IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

Defendant Microsoft Corporation ("Microsoft") submits this memorandum in support of its proposed final judgment. Although Microsoft respectfully disagrees with the Court’s conclusion that Microsoft has violated the antitrust laws, Microsoft submits the accompanying proposed final judgment in accordance with Scheduling Order No. 8. For the reasons stated herein, Microsoft believes that its proposed final judgment fully redresses the antitrust violations found by the Court in its Conclusions of Law.

The government did not show—and the Court did not find—a clear causal connection between (i) the conduct adjudged unlawful in this case and (ii) Microsoft’s current position as the leading supplier of "Intel-compatible PC operating systems." The government has never contended that Microsoft unlawfully acquired monopoly power, but rather that Microsoft "maintained" its supposed monopoly unlawfully. Yet, the Court did not find that, absent the conduct held to be anticompetitive here, Microsoft would have lost its leading position in "Intel-compatible PC operating systems," i.e., that the conduct contributed significantly to Microsoft’s "maintenance" of a monopoly. In fact, the Court expressly declined to make such a determination:

(Findings of Fact ¶ 411.) In the absence of such a finding, the government’s requests for relief purportedly designed to "restore competition in the market" (Pls.’ Mem. at 24) are unwarranted as a matter of law because the Court has already found that there is insufficient evidence that such heightened competition would have existed but for Microsoft’s conduct.

As Professors Areeda and Hovenkamp explain in their leading treatise on antitrust law, "[t]he mere existence of an exclusionary act does not itself justify full feasible relief against the monopolist to create maximum competition." III Philip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 650a, at 67 (1996). Instead, "more extensive equitable relief, particularly remedies such as divestiture designed to eliminate the monopoly altogether, . . . require a clearer indication of a significant causal connection between the conduct and creation or maintenance of the market power." Id. ¶ 653b, at 91-92 (emphasis added). Where the causal connection between the defendant’s anticompetitive conduct and its market position is limited or uncertain—as is the case here—then the only appropriate remedy is "an injunction against continuation of that conduct." Id. ¶ 650a, at 67. Microsoft has proposed just such an injunction.

Even the government agrees that the remedy in this case "must be reasonably related to the wrong." (Pls.’ Mem. at 13.) Despite the strongly disapproving language used by the Court in certain portions of its Findings of Fact and Conclusions of Law, the antitrust violations actually found by the Court are not sufficiently broad to warrant the drastic relief requested by the government. Indeed, when compared to the sweeping relief requested by the government, the antitrust violations found in this case—which relate to Microsoft’s efforts to develop and market Internet Explorer and, to a much lesser extent, Microsoft’s response to Sun’s Java—are quite narrow.

In holding that Microsoft’s conduct amounted to unlawful monopoly maintenance under Section 2 of the Sherman Act, the Court focused primarily on Microsoft’s efforts to persuade OEMs and IAPs to distribute and promote Internet Explorer rather than Netscape Navigator. (Conclusions of Law at 9-17.) In fact, the "OEM and IAP components" of Microsoft’s conduct were the only acts the Court identified as free-standing predicates for liability, "whether they are viewed separately or together." (Id. at 17.) The Court characterized the other acts at issue in this case—particularly, Microsoft’s dealings with ICPs, ISVs and Apple—as having "supplemented Microsoft’s efforts in the OEM and IAP channels." (Id.) The Court similarly held that Microsoft’s discussions with Netscape at the June 1995 meeting "illuminate[] the context" in which Microsoft’s conduct in the OEM and IAP channels should be viewed. (Id. at 10.) The Court found that these acts—only "several of which on their own independently satisfy the second element of a § 2 monopoly maintenance claim"—add up to a Section 2 violation when taken as a whole. (Id. at 20.)

Underscoring the fact that much of what the government challenged was not unlawful in and of itself, the Court rejected the government’s claim that Microsoft’s agreements with OLSs, ISPs and ICPs constituted unlawful exclusive dealing arrangements under Section 1. The Court stated:

(Id. at 38.)

Similarly, the Court’s determinations that Microsoft unlawfully attempted to monopolize a separate market for Web browsing software and unlawfully tied Internet Explorer to Windows are limited when compared with the sweeping relief proposed by the government. The Court’s attempted monopolization ruling is premised on the same conduct underlying the Court’s monopoly maintenance ruling, plus the proposal that the Court found Microsoft made to Netscape—and Netscape rejected—at the June 1995 meeting. (Id. at 22.) Likewise, the Court’s tying discussion focuses largely on Microsoft’s agreements with OEMs. For example, the Court stated that Microsoft’s OEM agreements prohibited OEMs "from ever modifying or deleting any part of Windows, despite the OEMs’ expressed desire to be allowed to do so." (Id. at 32.) The Court also noted that "Microsoft refused to license Windows 98 to OEMs unless they also agreed to abstain from removing the icons for Internet Explorer from the desktop." (Id.) Addressing such agreements does not require the wholesale interference with Microsoft’s product design decisions contemplated by the government.

Microsoft’s proposed final judgment fully redresses the conduct found by the Court to be anticompetitive. Unlike the government’s requested relief, Microsoft’s proposal is based on the evidence received at trial and the Findings of Fact and Conclusions of the Law entered by the Court. As Microsoft explains in its other submissions today, with (i) no proof of a casual link between Microsoft’s conduct and its current market position, (ii) Microsoft’s reasonable belief that the conduct at the core of the government’s case was legal at the time it occurred, and (iii) Microsoft’s significant contributions to consumer welfare and this Nation’s economy, the remedy imposed here must be focused and not punitive.

1. OEM License Agreements. Paragraph 4 of Microsoft’s proposal addresses the Court’s conclusion that Microsoft improperly induced OEMs to distribute Internet Explorer rather than Netscape Navigator and did not give OEMs sufficient latitude to modify Windows. Paragraphs 4.a and c of the proposal would ensure that Microsoft will not cancel or refuse to grant a Windows license agreement to an OEM because the OEM ships or promotes non-Microsoft platform software and that, before canceling any of the top twenty OEMs’ license agreements, Microsoft would give the OEM thirty days’ written notice and an opportunity to cure any breach.

Paragraph 4.b would ensure that OEMs are free to include on the Windows desktop as many icons for non-Microsoft platform software as they like, thus permitting OEMs to promote and distribute competing platform software. Under Microsoft’s proposal, the icons added by OEMs could be of any shape or size that the OEM wants so long as the OEM’s icons do not cover any of the icons supplied by Microsoft.

Paragraph 4.b also directly addresses the Court’s concerns about OEMs’ ability to modify Windows to promote competing Web browsing software—a central issue in this case. In particular, this paragraph would ensure that OEMs can (i) offer end users "browser choice" during the initial Windows boot sequence, (ii) remove the Internet Explorer icon from the Windows desktop and Start menu, and (iii) configure non-Microsoft Web browsing software to be the "default browser" on the personal computers they sell. Accordingly, paragraph 4.b fully redresses the Court’s finding that Microsoft prevented OEMs from removing the ready means of accessing Internet Explorer and from promoting Netscape Navigator during the initial Windows boot sequence. (See Findings of Fact ¶¶ 202-29.)

Paragraph 4.b also addresses the Court’s conclusion that Microsoft violated Section 1 of the Sherman Act by tying Internet Explorer to Windows. It does so in a manner consistent with the approach advocated by the government and its experts, namely, removal of the predominant means of access to Internet Explorer rather than removal of the software code in Windows that provides Web browsing functionality. As the Court recognized, the latter approach is unworkable because it would result in the removal of APIs on which third-party software developers rely. (See id. ¶ 226 ("Certainly, Microsoft has a legitimate interest in ensuring that OEMs do not take Windows under license, alter its API set, and then ship the altered version.").) By providing OEMs with the ability to remove the Internet Explorer icon, offer "browser choice" during the initial Windows boot sequence and configure non-Microsoft Web browsing software to be the "default browser," Microsoft’s proposed remedy affords OEMs complete flexibility to distribute and promote any Web browsing software they choose, while at the same time protecting the integrity of Windows as a stable and consistent platform for software development.

2. Promotion on the Windows Desktop. Paragraph 5 of Microsoft’s proposal addresses the Court’s conclusion that Microsoft improperly induced IAPs to distribute and promote Internet Explorer rather than Netscape Navigator, as well as the Court’s concerns about Microsoft’s dealings with ICPs. Specifically, paragraph 5 responds to the Court’s finding that Microsoft’s agreements with ICPs, ISPs and OLSs improperly traded promotion on the Windows desktop for third parties’ agreement to limit their distribution of competing Web browsing software—another central issue in this case. This paragraph would prohibit Microsoft from agreeing to promote another party’s product or service on the Windows desktop itself or in a folder on the Windows desktop in exchange for that party’s agreement to limit in any way its distribution of non-Microsoft platform software.

In addition to these provisions, which address the Court’s conclusions with respect to the OEM and IAP channels and tying, Microsoft has included in its proposed final judgment a number of prophylactic provisions that relate to other issues in this case.

1. ISVs’ Access to Technical Information. Paragraph 6 of Microsoft’s proposal would ensure that ISVs have timely access to the APIs needed to write Windows applications. Specifically, paragraph 6.a would ensure that any bona fide ISV has access to all technical information that Microsoft provides to ISVs generally to assist in the creation of Windows applications. And paragraph 6.b would prohibit Microsoft, in the event that it furnishes technical information to an ISV in addition to that referred to in paragraph 6.a, from conditioning the release of such technical information on that ISV’s agreement not to write platform software or applications for non-Microsoft platform software. Paragraph 6 therefore addresses the Court’s apparent concerns regarding Microsoft’s dealings with ISVs, including Microsoft’s dealings with Netscape prior to the release of Windows 95.

2. Release of Products for Non-Microsoft Platforms. Paragraph 7 of Microsoft’s proposal addresses the Court’s conclusion that Microsoft’s agreements with Apple "diminished the usage of Navigator on the Mac OS." (Conclusions of Law at 17.) This paragraph would prohibit Microsoft from conditioning the timely release of a software product designed to run on a non-Microsoft platform (such as Mac Office) and ready for commercial release on an agreement by the vendor of the competing platform to limit its development, manufacture, distribution or promotion of non-Microsoft platform software.

3. Licensing of Predecessor Operating Systems. Paragraph 8 of Microsoft’s proposal would require Microsoft, after the release of a major Windows operating system such as Windows 98 or Windows 2000 Professional, to continue to license the predecessor operating system at a royalty not higher than the existing royalty for three years. This provision therefore would permit OEMs to pre-install such operating systems on their computers if they do not like the features and functionality of Microsoft’s new operating systems. Like paragraph 4.b, this paragraph would address the Court’s conclusion that Microsoft unlawfully tied Internet Explorer to Windows.

Paragraph 8 is also similar to paragraph 3.i of the government’s proposed final judgment. According to one of the government’s experts, "[t]his provision will give OEMs, and thus customers, the choice of using the predecessor version, perhaps in conjunction with rival middleware, or the newest Microsoft operating system." (Shapiro Decl. at 27.) Professor Shapiro also opined that this provision "should make it more difficult for Microsoft to use its Windows monopoly power to gain control over adjacent markets: if a new version of Windows favors Microsoft’s complementary products, OEMs and customers will at least have the choice to use the predecessor version, perhaps in conjunction with non-Microsoft complementary products." (Id. at 28.)

4. Term & Monitoring of Compliance. Microsoft’s proposed final judgment also includes appropriate provisions regarding the term of the decree and the means by which the government can monitor Microsoft’s compliance. First, paragraph 12 of Microsoft’s proposal provides that the decree will terminate four years from its effective date. In contrast, under the government’s proposal, the decree would remain in force for ten years (assuming the Court rejects the government’s breakup proposal). (See Pls.’ Proposed Final Judgment ¶ 6.c.) Nothing in the record justifies such a lengthy term for relief in this case. Most of the conduct challenged by the government occurred over a two- or three-year period, and much of that conduct stopped long ago.

Given the lightening pace at which the software industry moves, Microsoft’s proposed term of four years is reasonable. No one can predict with reasonable certainty what effect the government’s proposed relief would have on Microsoft and the software industry today. Indeed, the government’s own experts equivocate, declining make such a prediction. To impose stringent restrictions on Microsoft that would apply for more than four years is unnecessary and would risk impeding technological advancement in ways that cannot now be anticipated.

Microsoft’s proposed final judgment also would provide the government with sufficient means to determine and secure compliance with the Court’s judgment. Paragraph 10 of Microsoft’s proposal would enable the government, upon written request, to inspect Microsoft’s books and records, interview Microsoft’s officers and employees and require Microsoft to submit written reports. This paragraph therefore provides the government with the necessary means to monitor compliance, while at the same time preserving Microsoft’s fundamental rights to be represented by counsel and to preserve the confidentiality of its trade secrets and other confidential business information.

In contrast, the rights of access sought by the government are unreasonably broad and not limited to ensuring compliance with the Court’s judgment. Indeed, the government seeks authority to conduct perpetual, essentially unbounded, investigations of Microsoft, without any of the protections to which Microsoft would otherwise be entitled under the law.

Unlike the government’s requested relief, which seeks to re-engineer the entire software industry and impose extremely burdensome restraints on Microsoft that are wholly unrelated to the case that was tried, Microsoft’s proposed final judgment fully redresses the antitrust violations found in this case. Microsoft therefore respectfully requests that the Court enter its proposed final judgment.

William H. Neukom
Thomas W. Burt
David A. Heiner, Jr.
Diane D’Arcangelo
Christopher J. Meyers
MICROSOFT CORPORATION
One Microsoft Way
Redmond, Washington 98052
(425) 936-8080

John L. Warden (Bar No. 222083)
Richard J. Urowsky
Steven L. Holley
Theodore Edelman
Michael Lacovara
Richard C. Pepperman, II
Christine C. Monterosso
Bradley P. Smith
SULLIVAN & CROMWELL
125 Broad Street
New York, New York 10004
(212) 558-4000

May 10, 2000 Microsoft Corporation

I hereby certify that on this 10th day of May, 2000, I caused a true and correct copy of the foregoing Defendant Microsoft Corporation’s Memorandum in Support of its Proposed Final Judgment to be served by facsimile and by overnight courier upon:

Phillip R. Malone, Esq.

Antitrust Division

U.S. Department of Justice

450 Golden Gate Avenue, Room 10-0101

San Francisco, California 94102

Fax: (415) 436-6687

Kevin J. O’Connor, Esq.

Office of the Attorney General of Wisconsin

P.O. Box 7857

123 West Washington Avenue

Madison, Wisconsin 53703-7957

Fax: (608) 267-2223

Christine Rosso, Esq.

Chief, Antitrust Bureau

Illinois Attorney General’s Office

100 West Randolph Street, 13th Floor

Chicago, Illinois 60601

Fax: (312) 814-2549

And by facsimile and by hand upon:

Richard L. Schwartz, Esq.

Deputy Chief, Antitrust Bureau

New York State Attorney General’s Office

120 Broadway, Suite 2601

New York, New York 10271

Fax: (212) 416-6015

Bradley P. Smith