaporware and
indeed, states that the practice that is described is a perfectly
legitimate competitive practice. When pressed as to why the
practices described in the documents were not vaporware, counsel
for Microsoft stated he would limit "vaporware" to those
instances where no product at all exists at the time of the
so-called "preannouncement." According to counsel, it does not
even matter that the date for introduction of the preannounced
product is not met. Counsel further advised the Court that he
would advise his client to continue to engage in the described
practices. At the January 20, 1995 hearing, the Government merely
acknowledged receipt of the documents. It outright refused to
discuss them or to state what consideration it has given to them.
It declined to state whether it had even interviewed the authors of
the documents. In a subsequent filing, the Government has taken
the following position: "[P]roduct preannouncements do not violate
antitrust laws unless those preannouncements are knowingly false
and contribute to the acquisition, maintenance, or exercise of
market share." Of course, this is not the time or place to debate
the Government's rather narrow view of this highly questionable
practice. It is obvious that the Government has adopted a criminal
standard and may have ignored the fact that it also has plenary
civil authority to enjoin violative practices without having to
prove criminal culpability.
Regardless of how narrow the Government's view is, it is
incumbent on the Government to address whether the defendant has
been preannouncing products and what effect, if any, such
preannouncements have had in eliminating competition in an
increasing returns market where the market has clearly been tipped.
Even if Microsoft's current practice of "preannouncing" did not
meet the Government's definition of vaporware, shouldn't the Court
be advised whether there is a basis for seeking to limit the
practice in fashioning an antitrust remedy? As Judge Green held in
the AT&T case, even practices that have not been found to be
unlawful can be prohibited if they prevent the prying open of the
market that has been closed through illegal restraints. AT&T, 552
F. Supp. at 150. Even if these practices might be legal in another
context, defendant's ability to use them to maintain a monopoly
position that it gained in part through improper licensing and non-
disclosure agreements certainly raises the question whether a
decree that does not address such anticompetitive practices, is in
the public interest.
This Court cannot ignore the obvious. Here is the dominant
firm in the software industry admitting it "preannounces" products
to freeze the current software market and thereby defeat the
marketing plans of competitors that have products ready for market.
Microsoft admits that the preannouncement is solely for the purpose
of having an adverse impact on a competitor's product. Its counsel
states it has advised its client that the practice is perfectly
legal and it may continue the practice. This practice of an
alleged monopolist would seem to contribute to the acquisition,
maintenance, or exercise of market share.
The Government has pressed for the adoption of its decree on
the grounds that it will open up competition. Given the
Government's desire to open up competition why does it not want to
take on the vaporware issue?
When the Court gave Microsoft the opportunity to disavow this
practice by an undertaking it declined to do so. What is more, the
Government told the Court that if it conditioned its approval on
Microsoft's undertaking no longer to engage in the practice, the
Government would withdraw its approval of the decree even if
Microsoft agreed to the undertaking.
The Court cannot sign off on a decree knowing that the
defendant intends to continue to engage in an anticompetitive
practice without the Government providing a full explanation as to
its "no action" stance. It would almost be the equivalent of a
Court accepting a probationary plea from a defendant who has told
the Court he will go out and again engage in inappropriate conduct.
V.B.4. Compliance
The only change in the decree that the Government stated it
would accept is the Court's suggestion that Microsoft establish an
internal mechanism to monitor the decree. This too Microsoft has
declined even to consider. Microsoft's position is that its 50 or
90 in-house lawyers, along with its outside retained counsel, are
sufficient to monitor the decree. This is the same group that has
advised its client that "product preannouncements" to impede
competition is proper behavior.
This Court finds itself in a position similar to that of Judge
Greene in AT&T, who refused to approve the decree without
modification because of his concern as to its compliance and
enforcement. AT&T, 552 F.Supp at 214-17.
Based on Microsoft's counsel's representations to this Court,
the Court is concerned about the question of compliance. This
concern is heightened because even though the Company on prior
occasions has publicly stated it does not and will not abuse its
dominant position in the operating systems market vis-a-vis its
development of application products, it has refused to give the
Court the same assurance. Without a compliance mechanism, the
Court cannot make the public interest finding. This is
particularly so because Microsoft denies that the conduct charged
in the Government's complaint to which it has consented, violates
the antitrust laws.
This is clearly the kind of case that Congress had in mind
when it passed the Tunney Act. Microsoft is a company that has a
monopolist position in a field that is central to this country's
well being, not only for the balance of this century, but also for
the 21st Century. The Court is certainly mindful of the heroic
efforts of the Antitrust Division to negotiate the decree. There
is no doubt its task was formidable. Here is a company that is so
feared by its competitors that they believe they will be retaliated
against if they disclose their identity even in an open proceeding
before a U.S. District Court Judge.
The picture that emerges from these proceedings is that the
U.S. Government is either incapable or unwilling to deal
effectively with a potential threat to this nation's economic well
being. How else can the four year deadlocked investigation
conducted by the FTC be explained. What is more, the Justice
Department, although it labored hard in its follow up
investigation, likewise was unable to come up with a meaningful
result. It is clear to this Court that if it signs the decree
presented to it, the message will be that Microsoft is so powerful
that neither the market nor the Government is capable of dealing
with all of its monopolistic practices. The attitude of Microsoft
confirms these observations. While it has denied publicly that it
engages in anticompetitive practices, it refuses to give the Court
in any respect the same assurance. It has refused to take even
a small step to meet any of the reasonable concerns that have been
raised by the Court.
The Government itself is so anxious to close this deal that it
has interpreted certain anticompetitive practices so narrowly that
it possibly has given the green light for persons to engage in
anticompetitive practices with impunity. To in any way condone the
practice of announcing products before they are ready for market to
freeze a competitor's product is terribly bothersome to this Court.
"Vaporware" is a practice that is deceitful on its face and
everybody in the business community knows it. Why else has the
business community dubbed the practice "vaporware?" It is
interesting that business leaders know that the practice is
improper but the Government does not. Philip K. Howard's comment
from his book "The Death of Common Sense" might well be right:
"Law designed to make Americans' lives safer and fairer has now
become an enemy of the people."
The Tunney Act provides that a Court must find that a proposed
consent decree is in the public interest before it shall enter an
order to that effect. Because of the many concerns that the Court
has, that finding cannot be made on the present record. The
Court fully understands the role the judiciary plays in this
society. It has no interest in intruding on the prerogatives of
the executive branch. The Court's only reason for being involved
in this case is because of the dictates of the Tunney Act. To make
the public interest finding required by the Tunney Act, the Court
has to be confident of its decision. It does not have the
confidence in the proposed antitrust decree that has been presented
to it. In part, this lack of confidence is a result of the
Government's "stonewalling" position.
Microsoft has done extremely well in its business in a
relatively short period of time, which is a tribute both to its
talented personnel and to this nation's great ethic that affords
every citizen the ability to rise to the top. Microsoft, a rather
new corporation, may not have matured to the position where it
understands how it should act with respect to the public interest
and the ethics of the market place. In this technological age,
this nation's cutting edge companies must guard against being
captured by their own technology and becoming robotized.
Some might suggest that disapproval of the proposed decree
serves little purpose since all that the Government will be able to
achieve if it prevails after a lengthy trial would be the relief
set forth in the proposed consent decree.
This is not necessarily so. First after a fully successful
litigated case and findings made, the judgment may have preclusive
effect in other cases. Second, unlike a denial in a consent
decree, once a court issues its findings and conc1usions, a party's
denial of liability has no effect unless the party is successful on
appeal. Third, a court of equity has a wide range of remedies it
can fashion to protect the public interest. After a trial in which
the Government prevails, the Court is not limited solely to the
relief set forth in the Government's earlier proposed negotiated
settlement. Certainly, all parties to a litigation face certain
risks. While the risks are greater, so are the rewards. For all
of the above reasons, the Court finds that the proposed antitrust
consent decree is not in the public interest. An appropriate order
accompanies this memorandum opinion.
DATE: February 14, 1995 _________________________________
Stanley Sporkin
United States District Judge
.