1. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft - Early Consent Decree Early phase: 1. Microsoft gave OEMs licenses on condition OEM pay based on all computers sold, whether or not used Microsoft software. 2. Microsoft required any firm that made software applications for Windows to not use any know-how used in such applications to make software for Microsoft competitors Result: 1994 consent decree that was criticized as “band-aids stuck on a rampaging dragon.” Among other things, Microsoft agreed not to condition its OEM licenses on the licensing of any other product, but this was not to prevent Microsoft from developing “integrated products.”

2. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft - Contempt Case Aftermath of early deal: Netscape’s browser Navigator showed up. Microsoft developed its own browser Internet Explorer (IE), bundled IE with Windows and refused to let OEMs include Navigator on Microsoft system. DOJ sued Microsoft for contempt, alleging it violated earlier decree by illegal tying arrangement. Dist. Ct. (Jackson) granted DOJ’s request for preliminary injunction.

3. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft - Contempt Case Aftermath of early deal: Court of Appeals reversed contempt/tying holding: - If only bolt two different products together, there is illegal tie. - But integration is “genuine” if it is beneficial when compared to a purchaser having to combine. - Courts may not embark on product design assessment. - If there is difference of opinion on integration “genuineness”, that is end of inquiry. Result: Contempt suit dropped and DOJ and twenty states brought monopolization case.

4. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft - District Court Monopolization Ruling 1.Microsoft’s summary judgment motions all dismissed except leveraging claim – use of operating system monopoly to gain advantage in browser market, but not market power. Ct. recognized leverage theory highly criticized and Microsoft, by virtue of operating system monopoly, can extract profit maximizing from its OS/browser combination. 2.At trial on all other claims, Dist. Ct. held: - Microsoft had illegally maintained its OS monopoly by anticompetitive acts to destroy competition. - Illegally attempted to monopolize the browser market. - Illegally tied IE to Windows. Result: Dist. Ct. ordered Microsoft to be broken into two parts; One OS system only; One applications for OS system.

5. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft - On Appeal To D.C Circuit Key Principles for Sherman 2 Conduct inquiry: 1.Whether conduct exclusionary, or just vigorous competition, difficult to discern. 2.Must have “anticompetitive” effect – harm “competitive process” and consumers. Harm to one or more competitors won’t suffice. 3.P has burden of proving anticompetitive effect. 4.If P make prima facie case, D may offer “pro-competitive justification” – that conduct promotes efficiency, innovation or consumer appeal. 5.If D pro-competitive justification is unrebutted, P may show anticompetitive effects outweigh pro-competitive effects under rule of reason analysis. 6. In determining if conduct harms competition, look to effect of conduct, not intent behind conduct.

6. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; OEM restrictions - On Appeal To D.C. Circuit 1.If consumer could acquire desired applications independent of OS system, wouldn’t be compelled to use Windows. Thus, to preserve OS monopoly, Microsoft has incentive to prevent other browsers from getting critical mass. 2.Three restrictions in OEM license agreements, all anticompetitive: - OEM can’t mess with desktop icons or folders. - OEM can’t change boot sequence to give user choice of other products. - OEM can’t make other changes to desktop, including auto launches and “Active Desktop” feature to promote others.

7. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; OEM restrictions - On Appeal To D.C. Circuit 3.Microsoft justifications to OEM license restrictions. - “Just exercising rights to copyrights”. Ct said “frivolous” – “IP does not confer privilege to violate antitrust.” Baseball bat analogy. Only justification here is prohibitions on auto launch from boot process; that does “drastically” alter copyright product. No justification for others. - “License restrictions prevent OEMs from reducing values of copyright products. No proof. OEM can’t effect code in product so can’t impact “stability” or “consistency” of platform.

8. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; IE/Windows Integration - On Appeal To D.C. Circuit 1.Three alleged anticompetitive “technological shackles” - Exclude IE from “Add/Remove” programs so couldn’t delete it. - Design so that IE would override user’s choice of another browser in certain situations. - Commingle IE and OS code so that selection of different browser would cripple OS. 2.Microsoft offered no justification for no “Add/Remove” or code commingling. Thus, these constitute exclusionary conduct under Sherman 2. 3. Justification for select browser override is to insure internet access in select situations. Since this justification unrebutted, no liability for this conduct.

9. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; IAP Agreements - On Appeal To D.C. Circuit 1.Five alleged anticompetitive acts with internet access providers (AOL, etc) - Offered IE free of charge to IAPs. - Paid IAPs a bounty for each IE customer they signed up. - Developed custom marketing kit (IEAK) which locked in IAPs to IE. - Offered IEAK free of charge. - Agreed to provide IAP easy access from Microsoft desktop if IAP exclusively promoted IE and kept Navigator shipments under 25%.

10. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; IAP Agreements - On Appeal To D.C. Circuit IAP Allegations: 2.Since no allegation of predatory pricing, first four have no merit – just good tough competition and the right to develop new product (IEAK). Monopolist is free to sell at attractive price. 3.Exclusionary conducts with IAPs violate Sherman 2: - IAP one of two major channels from browsers. - Microsoft locked up 14 of 15 major IAPs. - Microsoft’s only justification is desire to maintain OS monopoly and application development advantage. Not valid justification.

11. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; Other Agreements - On Appeal To D.C. Circuit 1.Microsoft agreements with internet content providers – Microsoft offered free IE and inducements. Dist. Ct. held Sherman 2 violation; Appeals Ct. held no violation because no proof of substantial effect on competition. 2.Microsoft exclusive deal with internet software vendors (ISV) important because close off another channel for other browsers. Since no justification offered, these violate Sherman 2. 3.Microsoft – Apple deal. Apple was using Navigator and was about to fold. Microsoft had power to end Apple by no longer offering MAC Office. Gates threatened; Apple folded and agreed to use IE and booted Navigator. Appeals Ct. upheld Dist. Ct. finding that exclusive Apple deal had substantial anticompetitive effects.

12. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; Java - On Appeal To D.C. Circuit 1.Sun’s Java included Java Virtual Machine (JVM). Sun contracted with Navigator to include with all Navigator systems – this was primary way to get Java on Windows OS systems. 2.Microsoft took steps to maximize difficulty of Java on windows: - Developed its own JVM incompatible with Java and bundled with IE. New JVM runs move swiftly and not itself anticompetitive. No Sherman 2 just for making a product like a competitors product. - Microsoft exclusive deals with ISVs to use its JVM were anticompetitive designed to protect OS monopoly. Thus, Sherman 2 violation.

13. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; Java - On Appeal To D.C. Circuit 2. Microsoft took steps to maximize difficulty of Java on windows (con’t): - Microsoft deceived Java developers by offering tools that were to help use of Java with windows, but they caused problems of cross platform use. Deceptive intent was shown: “Kill cross-platform Java by growing polluted Java market”. No justification; clear Sherman 2 violation. - Intel was supported of Java until Gates threatened to stop bundling Intel with Windows. Intel folded and backed off Java. Sherman 2 violation.

14. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; Causation - On Appeal To D.C. Circuit 1.Microsoft sought reversal of monopolization maintenance claims because no proof of causation between alleged anticompetitive conduct and OS monopoly maintenance. 2.No requirement for Section 2 liability to prove direct causation. 3.If causation was required element, it would just encourage monopolist to take more and earlier actions to stop competitive threats. 4.Sherman Act should not allow “monopolists free rein to squash nascent, albeit unproven, competitors at will”. 5.Issue of causation may impact remedy decision, but not liability.

15. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; Attempted Monopolization - On Appeal To D.C. Circuit 1.Dist. Ct. had found that Microsoft had attempted to monopolize browser market. 2.Attempted monopolization requires anticompetitive conduct, intent, and dangerous probability of success. 3.Dist. Ct. erred because no dangerous probability of success. No appropriate analysis of relevant market, and Plaintiff had not proved any barriers to entry that would protect monopoly if obtained. 4.No Sherman 2 liability for attempt to monopolize browser market.

16. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft; Split-Up Rationale - On Appeal To D.C. Circuit Shapiro Testimony: -Split Microsoft into OS company and an applications company. -Will stop future anticompetitive conduct of Microsoft and create more competition in OS and applications market. -No OS competition now – best prospects for future would come from a strong firm in complementary market. Video game, word processing, credit card, data management examples. -New applications company may be the player. Would have incentives to broaden beyond Windows and work with all OS systems and browsers and all new technologies. -Split-up would lower barriers to entry in all markets because Microsoft would no longer be building barriers to protect it’s OS monopoly. -Microsoft-Intel relationship is good example of potential relationship between two companies. Intel always supported other OSs. -Costs of reorganization outweighed by pro-competitive benefits.

17. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft Final Decree – Key Elements 1.No OEM retaliation for OEM promoting, etc., competitors product. 2. OEM Windows license pursuant to uniform contract, with website published royalty rates. Uniform volume discounts permitted. 3.MS shall not restrict any OEM licensee from changing icons, shortcuts and menu entries on Windows to feature competitive products, auto launching those products after booting, and otherwise promoting such products. 4.MS must disclose to all ISVs, IHVs, IAPs, ICPs and OEM the APIs and interfaces used by MS so as to enable others to interoperate with Windows. 5.MS shall not retaliate against any ISV or IHV that develops competing product, nor condition any consideration paid ISV on refraining from developing competitive product.

18. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft Final Decree – Key Elements 6.MS shall have no agreement that conditions any consideration on other partyexclusively promoting MS products or fixed % of MS products. 7.MS system shall allow end-users and OEMs to remove MS products and add Non-MS products. MS must insure Windows does not remove or alter OEM’s configurations for Non-MS products. 8. MS must offer IP to others as needed to enforce decree on reasonable non-discriminatory terms. 9. US and states have exclusive responsibility to enforce decree. 10. Elaborate process to appoint independent Technical Committee – Three persons who are software experts with no connections to MS. Committee has offices at MS and supervise to insure compliance with Decree. MS pays all costs.

19. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft Final Decree – Key Elements 11. Committee may hire any staff it needs at MS expense. 12. Committee has access to MS source codes. 13. Microsoft shall appoint and employ compliance officer. 14. Website process for filing complaints with compliance officer or committee. 15. Decree last 5 yrs. If court finds MS violated decree, Court may extend for another 2 years and award other relief as appropriate.

20. Law 552 - Antitrust - Instructor: Dwight Drake Microsoft Post- Decree Action Caldera Litigation – MS paid 155 mill when its motion for summary judgment failed in 2000 in case brought by competitive OS developer who alleged MS did many anticompetitive acts to create a “campaign of fear, uncertainty and doubt.” Netscape, through new parent AOL, sued MS directly. In 2003, it settled for $750 mill and several software development agreements/ Sun litigation for mandatory preliminary injunction to require MS to include JAVA in Window. Theory was feedback effects leads to early market “tipping” and then game is over for all competitors. Dist. Ct. bought argument; Appeals Ct. rejected because harm not imminent and injunction was focused at an emerging collateral market, not relevant market. European Commission - Investigation re: exclusionary conduct in media players…. Korea now on attack… And the beat goes on!