Government Pursues Microsoft Case It Has To Lose

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The Antitrust Division and the state attorneys general are back to business-as-usual on the Microsoft case.The legal wolf pack confirmed, in a Sept. 20 filing with newly appointed Judge Colleen Kollar-Kotelly, earlier public statements that they are dropping both their claim that Microsoft illegally tied its browser to its operating system and their push for corporate dismemberment as the proper remedy. The concessions are not a surprise, considering that the D.C. Circuit Court of Appeals lambasted these parts of the governments’ case.However, in a move sure to discourage already-depressed markets, the governments told the judge that they plan to pursue energetically extensive remedies against Microsoft for its illegal “monopoly maintenance” activities, the only charge that survived appellate review. These remedies, they said, would be based on the “conduct restrictions” that Judge Thomas Jackson wanted to impose on Microsoft pending the breakup of the company. Particularly frightening, the governments say they want to explore the need for limitations on Microsoft’s new operating system, XP, which is scheduled for release in late October.These conduct restrictions were imperial, occupying seven full pages of Jackson’s Final Judgment. They would have tied Microsoft’s hands in dealing with other companies, opened up the programming secrets of its operating code (a windfall not only for competitors but cyber terrorists) and curtailed Microsoft’s integration of new features in its products. To top it off, Jackson would have created an independent Microsoft Board of Directors’ Compliance Committee that would in turn appoint a Chief Compliance Officer who would snitch on any violations to the government, a provision that would have turned the company into a regulated subsidiary of the Department of Justice.The government lawyers take the view that such extreme measures remain permissible because the D.C. Circuit Court of Appeals confirmed Microsoft’s culpability, even if only for a small part of the government’s case. They view this limited ruling as granting them a computer world equivalent of 007’s “license to kill,” and want to use it against any software innovations or business practices they dislike. One media commentary was headlined, “Mr. Gates, meet your new partners,” and indicated that state AGs in particular are eager to control what Microsoft is allowed to include in its new XP software.Consumers will suffer most from added inconvenience and deferred competition and innovation if this power grab by politically ambitious but technologically (and ethically) challenged lawyers succeeds. Yet, there is hope they won’t get away with it. A re-reading of the D.C. Circuit Court of Appeals opinions indicates the governments’ lawyers are over-reaching.Judge Jackson’s remedies were based on a finding that Microsoft had committed three antitrust violations. The appellate court upheld only one, that Microsoft had maintained a pre-existing monopoly. Jackson did not tie any of his remedies specifically to any of his three violations, so the appellate court rejected them totally and charged the new trial judge with designing something to fit the one that survived.But, the circuit judges made clear, the trial court’s power to remedy a violation is not power to re-engineer the company. They reviewed the ground rules for crafting antitrust remedies, emphasizing that this is a civil case and that punishment is not appropriate. The goal is to prevent future violations, and, when relevant, to deprive the defendant of the fruits of past violations. Moreover, the appellate court said even these functions must be exercised carefully. The remedies imposed must be tightly linked to the specific violation found and the connection must be explained in persuasive terms.Under these principles, the governments face a difficult time because of the narrow nature of the case they chose to bring on monopoly maintenance.To portray Microsoft as a monopolist, the governments had to limit the definition of “the market” in which Microsoft had monopoly power to “Intel-compatible PC operating systems.” This excluded the Macintosh, web-based interactive software, Linux, Solaris, and UNIX, not to mention other Microsoft operating systems not integrated with Intel chips.The governments did not charge Microsoft with attaining its market power illicitly. They charged it only with maintaining power once it had legitimately gotten it. Nor did the governments charge the company with taking actions that were automatically illegal. The actions were declared wrong only because they were taken by a company with monopoly power. Another company, or even Microsoft in a different market context, could do the same things with impunity.The specific conduct targeted served to narrow the case even further.All of the actions found illegal were based on the theory that Microsoft discouraged development of so-called “middleware,” software that would serve as an intermediary between operating systems and applications, and that would permit applications to work with different operating systems. The government theorized that Microsoft opposed development of middleware so as to hinder development of new operating systems that would compete with Windows as the OS for Intel chips.The specific conduct discouraging middleware was also limited. It consisted of two aspects of Microsoft’s integration of its Explorer browser with its Windows operating system (excluding the browser from the Add/Remove program and commingling some Explorer code and operating code in a way that discouraged removal by OEMs) plus some business behavior — contractual restrictions on computer manufacturers’ right to remove the browser; exclusive dealings with internet access providers, independent software vendors, and Apple; and, finally, some messy dealings with Sun over Java.When this narrow case is juxtaposed with Jackson’s broad conduct remedies, not much of the latter can survive. Jackson applied his remedies to Microsoft operating systems that have nothing to do with PCs and Intel chips, such as NT and CE; this cannot stand. Nor can remedies directly assault Window’s market position; there was no evidence that this position was not honestly attained. Further, the “middleware” theory is pretty hypothetical, and DOJ will have trouble establishing to any judge of reasonable skepticism and impartiality (in contrast to Jackson) that Microsoft’s conduct made a particle of difference in Windows’ market position. There are no “fruits of the violation” of which it can be deprived. (In reality, of course, Microsoft was concerned about its position on the Internet, and the government’s middleware theory that the company feared Netscape and Java because of their impact on competition for desktop operating systems was pure moonshine.)Continuing to compare the offenses with Jackson’s remedies, Microsoft can argue forcefully that the only legitimate remedies involve Microsoft’s dealings with middleware, or, slightly broader, its actions vis-à-vis other players in the industry that might arguably serve to maintain its power over operating systems for Intel PCs. In this context, the governments can try to cast a broad net, but they will have a problem identifying specific conduct to which they object and explaining how the conduct is linked to the narrow market they defined.Most importantly, given the legal limits on the scope of antitrust relief articulated by the Court of Appeals, it is difficult to see how any remedy can be directed at XP, or .Net, or any other Microsoft initiatives. Under the narrow market definition, the “middleware” theory of the case, and the truncated list of illegal actions, it is irrelevant that Microsoft is integrating features into XP, such as photo processing, media players, and instant messaging. These features are not middleware, and there is no theory under which they constitute efforts to maintain any Windows monopoly over Intel based PC operating systems.Such features might be open to attack if they constituted illegal tie-ins, but the governments lost on the tying theory and have now abandoned it. They cannot resurrect it in the form of relief for a totally different theory of liability, and the D.C. Circuit has put them on notice that if they want to become the industrial policy czars of software design they must start by proving a case in court.Unfortunately, the governments are not getting the message. Rather than a quick resolution to this case, which would give a boost to the sagging high tech sector, we are in for more rounds of dreary fighting. By public pronouncements that blur the legal principles involved, the governments have dug themselves a hole, since they will now be subject to intense criticism if they recognize the legal realities and the weakness of their position. Perhaps even worse news is that the new DOJ antitrust team seems as insensitive to the nation’s need for economic rationality and certainty as was Klein & Company, the actions of which helped initiate the tech-stock wreck.

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