United States Microsoft antitrust case

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United States v. Microsoft was a set of consolidated civil actions filed against Microsoft Corporation on May 18, 1998 by the United States Department of Justice (DOJ) and twenty U.S. states. Joel I. Klein was the lead prosecutor. The plaintiffs alleged that Microsoft abused monopoly power in its handling of operating system sales and web browser sales. The issue central to the case was whether Microsoft was allowed to bundle its flagship Internet Explorer (IE) web browser software with its Microsoft Windows operating system. Bundling them together is alleged to have been responsible for Microsoft's victory in the browser wars as every Windows user had a copy of Internet Explorer. It was further alleged that this unfairly restricted the market for competing web browsers (such as Netscape Navigator or Opera) that were slow to download over a modem or had to be purchased at a store. Underlying these disputes were questions over whether Microsoft altered or manipulated its application programming interfaces (APIs) to favor Internet Explorer over third party web browsers, Microsoft's conduct in forming restrictive licensing agreements with OEM computer manufacturers, and Microsoft's intent in its course of conduct.

Microsoft stated that the merging of Microsoft Windows and Internet Explorer was the result of innovation and competition, that the two were now the same product and were inextricably linked together and that consumers were now getting all the benefits of IE for free. Those who opposed Microsoft's position countered that the browser was still a distinct and separate product which did not need to be tied to the operating system, since a separate version of Internet Explorer was available for Mac OS. They also asserted that IE was not really free because its development and marketing costs may have kept the price of Windows higher than it might otherwise have been. The case was tried before U.S. District Court Judge Thomas Penfield Jackson. The DOJ was initially represented by David Boies.

Contents

[edit] History

Government interest in Microsoft's affairs had begun in 1991 with an inquiry by the Federal Trade Commission over whether Microsoft was abusing its monopoly on the PC operating system market. The commissioners deadlocked with a 2-2 vote in 1993 and closed the investigation, but the Department of Justice opened its own investigation on August 21 of that year, resulting in a settlement on July 15, 1994 in which Microsoft consented not to tie other Microsoft products to the sale of Windows but remained free to integrate additional features into the operating system. In the years that followed, Microsoft insisted that Internet Explorer (which first appeared in the Plus! Pack sold separately from Windows 95) was not a product but a feature which it was allowed to add to Windows, although the DOJ did not agree with this definition.

In its 2008 Annual Report Microsoft stated:[1]

“ Lawsuits brought by the U.S. Department of Justice, 18 states, and the District of Columbia in two separate actions were resolved through a Consent Decree that took effect in 2001 and a Final Judgment entered in 2002. These proceedings imposed various constraints on our Windows operating system businesses. These constraints include limits on certain contracting practices, mandated disclosure of certain software program interfaces and protocols, and rights for computer manufacturers to limit the visibility of certain Windows features in new PCs. We believe we are in full compliance with these rules. However, if we fail to comply with them, additional restrictions could be imposed on us that would adversely affect our business. ”

[edit] Trial

Bill Gates testifying August 27, 1998 See external links for full video
Bill Gates testifying August 27, 1998 See external links for full video

The trial started on May 18, 1998 with the U.S. Justice Department and the Attorneys General of twenty U.S. states suing Microsoft for illegally thwarting competition in order to protect and extend its software monopoly. Later, in October the US Justice Department also sued Microsoft for violating a 1994 consent decree by forcing computer makers to include its Internet browser as a part of the installation of Windows software. During the antitrust case it was revealed that Microsoft had threatened PC manufacturers with revoking their license to distribute Windows if they removed the Internet Explorer icon from the initial desktop,[citation needed] something that Netscape had requested of its licensees.[citation needed]

Microsoft Chairman Bill Gates was called "evasive and nonresponsive" by a source present at a session in which Gates was questioned on his deposition.[2] He argued over the definitions of words such as "compete", "concerned", "ask", and "we".[3] BusinessWeek reported, "Early rounds of his deposition show him offering obfuscatory answers and saying 'I don't recall' so many times that even the presiding judge had to chuckle. Worse, many of the technology chief's denials and pleas of ignorance have been directly refuted by prosecutors with snippets of E-mail Gates both sent and received."[4] Intel Vice-President Steven McGeady, called as a witness, quoted Paul Maritz, a senior Microsoft vice president as having stated an intention to "extinguish" and "smother" rival Netscape Communications Corporation and to "cut off Netscape's air supply" by giving away a clone of Netscape's flagship product for free. The Microsoft executive denied the allegations.[5]

A number of videotapes were submitted as evidence by Microsoft during the trial, including one that demonstrated that removing Internet Explorer from Microsoft Windows caused slowdowns and malfunctions in Windows. In the videotaped demonstration of what Microsoft vice president James Allchin's stated to be a seamless segment filmed on one PC, the plaintiff noticed that some icons mysteriously disappear and reappear on the PC's desktop, suggesting that the effects might have been falsified.[6] Allchin admitted that the blame for the tape problems lay with some of his staff "They ended up filming it -- grabbing the wrong screen shot," he said of the incident. Later, Allchin re-ran the demonstration and provided a new videotape, but in so doing Microsoft dropped the claim that Windows is slowed down when Internet Explorer is removed. Mark Murray, a Microsoft spokesperson, berated the government attorneys for "nitpicking on issues like video production."[7] Microsoft submitted a second inaccurate videotape into evidence later the same month as the first. The issue in question was how easy or hard it was for America Online users to download and install Netscape Navigator onto a Windows PC. Microsoft's videotape showed the process as being quick and easy, resulting in the Netscape icon appearing on the user's desktop. The government produced its own videotape of the same process, revealing that Microsoft's videotape had edited out a long and complex part of the procedure and that the Netscape icon was not placed on the desktop, requiring a user to search for it. Brad Chase, a Microsoft vice president, verified the government's tape and conceded that Microsoft's own tape was inaccurate.[8]

When the judge ordered Microsoft to offer a version of Windows which did not include Internet Explorer, Microsoft responded that the company would offer manufacturers a choice: one version of Windows that was obsolete, or another that did not work properly. The judge asked, "It seemed absolutely clear to you that I entered an order that required that you distribute a product that would not work?" David D. Cole, a Microsoft vice president, replied, "In plain English, yes. We followed that order. It wasn't my place to consider the consequences of that."[9] Princeton University professor Edward Felten presented a modified version of Windows from which he claimed the Internet Explorer function had been removed. On cross-examination, he was guided through a sequence of steps that produced a fully functional Internet Explorer window.

Microsoft vigorously defended itself in the public arena, claiming that its attempts to innovate were under attack by rival companies jealous at its success, and that government litigation was merely their pawn. A full-page ad run in The Washington Post and The New York Times on June 2, 1999 by The Independent Institute (which received donations from Microsoft as well as other companies[10]) delivered "An Open Letter to President Clinton From 240 Economists On Antitrust Protectionism." It said, in part, "Consumers did not ask for these antitrust actions - rival business firms did. Consumers of high technology have enjoyed falling prices, expanding outputs, and a breathtaking array of new products and innovations. ... Increasingly, however, some firms have sought to handicap their rivals by turning to government for protection of these cases are based on speculation about some vaguely specified consumer harm in some unspecified future, and many of the proposed interventions will weaken successful U.S. firms and impede their competitiveness abroad."[11]

Judge Jackson issued his findings of fact[12] on November 5, 1999, which stated that Microsoft's dominance of the personal computer operating systems market constituted a monopoly, and that Microsoft had taken actions to crush threats to the monopoly, including Apple, Java, Netscape, Lotus Notes, Real Networks, Linux, and others. Then on April 3, 2000, he issued a two-part ruling: his conclusions of law were that Microsoft had committed monopolization, attempted monopolization, and tying in violation of Sections 1 and 2 of the Sherman Act, and his remedy was that Microsoft must be broken into two separate units, one to produce the operating system, and one to produce other software components.

The trial was also notable for the use by both the prosecution and the defense of professors of MIT to serve as expert witnesses to bolster their cases. Richard L. Schmalensee, a noted economist and the dean of the MIT Sloan School of Management, testified as an expert witness in favor of Microsoft. Frank Fisher, another MIT economist who was Schmalensee's former doctoral thesis adviser, testified in favor of the Department of Justice.

[edit] Appeal

On September 26, 2000, after Judge Jackson issued his findings of fact,[12] the plaintiffs (to save time) attempted to send Microsoft's appeal directly to the U.S. Supreme Court. However, the Supreme Court declined to hear the appeal and sent the case to a federal appeals court.

The D.C. Circuit Court of Appeals overturned Judge Jackson's rulings against Microsoft. This was in part because the Appellate court had adopted a "drastically altered scope of liability" under which the Remedies could be taken, but also due to the embargoed interviews Judge Jackson had given to the news media while he was still hearing the case, in violation of the Code of Conduct for US Judges.[13] Judge Jackson did not attend the D.C. Circuit Court of Appeals hearing, in which the appeals court judges accused him of unethical conduct and determined he should have recused himself from the case.[14]

Judge Jackson's response to this was that Microsoft's conduct itself was the cause of any "perceived bias"; Microsoft executives had "proved, time and time again, to be inaccurate, misleading, evasive, and transparently false. ... Microsoft is a company with an institutional disdain for both the truth and for rules of law that lesser entities must respect. It is also a company whose senior management is not averse to offering specious testimony to support spurious defenses to claims of its wrongdoing."[15]

However, the appeals court did not overturn the findings of fact. The D.C. Circuit remanded the case for consideration of a proper remedy under a more limited scope of liability. Judge Colleen Kollar-Kotelly was chosen to hear the case.

The DOJ announced on September 6, 2001 that it was no longer seeking to break up Microsoft and would instead seek a lesser antitrust penalty.

[edit] Settlement

On November 2, 2001, the DOJ reached an agreement with Microsoft to settle the case. The proposed settlement required Microsoft to share its application programming interfaces with third-party companies and appoint a panel of three people who will have full access to Microsoft's systems, records, and source code for five years in order to ensure compliance. However, the DOJ did not require Microsoft to change any of its code nor prevent Microsoft from tying other software with Windows in the future. On August 5, 2002, Microsoft announced that it would make some concessions towards the proposed final settlement ahead of the judge's verdict. On November 1, 2002, Judge Kollar-Kotelly released a judgment accepting most of the proposed DOJ settlement. Nine states (California, Connecticut, Iowa, Florida, Kansas, Minnesota, Utah, Virginia and Massachusetts) and the District of Columbia (which had been pursuing the case together with the DOJ) did not agree with the settlement, arguing that it did not go far enough to curb Microsoft's anti-competitive business practices. On June 30, 2004, the U.S. appeals court unanimously approved the settlement with the Justice Department, rejecting objections from Massachusetts that the sanctions were inadequate.

The dissenting states regarded the settlement as merely a slap on the wrist. Industry pundit Robert X. Cringely believes a breakup is not possible, and that "now the only way Microsoft can die is by suicide."[16] Andrew Chin, an antitrust law professor at the University of North Carolina at Chapel Hill who assisted Judge Jackson in drafting the findings of fact, wrote that the settlement gave Microsoft "a special antitrust immunity to license Windows and other 'platform software' under contractual terms that destroy freedom of competition."[17]

Microsoft's obligations under the settlement, as originally drafted, expired on November 12, 2007.[18] However, Microsoft later "agreed to consent to a two-year extension of part of the Final Judgments" dealing with communications protocol licensing, and that if the plaintiffs later wished to extend those aspects of the settlement even as far as 2012, it would not object. The plaintiffs made clear that the extension was intended to serve only to give the relevant part of the settlement "the opportunity to succeed for the period of time it was intended to cover", rather than being due to any "pattern of willful and systematic violations". The court has yet to approve the change in terms as of May 2006.[19]

[edit] Criticisms of the case

 This section needs additional citations for verification.
Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (January 2008)

The late Nobel economist Milton Friedman believed that the antitrust case against Microsoft set a dangerous precedent that foreshadowed increasing government regulation of what was formerly an industry that was relatively free of government intrusion and that future technological progress in the industry will be impeded as a result.[20]

Jean-Louis Gassée, CEO of Be Inc., which at the time made a competing operating system which eventually folded in the face of Microsoft's dominance, criticized the emphasis on the "packaging problem."[citation needed] He claimed Microsoft was not really making any money from Internet Explorer, and its incorporation with the operating system was due to consumer expectation to have a browser packaged with the operating system. BeOS came packaged with its web browser, NetPositive.

Instead, he argued, Microsoft's true anticompetitive clout was in the rebates it offered to OEMs preventing other operating systems from getting a foothold in the market.[21]

[edit] See also

[edit] References

  1. ^ http://news.cnet.com/8301-13505_3-10005379-16.html
  2. ^ Gates deposition called evasive - CNET News.com
  3. ^ CNN - Gates deposition makes judge laugh in court - November 17, 1998
  4. ^ 11/30/98 MICROSOFT'S TEFLON BILL
  5. ^ Washingtonpost.com: WashTech - U.S. v. Microsoft Special Report
  6. ^ http://www.chguy.net/news/feb99/demoMS.html
  7. ^ Feds Accuse MS of Falsification
  8. ^ Compaq: It Was All a Big Mix-Up
  9. ^ Microsoft Antitrust Trial C
  10. ^ Winners, Losers & Microsoft Strikes a Sensitive Nerve: Newsroom: The Independent Institute
  11. ^ Open Letter on Antitrust Protectionism: The Independent Institute
  12. ^ a b U.S. v. Microsoft: Court's Findings of Fact
  13. ^ Judiciary Policies And Procedures: Codes Of Conduct
  14. ^ Microsoft Judge Ripped in Court
  15. ^ Judge Jackson Exits Microsoft Discrimination Case
  16. ^ I, Cringely . The Pulpit . The Once and Future King | PBS
  17. ^ The Microsoft Case
  18. ^ Microsoft Consent Decree Compliance Advisory - August 1, 2003 : U.S. v. Microsoft
  19. ^ ATR-SV-DIV401;MDE;15906;7
  20. ^ Policy Forum: The Business Community's Suicidal Impulse
  21. ^ Jean-Louis Gassée on why PC manufacturers don't sell non MS products

[edit] Bibliography

  • Andrew Chin, Decoding Microsoft: A First Principles Approach, 40 Wake Forest Law Review 1 (2005)
  • Kenneth Elzinga, David Evans, and Albert Nichols, United States v. Microsoft: Remedy or Malady? 9 Geo. Mason L. Rev. 633 (2001)
  • John Lopatka and William Page, Antitrust on Internet Time: Microsoft and the Law and Economics of Exclusion, 7 Supreme Court Economic Review 157-231 (1999)
  • John Lopatka and William Page, The Dubious Search For Integration in the Microsoft Trial, 31 Conn. L. Rev. 1251 (1999)
  • John Lopatka and William Page, Who Suffered Antitrust Injury in the Microsoft Case?, 69 George Washington Law Review 829-59 (2001)
  • Alan Meese, Monopoly Bundling In Cyberspacec: How Many Products Does Microsoft Sell ? 44 Antitrust Bulletin 65 (1999)
  • Alan Meese, Don't Disintegrate Microsoft (Yet), 9 Geo. Mason L. Rev. 761 (2001)
  • Alan Reynolds, The Microsoft Antitrust Appeal, Hudson Institute (2001)
  • Steven Salop and R. Craig Romaine, Preserving Monopoly: Economic Analysis, Legal Standards, and the Microsoft Case, 7 Geo. Mas. L. Rev. 617 (1999)
  • Howard A. Shelanski and J. Gregory Sidak, Antitrust Divestiture in Network Industries, 68 University of Chicago Law Review 1 (2001)

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