TechKnowledge No. 13

The Microsoft Decision - Part 2 of 2: Prospects for the Company, Implications for Antitrust,

With the Microsoft antitrust suit back in the lap of the trial court, there are hints that both Microsoft and the Justice Department would like to put this case behind them. The trick, of course, is to come up with a formula that will appease the state attorneys general, who insist they will keep litigating if a proposed settlement does no more than slap Microsoft on the wrist. That threat may be an empty one if the two principal litigants favor an end to the protracted courtroom battle. The AGs surely understand that Microsoft has already been, and will continue to be, punished by this lawsuit in ways quite apart from the remedies that are ultimately put in place.

The cost of the litigation - in time, money, public image, and diversion of executive resources - has been enormous. Microsoft’s shareholders, Bill Gates in the lead, suffered an erosion of market value measured in hundreds of billions of dollars. And the company still faces an onslaught of legal action, both public and private. An increasingly interventionist European Union, raring to establish its independence from the United States, will move forward with its own antitrust probe. Private lawsuits will probably be filed by consumer classes and Microsoft’s disgruntled competitors, like AOL-Netscape.

Those private plaintiffs can collect treble damages under U.S. antitrust laws, and they are in a much stronger position as a result of the Justice Department’s partial victory. Because the court held that Microsoft has a monopoly in operating systems and behaved anti-competitively, private litigants - without revisiting those issues - can proceed straight to proof of injury. Even consumers, who do not purchase computers directly from Microsoft and are therefore prevented from recovering damages under federal law, can sue in some state courts where the direct purchaser rule doesn’t apply.

So whatever conduct remedies might be included in a settlement, Microsoft has a slew of other problems arising from the federal lawsuit. And because of amorphous antitrust statutes that delegate too much discretion to Justice Department officials and federal judges, potential defendants like Microsoft still do not know what rules govern their conduct.

To be fair, the appellate judges on the D.C. Circuit were faced with a triple dilemma. First, they are judges, not legislators. Accordingly, they interpret the law and do not rule on its wisdom or policy implications. Antitrust, as codified in legislation and construed in prior cases, is an amalgam of doctrines that are murky at best. Nonetheless, the judges seemed to go out of their way to affirm its vitality in high-tech markets. Down the road, that could be the most destructive aspect of the appellate ruling.

Second, the Court of Appeals commented repeatedly that Microsoft had failed to question the connection between Judge Jackson’s findings of fact and his conclusions of law. The judges were disinclined to make those arguments on Microsoft’s behalf. Significant conclusions of law were thus affirmed, not because the appellate court necessarily agreed, but because they had not been adequately refuted.

Third, under federal rules of civil procedure, the court had two choices in reviewing Jackson’s fact-finding: All of his facts could be rejected on account of apparent bias, or all of his facts would have to be scrutinized deferentially - that is, they would be discarded only if “clearly erroneous.” There was no middle ground. Because Jackson’s misbehavior occurred mostly toward the end of the trial, and related mostly to the remedies phase, the appellate court opted not to dismiss categorically his fact-finding. Yet because Microsoft failed to challenge key facts - choosing merely to assert their inaccuracy - they were affirmed, almost by default, and critically affected the outcome of the case.

Microsoft will escape without dismemberment and without permanently disabling conduct remedies. Consumers might not be as lucky. They may have to contend with sterile markets that will evolve if vigorous antitrust enforcement extinguishes the incentives for new and improved products. Long term, the solution is to repeal the antitrust laws. They rely on a false ideal of perfect competition, debase property rights, punish success, and encourage government to proceed in the name of correcting market failure without considering the possibility of government failure. Too often, antitrust is used as an anti-competitive subsidy to prop up less successful firms - politicizing competition to advance the private, parochial interests of favored competitors.

Read Part 1

Robert A. Levy is senior fellow in constitutional studies at the Cato Institute. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.