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Judge Finds Microsoft Violated Antitrust Act

By James V. Grimaldi
Washington Post Staff Writer
Monday , April 3, 2000

Saying that Microsoft put "an oppressive thumb on the scale of competitive fortune," U.S. District Judge Thomas Penfield Jackson ruled today that Microsoft Corp. broke federal antitrust laws when it acted to protect its monopoly in the Windows operating system.

"Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems," Jackson said. "While the evidence does not prove that they would have succeeded absent Microsoft's actions, it does reveal that Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market."

The far-reaching ruling opens up the possibility that the U.S. Department of Justice and 19 states will seek tough remedies, from breaking up the software giant to imposing severe sanctions on the company's business practices.

"Microsoft's anticompetitive actions trammeled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers," Jackson said.

And in a ruling that seems to challenge the appeals court, Jackson ruled that Microsoft also broke antitrust law when it "unlawfully tied" the Internet browser to its monopoly Windows operating system.

Reaction to Jackson's ruling from the states came quickly. "We must act on this ruling by advocating that the court adopt remedies that are as far-reaching and fundamental as Microsoft's abuses of its monopoly power," Connecticut Attorney General Richard Blumenthal said this afternoon.

The verdict comes as the two sides in the case were pointing fingers over who was to blame for the collapse of the settlement talks, which they agreed had made some notable progress.

Some of Microsoft Corp.'s closest allies urged the software giant to strike a deal in the antitrust case, but Chairman Bill Gates said yesterday the government's demands and plaintiffs' inability to reach consensus in their ranks forced him to take his chances back in court.

"We feel very good about the legal case we have as it goes through the additional stages," Gates said in an interview.

The four-month-old settlement talks collapsed Saturday when the federal judge mediating between Microsoft and the plaintiffs – the Justice Department and 19 states – said the differences "among the parties" were simply "too deep-seated to be bridged."

Microsoft said the mediation failed because of disagreements among attorneys for the states and the Justice Department. Sources close to the government side of the case, however, said the stumbling block was Microsoft's refusal to make concessions that would restore competition to the computer software marketplace.

The next step is the "remedy" phase to determine what sanctions should be meted out.

Three high-profile attorneys who helped craft a friend-of-the-court brief in Microsoft's defense – C. Boyden Gray, Howard Trienens and Nicholas Katzenbach – said in interviews before the talks collapsed that it would have been in Microsoft's best interests to settle rather than accept a courtroom verdict and fight on appeal an order that could lead to the breakup of the company.

"You risk a breakup if you don't show some give on a lesser set of remedies and you risk a result that makes it more difficult to defend private lawsuits," said Gray, a former White House counsel who frequently appeared at the Microsoft trial to argue the company's case to reporters. "I don't think that this will be the first time that people from Microsoft have heard those arguments."

The government long ago had surrendered its demands in the negotiations that Microsoft be broken up, agreeing instead to discuss ways to rein in the company's business practices. "We knew it would be tough," Gates said. "If there had been fewer people to agree [among the government], the odds of success would have been much much higher."

Gates said the company was working on a response to the government's latest offer when he got word from his top lawyer, Bill Neukom, that mediation talks were called off by Richard Posner, chief judge of the 7th U.S. Circuit Court of Appeals in Chicago.

But government officials saw it differently.
"Microsoft simply wouldn't agree to the types of remedies that would satisfy Justice or the states," New York Attorney General Eliot Spitzer said.

Connecticut Attorney General Richard Blumenthal agreed: "The contention that the difference between the states and DOJ [Department of Justice] somehow scuttled the talks is absolutely unfounded."

During the negotiations, sources familiar with the discussions said, the government had asked for a series of changes in Microsoft's business practices. Microsoft thought the government's demands encroached on its ability to innovate and compromised its intellectual property rights. The company made concessions, but although both sides agreed on a number of key issues, government lawyers still believed that both sides remained divided on the core issues of the case, the sources said.

The divisions included:

Microsoft offered to give computer makers flexibility to alter the Windows operating system, a key demand of the government based on the notion that computer makers wanted to give users more choices. But Microsoft applied conditions on the flexibility considered by the government to be so burdensome that no computer maker would take up the offer.

Microsoft would not agree to place limits on what new software products it "tied" to Windows. Jackson's preliminary ruling found that Microsoft had tied the Internet browser to Windows to crush rival Netscape Communications Corp. Microsoft insisted that it be able to continue to add items to the operating system that it considered technological advances.

Microsoft promised not to charge different computer makers different prices for Windows to get its way. However, the government believed there were loopholes in the company's plan that still needed to be closed.

Microsoft offered to provide equal access to applications programming interfaces, the parts of Windows code that outside software developers need to make their own products work on Windows. But Microsoft refused to agree to a provision that would have required outside developers to get the same kind of access to the code that Microsoft developers got. This would neuter the government's point, which was to ensure that Microsoft wasn't using early access to the code to give its own developers an unfair advantage.

"We worked hard and went the extra mile," Gates said. "We were creative in a way that addressed many of the concerns. We did our best."

Although the gap between the two sides never closed, the Justice Department and Microsoft had incentives to find common ground. Each had much to gain by settling and an enormous amount to lose in a drawn-out legal battle.

Had Microsoft settled the case, it could have avoided an almost certain guilty verdict from Jackson and the prospect of a penalty phase that could end in the breakup of the company. A verdict that Microsoft broke the law also would energize multibillion-dollar private antitrust lawsuits, in which plaintiffs can claim triple damages.

The other danger for Microsoft was that the lawsuit and appeals process could weaken the company as it faces serious business challenges. Roger McNamee, a venture capitalist who follows Microsoft for Integral Capital Partners, contended that the case already had distracted Microsoft. "The ground rules of business on the Internet are being set by companies other than Microsoft," he said.

Gates devoted hundreds of hours just to the mediation, let alone the case, meeting at least once with Posner and speaking with him by phone more than a dozen times. The company said it had spent more than 3,000 hours on mediation alone.

Still, Gates said, "There certainly is no distraction for the full company. We're coming into work every day building new-generation software."

Trienens, the AT&T Corp. general counsel who negotiated the breakup of the Bell System with the Justice Department, said that the phone company's executives faced a much different situation in the early 1980s. AT&T capitulated, Trienens said, because it faced regulatory bills in Congress that the company couldn't abide.

While Trienens signed the brief that strongly argued Microsoft did not break the law, he also said the software company had good reason to settle.

"If you go to final judgment and lose, the finding of violation of the Sherman Act is prima facie evidence against you in a private case," he said.

Katzenbach, a former U.S. attorney general and who later led International Business Machines Corp.'s successful 13-year antitrust battle against the Justice Department, also joined the pro-Microsoft brief and urged a settlement.

"If you can get rid of it, get rid of the burden of trying the thing, get rid of the [bad] publicity, it makes sense to try to do it even if you have to give up something," he said.

As for the government, settling the case would have provided an immediate remedy for the ills in the industry caused by Microsoft's alleged anti-competitive acts. A prolonged legal battle, however, will delay relief.

A new administration will be in place in Washington early next year. Texas Gov. George W. Bush, the presumed Republican presidential nominee, has spoken out against breaking up Microsoft and, if elected president, could appoint Justice Department lawyers sympathetic with the company. Vice President Gore, the presumed Democratic nominee, has been more supportive of the case.

Next year Justice Department antitrust chief Joel Klein almost certainly will be gone as the White House administration changes; the settlement talks likely were his last opportunity to walk away with a victory that will be his legacy.

"Joel Klein knows that unless he settles, this is not going to end on his watch," said Marc Schildkraut, a former Federal Trade Commission lawyer who helped launch the first Microsoft antitrust case in 1989. "He can get a decision out of the judge, but he knows that on appeal it will be another assistant attorney general."

Gates also said that Microsoft has faced lawsuits in the past and this is not the most threatening the company has faced. In a patent-infringement lawsuit, Apple Computer Inc. questioned the very notion of Windows, alleging that Microsoft had stolen the point-and-click technology. Microsoft ultimately won.

"You could say during the last 15 years, we have always had some lawsuit" facing the company, Gates said. "If we had lost the Apple lawsuit, we could not longer be able to ship Windows. That is even a more direct threat."

© 2000 The Washington Post Company

Conduct 'Must Be Termed Predatory'

Tuesday , April 4, 2000 ; A16

Following are excerpts from Judge Thomas Penfield Jackson's ruling in the Microsoft antitrust

Conclusions of Law

Jackson found Microsoft guilty on three of four counts brought against the firm for violating the Sherman Antitrust Act.

[T]he Court concludes that Microsoft maintained its monopoly power by anticompetitive means and attempted tomonopolize the Web browser market, both in violation of Section 2 [of the Sherman Antitrust Act]. Microsoft also violated Section 1 of the Sherman Act by unlawfully tying its Web browser to its operating system. The facts found do not support the conclusion, however, that the effect of Microsoft's marketing arrangements with other companies constituted unlawful exclusive dealing under criteria established by leading decisions under Section 1.

Maintenance of Monopoly Power By Anticompetitive Means

Jackson ruled Microsoft used its monopoly in PC operating systems to squelch competitive threats posed by software that runs on top of Windows, known as middleware.

. . . In this case, Microsoft early on recognized middleware to be the Trojan horse that, once having, in effect, infiltrated the applications barrier, could enable rival operating systems to enter the market for Intel-compatible PC operating systems unimpeded. Simply put, middleware threatened to demolish Microsoft's coveted monopoly power. Alerted to the threat,Microsoft strove over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured, cross-platform applications to erode the
applications barrier.

In pursuit of this goal, Microsoft sought to convince developers to concentrate on Windows-specific [Application Program Interfaces] and ignore interfaces exposed by the two incarnations of middleware that posed the greatest threat, namely,Netscape's Navigator Web browser and Sun's implementation of the Java technology. Microsoft's campaign succeeded inpreventing--for several years, and perhaps permanently--Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits. . . . Because Microsoft achieved this resultthrough exclusionary acts that lacked procompetitive justification, the Court deems Microsoft's conduct the maintenance ofmonopoly power by anticompetitive means.

Microsoft's Conduct When Taken as a Whole

Jackson ruled that Microsoft's attempts to crush Netscape were not simply to increase its profits, but rather to protect itsmonopoly.

. . . Microsoft's campaign to protect the applications barrier from erosion by network-centric middleware can be brokendown into discrete categories of activity. . . . But only when the separate categories of conduct are viewed, as they shouldbe, as a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to thecompetitive process reveal itself. . . .

In essence, Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems. . . .While the evidence does not prove that they would have succeeded absent Microsoft's actions, it does reveal thatMicrosoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market. More broadly, Microsoft's anticompetitive actions trammeled the competitive processthrough which the computer software industry generally stimulates
innovation and conduces to the optimum benefit of consumers.

Viewing Microsoft's conduct as a whole also reinforces the conviction that it was predacious. Microsoft paid vast sums ofmoney, and renounced many millions more in lost revenue every year, in order to induce firms to take actions that wouldhelp enhance Internet Explorer's share of browser usage at Navigator's expense.

These outlays cannot be explained as subventions to maximize return from Internet Explorer. Microsoft has no intention ofever charging for licenses to use or distribute its browser. . . .

Moreover, neither the desire to bolster demand for Windows nor the prospect of ancillary revenues from Internet Explorercan explain the lengths to which Microsoft has gone. In fact, Microsoft has expended wealth and foresworn opportunitiesto realize more in a manner and to an extent that can only represent a rational investment if its purpose was to perpetuate the applications barrier to entry. . . .

Because Microsoft's business practices 'would not be considered profit maximizing except for the expectation that . . . theentry of potential rivals' into the market for Intel-compatible PC operating systems will be 'blocked or delayed,' . . .Microsoft's campaign must be termed predatory. Since the Court has already found that Microsoft possesses monopoly power . . . the predatory nature of the firm's conduct compels the Court to hold Microsoft liable under Section 2 of theSherman Act.


Jackson ruled that Microsoft added its Web browser to its Windows 98 operating system to stifle competition, particularly from rival Netscape Communications Corp. The plaintiffs allege that Microsoft's combination of Windows and Internet Explorer by contractual and technological artifices constitute unlawful tying to the extent that those actions forced Microsoft's customers and consumers to take Internet Explorer as a condition of obtaining Windows. . . .

The fact that Microsoft ostensibly priced Internet Explorer at zero does not detract from the conclusion that consumers were forced to pay, one way or another, for the browser along with Windows. Despite Microsoft's assertion that the Internet Explorer technologies are not 'purchased' since they are included in a single royalty price paid by [originalequipment manufacturers] for Windows 98 . . . it is nevertheless clear that licensees, including consumers, are forced totake, and pay for, the entire package of software and that any value to be ascribed to
Internet Explorer is built into this single price. . . .

This Court concludes that Microsoft's decision to offer only the bundled--'integrated'--version of Windows and InternetExplorer derived not from technical necessity or business efficiencies; rather, it was the result of a deliberate and purposeful choice to quell incipient competition before it reached truly minatory proportions.

© 2000 The Washington Post Company