TechKnowledge No. 42

Microsoft: The States’ Last Hurrah

The opinion was straightforward. “Harm to ‘one or more competitors,’ however severe, is not condemned by the Sherman Act in the absence of … harm to consumers.” With those words, federal judge Colleen Kollar-Kotelly pinpointed the driving force behind the Microsoft antitrust suit - an attempt by Microsoft’s disgruntled rivals to use government for competitive advantage.

She went on to note that the attorneys general of the nine non-settling states offered “little, if any, legitimate justification” for the remedies they requested, which, for the most part, were “not supported by any economic analysis.” Why, she wondered, would the states ask for relief “at this late stage … unrelated to [Microsoft’s] monopoly market.” Her answer: “Certain of Microsoft’s competitors appear to be those who desire these provisions.”

In effect, nine states tried to replace the United States as the enforcer of federal antitrust laws - seeking broader relief than the federal settlement afforded, based solely on their different view of the public interest. And they undertook that task at the behest of companies like Sun Microsystems, which plays a major role in the high-end server market, and AOL, which dominates Internet access, and Real Player, which rules the market for multimedia software.

All of that whining and political jockeying by Microsoft’s giant rivals might be just grist for an intriguing tale of corporate cronyism, except that the cost of the litigation - in time, money, and diversion of executive resources - has been enormous. Microsoft’s shareholders suffered an erosion of market value measured in hundreds of billions of dollars. Indeed, Microsoft stock plummeted $80 billion on one day - April 3, 2000, when Judge Thomas Penfield Jackson issued his ill-fated conclusions of law, which were mostly overturned on appeal. Contrast that single-day loss with the mere $60 billion that disappeared from investors’ and employees’ portfolios in the aftermath of the Enron debacle.

Microsoft shareholders aren’t off the hook yet. The company still faces an onslaught of legal action, public and private. The European Union moves forward with its own antitrust investigation. Private lawsuits are under way, brought by consumer classes as well as competitors. They can collect treble damages under U.S. antitrust laws, and they are in a much stronger position in light of the Justice Department’s litigation. 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.

Because of murky statutes and conflicting case law, companies like Microsoft can never be quite sure what constitutes permissible behavior. If the company can’t demonstrate that its actions were motivated by efficiency, conduct that is otherwise legal somehow morphs into an antitrust violation. Normal business practices - price discounts, product improvements, exclusive contracting - become violations of law. Long-term, the answer is root and branch repeal of the antitrust laws that Federal Reserve chairman Alan Greenspan described more than 30 years ago as a “jumble of economic irrationality and ignorance.”

In the meantime, Congress ought to strip the states of most of their authority to enforce federal antitrust laws by suing on behalf of state residents. Otherwise, some states will continue to abuse that authority - exercising it to impose sovereignty beyond their borders, cater to the parochial interests of politically powerful local constituents, and promote remedies that the federal government has expressly considered and rejected.

Here are the rules that ought to govern when states propose to vindicate the private rights of their residents under federal antitrust law: First, states should not be allowed to litigate on behalf of private parties who, on their own, have unhindered access to the courts. Second, injury claims must be those related to residents collectively or to a state’s overall economy, not particular parties. That reduces the likelihood that the litigation will be instigated by special interests. Third, relief should be in the form of money damages only, not conduct remedies. The problem with conduct remedies is that they invariably affect out-of-state residents. Finally, no state should be permitted to sue if a federal agency is also suing, unless there are state-specific injuries that are not addressed in the federal suit.

The underlying principle is this: Government frequently moves forward in the name of correcting market failure, apparently without considering at all the possibility of government failure. As a result, economic losses from excessive regulation often cause immense damage to producers and consumers. The Microsoft litigation is Exhibit A.

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.