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State of New York v. Microsoft Corp.

November 1, 2002


The opinion of the court was delivered by: Colleen Kollar-kotelly, United States District Judge.


Presently pending before the Court is a joint stipulation entered by Defendant Microsoft Corporation and the Plaintiff States of New York, Ohio, Illinois, Kentucky, Louisiana, Maryland, Michigan, North Carolina, and Wisconsin ("Plaintiff Settling States"). The stipulation indicates that these States have joined the settlement between the United States and Microsoft in United States v. Microsoft Corp., No. 98-1232 (D.D.C.). In United States v. Microsoft Corp., the United States and Microsoft have proposed entry of a consent decree-the Second Revised Proposed Final Judgment ("SRPFJ")-as the final judgment in that case. Pursuant to Federal Rule of Civil Procedure 54(b), the Plaintiff Settling States *fn1 ask the Court to enter the SRPFJ as a final judgment as to their claims. For the reasons set forth in the Memorandum Opinion issued in United States v. Microsoft, No. 98-1232 (D.D.C. Nov. 1, 2002), appended hereto as Appendix A, the Court conditionally approves the SRPFJ as a final judgment as to the claims of the Plaintiff Settling States.

In considering proposed settlements, the Court is generally required to assess whether the settlement fairly and reasonably resolves the controversy in a manner consistent with the public interest. See Citizens for a Better Env't v. Gorsuch, 718 F.2d 1117, 1126 (D.C. Cir.1983). "Naturally, the agreement reached normally embodies a compromise; in exchange for the saving of cost and elimination of risk, the parties each give up something they might have won had they proceeded with the litigation." Id. at 1124 (quoting United States v. Armour & Co., 402 U.S. 673, 681 (1971)); see also United States v. Microsoft Corp., 56 F.3d 1448, 1461 (D.C. Cir. 1995). "[T]he reviewing court is not to substitute its judgment for that of the parties to the decree but to assure itself that the terms of the decree are fair and adequate and are not unlawful, unreasonable, or against public policy." United States v. Hooker Chemicals and Plastics Corp., 540 F. Supp. 1067, 1072 (W.D.N.Y. 1982). In addition, because approval of a settlement is a judicial act that is committed to the informed discretion of the trial court, the Court must satisfy itself that the decree is equitable in any effect it may have upon third parties. Donovan v. Robbins, 752 F.2d 1170, 1176-77 (7th Cir.1985); see also Hooker Chemicals and Plastics Corp., 540 F. Supp. at 1072 ("[T]he court must eschew any rubber stamp approval in favor of an independent evaluation, yet, at the same time, it must stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case.") (quoting City of Detroit v. Grinnell Corp. 495 F.2d 448, 462 (2d Cir. 1974)).

The standard described above cannot be said to exceed that imposed by the Tunney Act, 15 U.S.C. § 16(b)-(h). The Tunney Act requires the Court to subject any consent decree proposed in any civil proceeding brought by the United States under the antitrust laws to a determination of whether entry of such decree is in the "public interest." 15 U.S.C. § 16(b),(e); See generally Microsoft, 56 F.3d 1448. The Court recited the legal history of this case and its former companion case-United States v. Microsoft Corp.-in Memorandum Opinions issued in United States v. Microsoft Corp. on July 1, 2002, and November 1, 2002. In its November 1, 2002, Opinion in United States v. Microsoft Corp., the Court determined that, save for the provision specifying the Court's reservation of jurisdiction, entry of the SRPFJ as the final judgment in that case is in the public interest. See Appendix A; Microsoft, No. 98-1232, slip op. (D.D.C. Nov. 1, 2002). As the claims of the Plaintiff Settling States are indistinguishable from the claims of the United States, except that the Plaintiff Settling States advanced claims under state law as well as federal law, based upon the detailed analysis set forth in the record of United States v. Microsoft Corp., No. 98-1232, the Court finds that, with the exception of the reservation of jurisdiction, the SRPFJ is fair, reasonable, and in the public interest.

Because the Court has concerns that the reservation of jurisdiction in the proposed decree is insufficient to ensure clear enforcement of its terms by the Court, the Court shall condition its entry of the SRPFJ as the final judgment for the claims of the Plaintiff Settling States pending receipt by the Court of an amendment to that provision. See Appendix A; Microsoft, 98-1232, slip op. (D.D.C. Nov. 1, 2002). The Court suggests that the public interest would be served if Microsoft and the parties to the settlement would agree to amend the proposed final judgment to reserve for the Court, in addition to the powers presently specified in the proposed final judgment, the power sua sponte to issue orders or directions for the construction or carrying out of the final judgment, for the enforcement of compliance therewith, and for the punishment of any violation thereof. Such an amendment would not appear to work a fundamental change to the parties' agreement and would ensure that the Court retains the power intended by Plaintiffs and which the Court considers necessary to ensure effective implementation of the final judgment in this case.

Based on the foregoing, the Court conditionally approves the SRPFJ as the final judgment as to the claims of the Plaintiff Settling States in the above-captioned case. The Court will enter final judgment upon receipt of a proposed decree which reflects the amendment described above. Such amendment shall be filed in writing with the Court not later than November 8, 2002. An appropriate Order accompanies this Memorandum Opinion.

Appendix A


Remaining in this case for the Court's determination is the resolution of a single issue: whether entry of the final judgment proposed by the parties is in the public interest. The Court makes this determination pursuant to the Antitrust Procedures and Penalties Act ("Tunney Act"), 15 U.S.C. § 16(b)-(h). In a previous Memorandum Opinion, the Court reviewed the pertinent procedural history and determined that the parties had satisfied the other requirements of the Tunney Act. See generally United States v. Microsoft Corp., No. 98-1232, slip op. (D.D.C. July 1, 2002). Having reviewed the voluminous record in this case and considered the factors enumerated in 15 U.S.C. § 16(e), the Court finds that, with the exception of the provisions relating to the retention of the Court's jurisdiction, the proposed consent decree is in the public interest. Accordingly, the Court conditionally approves the proposed consent decree as the final judgment in this case, pending the prompt agreement by the parties to a modification of the Court's retention of its jurisdiction.


On May 18, 1998, the United States filed a civil complaint alleging that Microsoft had engaged in anticompetitive conduct in violation of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. On that same date, a group of state plaintiffs filed a separate civil complaint alleging similar violations of federal law, as well as violations of the corresponding provisions of their various state laws. Not long after filing, the two cases were consolidated and thereafter, proceeded jointly through discovery and a trial on the merits. On November 5, 1999, Judge Thomas Penfield Jackson entered 412 findings of fact, United States v. Microsoft Corp., 84 F. Supp. 2d 9 (D.D.C. 1999) (hereinafter cited as "Findings of Fact"), and on April 3, 2000, Judge Jackson entered conclusions of law, finding Microsoft liable for violations of §§ 1 and 2 of the Sherman Act and the corresponding state law provisions, United States v. Microsoft Corp., 87 F. Supp. 2d 30 (D.D.C. 2000). On June 7, 2000, Judge Jackson entered final judgment in the consolidated cases and imposed a structural remedy of divestiture for Microsoft's violations of the Sherman Act. United States v. Microsoft Corp., 97 F. Supp. 2d 59 (D.D.C. 2000).

Microsoft appealed, and the United States Court of Appeals for the District of Columbia Circuit determined to consider the appeals in the consolidated cases en banc. Following extensive briefing and two days of oral argument, the appellate court issued a unanimous per curiam opinion affirming in part, reversing in part, vacating the remedy decree in full, and remanding in part for remedy proceedings before a different district court judge. See United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (en banc). Following reassignment, on September 28, 2001, this Court ordered that the parties enter into intensive settlement negotiations. United States v. Microsoft Corp., Nos. 98-1232 and 98-1233 (D.D.C. Sept. 28, 2001) (setting a schedule for settlement discussions). On that same date, the Court entered a schedule for discovery and commencement of evidentiary proceedings, in the event that the cases were not resolved through settlement. United States v. Microsoft Corp., Nos. 98-1232 and 98-1233 (D.D.C. Sept. 28, 2001) (setting discovery guidelines and schedule).

The United States and Microsoft were able to reach a resolution in United States v. Microsoft Corp., No. 98-1232 (D.D.C.), in the form of a proposed consent decree, filed with the Court as the "Revised Proposed Final Judgment" on November 6, 2001. As a result, the Court vacated the discovery schedule with regard to United States v. Microsoft Corp. and deconsolidated that case from its companion case, State of New York, et. al. v. Microsoft Corp., No. 98-1233 (D.D.C.). United States v. Microsoft Corp., Nos. 98-1232 and 98-1233 (D.D.C. Nov. 2, 2001) (vacating the Sept. 28, 2001, Scheduling Order with regard to Civil Action No. 98-1232); United States v. Microsoft Corp., Nos. 98-1232 and 98-1233 (Feb. 1, 2002) (deconsolidating cases). Rather than proceed to an evidentiary hearing on the issue of remedy along with some of the plaintiffs in State of New York, et. al. v. Microsoft Corp., *fn2 the United States and Microsoft commenced the process of obtaining judicial approval of the proposed consent decree pursuant to the Tunney Act, 15 U.S.C. § 16(b)-(h).

The November 6, 2001, filing of the Revised Proposed Final Judgment ("RPFJ") was accompanied by a "Stipulation" entered into by the United States, Microsoft, and the Settling States. The Stipulation provided that the Court could enter the proposed final judgment "at any time after compliance with the requirements of the Antitrust Procedures and Penalties Act, 15 U.S.C. § 16, and without further notice to any party or other proceedings." Stipulation and Revised Proposed Final Judgment at 1. The United States filed its "competitive impact statement" ("CIS") with the Court on November 15, 2001. Pursuant to 15 U.S.C. § 16(b), the United States published the proposed final judgment, along with the CIS, in the Federal Register on November 28, 2001. Revised Proposed Final Judgment and Competitive Impact Statement, 66 Fed. Reg. 59,452 (Nov. 28, 2001). On December 10, 2001, Defendant Microsoft filed with the Court its "description of . . . written or oral communications by or on behalf of [Microsoft] . . . with any officer or employee of the United States concerning or relevant to" the proposed consent decree. Thereafter, Microsoft supplemented this description on March 20, 2002.

The United States received 32,392 comments on the proposed final judgment and provided the full text of these comments to the Court on February 28, 2002. On March 1, 2002, the United States submitted the full text of the public's comments for publication in the Federal Register, and on May 3, 2002, the public comments appeared in the Federal Register pursuant to that submission. United States' Certificate of Compliance at 4; Public Comments, 67 Fed. Reg. 23,654 (Books 2-12) (May 3, 2002). On May 9, 2002, the United States published in the Federal Register an "addendum containing the correct text of thirteen (13) comments for which either an incomplete or incorrect electronic version had been included in the original submission to the Federal Register." Addendum to Public Comments, 67 Fed. Reg. 31,373 (May 9, 2002); United States Certificate of Compliance at 4. The United States certified compliance with 15 U.S.C. §16 (b)-(d) on May 9, 2002. On July 1, 2002, this Court confirmed the applicability of the Tunney Act to these proceedings and found that the parties had complied with the Act's requirements such that the matter was ripe for the Court's determination of the public interest. See United States v. Microsoft Corp., No. 98-1232, slip op. (D.D.C. July 1, 2002). *fn3


A. Tunney Act

Concerned with the appearance of impropriety engendered by the secrecy of consent decree negotiations in antitrust cases, in addition to exposing to "sunlight" the process by which such consent decrees are negotiated, 119 Cong. Rec. at 24599, Congress determined that the judiciary should do more than merely "rubber stamp" proposed consent decrees in antitrust cases, H. Rep. No. 93-1463, at 8 (1974), reprinted in 1974 U.S.C.C.A.N. 6535, 6536; S. Rep. No. 93-298, at 5 (1973). See also United States v. Microsoft Corp., 56 F.3d 1448, 1458 (D.C. Cir. 1995) (quoting legislative history). Accordingly, § 16(e) of Title 15 mandates that, prior to the entry of a consent judgment proposed by the United States in an antitrust action, the district court must determine that "entry of such judgment is in the public interest." 15 U.S.C. § 16(e). Subsection (e) specifically requires the Court to "make an independent determination as to whether or not entry of a proposed consent decree is in the public interest." S. Rep. 93-298, at 5; Microsoft, 56 F.3d at 1458 (quoting legislative history).

"The court's role in protecting the public interest is one of ensuring that the government has not breached its duty to the public in consenting to the decree." United States v. Bechtel, 648 F.2d 660, 666 (9th Cir. 1981). In making this determination, the Court "may consider" the following:

(1) the competitive impact of such judgment, including termination of alleged violations, provisions for enforcement and modification, duration or relief sought, anticipated effects of alternative remedies actually considered, and any other considerations bearing upon the adequacy of such judgment;

(2) the impact of entry of such judgment upon the public generally and individuals alleging specific injury from the violations set forth in the complaint including consideration of the public benefit, if any, to be derived from a determination of the issues at trial. 15 U.S.C. § 16(e).

The D.C. Circuit characterized these considerations more simply as an inquiry into the "purpose, meaning, and efficacy of the decree." Microsoft, 56 F.3d at 1462.

The D.C. Circuit identified a number of issues to which the district court should pay particularly close attention in its examination of the decree and corresponding assessment of the public interest. "A district judge pondering a proposed consent decree . . . should pay special attention to the decree's clarity," as it is the district judge who must "preside over the implementation of the decree." Id. at 1461-62. Based on a similar rationale, district courts are expected to "pay close attention" to the enforcement provisions in a proposed consent decree. Id. at 1462. Where there exist third-party claims that entry of the proposed decree will cause affirmative harm, the district court should at least pause or "hesitate" in order to consider these claims before reaching a conclusion that the proposed decree is appropriate. Id.

Notwithstanding the district court's focused consideration of these and other issues, the Court must recall that its "authority to review the [proposed] decree depends entirely on the government's exercising its prosecutorial discretion by bringing a case in the first place." Id. at 1459-60. Accordingly, the Court must accord deference to the "government's predictions as to the effect of the proposed remedies." United States v. Thomson Corp., 949 F. Supp. 907, 914 (D.D.C. 1996) (quoting Microsoft, 56 F.3d at 1461); see also United States v. Western Elec. Co., 900 F.2d 283, 297 (D.C. Cir. 1990) ("[A]lthough we see no doctrinal basis for the district court to defer to the DOJ's interpretation of the decree or its views about antitrust law, it is to be expected that the district court would seriously consider the Department's economic analysis and predictions of market behavior."). In this vein, "a proposed decree must be approved even if it falls short of the remedy the court would impose on its own, as long as it falls within the range of acceptability or is within the reaches of public interest." United States v. AT&T, 552 F. Supp. 131, 151 (D.D.C. 1982) (quotation marks omitted), aff'd without opinion sub nom. Maryland v. United States, 460 U.S. 1001 (1983); accord Microsoft, 56 F.3d at 1460; Bechtel, 648 F.2d. at 666.

Having so identified the general standard in Tunney Act cases, this Court must inquire as to whether that standard applies equally and without modification in this case. The instant case is more complicated than the usual case in that it contradicts the rule that "because it is a settlement [and] there are no findings that the defendant has actually engaged in illegal practices . . . it is therefore inappropriate for the [district court] judge to measure the remedies in the decree as if they were fashioned after trial." Microsoft, 56 F.3d at 1460-61 (emphasis omitted). In this case there has been a trial, and there have been findings of liability on numerous grounds. See Microsoft, 253 F.3d 34. Therefore, it seems entirely appropriate to "measure the remedies" based upon the post-trial liability findings in this case. Microsoft, 56 F.3d at 1461. Accordingly, the findings of liability provide an essential foundation to this Court's analysis, as a "discrepancy between the remedy and undisputed facts of antitrust violations could be such as to render the decree 'a mockery of judicial power.'" Mass. School of Law at Andover, Inc. v. United States, 118 F.3d 776, 782 (D.C. Cir. 1997) (quoting Microsoft, 53 F.3d at 1462); accord Thomson, 949 F. Supp. at 913 ("[T]he court is to compare the complaint filed by the government with the proposed consent decree and determine whether the remedies negotiated between the parties and proposed by the Justice Department clearly and effectively address the anticompetitive harms initially identified.").

While this is not to say that the circumstances of this case call for a review of the proposed decree in the absence of deference, the Court cannot simply proceed as if this were a case based upon untested allegations. In the ususal case "[r]emedies which appear less than vigorous may well reflect an underlying weakness in the government's case." Microsoft, 56 F.3d at 1460-61. Yet in this case, many, though certainly not all, of the strengths and weaknesses of the government's case have already been exposed. In this regard, the Court cannot overlook the fact that the appellate court sustained liability against Microsoft for violation of § 2 of the Sherman Act. Microsoft, 253 F.3d 59-78. Therefore, without applying a wholly distinct standard, this Court must remain ever-mindful of the posture of this case when assessing the proposed consent decree for determination of the public interest.

Given the liability findings, part of the public interest analysis will require consideration of the extent to which the proposed consent decree "meets the requirements for an antitrust remedy." AT&T, 552 F. Supp. at 153. "[A] remedies decree in an antitrust case must seek to 'unfetter a market from anticompetitive conduct,' Ford Motor Co. [v. United States], 405 U.S. [562,] 577 [1972], . . . to 'terminate the illegal monopoly, *fn4 deny to the defendant the fruits of its statutory violation, and ensure that there remain no practices likely to result in monopolization in the future,' [United Shoe, 391 U.S. at 250]." Microsoft, 253 F.3d at 103. Although this inquiry is usually reserved for cases which are litigated through remedy, such as State of New York, et al. v. Microsoft Corp., No. 98-1233 (D.D.C.), consideration of these "objectives," to the extent they are applicable to the facts of this case, remains appropriate because liability has been established in this case. Still, the Court's assessment of the remedy's ability to satisfy these objectives is tempered by the deference owed to the government in the Tunney Act context. See generally Microsoft, 56 F.3d 1448.

Applying these principles to the instant case, because the district court has rendered findings of fact and liability which have been reviewed on appeal, the Court examines, in general terms, the correspondence between the liability findings and the conduct restrictions in the proposed consent decree. In conjunction with this inquiry, the Court is particularly attentive to the clarity of the proposed decree's provisions, the enforcement mechanisms, and to claims that harm will result from the implementation of the proposed decree. Microsoft, 53 F.3d at 1461-62.


A. Court of Appeals Opinion

In most cases, judicial analysis of the public interest in a Tunney Act proceeding commences, quite logically, with an examination of the allegations laid out in the complaint. See, e.g., Thomson, 949 F. Supp. at 909-11 (describing complaint). Indeed, the district court is without authority to "reach beyond the complaint to evaluate claims that the government did not make and to inquire as to why they were not made." Microsoft, 56 F.3d at 1459. In light of the procedural posture of this case, however, the complaint in this case is of little moment, as proceedings have far surpassed the allegations stage. Instead, the opinion of the appellate court provides the underpinning for this Court's analysis of the proposed decree. As a result, the Court pauses to summarize and recount the pertinent portions of the appellate opinion in this case. Where appropriate, a more detailed examination of the appellate court's opinion appears in the context of the Court's discussion of the specific provisions of the proposed final judgment.

1. Market Definition

The appellate court began its opinion by examining Plaintiffs' *fn5 § 2 Sherman Act claims and specifically, whether the district judge had identified the proper market for purposes of assessing Microsoft's monopoly power. The appellate court concluded that the district court had properly defined the relevant market as "the licensing of all Intel-compatible PC *fn6 operating systems *fn7 worldwide." Microsoft, 253 F.3d at 52 (quoting Microsoft, 87 F. Supp. 2d at 36). Having agreed with the district court's definition of the relevant market, the appellate court adopted the district court's determination that "circumstantial evidence proves that Microsoft possesses monopoly power." Id. at 56. The appellate court further noted that "if we were to require direct proof [of monopoly power], . . . Microsoft's behavior may well be sufficient to show the existence of monopoly power." Id. at 57.

2. Theory of Liability

Integral to the appellate court's adoption of the market definition was its simultaneous acceptance of Plaintiffs' theory of Microsoft's market dominance. Both the district and appellate courts noted that Microsoft's lawfully acquired monopoly is naturally protected by a "structural barrier," known as the "applications barrier to entry." Id. at 55. "That barrier . . . stems from two characteristics of the software market: (1) most consumers prefer operating systems for which a large number of applications have already been written; and (2) most developers prefer to write for operating systems that already have a substantial consumer base." Id. (citing Findings of Fact ¶¶ 30, 36). This barrier creates a "chicken-and-egg" or network effects situation, which perpetuates Microsoft's operating system dominance because "applications will continue to be written for the already dominant Windows, *fn8 which in turn ensures that consumers will continue to prefer it over other operating systems." Id. Because "[e]very operating system has different APIs," *fn9 applications written for one operating system will not function on another operating system unless the developer undertakes the "time consuming and expensive" process of transferring and adapting, known in the industry as "porting," the application to the alternative operating system. Id. at 53.

Plaintiffs proceeded under the theory that certain kinds of software products, termed "middleware," *fn10 could reduce the "self-reinforcing cycle," Findings of Fact ¶ 39, by serving as a platform for applications, taking over some of the platform functions provided by Windows and thereby "weaken[ing] the applications barrier to entry," id. ¶ 68. One of middleware's defining characteristics as a software product is its ability to "expos[e] its own APIs." Findings of Fact ¶ 28. Eventually, reasoned Plaintiffs, if applications were written to rely on the middleware API set, rather than the Windows API set, the applications could be made to run on alternative operating systems simply by porting the middleware. Ultimately, by writing to the middleware API set, applications developers could write applications which would run on any operating system on which the middleware was preset. Plaintiffs focused their attention primarily upon two such middleware threats to Microsoft's operating system dominance-Netscape Navigator *fn11 and the Java technologies. Microsoft, 253 F.3d at 53. The district and appellate courts accepted Plaintiffs' theory of competition despite the fact that "neither Navigator, Java, nor any other middleware product could [at that time], or would soon, expose enough APIs to serve as a platform for popular applications." Id.; Findings of Fact ¶¶ 28-29.

3. Four-Part Test for Liability

Having concluded that the district court properly identified the relevant market as the market for Intel-compatible PC operating systems and properly excluded middleware products from that market, the appellate court turned its attention to the issue of whether Microsoft responded to the threat posed by middleware in violation of § 2 of the Sherman Act. Specifically, the appellate court set out to determine whether Microsoft "maintain[ed], or attempt[ed] to . . . maintain, a monopoly by engaging in exclusionary conduct." Microsoft, 253 F.3d at 58. The appellate court recounted that the district court answered that inquiry in the affirmative, finding

Microsoft liable for violating § 2 of the Sherman Act:

by engaging in a variety of exclusionary acts . . . [s]pecifically . . . : (1) the way in which it integrated [Internet Explorer] into Windows; (2) its various dealings with Original Equipment Manufacturers ("OEMs"), Internet Access Providers ("IAPs"), Internet Content Providers ("ICPs"), Independent Software Vendors (ISVs), and Apple Computer; (3) its efforts to contain and to subvert Java technologies; and (4) its course of conduct as a whole. Id.

In order to review the district court's findings on this point, the appellate court outlined a four-part test for determining whether particular conduct can be said to violate antitrust law. "First, to be condemned as exclusionary, a monopolist's act must have an 'anticompetitive effect.' That is, it must harm the competitive process and thereby harm consumers." Id. at 58 (emphasis in original). Second, the plaintiff must "demonstrate that the monopolist's conduct harmed competition, not just a competitor." Id. at 59. Third, "the monopolist may proffer a 'procompetitive justification' for its conduct." Id. (quoting Eastman Kodak Co. v. Image Technical Servs. Inc., 504 U.S. 451, 483 (1992)). If this justification stands unrebutted by the plaintiff, the monopolist may escape liability. Therefore, the fourth prong of the inquiry requires that the plaintiff "demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit." Id. The appellate court stressed that, although evidence of intent is relevant "to understand the likely effect of the monopolist's conduct," when assessing the balance between the anticompetitive harm and the procompetitive effect, the trial court should focus on the "effect of [the exclusionary] conduct, not the intent behind it." Id.

Using this framework, the appellate court addressed Microsoft's challenge to each of the findings by the district court. The appellate court examined the district court's four basic areas of findings with regard to § 2 liability in an order different from that of the district court. The Court presents these holdings, in the order addressed by the appellate court.

4. Original Equipment Manufacturer ("OEM") Licenses

Commencing its analysis with the "[l]icenses [i]ssued to [o]riginal [e]quipment [m]anufacturers," *fn12 id. at 59, the appellate court focused upon three license provisions "prohibiting the OEMs from: removing any desktop icons, folders, or 'Start' menu entries; (2) altering the initial boot sequence; and (3) otherwise altering the appearance of the Windows desktop," id. at 61 (citing Findings of Fact ¶ 213). Into the category of "otherwise altering the appearance of the Windows desktop," the appellate court subsumed the automatic launch of an alternative user interface, the prohibition against the addition of icons and folders different in size and shape from those used by Microsoft, and the prohibition on the use of the "Active Desktop" feature *fn13 to display third-party brands. Id. at 62; see also Findings of Fact ¶ 213. Of these license provisions, the appellate court concluded that, "with the exception of the one restriction prohibiting automatically launched alternative interfaces, all of the OEM license restrictions at issue represent uses of Microsoft's market power to protect its monopoly, unredeemed by any legitimate justification." Id. at 64. In commencing its next area of analysis, the appellate court noted with regard to the license restrictions imposed upon OEMs that they "have a significant effect in closing rival browsers out of one of the two primary channels of distribution." Id.

5. Integration of Internet Explorer ("IE") and Windows

The appellate court next turned its attention toward the "[i]ntegration of [Internet Explorer ("IE")] *fn14 and Windows." Id. At the outset of its analysis, the appellate court took a narrow view of the district court's determination, noting that the district court's "broad[]" condemnation of "Microsoft's decision to bind 'Internet Explorer to Windows with . . . technological shackles'" is supported by only three specific actions taken by Microsoft. Id. (quoting Microsoft, 87 F. Supp. 2d at 39). The appellate court identified these three as (1) "excluding IE from the 'Add/Remove Programs' utility"; (2) "designing Windows so as in certain circumstances to override the user's choice of a default browser other than IE"; and (3) "commingling code related to browsing and other code in the same files, so that any attempt to delete the files containing IE would, at the same time, cripple the operating system." Id. at 64-65. Pursuant to its four part test for liability, the appellate court concluded that Microsoft could be held liable for the first and the third of these actions. Id. at 65-67. As to the second of these actions, the override of the user's choice of default in certain circumstances, the court determined that Microsoft had proffered a procompetitive justification that went unrebutted by Plaintiffs, namely that the override was the result of "valid technical reasons" which justified the override in a "few out of the nearly 30 means of accessing the Internet." Id. at 67 (quotation marks omitted). Finding that Plaintiffs had neither rebutted Microsoft's procompetitive justification, nor demonstrated that the anticompetitive effect of the challenged act outweighed such justification, the appellate court held that "Microsoft may not be held liable for this aspect of its product design." Id.

6. Agreements with Internet Access Providers ("IAPs")

Directing its attention to Microsoft's "agreements with various IAPs," *fn15 which the district court "condemned" as exclusionary, the appellate court identified five Microsoft actions specifically relied upon by the district court for this condemnation:

(1) offering IE free of charge to IAPs[;] . . . (2) offering IAPs a bounty for each customer the IAP signs up for service using the IE browser[;] . . . (3) developing the IE Access Kit ("IEAK"), a software package that allows an IAP to "create a distinctive identity for its service in as little as a few hours by customizing the [IE] title bar, icon, start and search pages," Findings of Fact ¶ 249[;] . . . (4) offering the IEAK to IAPs free of charge, on the ground that those acts, too, helped Microsoft preserve its monopoly[,] [Microsoft, 87 F. Supp. 2d] at 41-42[;] . . . (5) agree[ing] to provide easy access to IAPs' services from the Windows desktop in return for the IAPs' agreement to promote IE exclusively and to keep shipments of internet access software using Navigator under a specific percentage, typically 25%. See [Microsoft, 87 F. Supp. 2d] at 42 (citing Findings of Fact ¶¶ 258, 262, 289). Id. at 67-68.

Grouping the first four of these actions together as "Microsoft's inducements," the appellate court held that these four actions merely "offer[ed] a consumer an attractive deal" and, therefore, could not be treated as anticompetitive. Id. at 68. In contrast, the appellate court agreed with the district court that Microsoft's exclusive contracts with IAP's "are exclusionary devices, in violation of § 2 of the Sherman Act." Id. at 71.

7. Agreements with Internet Content Providers ("ICPs"), Independent Software Vendors ("ISVs"), and Apple

The appellate court next considered Microsoft's "dealings with ICPs, which develop websites; ISVs, which develop software; and Apple, which is both an OEM and a software developer." Id. at 71. The "deals" at issue in this portion of the case are grants of "free licenses to bundle IE with [the ICPs' and ISVs'] offerings" and the exchange of "other valuable inducements for [ICPs' and ISVs'] agreement to distribute, promote, and rely on IE rather than Navigator." Id. (quoting Microsoft, 87 F. Supp. 2d at 42-43) (brackets and quotation marks omitted). The district court held these agreements to be anticompetitive in violation of § 2 of the Sherman Act because they had the effect of "directly induc[ing] developers to focus on [Microsoft's] own APIs rather than ones exposed by Navigator." Id. (quoting Microsoft, 87 F. Supp. 2d at 42-43) (quotation marks omitted).

At the outset of its analysis in this context, the appellate court concluded bluntly that "[w]ith respect to [Microsoft's] deals with ICPs, the District Court's findings do not support liability." Id. In contrast, the appellate court sustained the district court's finding of liability with regard to Microsoft's agreements with ISVs because Plaintiffs made "a prima facie showing that the deals have an anticompetitive effect," and Defendant did not successfully rebut this showing. Id. at 72. In particular, the appellate court found that the exclusive provisions in these so-called "First Wave Agreements" with ISVs foreclosed a substantial share of the market for Navigator. Id.

Turning its attention in this context finally to Microsoft's relationship with Apple, the appellate court concluded that Microsoft's agreement with Apple was exclusionary in violation of § 2 of the Sherman Act. Id. at 72-74. The appellate court recounted that in mid-1997, Microsoft and Apple entered into an agreement which obligated Microsoft to continue to release "up-to-date" versions of its office productivity software for Apple's systems, Mac Office. Id. at 73 (quoting Findings of Fact ¶¶ 350-52). The agreement further obligated Apple to make IE the default browser. Id. (quoting Findings of Fact ¶¶ 350-52). Pursuant to this same agreement, Apple promised not to install Navigator during the "default installation," and not to "position icons for non[-]Microsoft browsing software on the desktop of new Macintosh PC systems or Mac OS upgrades." Id. (quoting Findings of Fact ¶¶ 350-52). Similarly, the agreement prohibited Apple "from encouraging users to substitute another browser for IE, and state[d] that Apple [would] 'encourage its employees to use IE.'" Id. (quoting Findings of Fact ¶ 352) (brackets omitted). The appellate court concluded that "[t]his exclusive deal between Microsoft and Apple ha[d] a substantial effect upon the distribution of rival browsers." Id. Given the absence of a "procompetitive justification for the exclusive dealing arrangement," the appellate court affirmed the district court's finding of § 2 liability based upon Microsoft's exclusive deal with Apple. Id. at 74.

8. Java

The appellate court grouped the next category of Microsoft conduct under the heading "Java" in reference to "a set of technologies developed by Sun Microsystems" ("Sun"). Id. The Java technologies are described as "another type of middleware posing a potential threat to Windows' position as the ubiquitous platform for software development." Id. (citing Findings of Fact ¶ 28). The appellate opinion recounts that the district court identified four steps taken by Microsoft to "exclude Java from developing as a viable cross-platform threat: (a) designing a [Java Virtual Machine ("JVM") *fn16 ] incompatible with the one developed by Sun; (b) entering into contracts, the so called 'First Wave Agreements,' requiring major ISVs to promote Microsoft's JVM exclusively; (c) deceiving Java developers about the Windows-specific nature of the tools it distributed to them; and (d) coercing Intel to stop aiding Sun in improving the Java technologies." Id. Of these actions, the appellate court concluded that all but the first action were anticompetitive in violation of § 2. Id. at 74-78. With regard to the first enumerated action, the incompatible JVM, the appellate court held that because the incompatible JVM did not have an anticompetitive effect which outweighed the procompetitive justification for the design, it could not provide a basis for antitrust liability. Id. at 75.

Specifically, with regard to the First Wave Agreements, the appellate court observed that the district court had found the agreements, "although not literally exclusive . . . were exclusive in practice." Id. at 75. Although the district court did not enter precise findings as to the effect of the First Wave Agreements upon rival Java distribution, the appellate court determined that "the record indicates that Microsoft's deals with the major ISVs had a significant effect upon JVM promotion." Id. In the absence of procompetitive justification, the appellate court imposed liability for this aspect of the First Wave Agreements. Id. at 76.

As to the Java developer tools, the appellate court's imposition of liability focused not upon the fact that the tools created programs which were not cross platform, but upon the fact that Microsoft deceived software developers about the Windows-specific nature of the tools. Id. at 76-77. The appellate court found that Microsoft's deception was intentional and without procompetitive explanation. Id. at 77. As a result, the appellate court imposed liability for Microsoft's deception. Id.

9. Intel

As noted above, the appellate court's final imposition of liability arose out of a "threat" by Microsoft directed at Intel. Id. at 77. "Intel is [a firm] engaged principally in the design and manufacture of microprocessors." Findings of Fact ¶ 95. A segment of Intel's business develops software, with the primary focus upon "finding useful ways to consume more microprocessor cycles, thereby stimulating demand for advanced Intel microprocessors." Id. The appellate court recounted that in 1995, Intel was in the process of "developing a high performance, Windows-compatible JVM." Microsoft, 253 F.3d at 77. Furthering its efforts to combat the cross-platform threat of Java to the Windows platform, Microsoft repeatedly "urged Intel not to help Sun by distributing Intel's fast, Sun compliant JVM." Id. Eventually, Microsoft "threatened Intel that if it did not stop aiding Sun . . . then Microsoft would refuse to distribute Intel technologies bundled with Windows." Id. Intel capitulated after Microsoft threatened to support an Intel competitor, AMD, if Intel's efforts with Java continued. Id.

The appellate court acknowledged Microsoft's anticompetitive intent, as well as the anticompetitive effect of Microsoft's actions toward Intel. Id. Microsoft did not offer a procompetitive justification for its treatment of Intel, but "lamely characterize[d] its threat to Intel as 'advice.'" Id. Rejecting the characterization of Microsoft's threat as mere "advice," the appellate court found the district court's imposition of liability to be supported by both fact and law. Id. at 77-78. On this basis, the appellate court imposed § 2 liability for Microsoft's threat to Intel.

Corresponding to the above-described imposition of liability pursuant to § 2 of the Sherman Act, the appellate court imposed liability upon Microsoft for violations of the relevant "state law counterparts of" the Sherman Act. Id. at 46. Beyond these findings, the appellate court did not find Microsoft liable for any additional antitrust violations. Specifically, the appellate court reversed the district court's conclusion that Microsoft's "course of conduct" as a whole constitutes a separate violation of § 2. Id. at 78. In addition, the appellate court rejected the district court's finding of attempted monopolization and remanded the § 1 tying claim for further proceedings at the district court level. *fn17 Plaintiffs opted not to pursue the tying claim on remand. *fn18 Joint Status Report (Sept. 20, 2001) at 2.

10. Vacating the District Court's Order of Remedy

Following its review of the district court's conclusions with regard to liability, the appellate court considered the district court's choice of remedy. Over the objection of Defendant Microsoft, the district court decided to consider the merits of Plaintiffs' remedy proposal in the absence of an evidentiary hearing. Microsoft, 253 F.3d at 98-99; see also Microsoft, 97 F. Supp. 2d at 61. The district court did so based on the rationale that Microsoft's evidentiary proffers largely concerned "testimonial predictions about future events" which would be of little use to the court in identifying an "optimum remedy." Microsoft, 253 F.3d at 99 (quoting Microsoft, 97 F. Supp. 2d at 62). Based upon its finding of liability for illegal monopoly maintenance, attempted monopolization, and illegal tying, the district court entered a remedy "nearly identical to plaintiffs' proposal" mandating the divestiture of Microsoft Corporation into an "Operating Systems Business" and an "Applications Business." Id. at 99-100 (quoting Microsoft, 97 F. Supp. 2d at 64). The original decree entered by the district court, often referred to as the Initial Final Judgment ("IFJ"), also included a number of "interim restrictions on Microsoft's conduct." Id. at 100. The interim restrictions included, inter alia, mandatory disclosure "to third-party developers the APIs and other technical information necessary to ensure that software effectively interoperates with Windows," id. (describing IFJ § 3.b), a prohibition on Microsoft's ability to enter into contracts which oblige third parties to limit their "'development, production, distribution, promotion, or use of, or payment for' non-Microsoft platform level software," id. (quoting IFJ § 3.e), and a "'Restriction on Binding Middleware Products to Operating System Products' unless Microsoft also offers consumers 'an otherwise identical version' of the operating system without the middleware," id. (quoting IFJ § 3.g).

The appellate court found three fundamental flaws in the district court's order of remedy, each of which alone justified vacating the remedial decree. The appellate court first concluded that the failure to hold an evidentiary hearing in the face of disputed facts concerning the remedy violated the "cardinal principle of our system of justice that factual disputes must be heard in an open court and resolved through trial-like evidentiary proceedings." Id. at 101. The appellate court rejected the district court's conclusion that evidentiary proceedings would not be useful, noting that "a prediction about future events is not, as a prediction, any less a factual issue." Id. at 102. Moreover, noted the appellate court, "drafting an antitrust decree by necessity 'involves predictions and assumption concerning future economic and business events.'" Id. (quoting Ford Motor Co., 405 U.S. at 578).

In addition to the failure to hold an evidentiary hearing, the appellate court faulted the district court for its "fail[ure] to provide an adequate explanation for the relief it ordered." Id. at 103. Finding the trial court's devotion of "a mere four paragraphs of its order to explaining its reasons for the remedy" insufficient, the appellate court observed that the initial remedy was not accompanied by an explanation of the manner in which the remedy would accomplish the objectives of a remedial decree in an antitrust case. Id. In this regard, the appellate court recited that "a remedies decree in an antitrust case must seek to 'unfetter a market from anticompetitive conduct,' Ford Motor Co., 405 U.S. at 577, to 'terminate the illegal monopoly, deny to the defendant the fruits of its statutory violation, and ensure that there remain no practices likely to result in monopolization in the future,' [United Shoe, 391 U.S. at 250]." Id. (internal citations in original).

Lastly, the appellate court concluded that the substantial modifications to the liability imposed by the district court merited a new determination of the remedy for the surviving antitrust violations. In particular, the appellate court noted that of the three original findings of liability, only liability for illegal monopoly maintenance in violation of § 2 of the Sherman Act had survived, and even this aspect of liability had been modified. Id. at 103-04. The appellate court determined that where "sweeping equitable relief is employed to remedy multiple violations, and some-indeed most-of the findings of remediable violations do not withstand scrutiny" the remedy decree must be vacated because there no longer exists a rational connection between the liability imposed and the remedy ascribed thereto. Id. at 105. Accordingly, the appellate court remanded the case for this Court to resolve any factual disputes surrounding a remedy and for this Court to exercise its "broad discretion" in imposing the "relief it calculates will best remedy the conduct . . . found to be unlawful." Id.

11. Causation and Remedy

In its appeal, Microsoft "urge[d]" the circuit court to "reverse on the monopoly maintenance claim, because [P]laintiffs never established a causal link between Microsoft's anticompetitive conduct, in particular its foreclosure of Netscape's and Java's distribution channels, and the maintenance of Microsoft's operating system monopoly." Id. at 78. Relying heavily on the treatise on antitrust law authored by Phillip E. Areeda and Herbert Hovenkamp, the appellate court determined that liability in this case could be established through an "infer[ence]" of causation. Id. at 79 (citing 3 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 651c, at 78 (1996)). Applying this "rather edentulous test for causation" the appellate court identified two relevant inquiries, the satisfaction of which would result in liability:

(1) whether as a general matter the exclusion of nascent threats is the type of conduct that is reasonably capable of contributing significantly to a defendant's continued monopoly power and (2) whether Java and Navigator reasonably constituted nascent threats at the time Microsoft engaged in the anticompetitive conduct at issue. Id.

On the record from the district court, the appellate court readily concluded that both inquiries had been satisfied and that liability must be imposed. Id.

The appellate court noted, however, that "Microsoft's concerns over causation have more purchase in connection with the appropriate remedy issue, i.e., whether the court should impose a structural remedy or merely enjoin the offensive conduct at issue." Id. at 80. Again relying upon Areeda and Hovenkamp, the appellate court focused upon the structural remedy that had been imposed by Judge Jackson and identified a relationship between the evidence of causation and the imposition of "radical structural relief":

As we point out later in this opinion, divestiture is a remedy that is imposed only with great caution, in part because its long-term efficacy is rarely certain. Absent some measure of confidence that there has been an actual loss to competition that needs to be restored, wisdom counsels against adopting radical structural relief. See 3 AREEDA & HOVENKAMP, ANTITRUST LAW ΒΆ 653b, at 91-92 ("[M]ore extensive equitable relief, particularly remedies such as divestiture designed to eliminate the monopoly altogether, raise more serious questions and require a clearer ...

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