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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 MEMORANDUM

IN SUPPORT OF ITS MOTION FOR SUMMARY REJECTION

OF THE GOVERNMENT‚S BREAKUP PROPOSAL

 

May 10, 2000

TABLE OF CONTENTS

 

TABLE OF AUTHORITIES ii

ARGUMENT 6

I. The Government‚s Failure To Show a Significant Causal Connection

between Microsoft‚s Conduct and Market Position Precludes

the Breakup of Microsoft 6

II. The Government‚s Request for Punitive Structural Relief

Extends Far Beyond What Is Necessary To Redress the

Conduct Found To Be Anticompetitive 9

III. Breakup Is Unwarranted Because the Challenged Conduct

Could Reasonably Have Been Thought Permissible 14

IV. Breakup of Microsoft Would Jeopardize Important

Public Benefits 15

V. Breaking Microsoft in Half Would Be Unprecedented in

the History of the Sherman Act 16

CONCLUSION 25

 

TABLE OF AUTHORITIES

CASES

Berkey Photo, Inc. v. Eastman Kodak Co.,
603 F.2d 263 (2d Cir. 1979), cert. denied,
444 U.S. 1093 (1980) 13

Ford Motor Co. v. United States,
405 U.S. 562 (1972) 16-17

Hartford-Empire Co. v. United States,
323 U.S. 386 (1945) 14

Standard Oil Co. v. United States,
221 U.S. 1 (1911) 18

Timken Roller Bearing Co. v. United States,
341 U.S. 593 (1951) 9-10

United States v. ALCOA,
91 F. Supp. 333 (S.D.N.Y. 1950) 15, 21

United States v. American Tobacco Co.,
221 U.S. 106 (1911) 18

United States v. AT&T,
552 F. Supp. 131 (D.D.C. 1981), aff‚d sub nom.
Maryland v. United States,
460 U.S. 1001 (1983) 18, 19

United States v. Crescent Amusement Co.,
323 U.S. 173 (1944) 10

* United States v. E.I. du Pont de Nemours & Co.,
366 U.S. 316 (1961) 9, 10

United States v. Grinnell Corp.,
384 U.S. 563 (1966) 18

* United States v. National Lead Co.,
332 U.S. 319 (1947) 9, 11-12

United States v. National Lead Co.,
63 F. Supp. 513 (S.D.N.Y. 1945), aff‚d,
332 U.S. 319 (1947) 10-11

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) 19

United States v. Pullman Co.,
50 F. Supp. 123 (E.D. Pa. 1943) 18

United States v. United Shoe Machinery Corp.,
391 U.S. 244 (1968) 21

United States v. United Shoe Machinery Corp.,
347 U.S. 521 (1954) 21

United States v. United Shoe Machinery Co.,
247 U.S. 32 (1918) 9

United States v. United Shoe Machinery Corp.,
266 F. Supp. 328 (D. Mass. 1967), rev‚d,
391 U.S. 244 (1968) 21

* United States v. United Shoe Machinery Corp.,
110 F. Supp. 295 (D. Mass. 1953), aff‚d,
347 U.S. 521 (1954) 14, 20-21

United States v. United States Gypsum Co.,
340 U.S. 76 (1950) 14

United States v. W.T. Grant Co.,
345 U.S. 629 (1953) 9

STATUTES, TREATISES AND OTHER AUTHORITIES

15 U.S.C. § 16(e) 19

II Philip E. Areeda & Herbert Hovenkamp,
Antitrust Law (1996) 9

III Philip E. Areeda & Herbert Hovenkamp,
Antitrust Law (1996) 6-7

Robert H. Bork, The Antitrust Paradox (1978) 22

Federal Trade Comm‚n,
A Study of the Commission‚s Divestiture Process (1999) 23

Lino A. Graglia, Is Antitrust Obsolete?,
23 Harv. J.L. Pub. Pol‚y 11 (1999) 22

John E. Lopatka & William H. Page,
A (Cautionary) Note on Remedies in the Microsoft Case,
13 Antitrust 25 (Summer 1999) 22

RICHARD A. POSNER,
ANTITRUST LAW, AN ECONOMIC PERSPECTIVE (1976) 17-18

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 MEMORANDUM

IN SUPPORT OF ITS MOTION FOR SUMMARY REJECTION

OF THE GOVERNMENT‚S BREAKUP PROPOSAL

As a matter of law, the Court‚s Findings of Fact and Conclusions of Law do not justify the government‚s radical request to split Microsoft into two separate companiesųwhat the government euphemistically refers to as a simple "reorganization." That the government would request such structural relief is particularly inappropriate given the manner in which the case was tried. The Court dramatically accelerated the trial of this action, and consolidated it with the hearing on the government‚s motion for a preliminary injunction, in part because the final relief requested by the government in its complaint was essentially the same as the relief requested in its preliminary injunction motion. That relief dealt primarily with distribution of Netscape‚s Web browsing software, the crux of the case the government brought. Now, in stark contrast to the relief sought in its complaint, the government seeks to rip apart the company that until recently had the largest market capitalization in the worldųan extreme remedy not even hinted at in the government‚s complaint. The law and the facts do not support such a radical step.

1. The evidence at trial did not establish, and the Court did not find, a clear causal link between the conduct held to be anticompetitive and Microsoft‚s current market position. The government has never contended here or in any other case that Microsoft obtained its market position unlawfully. To the contrary, the government‚s own economist in 1995, Nobel Laureate Kenneth J. Arrow of Stanford University, acknowledged that Microsoft "achieved its dominant position in its market as a consequence of good fortune and possibly superior product and business acumen." (GX 2517 at 11.) Nor did this Court find that, but for the conduct held to be anticompetitive in this case, Microsoft would have lost its leading position in Intel-compatible PC operating systemsųin fact, the Court expressly disavowed such a finding. (Findings of Fact ¶ 411.) Given the absence of a proven causal connection between the conduct found to be anticompetitive and Microsoft‚s continued leading position in operating systems, the only appropriate remedy is an injunction against continuation of such conduct. The record in this case simply does not support the government‚s efforts to dismember Microsoft and reshape the software industry in a speculative effort to weaken Microsoft‚s market position.

2. Courts are not authorized in civil enforcement proceedings to punish antitrust defendants. Instead, relief may extend no farther than is necessary to redress the conduct found to be unlawful. Even the government acknowledges that "the remedy must be reasonably related to the wrong." (Pls.‚ Mem. at 13.) Enjoining Microsoft from conduct held to be anticompetitive would redress all of the antitrust violations found by the Court. As a result, there is no basis to split Microsoft into separate companies with all the attendant risks, costs and complexities.

3. The extreme remedy proposed by the government is particularly inappropriate given the unsettled legal standards applicable to the government‚s claims. The conduct that was the cornerstone of the government‚s caseųMicrosoft‚s inclusion of Web browsing software in Windowsųwas not clearly barred by the Sherman Act under existing case law. Although this Court has now concluded that Microsoft‚s design of Windows violated Section 1 of the Sherman Act, the Court acknowledged that the Court of Appeals and a number of other courts have articulated a different standard for "technological tying." (Conclusions of Law at 33-34.) Under this more deferential standard, Microsoft‚s conduct did not violate the Sherman Act. (See Brief of Amicus Curiae Lawrence Lessig at 17 ("under the Court of Appeals test, Microsoft must prevail").) In fact, the Court expressly stated that its conclusion that Microsoft is liable for unlawful tying "is arguably at variance with a decision of the U.S. Court of Appeals for the D.C. Circuit in a closely related case." (Conclusions of Law at 26.) Under controlling Supreme Court precedent, conduct that could reasonably have been thought permissible at the time it occurred calls for a more lenient remedy under the Sherman Act.

4. The public has reaped substantial benefits from Microsoft‚s development of Windows and other software products. Many of these benefits would not have been possible but for Microsoft‚s unified structure, which enables Microsoft to conceive and implement new ideas that span operating systems and applications. There can be no dispute that Microsoft has played a leading role in the personal computer revolution that has helped fuel this country‚s unprecedented economic growth. As the government‚s own experts admit, no one can predict with any degree of reliability what effects the government‚s breakup proposal will have on the two resulting companies, the software industry or the Nation‚s economy. (E.g., Romer Decl. ¶ 71 ("There is genuine uncertainty about the exact magnitudes of the benefits and any costs.").) Indeed, much of the government‚s submission on remedies is based on sheer speculation. For example, Ernest von Simson states in a three-page declaration without any empirical support that his "personal view" is that "structural separation" of Microsoft into separate companies "would increase competition and innovation" and "would not cause significant inconvenience to large enterprises." (von Simson Decl. at 1-2.) Such musings hardly provide a legal justification for ripping Microsoft apart.

5. No court has ever ordered significant structural relief in a contested case where the defendant obtained its leading market position through internal growth rather than through acquiring its rivals. The fact that no court has ordered the breakup of a unitary company like Microsoft demonstrates the extreme nature of the relief requested by the government. Even two of the plaintiffs in this caseųIllinois and Ohioųagree that the government‚s breakup proposal is unwarranted.

In the cases of AT&T and Standard Oil, the defendants were a regulated holding company and a trust, respectively, that had separate operating units (often obtained through acquisitions) that could be separated from one another without massive disruption. In contrast, Microsoft does not have free-standing operating units devoted to particular regions or types of productsųit has one headquarters, one set of sales and marketing subsidiaries around the world, one sales and marketing force, one product support organization, one basic research unit, one finance department, etc. In addition, because its business is based on intellectual property, Microsoft‚s most important assets are its people, who may leave the company in droves if draconian structural relief is imposed. Contrary to the government‚s blithe suggestion, a breakup of Microsoft would be hopelessly complex and difficult to administer.

For these reasons, which are discussed in more detail below, Microsoft respectfully requests that the Court summarily reject the government‚s proposal to split Microsoft into two separate companies. (See Pls.‚ Proposed Final Judgment ¶¶ 1, 2.) By rejecting forthwith the government‚s improper request for structural relief, the Court will spare itself and the parties the burden of extended proceedings addressing a remedy that cannot be imposed here as a matter of law.

Microsoft also should not be forced to suffer the disruption to its business that will inevitably result from having the threat of a breakup hang over its head like the sword of Damocles while this Court conducts proceedings on remedies. Not only may Microsoft lose irreplaceable employees, but third parties may be unwilling to enter into routine business agreements with Microsoft while its continued corporate existence remains in doubt.

ARGUMENT

I. The Government‚s Failure To Show a Significant Causal Connection

between Microsoft‚s Conduct and Market Position Precludes

the Breakup of Microsoft.

The government did not showųand the Court did not findųa clear causal link between the conduct held to be anticompetitive in this case and Microsoft‚s market position in "Intel-compatible PC operating systems." Absent such a causal connection, the only appropriate remedy is an injunction directed against the anticompetitive conduct identified by the Court.

Determining the proper remedy for a Section 2 violation requires an analysis of the causal connection between the defendant‚s conduct and its market position. This is especially important where, as here, the court does not require the plaintiff to demonstrate such a causal connection at the liability stage. (See Conclusions of Law at 7.) Were the law otherwise, a single anticompetitive act by a company with lawful monopoly power could result in the company being ripped apart even though the act had little or no impact on the company‚s market position. As Professors Areeda and Hovenkamp explained in their leading antitrust treatise, "[t]he mere existence of an exclusionary act does not itself justify full feasible relief against the monopolist to create maximum competition." III Philip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 650a, at 67 (1996). Instead, "more extensive equitable relief, particularly remedies such as divestiture designed to eliminate the monopoly altogether, . . . require a clearer indication of a significant causal connection between the conduct and creation or maintenance of the market power." Id. ¶ 653b, at 91-92 (emphasis added). Ifųas hereųthe causal connection between the defendant‚s anticompetitive conduct and its market position is at most wholly speculative and likely nonexistent, the only appropriate remedy is "an injunction against continuation of that conduct." Id. ¶ 650a, at 67.

The government has never contended that Microsoft unlawfully acquired monopoly power. In fact, the government has taken the exact opposite position. In seeking entry of the 1994 consent decree, the government submitted a declaration in 1995 from Nobel Laureate Kenneth J. Arrow of Stanford University, which the government also introduced into evidence in this case. (GX 2517.) Professor Arrow emphatically rejected the assertion of certain anonymous amici curiae that Microsoft‚s leading position in operating system software was the result of anticompetitive conduct. (Id. at 11.) According to Professor Arrow, the dramatic growth in the installed base of Microsoft‚s desktop operating systems instead was "primarily the result of the extraordinary commercial success of the IBM-compatible PC platform, in which Microsoft‚s product development and marketing played a part." (Id.) Professor Arrow thus 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.)

This Court likewise rejected the notion that the conduct found to be anticompetitive in this case contributed significantly to Microsoft‚s continued monopoly power. Contrary to the government‚s suggestion, the Court did not find that absent the challenged conduct, middleware such as Netscape‚s Navigator and Sun‚s implementation of Java "would have lowered entry barriers" to the point where "rival PC operating systems" would have appeared and flourished. (Pls.‚ Mem. at 32-33.) Quite the opposite, the Court expressly found 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 noted 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; see also id. at 19 ("It is not clear whether, absent Microsoft‚s machinations, Sun‚s Java efforts would by now have facilitated porting between Windows and other platforms to a degree sufficient to render the applications barrier to entry vulnerable.").) In other words, there is no basis for concluding that the challenged conduct has eliminated competition in what the Court defined as the market for "Intel-compatible PC operating systems."

As a result, the government‚s assertion that draconian structural relief is necessary to "restore competition" is premised on a false assumption: that, absent Microsoft‚s conduct, there would be greater competition in the market for "Intel-compatible PC operating systems" than there is now. There has been no such finding in this case. Because this Court did not find a causal connection, much less a significant causal connection, between the conduct held to be anticompetitive and Microsoft‚s maintenance of its position in Intel-compatible PC operating systems, the only appropriate remedy is an injunction against continuation of such anticompetitive conduct. The government‚s adventurous request to split Microsoft into two companies should be rejected as a matter of law.

II. The Government‚s Request for Punitive Structural Relief

Extends Far Beyond What Is Necessary To Redress the

Conduct Found To Be Anticompetitive.

The government does not dispute that it bears the burden of satisfying the Court that the relief requested is necessary to remedy the antitrust violations found. See United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953). Indeed, the government agrees that "the remedy must be reasonably related to the wrong." (Pls.‚ Mem. at 13.) The government cannot show that its request for drastic structural relief is necessary to remedy the antitrust violations found in this case.

It is well settled that "[c]ourts are not authorized in civil proceedings to punish antitrust violators" and that relief "must not be punitive." United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 326 (1961); accord United States v. National Lead Co., 332 U.S. 319, 338 (1947) ("The purpose of the decree [in a civil proceeding] is effective and fair enforcement, not punishment."). Consequently, if an injunction preventing continuation of the conduct held to be anticompetitive remedies the violation, the Court should reject requests for more extreme measures. See II Philip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 345, at 162 (1996) ("The purpose of the decree is not punitive, and it will not embody harsh measures when less severe ones will do.").

Contrary to the government‚s suggestion that courts routinely break up companies as a remedy for antitrust violations, dissolution as a remedy is "extreme, even in its mildest demands." United States v. United Shoe Machinery Co., 247 U.S. 32, 46 (1918). Courts therefore have stressed that structural remedies are "not to be used indiscriminately, without regard to the type of violation or whether other effective methods, less harsh, are available." Timken Roller Bearing Co. v. United States, 341 U.S. 593, 603-04 (1951) (Reed, J., concurring) (reversing order that defendant divest itself of foreign stockholdings and other interests because divestiture is inappropriate "unless necessary to do away with the prohibited evil").

Citing du Pont, the government nevertheless argues that "[d]ivestiture is őthe most important of antitrust remedies. It is simple, relatively easy to administer, and sure.‚" (Pls.‚ Mem. at 31 (quoting du Pont, 366 U.S. at 330-31).) At issue in du Pont, however, was not the dissolution of a company, but rather the government‚s request that du Pont divest itself of a large holding of General Motors stock over a ten-year period. 366 U.S. at 319. A divestiture of stock held in a separate company bears no resemblance to the corporate dismemberment sought by the government in this case.

The other divestiture case on which the government principally relies, United States v. Crescent Amusement Co., 323 U.S. 173 (1944), is likewise inapposite. (See Pls.‚ Mem. at 26, 32.) As in du Pont, the challenged order in Crescent required the defendants to divest themselves "of the ownership of any stock or other interest in any other corporate defendant or affiliated corporation." 323 U.S. at 188. The divestitures in du Pont and Crescent thus bear no resemblance to the radical surgery the government asks this Court to perform on Microsoft. It may be "relatively easy" to require a company to divest itself of an ownership interest it holds in a separate, free-standing corporation; it is quite another thing to break up a unitary company.

Courts‚ general reluctance to order divestiture in Sherman Act cases is exemplified by the Supreme Court‚s decision in National Lead, a case the government neglects to discuss. The district court in National Lead found that the two defendants, National Lead and du Pont, violated the antitrust laws by jointly using their patents relating to titanium pigments to control the manufacture and sale of titanium pigments and compounds in the United States. See United States v. National Lead Co., 63 F. Supp. 513, 532 (S.D.N.Y. 1945). On appeal, the government asked the Supreme Court to add a provision to the district court‚s decree requiring National Lead and du Pont each to divest one of its two principal titanium pigment plants. 332 U.S. at 351. In denying the government‚s request, the Supreme Courtųin words directly applicable hereųstated:

We believe there is neither precedent nor good reason for such a requirement. The violation of the Sherman Act is found in these cases in the patent pooling and in the related agreements restraining interstate and foreign commerce. There is neither allegation in the complaint nor finding of fact by the District Court that the physical properties of either National Lead or du Pont have been acquired or used in a manner violative of the Sherman Act, except as such acquisition or use may have been incidental or related to the agreements above mentioned. The cancellation of such agreements and the injunction against the performance of them by the appellant companies eliminate them.

Id. at 351 (emphasis added). The Supreme Court continued:

There is no finding of fact, and apparently no evidence, showing that the respective principal titanium plants of National Lead or du Pont were acquired in violation of law, that they ever were separately owned or operated, or that they are adapted to such operation.

Id. at 352.

The Supreme Court also emphasized that the government failed to show "the necessity for this divestiture of plants or of its practicality and fairness." Id. The Supreme Court thus concluded:

It is not for the courts to realign and redirect effective and lawful competition where it already exists and needs only to be released from restraints that violate the antitrust laws. To separate the operating units of going concerns without more supporting evidence than has been presented here to establish either the need for, or the feasibility of, such separation would amount to an abuse of discretion.

Id. at 353 (emphasis added). The Supreme Court rejected divestiture as a remedy in National Lead even though the illegal conduct in that case had been ongoing for more than twenty years and had allowed National Lead and du Pont to obtain complete control over the relevant market. Id. at 325 n.2, 327-28.

The antitrust violations found in this case can be redressed by an injunction against the conduct held to be anticompetitive. Dividing Microsoft into two separate companies would be far more drastic relief than is justified by the scope of this case, which focused primarily on Microsoft‚s competition with Netscape in the development and distribution of Web browsing software between 1995 and 1998. The government should not be permitted to seek a remedy that is not commensurate withųindeed, has nothing to do withųthe case it alleged or tried. In fact, prior to trial, this Court expressly stated that it would not predicate relief on extraneous matters unrelated to the conduct challenged in the complaints. (See Transcript of Sept. 17, 1998 Hearing at 7.)

As the Court is well aware, this case had nothing to do with competition in the office productivity suite business or the success of Microsoft Office in that business. The government presented no evidence at trial that there would be more competition in the market for "Intel-compatible PC operating systems" if the version of Microsoft Office for Windowsųa product that was hardly mentioned at trialųwere owned by an independent company because such evidenceųwere it to existųwas not relevant to any issue in the case. Although the plaintiff states alleged in their original complaint that Microsoft monopolized the market for "office productivity suite software for personal computers" by licensing Microsoft Office to OEMs on a "per system" basis (States Compl. ¶¶ 85-97, 117-19), they abandoned that claim when they amended their complaint in July 1998.

Nor did plaintiffs allege that Microsoft‚s development of both operating systems and applications itself suppresses competition. The truth is that many of Microsoft‚s fiercest competitorsųSun Microsystems and IBM, for instanceųare far more integrated than Microsoft. They manufacture microprocessors and computers as well as developing proprietary softwareųboth applications and operating systemsųdesigned especially for such hardware. The notion that Microsoft should be torn apart to prevent it from benefiting from similar integration across a narrower range of products in its competition with corporate behemoths like IBM, a company with 291,000 employees in contrast with Microsoft‚s 35,000, is legally baseless. As the Second Circuit observed more than twenty years ago about Kodak, a company adjudged to have monopoly power:

[A] large firm does not violate § 2 simply by reaping the competitive rewards attributable to its efficient size, nor does an integrated business offend the Sherman Act whenever one of its departments benefits from association with a division possessing a monopoly in its own market. So long as we allow a firm to compete in several different fields, we must expect it to seek the competitive advantages of its broad-based activityųmore efficient production, greater ability to develop complementary products, reduced transportation costs, and so forth. These are gains that accrue to any integrated firm, regardless of its market share, and they cannot by themselves be considered uses of monopoly power.

Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 276 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980).

Finally, not one of the government‚s experts opines that the extreme relief requested by the government will actually result in an immediate increase in competition in the market for "Intel-compatible PC operating systems." Given that the government is willing to propose such extreme relief based on highly speculative suppositions about the impact of a breakup of Microsoft on the marketplace, one must conclude that the true objective of the requested relief is punitive. As the Supreme Court has held, however, a decree must not "impose penalties in the guise of preventing future violations." Hartford-Empire Co. v. United States, 323 U.S. 386, 409 (1945) (footnote omitted).

III. Breakup Is Unwarranted Because the Challenged Conduct

Could Reasonably Have Been Thought Permissible.

In addition to courts‚ general reluctance to order divestiture in Sherman Act cases, such radical relief is particularly inappropriate given the uncertainty surrounding the applicable legal standards in this case.

It is well-settled that uncertainty about the governing substantive law counsels in favor of narrower relief. As the Supreme Court observed, "[a]cts in disregard of law call for repression by sterner measures than where the steps could reasonably have been thought permissible." United States v. United States Gypsum Co., 340 U.S. 76, 89-90 (1950). In United States v. United Shoe Machinery Corp., 110 F. Supp. 295, 348 (D. Mass. 1953), aff‚d, 347 U.S. 521 (1954), the court rejected the government‚s request to split United Shoe into three separate companies in part for this very reason, noting that "[u]ntil Alcoa lost its case in 1945, there was no significant reason to suppose that United‚s conduct violated Sec. 2 of the Sherman Act."

In view of the body of case law rejecting "technological tying" claims and the difference of opinion between this Court and the Court of Appeals on the proper standard to apply to the government‚s tying claimųthe crux of this caseųthere can be no claim that Microsoft‚s decision to include Web browsing software in Windows was in clear disregard of the law. In addition, this Court held that Microsoft‚s agreements with OEMs, OLSs, ISPs, ICPs and ISVsųthe other major element of the government‚s caseųdid not violate Section 1 of the Sherman Act because they "did not ultimately deprive Netscape of the ability to have access to every PC user worldwide to offer an opportunity to install Navigator." (Conclusions of Law at 38.) Although the Court concluded that some of these agreements, alone and taken together with other conduct, violated Section 2 of the Sherman Act, there was reasonable uncertainty at the time concerning whether agreements that did not violate Section 1 because they did not foreclose Netscape‚s access to consumers could nevertheless violate Section 2.

IV. Breakup of Microsoft Would Jeopardize Important

Public Benefits.

The public has reaped substantial benefits from Microsoft‚s development of both Windows and Office. This is further reason why the Court should reject the government‚s invitation to tear the company apart. Courts are understandably reluctant "to attempt to tamper unnecessarily with economic and industrial forces from which the public has reaped substantial benefits." United States v. ALCOA, 91 F. Supp. 333, 416 (S.D.N.Y. 1950).

This Court found that the conduct challenged here "contributed to improving the quality of Web browsing software, lowering its cost, and increasing its availability, thereby benefiting consumers." (Findings of Fact ¶ 408.) More fundamentally, Microsoft‚s efforts to develop a common platform for software developmentųWindowsųand to promote the development of a wide range of compatible products have helped to make computers more powerful, easier to use and much less expensive, thus giving rise to the PC revolution. In addition, cross-pollination between engineers working on different products such as Windows and Office has led to numerous innovations. For example, the concept of toolbars, now a basic element of virtually all Windows applications, was first developed by the team building Excel, a spreadsheet application included in Office. The functionality then was incorporated into Windows and made available to all applications developers through APIs. There are many other similar examples.

Millions of consumers, including hundreds of thousands of companies, have benefited from Microsoft‚s software. Indeed, it is no exaggeration to say that the entire United States economy has benefited from Microsoft‚s efforts. Such benefits would be put at risk were this Court to order that Microsoft be broken up into separate companies.

V. Breaking Microsoft in Half Would Be Unprecedented in

the History of the Sherman Act.

Leaving aside consent decrees, no court has ever split apart a unitary company that was not formed by mergers and acquisitions. Indeed, the government concedes that "divestitures and reorganizations are used most often in merger cases." (Pls.‚ Mem. at 31.) As the Supreme Court has explained, "divestiture is particularly appropriate where asset or stock acquisitions violate the antitrust laws" because it "is a start toward restoring the pre-acquisition situation." Ford Motor Co. v. United States, 405 U.S. 562, 573 (1972). That is decidedly not the situation here.

Microsoft did not become the leading supplier of "Intel-compatible PC operating systems" by acquiring or merging with its rivals. Instead, Microsoft built its current market position from scratch by developing a succession of operating systems, each one markedly better than its predecessors, broadly licensing those products to computer manufacturers at attractive prices, and evangelizing the benefits of those products to software developers. Formed twenty-five years ago with only two employeesųBill Gates and Paul AllenųMicrosoft has grown into a unitary company with 35,000 employees, the majority of whom are directly engaged in developing and marketing software products.

Notwithstanding the government‚s efforts to make its proposed relief appear routine, ordering structural relief here would be unprecedented in the 110-year history of the Sherman Act. In his book on the economics of antitrust law, Judge Posner analyzed all single-firm monopolization cases resolved between 1890 and 1974. See RICHARD A. POSNER, ANTITRUST LAW, AN ECONOMIC PERSPECTIVE 78-95 (1976). Relying on the antitrust "Blue Book"ųwhich contains a description of all antitrust cases brought by the Department of JusticeųJudge Posner divided these cases into two groups: "merger" cases (i.e., where "the defendant is accused of having obtained or maintained monopoly power wholly or partly by mergers with competitors") and "exclusionary-practices" cases (i.e., where the defendant was found to have engaged in only exclusionary conduct). Id. at 81-84. Judge Posner concluded: "I have found no contested case involving exclusionary practices only in which substantial divestiture was ordered." Id. at 85. The record from 1974 to 2000 is the same.

The "mergers" cases referred to by Judge Posner are clearly inapposite here. See, e.g., United States v. Grinnell Corp., 384 U.S. 563, 566-68, 580 (1966) (defendant ordered to divest itself of stock in three other companies where it obtained monopoly by purchasing large equity stakes in those companies); United States v. American Tobacco Co., 221 U.S. 106, 158-59, 187-88 (1911) (defendant ordered dissolved where it obtained monopoly by, inter alia, acquiring competitors); Standard Oil Co. v. United States, 221 U.S. 1, 75-82 (1911) (defendant ordered dissolved where acquisitions gave it control over entire oil industry); United States v. Pullman Co., 50 F. Supp. 123, 126, 137 (E.D. Pa. 1943) (defendant ordered to divest itself of one of two lines of sleeping car business where it had acquired all of its competitors). As Judge Posner explained, "divestiture is simpler to effectuate where the firm to be broken up is itself the product of mergers," for "[t]he mergers suggest the lines along which the firm can be broken up with minimal disruption." POSNER, supra, at 84. Although divestiture may be "the natural and normal remedy in a merger case," id. at 85, it remains an extreme and dangerous course to tear asunder a unitary enterprise, especially one like Microsoft whose principal assets consist of people who can stay or go as they please.

The cases on which the government relies as authority for its sweeping assertion that "divestitures and reorganizations" are also used "to remedy monopolization violations" are similarly inapposite. (Pls.‚ Mem. at 31.) For example, in United States v. AT&T, 552 F. Supp. 131 (D.D.C. 1981), aff‚d sub nom. Maryland v. United States, 460 U.S. 1001 (1983), divestiture was ordered pursuant to a consent decree, which required AT&Tųthen a government-regulated monopolyųto divest itself of the separate operating companies that furnished local telephone service. AT&T agreed to this breakup in part to free itself of restrictionsųwhich limited AT&T to the provision of telecommunications servicesųthat existed by virtue of a prior consent decree entered in 1956. Id. at 223. The only issue before the court in that case was whether the new consent decree proposed by the parties satisfied the Tunney Act‚s public interest test despite the objections of third parties. 15 U.S.C. § 16(e). That is hardly the case here. Microsoft vehemently opposes any effort to split the company in two, and legitimately fears the effect of such a radical step on its employees, shareholders, business partners and customers. In addition, the government in the AT&T case had specifically requested divestiture in its complaint, 552 F. Supp. at 139, and the trial of that matter was very different, involving the testimony of approximately 350 witnesses over an extended period of time, id. at 140.

The other case cited by the government, 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), is similarly distinguishable. The order in that case required five companies that produced and distributed motion pictures to divest their interests in the theatres that exhibited those films. Id. at 898-99. Here, the actions challenged by the government are purely unilateral; there is no claim that Microsoft engaged in concerted action with competitors that restricted competition. More importantly, requiring movie production companies to divest themselves of the theatres that served as their distribution mechanism is a far cry from forcing Microsoft to break itself in half despite the unitary nature of its operations.

Nor does United States v. United Shoe Machinery Corp. support the government‚s position. In United Shoe, Judge Wyzanski rejected the government‚s request to divide United Shoe into three separate shoe companies. 110 F. Supp. 295, 398 (D. Mass. 1953), aff‚d, 347 U.S. 521 (1954). In so doing, he eloquently explained why courts are reluctant to order radical structural relief if the defendant is not the product of recent mergers:

Judges in prescribing remedies have known their own limitations. They do not ex officio have economic or political training. Their prophecies as to the economic future are not guided by unusually subtle judgment. They are not so representative as other branches of government. The recommendations they receive from government prosecutors do not always reflect the over-all approach of even the executive branch of the government . . . .

Id. at 347. "Above all," Judge Wyzanski noted, "no matter with what authority he is invested, with what facts and opinions he is supplied, a trial judge is only one man, and should move with caution and humility." Id. at 347-48. Judge Wyzanski further stated that "if courts were in the habit of proceeding with the surgical ruthlessness that might commen[d] itself to those seeking absolute assurance that there will be workable competition, and to those aiming at immediate realization of the social, political, and economic advantages of dispersal of power," courts would not have been given, or allowed to keep, the authority to order divestiture in antitrust cases. Id. at 348.

Judge Wyzanski also emphasized the significant practical problems associated with the breakup of a unitary company:

The Government‚s proposal that the Court dissolve United into three separate manufacturing companies is unrealistic. United conducts all machine manufacture at one plant, in Beverly, with one set of jigs and tools, one foundry, one laboratory for machinery problems, one managerial staff, and one labor force. It takes no Solomon to see that this organism cannot be cut into three equal and viable parts.

Id. Judge Wyzanski further rejected the notion that United Shoe could be fairly split along three separate lines of business, stating that "[s]uch an order would create for the new companies the most serious type of problems respecting the acquisition of physical equipment, the raising of new capital, the allotment of managerial and labor forces, and so forth. The prospect of creating three factories where one grew before has not been thought through by its proponents." Id.; see also ALCOA, 91 F. Supp. at 416 ("A corporation, designed to operate effectively as a single entity, cannot readily be dismembered of parts of its various operations without a marked loss of efficiency.").

The Supreme Court affirmed Judge Wyzanski‚s decision not to order the dissolution of United Shoe. 347 U.S. 521 (1954). As the government points out in its memorandum (see Pls.‚ Mem. at 32), ten years after the decree was entered in United Shoe, the government filed a petition to modify the decree, arguing that additional relief was necessary and requesting that United Shoe be split into two competing companies. Judge Wyzanski denied the government‚s petition on the ground that he lacked the power to modify the original decree. 266 F. Supp. 328, 330, 334 (D. Mass. 1967). On appeal, the Supreme Court held that Judge Wyzanski had misunderstood the scope of his authority to modify the decree, and thus remanded the case for him "to determine whether the relief in this case has met the standards which this Court has prescribed." 391 U.S. 244, 252 (1968). The matter ultimately was resolved by a modification of the decree on consent. As such, United Shoe is hardly authority for the government‚s request for structural relief in this case.

Furthermore, as two commentators recently remarked, "[t]o use this őmacabre‚ tale as a model for remedies in [this case] is perverse." John E. Lopatka & William H. Page, A (Cautionary) Note on Remedies in the Microsoft Case, 13 Antitrust 25, 28 (Summer 1999) (quoting Robert H. Bork, The Antitrust Paradox 171 (1978)). Weakened by the modified decree, "United Shoe Machinery eventually left the market, and the American shoe industry declined sharply in the decades following the decree." Id. As another commentator observed in discussing the dismemberment of United Shoe, "[t]he company then went into rapid decline; the price of shoe machinery went up; America lost its leadership in shoe machinery; and today the plant stands boarded and idle in Belmont, Massachusetts . . . ." Lino A. Graglia, Is Antitrust Obsolete?, 23 Harv. J.L. Pub. Pol‚y 11, 17 (1999). The government should not be permitted to do for the American software industry what it did for the American shoe industry.

Attempting to downplay the seriousness of its requested relief, the government argues that "like countless other corporate reorganizations," Microsoft can be broken up "with only modest cost to Microsoft." (Pls.‚ Mem. at 3.) According to the government, Microsoft‚s applications and operating system businesses "involve different divisions with largely different personnel and assets." (Id. at 9.) This is not so.

Like United Shoe, Microsoft is a unitary company, with one headquarters, one sales force, one set of senior managers who set policy for the entire company, one set of sales and marketing subsidiaries in this country and abroad, and one set of operational departments. Contrary to the Government‚s implication, Microsoft is not an agglomeration of separate operating companies such as American Tobacco, Standard Oil or AT&T. Technologies are shared throughout the company; employees move from group to group on a routine basis; software code is shared as much as possible from product to product to increase efficiency and avoid redundancy; products are realigned across the imaginary divide constructed by the government; developing new technologies such as Microsoft‚s Tablet PC and Next Generation Windows Services requires close cooperation among researchers and engineers from all parts of the company; and consumers are offered unified solutions to their computing needs. As the staff of the Federal Trade Commission recently observed, "[s]eparating out portions of companies for divestiture may destroy the organic integrity of . . . businesses." Federal Trade Comm‚n, A Study of the Commission‚s Divestiture Process at 3 (1999).

In short, the government‚s suggestion that Microsoft is organized by products is erroneous: there is no neat divisionųeven in theoryųbetween operating systems and applications. Engineers at Microsoft routinely consider whether newly developed software code should be implemented as operating system technology, application technology, neither or both. Moreover, the same sales force that markets Windows to corporate customers also markets Office, SQL Server, Exchange and the rest of Microsoft‚s product line, and Microsoft‚s subsidiaries around the globe likewise market and support all of Microsoft‚s products. The government does not address any of these issues. Should "Ops Co." get Microsoft‚s subsidiary in France and "Apps Co" get Microsoft‚s subsidiary in Germany? Despite the government‚s assurance that Microsoft can be split neatly in half with no ongoing judicial supervision, any attempt to break up Microsoft would encounter all of the same practical problems that Judge Wyzanski described in United Shoe.

In fact, the problems involved in splitting up Microsoft would be more pronounced than were the problems involved in splitting up United Shoe because Microsoft‚s business is based on intellectual property. Unlike United Shoe, Microsoft‚s most important assets are creative people, not machines or factories. (See Romer Decl. ¶ 43.) People will not work where they do not want to work, and they will not be productive if forced to work in conditions they find unsatisfactory. As a result, structural relief here threatens not simply temporary dislocation and inefficiency, but much more profound damage to Microsoft and its ability to deliver quality software products at the rapid pace demanded by the competitive software industry. If Microsoft‚s developers were to quit because of the uncertainty and chaos that would inevitably flow from a breakupųand such developers have many other exciting options in today‚s flourishing economyųthe company‚s entire business would be destroyed. More importantly, consumers and numerous other companies in the industry with which Microsoft works would suffer enormous harm.

CONCLUSION

For the foregoing reasons, the Court should summarily reject paragraphs 1 and 2 of Plaintiffs‚ Proposed Final Judgment, which 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
Redmond, Washington 98052
(425) 936-8080

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
SULLIVAN & CROMWELL
125 Broad Street
New York, New York 10004
(212) 558-4000

Counsel for Defendant

Counterclaim-Plaintiff

May 10, 2000 Microsoft Corporation

CERTIFICATE OF SERVICE

I hereby certify that on this 10th day of May, 2000, I caused a true and correct copy of the foregoing Defendant Microsoft Corporation‚s Memorandum in 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

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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