UPDATE3: Judge Rules Microsoft Broke the Law

BOSTON (04/03/2000) - U.S. District Court Judge Thomas Penfield Jackson today ruled that Microsoft Corp. violated federal and various U.S. state antitrust laws, and said that only by viewing the company's various areas of misconduct as "a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself."

Issuing his "conclusions of law," or the verdict, in the U.S. government's antitrust case against the software maker, Jackson ruled that "Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market," in violation of the Sherman Antitrust Act.

Jackson had ruled last November that Microsoft is a monopoly. Now that he has ruled that Microsoft used its monopoly power to break federal and U.S. state laws the next step will be to determine the "remedies" or penalties in the case.

Microsoft and the plaintiffs, the U.S. Department of Justice (DOJ), 19 U.S. state attorneys general and the District of Columbia, still could reach a settlement on those penalties. However, four months of settlement talks broke down over the weekend when a court-appointed mediator declared the sides at an impasse too great to be resolved. Jackson had urged the sides to settle and end the litigation.

Even if the sides now come to terms on penalties, the findings of fact establishing Microsoft as a monopoly and the conclusions of law would stand, though are subject to appeal. Microsoft issued a statement after the conclusions of law were released saying that the company will appeal today's ruling.

"Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems," Jackson wrote in today's ruling, adding that "Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market. More broadly, Microsoft's anticompetitive actions trammeled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers."

Looking at Microsoft's overall conduct "also reinforces the conviction that it was predacious," Jackson wrote. "Microsoft paid vast sums of money, and renounced many millions more in lost revenue every year, in order to induce firms, to take actions that would help enhance Internet Explorer's share of browser usage at Navigator's expense," he continued, referring to Netscape Communication Corp.'s Navigator browser.

"Moreover, neither the desire to bolster demand for Windows nor the aspect of ancillary revenues from Internet Explorer can explain the lengths to which Microsoft has gone," Jackson wrote.

The judge also ruled that Microsoft's tying of its Internet Explorer Web browser to the Windows operating system was illegal, and did not benefit consumers. "Internet Explorer is not the current 'best of breed' Web browser, nor is it likely to be so at any time in the immediate future," Jackson wrote.

"The fact that Microsoft itself was aware of this reality only further strengthens the conclusion that Microsoft's decision to tie Internet Explorer to Windows cannot truly be explained as an attempt to benefit consumers and improve the efficiency of the software market generally, but rather as part of a larger campaign to quash innovation that threatened its monopoly position."

The judge ruled that Microsoft's marketing deals with other vendors did not constitute unlawful exclusionary dealing, but his verdict endorses the U.S. government position on other key points of the case and paints a damning picture of anticompetitive behavior by a company bent on controlling the Internet browser market and maintaining its operating systems monopoly.

"The predatory course of conduct Microsoft has pursued since June of 1995 has revived the dangerous probability that Microsoft will attain monopoly power in a second market," Jackson wrote. "Internet Explorer's share of browser usage has already risen above 50 percent, will exceed 60 percent by January 2001, and the trend continues unabated."

Microsoft behaved as a "profit-maximizing firm" in its approach to stomping out competition in middleware, Jackson said, specifically when it came to dealing with Netscape's Navigator and Sun Microsystems Inc.'s Java technology, referring to those product offerings as "the two incarnations of middleware that posed the greatest threat" to Microsoft's monopoly.

"Microsoft early on recognized middleware as the Trojan horse" that, if left to march on, would "enter the market for Intel-compatible PC operating systems unimpeded," Jackson wrote in his verdict.

"Simply put, middleware threatened to demolish Microsoft's coveted monopoly power. Alerted to the threat, Microsoft strove over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured, cross-platform applications to erode the applications barrier," Jackson wrote.

Microsoft's effort "succeeded in preventing -- for several years, and perhaps permanently -- Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits," Jackson found.

"As part of its grand strategy to protect the applications barrier, Microsoft employed an array of tactics designed to maximize the difficulty with which applications written in Java could be ported from Windows to other platforms, and vice versa," Jackson wrote. "The first of these measures was the creation of a Java implementation for Windows that undermined portability and was incompatible with other implementations. ...Microsoft then induced developers to use its implementation of Java rather than Sun-compliant ones. It pursued this tactic directly, by means of subterfuge and barter, and indirectly, through its campaign to minimize Navigator's usage share."

Furthermore, when it came to dealing with OEMs (original equipment manufacturers), "Microsoft bound Internet Explorer to Windows with contractual, and later, technological shackles in order to ensure the prominent (and ultimately permanent) presence of Internet Explorer on every Windows user's PC system and to increase the costs attendant to installing and using Navigator on any PCs running Windows," Jackson ruled.

"Not willing to take actions that would jeopardize their already slender profit margins, OEMs felt compelled by Microsoft's actions to reduce drastically their distribution and promotion of Navigator," he continued.

Jackson discredited Microsoft's defense that federal copyright law justifies the restrictions the software giant placed on OEMs because "that defense neither explains nor operates to immunize Microsoft's conduct under the Sherman Act." Microsoft did not show that it has the right under the Federal Copyright Act to place restrictions on OEMs' ability to alter Windows, he said.

Microsoft also "adopted similarly aggressive measures to ensure that the IAP (Internet access provider) channel would generate browser usage share for Internet Explorer rather than Navigator," Jackson said. Microsoft licensed its browser and its Internet Explorer Access Kit to "hundreds" of IAPs for free, and then offered "valuable promotional treatment to the 10 most important IAPs in exchange for their commitment to promote and distribute Internet Explorer and to exile Navigator from the desktop," Jackson wrote, adding, "there are no valid reasons to justify the full extent of Microsoft's exclusionary behavior in the IAP channel."

Although Jackson's ruling is overall damning of Microsoft's conduct, the judge did break with the decision of the U.S. Court of Appeals for the District of Columbia Circuit in its findings in a related case involving product tying and a prior consent decree Microsoft had agreed to. He explained his differing opinion in some detail because "both prudence and the deference this (District) Court owes to pronouncements of its own Circuit oblige that it follow in the direction it is pointed until the trail falters."

Jackson argued in his ruling that the previous appellate decision seems to "immunize" software design from antitrust scrutiny and is furthermore inconsistent with relevant U.S. Supreme Court decisions related to product tying. Jackson wrote that he thinks that his ruling issued today is consistent with the Supreme Court's findings.

The appeals process would take the case to the Court of Appeals in question, and potentially to the Supreme Court, which can choose to hear the case or refuse to consider it, letting lower court rulings stand. The appeals process could conceivably take years.

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