IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
Civil Action No. 98-1232 (CKK)
Civil Action No. 98-1233 (CKK)
Next Court Deadline: March 4, 2002
DEFENDANT MICROSOFT CORPORATION’S REMEDIAL PROPOSAL
At the outset of these proceedings, the Court clearly expressed its view that this case should settle. (See Sept. 28, 2001 Tr. at 5 ("I think this case should be settled and I think this is the optimum time to do so.").) In accordance with the Court’s Order dated September 27, 2001, Microsoft, the United States and the plaintiff States engaged in over five weeks of intensive settlement negotiations, which culminated in the Revised Proposed Final Judgment ("RPFJ") filed on November 6, 2001. The United States—the only plaintiff here with legal responsibility for enforcing the Sherman Act and the party that took the lead in prosecuting this action—has concluded that the RPFJ adequately addresses each and every one of the anticompetitive acts found by the Court of Appeals. (See generally Competitive Impact Statement.) So, too, have nine of the plaintiff States, including New York and Wisconsin, the two States that served as lead counsel for the plaintiff States. In fact, as explained below, the RPFJ provides considerably more relief than is warranted by the Court of Appeals’ liability determinations.
Nevertheless, nine other States and the District of Columbia (the "non-settling States") have rejected the RPFJ, choosing to pursue their own radical and punitive injunctive relief that extends far beyond the case that was tried and the liability determinations that were upheld on appeal. Imposing such sweeping "relief" would result in, among other things, wholesale confiscation of Microsoft’s intellectual property and unprecedented governmental regulation of Microsoft’s product design decisions. In so doing, the non-settling States’ proposed judgment would harm not only Microsoft, but also numerous third parties and consumers. This memorandum will not provide an exhaustive list of all of the defects in the non-settling States’ proposed judgment, but rather will offer some examples of the ways in which their proposed "relief" is fundamentally misguided.
As the non-settling States themselves candidly acknowledge, the provisions of their proposed judgment "differ substantially from the DOJ settlement." (Plaintiff Litigating States’ Remedial Proposals at 38.) Their proposed "relief" is also substantially broader than the conduct provisions previously entered in this case, which the Court of Appeals vacated because, among other reasons, the scope of Microsoft’s liability had been "drastically altered" on appeal. United States v. Microsoft Corp., 253 F.3d 34, 107 (D.C. Cir.), cert. denied, 122 S. Ct. 350 (2001). And, most importantly, the non-settling States’ proposed judgment is not "carefully crafted so as to ensure that the enjoin[ed] conduct falls within the penumbra of behavior which was found to be anticompetitive." (Sept. 28, 2001 Tr. at 8.) As such, the proposed judgment is improper as a matter of law.
Although they have no responsibility for formulating national competition policy or enforcing the Sherman Act, the non-settling States seek to supplant the RPFJ negotiated by the United States. In effect, they are attempting to substitute their judgment as to what nationwide relief is appropriate here for that of the United States. In asserting claims under Section 16 of the Clayton Act, the non-settling States are not alternative national sovereigns to the United States, which asserts its claims under the broader terms of Section 15 of the Clayton Act. Rather, they have standing here only as parens patriae on behalf of natural persons—i.e., consumers—residing within their borders, and they are entitled to relief only to the extent that their citizens are faced with the threat of antitrust injury. See New York v. Kraft Gen. Foods, Inc., 862 F. Supp. 1030, 1033 (S.D.N.Y.) ("Although the State of New York is a governmental actor, it is considered a private party when seeking an injunction pursuant to the Clayton Act."), aff’d, 14 F.3d 590 (2d Cir. 1993). Neither the non-settling States’ parochial interests nor their differing views as to national competition policy should be permitted to interfere with a settlement negotiated by the United States on behalf of the citizenry of the entire country.
It is readily apparent (both from the terms of their proposal and from their comments to the press) that the non-settling States seek to punish Microsoft and to advance the commercial interests of powerful corporate constituents—Microsoft competitors such as Sun Microsystems, Oracle, Apple and Palm. E.g., 18 States Split Over Case Settlement, San Jose Mercury News, Nov. 7, 2001, at C1 ("‘This agreement [the RPFJ] does absolutely nothing to punish Microsoft for the bad behaviors that every judge agreed they committed,’ said California Attorney General Bill Lockyer."). Neither objective is appropriate under the antitrust laws. See United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 326 (1961) ("Courts are not authorized in civil proceedings to punish antitrust violators, and relief must not be punitive."); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) ("The antitrust laws . . . were enacted for ‘the protection of competition, not competitors.’") (emphasis in original). In contrast, the United States has concluded that the relief contained in the RPFJ "provides prompt, certain and effective remedies for consumers," the intended beneficiaries of the antitrust laws. (Competitive Impact Statement at 3 (emphasis added).)
As Chief Judge Posner, who previously served as a mediator in this action, observed following that unsuccessful mediation:
[States] are too subject to influence by interest groups that may represent a potential antitrust defendant’s competitors. This is a particular concern when the defendant is located in one state and one of its competitors in another, and the competitor, who is pressing his state’s attorney general to bring suit, is a major political force in that state.
Richard A. Posner, Antitrust in the New Economy, 68 Antitrust L.J. 925, 940-41 (2001). The concern expressed by Chief Judge Posner is directly applicable here. The non-settling States are lead by California, the home of Microsoft’s most significant competitors. See States Splintered on Microsoft Settlement; Antitrust: California Leads Holdouts That Want To Continue the Landmark Litigation, Los Angeles Times, Nov. 7, 2001, at C1 (California Attorney General Lockyer "has the strong support of many Silicon Valley companies, including Sun Microsystems Inc. and Oracle Corp., that staunchly oppose the proposed settlement").
Because the non-settling States assert identical claims on behalf of their own citizens—who are also citizens of the United States and will benefit from, and receive full and final relief pursuant to, the RPFJ—they are entitled to no relief once the RPFJ is entered. The non-settling States do not contend that their citizens suffered any unique injury as a result of the conduct found to be anticompetitive by the Court of Appeals. To the extent that the Court determines that the non-settling States are entitled to some relief, the Court should exercise its discretion to enter the RPFJ as such relief, thereby ensuring that a single, uniform decree governs Microsoft’s business nationwide.
I. The Non-Settling States’ Proposed "Relief" Is Substantially Broader Than the Vacated Conduct Provisions and Improper as a Matter of Law Given the Court of Appeals’ Liability Determinations.
The Court of Appeals vacated the conduct provisions previously entered in this case for four independent reasons, one of which was that the scope of Microsoft’s liability had been narrowed on appeal. See 253 F.3d at 98, 105-07. As the Court of Appeals stated, "[o]nly liability for the § 2 monopoly-maintenance violation has been affirmed—and even that we have revised." Id. at 104. Noting that "some—indeed most—of the findings of remediable violations [did] not withstand appellate scrutiny," id. at 105, the Court of Appeals instructed this Court to "consider which of the decree’s conduct restrictions remain viable in light of our modification of the original liability decision," id. (emphasis added). In describing the task on remand, the Court of Appeals emphasized that injunctive relief "should be tailored to fit the wrong creating the occasion for the remedy." Id. at 107. The Court of Appeals stressed: "[W]e have drastically 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." Id. at 107.
Consistent with the Court of Appeals’ decision, this Court stated at the initial scheduling conference that "the government’s first and most obvious task is going to be to determine which portions of the former judgment remain appropriate in light of the appellate court’s ruling and which portions are unsupported following the appellate court’s narrowing of liability." (Sept. 28, 2001 Tr. at 8 (emphasis added).) The Court described the governing standard as follows: "[T]he scope of any proposed remedy must be carefully crafted so as to ensure that the enjoin[ed] conduct falls within the penumbra of behavior which was found to be anticompetitive." (Id.) In response to Microsoft’s argument that "some of the terms of the former judgment are no longer appropriate," the Court stated, "that is correct. I think there are certain portions where the liability has been narrowed." (Id.)
Ignoring the instructions of both this Court and the Court of Appeals, the non-settling States not only have decided to pursue all of the conduct provisions of the vacated judgment; they also have dramatically expanded those provisions and have requested numerous additional provisions. As a result, their proposed judgment is substantially broader and much more onerous than the prior conduct provisions vacated by the Court of Appeals. At least 12 provisions of the non-settling States’ proposed judgment (Sections 4.a.iv, 9, 10, 12, 13, 14, 15, 16, 18, 19.c-f, 20 and 21.c) are not found anywhere in the vacated prior judgment. Many of these new provisions are truly draconian in nature, and all of them extend far beyond both the Court of Appeals’ ruling on liability and the issues raised at trial. The three examples described below are just a sample of these entirely new provisions, which seem calculated to inflict maximum commercial harm on Microsoft. The principal beneficiaries of such provisions are not consumers, but rather the numerous Microsoft competitors found on the non-settling States’ preliminary witness list.
First, Section 12 of the non-settling States’ proposed judgment provides that Microsoft must disclose and license without any royalty whatsoever all of the source code for the Internet Explorer components of Windows. This new provision thus would have the practical effect of requiring Microsoft to place in the public domain intellectual property that Microsoft has invested literally hundreds of millions of dollars developing. The non-settling States point to no part of the Court of Appeals’ decision that even remotely justifies such extreme relief. In addition, the non-settling States simply gloss over the fact that Microsoft would no longer have any incentive to improve the Web browsing functionality of its operating systems if it were required to give away all of its innovations, and they do not even attempt to reconcile their new proposal with their prior claim that Microsoft violated the Sherman Act by licensing Internet Explorer as part of the operating system at "a zero price." (See Plaintiffs’ Joint Proposed Findings of Fact at 514-64.)
Second, Section 14 provides that Microsoft must auction to third parties the right to "port" Microsoft Office, Microsoft’s extremely popular suite of office productivity software, to operating systems other than Windows, together with all Microsoft intellectual property necessary for such porting. Under this new provision, Microsoft would receive no royalty from the third parties that develop and license versions of Office for non-Windows operating systems other than the one-time price determined at the auction. The non-settling States advocate this extreme and draconian requirement—which would result in the effective confiscation of Microsoft’s valuable intellectual property—despite the fact that the States abandoned their claim that Microsoft has a monopoly in office productivity software when they amended their complaint in July 1998. There is also no plausible basis to assert that requiring the porting of only one of the thousands of Windows applications to other operating systems will have any effect at all on the applications barrier to entry. This is especially true given plaintiffs’ prior assertion that Apple’s Macintosh operating system is not a viable competitor to Windows even though Microsoft has developed a version of Office for that other operating system.
Third, Section 20 provides that Microsoft must give the non-settling States 60 days notice before any acquisition, investment or exclusive technology license (regardless of size) even if the transaction need not be reported under the Hart-Scott-Rodino Act, the statute governing pre-merger notification procedures. Plaintiffs seek to impose this unprecedented reporting obligation on Microsoft even though they did not allege, and the Court of Appeals did not find, that Microsoft has "use[d] acquisitions as a weapon to maintain its operating system monopoly." (Plaintiff Litigating States’ Remedial Proposals at 30.)
Other provisions contained in the non-settling States’ proposed judgment are simply unworkable and depart markedly from positions previously taken by plaintiffs in this case. For instance, Section 1 provides that Microsoft must develop and offer to OEMs and other licensees countless variations of Windows that omit any "Microsoft Middleware Products" that an OEM or licensee requests be removed from the operating system. To comply with this provision, Microsoft must remove the middleware’s underlying software code, not simply icons and other means of end-user access to the middleware’s functionality. Microsoft nevertheless is required to "ensure that such version [of Windows] operates effectively and without degradation." In other words, Section 1 would require Microsoft to do the impossible—remove critical software code from its operating system yet somehow preserve the functionality supplied by that software code. And Microsoft would be required to perform this impossible task for every feature of Windows that qualifies as a "Microsoft Middleware Product" under the non-settling States’ hopelessly vague and open-ended definition of that term. (See Proposed Final Judgment § 22.x.)
The example of Internet Explorer—the focus of this action—provides a useful illustration of the consequences that would surely result from removing such software code from the operating system. If all of the software code that provides Web browsing functionality in Windows were removed from the operating system, numerous features of Windows, including the user interface and the HTML-based "Help" system, would cease to function—to the detriment of consumers. Likewise, all applications that rely on APIs exposed by Internet Explorer would not run on the stripped-down version of Windows contemplated by the non-settling States, thereby inflicting grievous harm on (i) the many software developers whose products were designed to rely on those APIs and (ii) the consumers who purchased such applications.
Recognizing these facts, plaintiffs previously proposed that Microsoft be required only to offer a version of Windows in which means of "end-user access" to Microsoft middleware can be removed by OEMs and end users. The vacated judgment adopted this approach. (See Prior Final Judgment § 3.g.) As plaintiffs told the Court of Appeals last January, "Section 3.g [of the vacated judgment] requires only that end users and OEMs be able to remove end user access to the middleware product—in this case, the browser—not the APIs or code." (Brief for Appellees United States and the State Plaintiffs at 132 (emphasis added), United States v. Microsoft Corp., Nos. 00-5212, 00-5213.) Similarly, the States told the Supreme Court last September that Microsoft’s "commingling" of "the browser’s computer source code with code that performed non-browser functions" was anticompetitive because it "preclud[ed] OEMs and users from removing user access to Internet Explorer." (Brief in Opposition for the State Respondents at 2 (emphasis added), Microsoft Corp. v. United States, No. 01-236.) The Court should not countenance the non-settling States’ abrupt and dramatic change of position.
What is more, many provisions of the non-settling States’ proposed judgment are directly contrary to the Court of Appeals’ liability determinations. First, Section 2.c.iii provides that Microsoft shall not restrict OEMs from modifying Windows to display a "non-Microsoft desktop" upon the conclusion of the Windows boot sequence. Yet the Court of Appeals held that Microsoft’s "prohibition on OEMs automatically launching a substitute user interface upon completion of the boot process . . . is not an exclusionary practice that violates § 2 of the Sherman Act." 253 F.3d at 63. Second, Section 7 provides that Microsoft shall not condition the granting of a Windows license on a licensee’s agreement to license another Microsoft software product. Yet the Court of Appeals vacated the Section 1 violation for tying, see id. at 84-97, and the non-settling States, together with the other plaintiffs, decided not to pursue that claim on remand, see Joint Status Report at 2. Third, Section 10 provides that Microsoft shall not make any Microsoft middleware the "default" middleware in Windows unless OEMs and other licensees can choose to override this choice. Yet the Court of Appeals held that "Microsoft may not be held liable for this aspect of its product design." 253 F.3d at 67.
Lastly, the non-settling States’ proposed judgment contains vague and unworkable definitions and standards. The five-week mediation that culminated in the RPFJ was rigorous and time-consuming because Microsoft, the United States and the settling States, unlike the non-settling States, worked to develop a practical and enforceable decree. As Professor Green noted, "every paragraph, every sentence, every phrase, every comma, every parenthetical [of the RPFJ was] debated, negotiated and scrutinized by all parties." (Nov. 2, 2001 Tr. at 5.) In contrast, the proposed judgment put forward by the non-settling States is ill-considered in many respects.
To take one very important example, as noted above, the non-settling States’ definition of "Microsoft Middleware Product" is so broad and open-ended that it could encompass virtually any new feature Microsoft might add to Windows, as well as many existing features of the operating system. (See Proposed Final Judgment §§ 22.w, 22.x.) This definition also expressly includes diverse technologies like Office, "digital imaging software" and "directory services and management software" that are plainly not "middleware" within the meaning of the Court of Appeals’ decision. As the Court of Appeals used the term, "middleware" refers to software products that are capable of running on multiple client operating systems and that could provide a general-purpose platform for applications, such that "developers might begin to rely upon APIs exposed by the middleware for basic routines rather than relying upon the API set included in Windows" and the middleware "could take over some or all of Windows’s valuable platform functions." 253 F.3d at 53. Most of the technologies that the non-settling States sweep into their definition of middleware exhibit none of these characteristics; they are merely products offered by certain Microsoft competitors whose commercial interests the non-settling States have chosen to champion under the guise of acting in the public good.
In short, the non-settling States’ proposed "relief" is substantially broader than the conduct provisions of the prior vacated judgment, which itself was too broad given the Court of Appeals’ drastic alteration of the scope of Microsoft’s liability. See 253 F.3d at 107. In many respects, the non-settling States’ proposed conduct restrictions are no less extreme than plaintiffs’ previous proposal to break up Microsoft into separate operating system and applications companies, which plaintiffs discarded in view of the Court of Appeals’ decision. In requesting that Microsoft be required to make available to its competitors the source code for one of the most important features of Microsoft’s operating systems and for Microsoft’s Office suite of applications—some of the most valuable intellectual property in the world—the non-settling States’ proposed "relief" is tantamount to divestiture. By stripping Microsoft of its intellectual property rights, the non-settling States’ proposal also raises serious constitutional and public policy questions.
II. To the Extent That the Non-Settling States Are Entitled to Any Relief Once the RPFJ Is Entered, the Court Should Simply Enter the RPFJ as Such Relief.
Unlike the non-settling States’ proposed judgment, the provisions of the RPFJ "are modeled after" the conduct provisions of the vacated prior judgment, "with modifications, additions and deletions that take into account the current and anticipated changes in the computer industry, as well as the decision of the Court of Appeals, which reversed certain of the District Court’s liability findings." (Competitive Impact Statement at 61-62.) As the United States has concluded, the RPFJ "will provide a prompt, certain and effective remedy for consumers by imposing injunctive relief to halt continuance and prevent recurrence of the violations of the Sherman Act by Microsoft that were upheld by the Court of Appeals and restore competitive conditions to the market." (Id. at 2.) Significantly, the United States expressly considered and rejected many of the extreme proposals now advanced by the non-settling States, including a requirement that Microsoft offer a version of Windows without any Microsoft middleware. (See id. at 62-63.) After considering the limited grounds of liability upheld by the Court of Appeals, the United States concluded that the requirements and prohibitions set forth in the RPFJ "provided the most effective and certain relief." (Id. at 63.) During this Court’s review of the RPFJ pursuant to the Tunney Act, Microsoft and the United States will explain in greater detail how the RPFJ addresses each and every one of the anticompetitive acts found by the Court of Appeals.
Because the provisions of the RPFJ are modeled after the conduct provisions of the vacated prior judgment, the RPFJ actually goes considerably further than the Court of Appeals’ decision warrants, as the four examples set out below demonstrate. In fact, Professor Green, a neutral observer to these proceedings, advised the Court that "in some important respects the proposed final judgment goes beyond the issues affirmed by the Court of Appeals." (Nov. 2, 2001 Tr. at 5.) As a matter of law, the non-settling States are entitled to no injunctive relief relating to conduct that is outside the "penumbra" of behavior found to be anticompetitive by the Court of Appeals. (Sept. 28, 2001 Tr. at 8.)
First, Section III.E of the RPFJ requires Microsoft to disclose to third parties any communications protocol implemented in a Windows desktop operating system that is used to interoperate natively with a Microsoft server operating system. The whole issue of "client-server interoperability" was not addressed either at trial or by the Court of Appeals, and the States’ monopoly leveraging claim has already been dismissed from the case. See United States v. Microsoft Corp., 1998-2 Trade Cas. (CCH) ¶ 72,261, at 82,685-86 (D.D.C. Sept. 14, 1998).
Second, Section III.B requires Microsoft to license Windows to the top-20 OEMs pursuant to uniform licenses with uniform terms and conditions, and it regulates Microsoft’s pricing of Windows to the top-20 OEMs. The Court of Appeals did not hold that Microsoft violated the Sherman Act by licensing Windows to OEMs pursuant to individually negotiated terms, conditions and royalties.
Third, Section III.D requires Microsoft to disclose to third parties for purposes of achieving interoperability with Windows the interfaces used by Microsoft middleware to interoperate with other parts of Windows. The only arguable basis for this requirement is the claim that Microsoft withheld certain technical information from Netscape following the June 21, 1995 meeting between the companies, which was part of plaintiffs’ attempted monopolization claim relating to Web browsing software. The Court of Appeals reversed the attempted monopolization violation and did not mention this allegation as part of its monopoly maintenance ruling. See 253 F.3d at 58-78, 80-84. As this Court previously noted, "the appellate court was very clear with its liability determination." (Sept. 28, 2001 Tr. at 6.)
Fourth, Section IV.K defines the term "Microsoft Middleware Product," which is central to a number of provisions of the RPFJ, to encompass things such as "email client software" and "instant messaging software" that do not provide a general-purpose platform for applications and thus could not take over some or all of Windows’s platform functions. Such software is not "middleware" within the meaning of the Court of Appeals’ decision. See 253 F.3d at 53.
Notwithstanding the fact that several of its provision extend beyond the Court of Appeals’ liability determinations, Microsoft agreed to be bound by the RPFJ in the hopes of finally resolving this matter, which has consumed enormous resources and been a serious distraction for the company over the last four years. In so doing, Microsoft was mindful of this Court’s instruction that the parties should make all reasonable efforts to settle this case. (See Sept. 27, 2001 Order at 2 ("The Court cannot emphasize too strongly the importance of making these efforts to settle the cases and resolve the parties’ differences in this time of rapid national change."); Oct. 12, 2001 Order at 1-2 ("[A]s the importance of these negotiations cannot be overemphasized, the Court urges the parties to remain steadfast in their efforts to reach a mutually agreeable resolution.").)
Once the RPFJ is entered, the non-settling States are not entitled to any relief on their claims, which are identical to the claims asserted by the United States. In bringing an antitrust action as parens patriae pursuant to Section 16 of the Clayton Act, the non-settling States may seek relief only on behalf of their own citizens. See Georgia v. Pa. R.R. Co., 324 U.S. 439, 450 (1945). The non-settling States do not allege that their citizens—who are also citizens of the United States—suffered any unique injury as a result of Microsoft’s conduct. As a result, the citizens of the non-settling States will receive full and fair relief pursuant to the RPFJ negotiated by the United States and the settling States. After the RPFJ is entered, the Court can simply dismiss the non-settling States’ claims.
Having said that, to the extent that the Court determines that the non-settling States are entitled to some relief, Microsoft respectfully requests that the Court exercise its discretion to enter the RPFJ as such relief. Although the RPFJ is considerably broader than is justified by the Court of Appeals’ decision, it is of overriding importance that a single, uniform decree govern Microsoft’s business, which is conducted on a national—indeed, international—basis.
Microsoft’s proposed final judgment—which replicates the terms of the RPFJ—is attached hereto as Exhibit A.
Dated: Washington, D.C.
December 12, 2001
William H. Neukom
Thomas W. Burt
David A. Heiner, Jr.
Christopher J. Meyers
One Microsoft Way
Redmond, Washington 98052
|John L. Warden (Bar No. 222083)
Richard J. Urowsky
Steven L. Holley
Richard C. Pepperman, II
Ronald J. Colombo
SULLIVAN & CROMWELL
125 Broad Street
New York, New York 10004
Dan K. Webb
Bradley P. Smith (Bar No. 468060)
Charles F. Rule (Bar No. 370818)
FRIED, FRANK, HARRIS, SHRIVER
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2505
Counsel for Defendant