The Microsoft Decision — Part 1 of 2: The Appeal Ends, The Trial Resumes,

July 11, 2001 • TechKnowledge No. 12

Judge Thomas Penfield Jackson and consumers are the big losers in the Microsoft case. There were no winners. Seven judges on the U.S. Court of Appeals for the D.C. Circuit held unanimously that Jackson’s appearance of bias “seriously tainted the proceedings … and called into question the integrity of the judicial process.” Jackson’s rubber‐​stamp acceptance of the Justice Department’s proposal to dismember Microsoft — without either an evidentiary hearing or an adequate explanation — is history. Good riddance.

Now the case goes back to the trial court where a new judge — selected randomly, before mid‐​August, from among 10 Clinton appointees and one Reagan appointee — will decide how to remedy Microsoft’s transgressions. Because of the “drastically altered scope of liability” — about which more below — the appellate judges intimate that divestiture cannot be justified. Moreover, Microsoft is a “unitary” company, not one formed by merging or acquiring separate entities. Thus, dissolution would pose logistical difficulties, said the court. Absent a “significant causal connection” between Microsoft’s behavior and its maintenance of market power, conduct remedies would be more appropriate. In short, breaking up Microsoft is a dead issue.

That’s good news. So too is the reversal of Jackson’s holding that Microsoft attempted to monopolize the browser market. The government did not properly define the browser market and could not, therefore, show that Microsoft had a dominant share. Nor did the government demonstrate that the browser market is characterized by barriers to entry. Without those proofs, the Justice Department’s attempted monopolization charge evaporates.

On the tying question, the Court of Appeals ordered the new trial judge to reconsider Jackson’s conclusion that Microsoft broke the law. The court said that requiring customers to take Microsoft’s Internet Explorer browser if they want to acquire the Windows operating system is not unlawful, in and of itself. On remand, the lower court will have to apply a “rule of reason” standard — weighing the costs and benefits to consumers of the tie‐​in. The Justice Department will have to show an actual anti‐​competitive effect — not just intent — in the browser market. Then Microsoft can proffer a pro‐​competitive justification, which the government can rebut by proving that the anti‐​competitive effect is greater.

If the Justice Department renews its claim that Microsoft illegally engaged in “price bundling,” it will have to demonstrate that Windows alone — without the browser — would have sold for a lower price. But Microsoft can still prevail by showing that other operating system vendors also bundle an Internet browser, and don’t sell the operating system separately for a reduced price. Best bet: Under a “rule of reason” standard, the government will abandon its losing argument that Microsoft’s tying arrangement is unlawful.

So far, so good. But the waters get muddier for Microsoft. The appellate court affirmed Jackson’s holding that Microsoft is liable for engaging in anti‐​competitive conduct to maintain its monopoly in operating systems. That anti‐​competitive conduct purportedly involved the following: preventing PC makers from removing the Internet Explorer browser; crafting exclusionary contracts with Internet service providers and major online providers like AOL; commingling the browser and operating system program code; threatening Apple with removal of Microsoft’s Office Suite if Apple continued to deal with Netscape; extending preferred treatment to selected PC makers in return for restrictive licensing arrangements; pressuring Intel to back Microsoft’s version of Sun’s Java program; and, favoring software vendors who agreed not to support rival platforms. According to Jackson, Microsoft did not demonstrate any efficiency justification for those anti‐​competitive acts. The Court of Appeals found no basis to overturn that finding.

Those are the charges that will have to be remedied by the trial judge. Meanwhile, the government and Microsoft have until the end of September to ask the U.S. Supreme Court to review facets of the appellate decision with which they disagree. But the likelihood that the high court will accept the case is slim. The record is voluminous, the case would be enormously time‐​consuming, at least two of the appellate judges are renowned for their antitrust expertise, the entire appellate court — not just a three‐​judge panel — ruled on the case, the ruling was unanimous, and it was the unsigned product of multiple judges. Moreover, the Supreme Court might be reluctant to enter the fray if, as expected, the Justice Department and Microsoft open settlement negotiations.

[Part 2, upcoming: Prospects for the company; implications for antitrust.]

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