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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

 

UNITED STATES OF AMERICA,

Plaintiff,

vs.

MICROSOFT CORPORATION,

Defendant.

 

STATE OF NEW YORK ex rel.

Attorney General ELIOT SPITZER, et al.,

Plaintiffs,

vs.

MICROSOFT CORPORATION,

Defendant.

 

MICROSOFT CORPORATION,

Counterclaim-Plaintiff,

vs.

ELIOT SPITZER,

Attorney General of the State of New York,

In his official capacity, et al.,

Counterclaim-Defendants.

 

Civil Action No. 98-1232 (TPJ)

 

Civil Action No. 98-1233 (TPJ)

DEFENDANT MICROSOFT CORPORATION'S REPLY IN FURTHER SUPPORT OF ITS MOTION FOR SUMMARY REJECTION OF THE GOVERNMENT'S BREAKUP PROPOSAL

May 22, 2000

TABLE OF CONTENTS

1. The government has already admitted that the breakup of Microsoft would be "dangerous to the economy's welfare
and
against the public interest

2. The government concedes that the law requires a
significant causal connection between the conduct and the maintenance of monopoly power
before "more extensive equitable relief" may be ordered

3. The government does not dispute that no court has ever ordered the breakup of a unitary company in a contested case

4. The government acknowledges that the core issue in this case involves "unsettled law."

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Plaintiff,

vs.

MICROSOFT CORPORATION,

Defendant.

 

STATE OF NEW YORK ex rel.

Attorney General ELIOT SPITZER, et al.,

Plaintiffs,

vs.

MICROSOFT CORPORATION,

Defendant.

MICROSOFT CORPORATION,

Counterclaim-Plaintiff,

vs.

ELIOT SPITZER,

Attorney General of the State of New York,

In his official capacity, et al.,

Counterclaim-Defendants.

 

Civil Action No. 98-1232 (TPJ)

 

Civil Action No. 98-1233 (TPJ)

DEFENDANT MICROSOFT CORPORATION'S REPLY IN FURTHER SUPPORT OF ITS MOTION FOR SUMMARY REJECTION OF THE GOVERNMENT'S BREAKUP PROPOSAL

In its response to Microsoft's motion for summary rejection of its breakup proposal, the government fails to identify a single case in which a court ordered the breakup of a unitary company such as Microsoft outside the context of negotiated consent decrees. If this complete lack of precedent were insufficient to show that the government's breakup proposal is extreme and unwarranted, all one need do is review what the government has previously told this Court about the impropriety of "dismembering Microsoft." (DOJ Mem. in Support of Final Judgment at 31 (Exhibit A).)

In January 1995, various purported amici curiae that were allowed to appear anonymously in the Tunney Act proceeding before Judge Sporkin argued that the Court should reject the 1994 consent decree and instead require Microsoft to divest its applications business, essentially the same relief the government now seeks. In response, the government stated that "the law would not permit the sweeping remedies that the amici suggest" (id. at 21) and that "remedies such as dismembering Microsoft" -- what the government now calls a run-of-the-mill "corporate reorganization" -- would "act against the public interest" (id. at 31 (emphasis in original)). As explained below, the government had it right in 1995: the law does not countenance the dismemberment of Microsoft, a remedy that would clearly "act against the public interest." (Id. (emphasis in original).)

1. The government has already admitted that the breakup of Microsoft would be "dangerous to the economy's welfare" and "against the public interest." Five years ago, various anonymous amici curiae filed a memorandum with this Court opposing entry of the 1994 consent decree. In that memorandum, they argued that the relief awarded should, inter alia, "create a separate corporation for developing application programs, with a true 'Chinese Wall' between the applications and operating system development personnel." (Amici Mem. at 89 (Exhibit B).) The government responded, in language that presaged Microsoft's position today, that breaking up Microsoft would be unwarranted and inappropriate:

Accepting amici's invitation to restructure the computer industry more to their liking through sweeping remedies such as dismembering Microsoft very well might advance the private interests of the anonymous amici; but such remedies would not necessarily benefit competition and would, in Professor Arrow's view, act against the public interest.

(DOJ Mem. in Support of Final Judgment at 31 (emphasis in original).)

The government's economist, Nobel Laureate Kenneth Arrow of Stanford University, was emphatic in rejecting the anonymous amici's cry that Microsoft be broken up. As the government later told the Court of Appeals, "Professor Arrow saw no need for, and substantial risk of economic harm in, breaking up Microsoft or imposing other, more drastic remedies than those contained in the proposed decree." (Brief for Appellant DOJ at 8 (Exhibit C).) In rejecting the anonymous amici's demand for divestiture remedies allegedly "designed to return the market to a state of equilibrium," Professor Arrow stated that any such remedy "is likely to be of the form of penalizing whatever firm happens to be leading, Microsoft in this instance." (GX 2517 at 9-10 (Exhibit D).) He continued:

This may take the form of disintegrating the firm horizontally or vertically or of imposing constraints on its ability to enter certain markets. A rule of penalizing market successes that are not the result of anticompetitive practices will, among other consequences, have the effect of taxing technological improvements and is unlikely to improve welfare in the long run.

(Id. at 10 (emphasis added).) The government has never contended that Microsoft acquired monopoly power as a result of anticompetitive practices. In fact, Professor Arrow concluded that "Microsoft appears to have achieved its dominant position in its market as a consequence of good fortune and possibly superior product and business acumen." (Id. at 11.)

Professor Arrow also warned against attempting to fashion a structural remedy to address what the government now calls the "applications barrier to entry." Like the government's experts here, Professor Arrow observed that "[t]he 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." (GX 2517 at 6-7.) Professor Arrow referred to this phenomenon as a "natural barrier to entry" (as opposed to an "artificial barrier to entry") because it is a natural characteristic of operating systems rather an obstacle erected by Microsoft. Professor Arrow then stated, in words that apply with equal force here, that "interfering with purely natural barriers to entry can be dangerous to the economy's welfare." (Id. at 10.) The Court should heed Professor Arrow's warning.

2. The government concedes that the law requires a "significant causal connection between the conduct and the maintenance of monopoly power" before "more extensive equitable relief" may be ordered. The government does not dispute that a showing of causation is essential before broad equitable relief may be awarded. Instead, the government asserts that "because the Court found 'a significant causal connection between the conduct and the maintenance of monopoly power,'" the antitrust violations found by the Court "warrant 'more extensive equitable relief' than a mere prohibition on a continuation of the precise conduct it employed in the past." (Pls.' Reply Mem. at 7 (quoting III Philip E. Areeda & Herbert Hovenkamp, Antitrust Law  653b, at 91-92 (1996).) The Court's Findings of Fact and Conclusions of Law belie the government's assertion.

The Court expressly found that the government has not shown a significant causal connection between the challenged conduct and what the Court held to be Microsoft's maintenance of monopoly power. In its Findings of Fact, the Court stated that "[t]here is insufficient evidence to find that, absent Microsoft's actions, Navigator and Java already would have ignited genuine competition in the market for Intel-compatible PC operating systems." (Findings of Fact  411.) The Court similarly stated in its Conclusions of Law that "the evidence does not prove that [Navigator and Java] would have succeeded absent Microsoft's actions." (Conclusions of Law at 20.) These determinations preclude the extreme structural relief now demanded by the government.

It should come as no surprise to the government that the Court did not find a "significant causal connection" between Microsoft's conduct and position in operating systems -- the government argued that such a showing was not necessary to establish a violation of Section 2 of the Sherman Act. Microsoft asserted in its proposed conclusions of law that the government was required to show a clear causal link between Microsoft's challenged conduct and the persistence of Microsoft's market position in order to make out a monopoly maintenance claim. (Microsoft's Proposed Conclusions of Law at 56-57, 69-70.) The government vigorously disputed this assertion, arguing that Section 2 "requires no more than capability to make a significant contribution to maintaining monopoly." (Pls.' Joint Reply to Microsoft's Proposed Conclusions of Law at 13 (emphasis in original).) The Court in its Conclusions of Law adopted the government's position, holding that conduct is "exclusionary" for purposes of Section 2 if "it has restricted significantly, or threatens to restrict significantly, the ability of other firms to compete in the relevant market." (Conclusions of Law at 7 (emphasis added).) The Court therefore never found that the specific conduct held to be anticompetitive in this case contributed significantly to continuation of Microsoft's leading position in "Intel-compatible PC operating systems."

The government's argument in its proposed conclusions of law that a showing of causation was unnecessary is curious because the government emphasized the importance of causation in its submissions to the Court in 1995. In response to the anonymous amici's claim that the consent decree was insufficient to dissipate Microsoft's leading position in operating systems, the government argued that it "has not contended that Microsoft 'illegally acquired its massive installed base,' or that the size of its installed base would be substantially smaller today but for Microsoft's challenged licensing practices." (DOJ Mem. in Support of Final Judgment at 29 (emphasis in original and citation omitted).) Likewise, this Court did not find that Microsoft's position in "Intel-compatible PC operating systems" would be any different today but for the conduct challenged by the government. Without such a finding, the government's request for structural relief must fail. The government's position on the importance of causation may have changed over the years, but the law has not.

3. The government does not dispute that no court has ever ordered the breakup of a unitary company in a contested case. The government argues that "Microsoft's efforts to suggest that the proposed remedy is unprecedented is [sic] wrong," contending that it is "hardly surprising" that "there are no cases involving the specific type of corporate reorganization proposed by plaintiffs here under the precise competitive conditions that are present in this case." (Pls.' Reply at 25.) Yet, for all of its sophistry in discussing the case law, the government fails to identify a single precedent for its radical breakup proposal. (See id. at 25-28.)

The government admits that the divestitures ordered in United Shoe and AT&T were the result of consent decrees, and it does not deny that AT&T was a government regulated monopolist before it agreed to be broken up in order to avoid overlapping federal and state regulation of its business. Nor does the government dispute that its two-decade campaign to dismember United Shoe ultimately resulted in the demise of the American shoe industry -- which hardly makes the United Shoe case a blueprint for action here. As for Standard Oil, the government does not dispute that Standard Oil was, in fact, a trust with separate operating units and therefore very different from a unitary company like Microsoft. See Standard Oil Co. v. United States, 221 U.S. 1, 37-40 (1911) (listing the corporations whose stock was held by the Trustees of the Standard Oil Trust). And, lastly, although the government chides Microsoft for what it calls "Microsoft's elaborate efforts to distinguish" United States v. Paramount Pictures, Inc., 85 F. Supp. 881 (S.D.N.Y. 1949), aff'd sub nom. Loew's, Inc. v. United States, 339 U.S. 974 (1950), the government fails to explain how the order in that case requiring a group of motion picture companies to divest their financial interests in separate theatres that exhibited their films is a precedent for breaking up Microsoft. (Pls.' Reply at 26-27.) In short, when it comes to the controlling case law, the government essentially punts -- there is no precedent for ordering the dismemberment of a unitary operating company.

4. The government acknowledges that the core issue in this case involves "unsettled law." The government refers to Microsoft's "contractual tying in the case of Windows 95 and technological tying in the case of Windows 98" as "a central part of the case." (Id. at 8.) Indeed, the tying violations found by the Court provide the stated basis for much of the relief sought by the government, including the proposed breakup and sweeping restrictions on Microsoft's design of its operating systems. (E.g., Pls.' Proposed Final Judgment 1.c.ii, 3.a.iii, 3.b, 3.f, 3.g.) Yet, faced with the undeniable conflict between the decisions of this Court and the Court of Appeals, the government grudgingly acknowledges that the legality of this conduct under Section 1 of the Sherman Act "could be described as involving unsettled law." (Pls.' Reply at 24.)

This concession cannot be reconciled with the government's request that the Court impose the antitrust equivalent of the death penalty here. As Professors Areeda and Hovenkamp observed in their antitrust treatise, "Whatever the wisdom of visiting blameworthy conduct with far-reaching equitable sanctions, it disappears when illegality rests on criteria not previously made clear or on facts subject to reasonable dispute." Areeda & Hovenkamp, supra 653b4, at 94. It cannot be gainsaid that the tying violations found by the Court (what the government calls a central part of the case) "rest[] on criteria not previously made clear," which makes the government's irresponsible request that Microsoft be dismembered -- with truly awful consequences for Microsoft, its employees, its business partners and the consuming public -- inappropriate as a matter of law.


For the foregoing reasons, as well as those set out in Microsoft's opening memorandum, the Court should summarily reject paragraphs 1 and 2 of Plaintiffs' Proposed Final Judgment, which improperly seek to split Microsoft into two separate companies.

Respectfully submitted,
______________________________

William H. Neukom Thomas W. Burt
David A. Heiner, Jr.
Diane D'Arcangelo
Christopher J. Meyers
MICROSOFT CORPORATION
One Microsoft Way
125 Broad Street
John L. Warden (Bar No. 222083)
Richard J. Urowsky
Steven L. Holley
Theodore Edelman
Michael Lacovara
Richard C. Pepperman, II
Christine C. Monterosso
Bradley P. Smith
>New York, New York 10004
(212) 558-4000
Counsel for Defendant
Counterclaim-Plaintiff
Microsoft Corporation
(425) 936-8080 SULLIVAN & CROMWELL
Redmond, Washington 98052

May 22, 2000

CERTIFICATE OF SERVICE

I hereby certify that on this 22nd day of May, 2000, I caused a true and correct copy of the foregoing Defendant Microsoft Corporation's Reply in Further Support of Its Motion for Summary Rejection of the Government's Breakup Proposal to be served by facsimile and by overnight courier upon:

Phillip R. Malone, Esq.
Antitrust Division

U.S. Department of Justice
450 Golden Gate Avenue, Room 10-0101
San Francisco, California 94102
Fax: (415) 436-6687 and (202) 307-1454

Kevin J. O'Connor, Esq.
Office of the Attorney General of Wisconsin
P.O. Box 7857
123 West Washington Avenue
Madison, Wisconsin 53703-7957
Fax: (608) 267-2223

Christine Rosso, Esq.
Chief, Antitrust Bureau
Illinois Attorney General's Office
100 West Randolph Street, 13th Floor
Chicago, Illinois 60601
Fax: (312) 814-2549

And by facsimile and by hand upon:

Richard L. Schwartz, Esq.
Deputy Chief, Antitrust Bureau New York State Attorney General's Office
120 Broadway, Suite 2601
New York, New York 10271
Fax: (212) 416-6015

______________________
Bradley P. Smith

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