U.S. v. Microsoft Corp.

• Decision Date: 17 August 1995
• Docket Number: 95-5039,Nos. 95-5037,s. 95-5037
• Citation: 312 U.S. App. D.C. 378,56 F.3d 1448
• Parties: , 64 USLW 2001, 1995-1 Trade Cases P 71,027 UNITED STATES of America, Appellant, v. MICROSOFT CORPORATION. UNITED STATES of America v. MICROSOFT CORPORATION, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1448

56 F.3d 1448

312 U.S.App.D.C. 378, 64 USLW 2001,

1995-1 Trade Cases P 71,027

UNITED STATES of America, Appellant, v. MICROSOFT CORPORATION.

UNITED STATES of America v. MICROSOFT CORPORATION, Appellant.

Nos. 95-5037, 95-5039.

United States Court of Appeals District of Columbia Circuit.

Argued April 24, 1995.

Decided June 16, 1995.

Rehearing and Suggestion for Rehearing En Banc Denied Aug. 17, 1995.

Appeals from the United States District Court for the District of Columbia (94cv1564).

Joel I. Klein, Deputy Asst. Atty. Gen., U.S. Dept. of Justice, argued the cause for appellant U.S. With him on the briefs were Anne K. Bingaman, Asst. Atty. Gen., Catherine G. O'Sullivan, Robert B. Nicholson, David Seidman and Mark S. Popofsky, Attys., U.S. Dept. of Justice.

Richard J. Urowsky, Sullivan & Cromwell, argued the cause for appellant Microsoft Corp. With him on the briefs were Steven L. Holley, Richard C. Pepperman, II, Andrew C. Hruska, William H. Neukom, David A. Heiner, Jr., James R. Weiss and Donald A. Kaplan, Sullivan & Cromwell. Margaret K. Pfeiffer, Sullivan & Cromwell, entered an appearance.

John H. Chapman argued the cause and filed the briefs for amicus curiae Computer & Communications Industry Ass'n.

Gary L. Reback argued the cause for amici curiae Computer Industry Parties. With him on the briefs were Susan A. Creighton, David A. Killam, Neil M. Nathanson and Irwin R. Gross.

Jeffrey S. Jacobovitz argued the cause for amicus curiae I.D.E. Corp. With him on the briefs were Mark L. Rosenberg and Alan A.B. McDowell.

Before: EDWARDS, Chief Judge; SILBERMAN and BUCKLEY, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

Opinion PER CURIAM.

SILBERMAN, Circuit Judge:

Section 16(e) of the Antitrust Procedures and Penalties Act, known as the Tunney Act, requires the district court to determine whether entry of an antitrust consent decree is "in the public interest." 15 U.S.C. Sec. 16(e) (1988). In this case, the district court refused to enter a proposed consent decree the Antitrust Division of the Department of Justice negotiated with Microsoft Corporation. We conclude that the proposed consent decree is in the public interest, and that the district court exceeded its authority in concluding to the contrary. We therefore reverse and remand with instructions to enter an order approving the decree.

I.

Microsoft dominates the world market for operating systems software that runs on IBM-compatible personal computers ("PCs"). Operating systems software controls the operation of the computer and manages the interaction between the computer's memory and attached devices such as keyboards, printers, display screens and disk drives. In 1990, the Federal Trade Commission began investigating Microsoft's acquisition and maintenance of monopoly power in that market. When faced with the decision whether to file a complaint against Microsoft, however, the Commission deadlocked 2-2, thus suspending the agency's investigation.

The Antitrust Division of the Department of Justice then initiated its own investigation of Microsoft (apparently a rather rare occurrence), using the FTC's extensive investigatory file as its starting point. The Department issued 21 Civil Investigative Demands to Microsoft and third parties, reviewed one million pages of documents, and conducted over 100 interviews. The Department also deposed 22 persons, including Microsoft Chairman Bill Gates.

In July 1994, the Department filed a civil complaint under the Sherman Act, 15 U.S.C. Secs. 1 and 2 (1988), charging Microsoft with unlawfully maintaining a monopoly of operating systems for IBM-compatible PCs and unreasonably restraining trade of the same through certain anticompetitive marketing practices.

The key anticompetitive practice against which the complaint is aimed is Microsoft's use of contract terms requiring original equipment manufacturers ("OEMs") to pay Microsoft a royalty for each computer the OEM sells containing a particular microprocessor (in this case, an x86 class microprocessor), whether or not the OEM has included a Microsoft operating system with that computer. The practical effect of such "per processor licenses," it is alleged, is to deter OEMs from using competing operating systems during the life of their contracts with Microsoft. The complaint further charges that Microsoft has exacerbated the anticompetitive effect of the per processor licenses by executing long-term contracts with major OEMs, and by requiring minimum commitments and crediting unused balances to future contracts, thereby extending the contract term and creating an economic disincentive for an OEM to install a non-Microsoft operating system.

The other anticompetitive device alleged in the complaint is Microsoft's use of overly restrictive nondisclosure agreements with certain independent software vendors ("ISVs"). Those ISVs provide applications software to run "on top of" Microsoft's operating system, enabling the user to perform a variety of tasks, such as wordprocessing. Microsoft provides those ISVs with advance test versions of its newest operating system so that the ISVs can develop their software to be compatible with that operating system. The government alleged that Microsoft, as a corollary, has imposed nondisclosure agreements on some ISVs which would restrict their ability to work with competing operating systems companies and to develop competing products for an unreasonably long period of time.

The government did not allege and does not contend--and this is of crucial significance to this case--that Microsoft obtained its alleged monopoly position in violation of the antitrust laws. The government believes that Microsoft's initial acquisition of monopoly power in the operating systems market was the somewhat fortuitous result of IBM choosing for its PCs the operating system introduced by Microsoft ("MS-DOS"), which, with Microsoft's successful exploitation of that advantage, led Microsoft to obtain an installed base on millions of IBM, and IBM-compatible, PCs.

It is undisputed that the software market is characterized by "increasing returns," resulting in natural barriers to entry. Because the costs of producing software are almost exclusively in its design, marginal production costs are "virtually zero." Professor Arrow, the government's consultant and a Nobel-prize winning economist, described the importance of Microsoft's large installed base in an increasing returns market as follows:

A software product with a large installed base has several advantages relative to a new entrant. Consumers know that such a product is likely to be supported by the vendor with upgrades and service. Users of a product with a large installed base are more likely to find that their products are compatible with other products. They are more likely to be able successfully to exchange work products with their peers, because a large installed base makes it more likely that their peers will use the same product or compatible products. Installed base is particularly important to the economic success of an operating system software product. The value of the operating system is in its capability to run application software. The larger the installed base of a particular operating system, the more likely it is that independent software vendors will write programs that run on that operating system, and, in this circular fashion, the more valuable the operating system will be to consumers.

In a not uncommon technique, the Department of Justice filed a proposed consent decree along with its complaint, which embodied the Department's and Microsoft's settlement of the case. The consent decree, which essentially tracks the complaint and is effective for 78 months following its entry, prohibits Microsoft from entering into per processor licenses, licenses with a term exceeding one year (unless the customer opts to renew for another year), licenses containing a minimum commitment, and unduly restrictive nondisclosure agreements. To prevent Microsoft from using other exclusionary practices to achieve effects similar to those achieved by the practices challenged in the complaint, the proposed decree also prohibits certain other arrangements such as lump-sum pricing and variants of per processor licensing. The decree applies to Microsoft's most popular operating systems products (MS-DOS, Windows and Windows 95) and successor versions or operating systems marketed as replacement products. The decree does not, however, cover "Windows NT" products, which are designed for sophisticated "high end users" and which do not enjoy a substantial portion of the market for such products.

Pursuant to Section 16(b) of the Tunney Act, 15 U.S.C. Sec. 16(b) (1988), the Department of Justice published the proposed decree in the Federal Register, accompanied by a competitive impact statement, and invited comment. See 59 Fed.Reg. 42,845 (1994). Only five comments were received during the statutory period, to which the government responded on October 31, 1994.

At the first substantive status conference on September 29, 1994, the district judge informed the parties that over the summer he had read a book about Microsoft--Hard Drive ¹--because he "thought it would be a good idea maybe to know as much about Microsoft as probably they're going to know about me." Much of the ensuing discussion focused on accusations against Microsoft contained in the book. The district judge asked whether the government's lawyers had read the book and whether they had investigated the allegations made by its authors. In particular, the judge focused on the allegation that Microsoft engages in "vaporware," which he described in differing terms but ultimately defined as "the public announcement of a computer product before it is ready for market for the sole purpose of causing consumers not to purchase a competitor's product that has been developed and is either currently...