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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
STATE OF NEW YORK ex rel.
Attorney General ELIOT SPITZER, et al.,
Attorney General of the State of New York,
In his official capacity, et al.,
Civil Action No. 98-1232 (TPJ)
Civil Action No. 98-1233 (TPJ)
DEFENDANT MICROSOFT CORPORATION'S SUR-REPLY
IN RESPONSE TO PLAINTIFFS' JOINT REPLY
February 1, 2000
TABLE OF CONTENTS
TABLE OF AUTHORITIES
1.Plaintiffs' tying claim fails for three independent reasons
a.Windows 98 is a single, integrated product under the controlling standard adopted by the Court of Appeals
b.There has been no forced purchase of a second distinct product
c.The alleged tie does not foreclose a substantial amount of sales of the allegedly tied product
2.Plaintiffs' failure to show foreclosure of a substantial share of the relevant market is fatal to their exclusive dealing claim
3.Microsoft's OEM license agreements do not constitute an unlawful restraint of trade
4.Plaintiffs' attempted monopolization claim flies directly in the face of settled law
a.Microsoft did not act with a specific intent to monopolize Web browsing software
b.There is no dangerous probability that Microsoft will obtain monopoly power in Web browsing software
5.Microsoft did not engage in anticompetitive conduct that contributed significantly to the maintenance of a monopoly
a.Products need not be complete substitutes to be included in the same relevant product market
b.Microsoft does not have the power to control prices or exclude competition in the relevant market, the touchstone of monopoly power
c.Microsoft's so-called "binding of Internet Explorer to Windows" was not anticompetitive because it resulted in improvements to the operating system
d.Microsoft's various agreements were not anticompetitive because they did not result in substantial foreclosure
e.Microsoft had no duty to predisclose information to Netscape about Windows 95
f.Microsoft did not engage in predatory pricing
g.Conduct that admittedly came to naught cannot form the basis of a monopolization claim
h.Plaintiffs' "monopoly broth" theory of antitrust liability is unavailing28
(i)The "monopoly broth" theory has been largely discredited, most recently by the Federal Circuit in Intergraph
(ii)Even if Microsoft's conduct is considered as a whole, plaintiffs failed to establish the requisite causal connection between that conduct and maintenance of monopoly power
TABLE OF AUTHORITIES
Abcor Corp. v. AM Int'l, Inc., 916 F.2d 924 (4th Cir. 1990)
Association for Intercollegiate Athletics for Women v. NCAA, 735 F.2d 577 (D.C. Cir. 1984)
Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887 (10th Cir. 1991)
Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1983)
Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979)11,
*Brooke Group, Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993)
Brown Shoe Co. v. United States, 370 U.S. 294 (1962)
Cable/Home Communication Corp. v. Network Prods., Inc., 902 F.2d 829 (11th Cir. 1990)
CBS v. ASCAP, 620 F.2d 930 (2d Cir. 1980), cert. denied, 450 U.S. 970 (1981)
City of Mishawaka v. American Elec. Power Co., 616 F.2d 976 (7th Cir. 1980), cert. denied, 449 U.S. 1096 (1981)
Colorado Interstate Gas Co. v. Natural Gas Pipeline Co. of Am., 885 F.2d 683 (10th Cir. 1989)
Computer Assocs. Int'l, Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992)
Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147 (1st Cir. 1994)
Fonar Corp. v. Domenick, 105 F.3d 99 (2d Cir.), cert. denied, 522 U.S. 908 (1997)
Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534 (9th Cir. 1983), cert. denied, 465 U.S. 1038 (1984)
Forsyth v. Humana, Inc., 114 F.3d 1467 (9th Cir. 1997), aff'd, 525 U.S. 299 (1999)
Gamma Audio & Video, Inc. v. Ean-Chea, 11 F.3d 1106 (1st Cir. 1993)
General Indus. Corp. v. Hartz Mountain Corp., 810 F.2d 795 (8th Cir. 1987)
*Gilliam v. ABC, 538 F.2d 14 (2d Cir. 1976)10,
Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792 (1st Cir. 1988)
Great Escape, Inc. v. Union City Body Co., 791 F.2d 532 (7th Cir. 1986)
Greyhound Computer Corp. v. IBM, 559 F.2d 488 (9th Cir. 1977), cert. denied, 434 U.S. 1040 (1978)
ILC Peripherals Leasing Corp. v. IBM, 458 F. Supp. 423 (N.D. Cal. 1978), aff'd sub nom. Memorex Corp. v. IBM, 636 F.2d 1188 (9th Cir. 1980), cert. denied, 452 U.S. 972 (1981)
Image Technical Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), cert. denied, 523 U.S. 1094 (1998)
In re Echlin Mfg. Co., 105 F.T.C. 410 (1985)
*In re IBM Peripheral EDP Devices Antitrust Litig., 481 F. Supp. 965 (N.D. Cal. 1979), aff'd sub nom. Transamerica Computer Co. v. IBM, 698 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955 (1983)passim
In re Indep. Serv. Orgs. Antitrust Litig., 989 F. Supp. 1131 (D. Kan. 1997)
*Intergraph Corp. v. Intel Corp., 195 F.3d 1346 (Fed. Cir. 1999)passim
Lotus Dev. Corp. v. Borland Int'l Inc., 49 F.3d 807 (1st Cir. 1995), aff'd by an equally divided court, 516 U.S. 233 (1996)
*National Bank of Commerce v. Shaklee Corp., 503 F. Supp. 533 (W.D. Tex. 1980)10, 11
NLFC, Inc. v. Devcom Mid-Am., Inc., 45 F.3d 231 (7th Cir.), cert. denied, 515 U.S. 1104 (1995)
*Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157 (9th Cir. 1997), cert. denied, 119 S. Ct. 46 (1998)
Pacific Coast Agric. Export Ass'n v. Sunkist Growers, Inc., 526 F.2d 1196 (9th Cir. 1975), cert. denied, 425 U.S. 959 (1976)
Paramount Pictures Corp. v. Video Broad. Sys., Inc., 724 F. Supp. 808 (D. Kan. 1989)11
Richter Concrete Corp. v. Hilltop Concrete Corp., 691 F.2d 818 (6th Cir. 1982)
SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981), cert. denied, 455 U.S. 1016 (1982)13
Southern Pac. Communications Co. v. AT & T, 556 F. Supp. 825 (D.D.C. 1982), aff'd, 740 F.2d 980 (D.C. Cir. 1984), cert. denied, 470 U.S. 1005 (1985)28
*Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993)
Stewart v. Abend, 495 U.S. 207 (1990)11
Thurman Indus., Inc. v. Pay'N Pak Stores, Inc., 875 F.2d 1369 (9th Cir. 1989)20
Times-Picayune Publ'g Co. v. United States, 345 U.S. 594 (1953)
United States v. ALCOA, 148 F.2d 416 (2d Cir. 1945)
United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956)
United States v. Grinnell Corp., 384 U.S. 563 (1966)30
United States v. Loew's, Inc., 371 U.S. 38 (1962)11
*United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998)
*United States v. Microsoft Corp., Nos. 98-1232, 98-1233, 1998 WL 614485 (D.D.C. Sept. 14, 1998)passim
United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948)
Walt Disney Co. v. Powell, 897 F.2d 565 (D.C. Cir. 1990)
*WGN Continental Broad. Co. v. United Video, Inc., 693 F.2d 622 (7th Cir. 1982)
STATUTES AND RULES
17 U.S.C. § 106
17 U.S.C. § 410(c)
Fed. R. Evid. 406
III Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law (1996)
1999 DOJ & FTC Guidelines for Collaborations Among Competitors
Plaintiffs' reply is noteworthy for the lack of substance underlying their strident assertions. For example, plaintiffs chastise Microsoft for "address[ing] strawmen and seek[ing] to apply to this case out-of-context passages from decisions involving patently different market circumstances" (Pls. Reply at 1), yet they provide no specifics to back up that sweeping assertion. Such empty rhetoric will not assist this Court in resolving the important legal issues in this case.
Plaintiffs also criticize Microsoft for "relegating its discussion" of their Section 2 claim for monopoly maintenance "to the back of its brief and discussing the Section 1 issues (and the attempted monopoly issue) first." (Id.) Yet, in cases involving both Section 1 and Section 2 claims, courts often address the Section 1 issues first, especially where, as here, the Section 2 claims are premised largely on the same conduct said to violate Section 1. Indeed, that is exactly what this Court did in ruling on Microsoft's summary judgment motion.
By lambasting Microsoft, plaintiffs apparently hope to draw attention away from the flaws in their case. Time and again, plaintiffs' only support for bold pronouncements about applicable legal principles is a citation to their own proposed conclusions of law -- which themselves contain little in the way of legal authority. For instance, plaintiffs argue that an intent to maximize market share at the expense of a competitor and to "win" is an "unlawful intent." (Id. at 23.) Says who? Certainly not the Supreme Court, which held the opposite in Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 457-59 (1993). Plaintiffs also contend that agreements found not to have "'a substantial, deleterious impact on Navigator's usage'" (Pls. Reply at 11 n.9 (quoting Findings ¶ 332)) and other conduct that admittedly bore no "fruit" (id. at 13) can nevertheless be anticompetitive acts that unlawfully maintained a monopoly. How? Plaintiffs' bare assertions cannot substitute for the requisite proof of causation.
Make no mistake, plaintiffs' case is not supported by existing case law. This Court should decline plaintiffs' invitation to rewrite the antitrust laws to protect Microsoft's competitors at the expense of consumers.
1.Plaintiffs' tying claim fails for three independent reasons. Plaintiffs readily admit that courts have "urg[ed] caution in the interpretation and application of Section 1 per se tying standards." (Pls. Reply at 8.) Yet, they urge this Court to throw caution to the wind and hold that Windows 98 constitutes a per se unlawful tying arrangement. If this Court were to do so, it would be the first court in the history of American law to sustain a technological tying claim.
a.Windows 98 is a single, integrated product under the controlling standard adopted by the Court of Appeals. Plaintiffs concede that the Court of Appeals adopted a "deferential two-product standard for technological tying." (Id. at 16.) They nevertheless argue that Microsoft has tied two separate products -- Windows 98 and Internet Explorer -- in violation of the Court of Appeals' deferential standard. In so doing, plaintiffs criticize Microsoft for "ignoring" the Court of Appeals' so-called "'bolting' standard" (id. at 16-17), but they seriously misstate that standard, essentially asking the Court to ignore binding precedent.
Plaintiffs contend that Windows 98 and Internet Explorer are separate products because "all the relevant benefits of Windows 98 could be achieved by a user combining [the retail] version of Windows 95 with a stand-alone browser like Internet Explorer 5.0." (Id. at 17 n.15.) That is not the Court of Appeals' test. Indeed, if it were, then the Court of Appeals would have reached a different result in the Consent Decree case. At the time, "Microsoft provide[d] OEMs with IE 4 on a separate CD-ROM (a fact to which the Department attach[ed] great significance)." United States v. Microsoft Corp., 147 F.3d 935, 951 (D.C. Cir. 1998). Although OEMs were "just as capable as Microsoft" of combining Internet Explorer 4.0 and Windows 95 -- thereby achieving the benefits of the combination -- the Court of Appeals held that "[t]he idea that in installing IE 4 an OEM is combining two stand-alone products is defective." Id.
The Court of Appeals concluded that the combination of Windows 95 and Internet Explorer 4.0 constituted a single, integrated product (even though they could be distributed on separate CD-ROMs) because it recognized that the argument advanced by plaintiffs here proves too much. Because "[s]oftware code by its nature is susceptible to division and combination in a way that physical products are not," the Court of Appeals held that the act of combination is not the running of "particular disks or CD-ROMs," but rather "the design that knits the two together" Id. at 951-52. According to the Court of Appeals, when an OEM installed Internet Explorer 4.0 together with Windows 95, it upgraded the "operating system to the Windows 95/IE level," thus "implement[ing] Microsoft's prior integration of IE into Windows 95." Id. at 951 n.16. As a result, even if it were possible to remove Internet Explorer from Windows 98 and distribute the software code on a separate CD-ROM, the result would be no different here than it was in the Consent Decree case: the act of reinstalling Internet Explorer together with Windows 98 would simply upgrade the operating system to the Windows 98/Internet Explorer level, thus implementing Microsoft's prior integration of Internet Explorer into Windows 981.
Because the Court of Appeals understood that software integration occurs at the design stage, it held that the controlling test is whether there are "facially plausible benefits to [the] integrated design [of Windows 95] as compared to an operating system combined with a stand-alone browser such as Netscape's Navigator." Id. at 950 (emphasis added). This is exactly how this Court understood the Court of Appeals' test when it ruled on Microsoft's summary judgment motion. This Court stated that it could not "determine whether Windows and IE are 'separate products' until it becomes clear what are the synergistic benefits that are unique to the Windows/IE combination, i.e., benefits that could not be obtained by combining another browser with Windows." United States v. Microsoft Corp., Nos. 98-1232, 98-1233, 1998 WL 614485, at *12 (D.D.C. Sept. 14, 1998) (emphasis added).
Plaintiffs do not contend, and did not attempt to show at trial, that the benefits of the integrated design of Windows 98 could be obtained by combining another browser such as Netscape Navigator with Windows 98. They instead argue that the language used by the Court of Appeals and this Court "is not and cannot be limited to non-Microsoft browsers." (Pls. Reply at 17.) That argument is simply unsustainable. The Court of Appeals expressly referred to "a stand-alone browser such as Netscape's Navigator," 147 F.3d at 950, and this Court's reference to "another browser," taken in context, can only mean something other than Internet Explorer, 1998 WL 614485, at *122.
b.There has been no forced purchase of a second distinct product. The Supreme Court has stated that "[t]he common core of the adjudicated unlawful tying arrangements is the forced purchase of a second distinct commodity with the desired purchase of a dominant 'tying' product." Times-Picayune Publ'g Co. v. United States, 345 U.S. 594, 614 (1953). Plaintiffs do not contend that Microsoft forced anyone to purchase (i.e., pay for) a second product because Internet Explorer is included as part of Windows 98 (and otherwise distributed for free). Nor do they argue that users who obtain a copy of Windows 98 are unable or unwilling to obtain a copy of Netscape Navigator. In fact, the Court found that Netscape Navigator's share of "incremental browser usage" is still approximately 40%. (Findings ¶ 372.) Plaintiffs instead assert that "a 'tie' exists" because OEMs and users are forced to take Internet Explorer as part of Windows 98. (Pls. Reply at 19.) Although plaintiffs say this assertion is based on "black-letter law" (id.), they fail to cite a single case in which an unlawful tie was found notwithstanding the fact that the allegedly tied product was given away free.
c.The alleged tie does not foreclose a substantial amount of sales of the allegedly tied product. In Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792, 794 (1st Cir. 1988) -- a decision plaintiffs ignore -- then-Judge Breyer stated that a "tying arrangement" is unlawful only if "the tie forecloses a 'not insubstantial' amount of potential sales for the 'tied' product." Plaintiffs did not show that the design of Windows 98 foreclosed a substantial amount of Netscape's sales of Web browsing software. In fact, users could utilize the Web browsing software in Windows 98 to download Navigator -- and there is no cost disincentive to do so because both are free -- and then use Navigator instead of Internet Explorer to access the Internet.
Setting up a straw man of their own, plaintiffs blatantly mischaracterize Microsoft's argument, referring to it as Microsoft's "'absolute prohibition' contention." (Pls. Reply at 20.) Microsoft does not contend that the alleged tie must totally foreclose Netscape's ability to reach consumers, but that there must be actual foreclosure of the ability to satisfy a substantial amount of demand. Plaintiffs next contend that the Court's findings establish that Microsoft's design of Windows 98 "effectively foreclos[ed] the OEM channel to Netscape as a way to secure actual usage." (Id.) Not only were other channels available to Netscape, such as electronic downloading from the Internet, but documents reporting the findings of AOL's due diligence investigation of Netscape state that Netscape's Web browsing software was distributed on "22% of OEM shipments with minimal promotion." (DX 2440 at 341778.) That is not substantial foreclosure, and plaintiffs cite no authority to the contrary.
2.Plaintiffs' failure to show foreclosure of a substantial share of the relevant market is fatal to their exclusive dealing claim. This Court has already held that "plaintiffs must establish foreclosure on the order of greater than 40% to prevail on their exclusive dealing claims." 1998 WL 614485, at *19. Plaintiffs do not contend that the Court found that the challenged agreements foreclosed Netscape's access to 40% of the alleged market for Web browsing software. They instead seek to dismiss the Court's "40% foreclosure figure" as "formalistic" (Pls. Reply at 20), not "conclusive" (id. at 21) and "some numerical threshold" (id.). Whatever derisive terms plaintiffs seek to attach to the 40% figure, it remains this Court's holding, which was based on considerable case law.
Plaintiffs also assert that the Court's findings establish that Netscape was "commercially foreclosed" from the IAP and OEM channels of distribution. (Id. at 20.) As this Court has already stated, "the relevant figure is the share of the browser market that is foreclosed by the challenged agreements," not the share of particular distribution channels. 1998 WL 614485, at *19 (emphasis added). Plaintiffs presented no evidence, and the Court made no findings, concerning the share of the alleged market for Web browsing software that was purportedly foreclosed. Besides, as noted above, documents generated during AOL's acquisition of Netscape show that Navigator was distributed on 22% of OEM shipments and that it accounted for 24% of the Web browsing software distributed by the 20 largest ISPs. (DX 2440 at 341778.) And those numbers reflect the results achieved, not access to those channels, which is the relevant inquiry. Once again, plaintiffs cite no authority to the contrary.
The remainder of plaintiffs' arguments in support of their exclusive dealing claim need not detain the Court long. Plaintiffs do not dispute that the challenged agreements were short term and "not true 'exclusive dealing' agreements." (Pls. Reply at 21-22.) Although they baldly assert that "the contracts were long enough to accomplish Microsoft's anticompetitive goals" (id. at 22), plaintiffs fail to cite a single case in which similarly short-term, non-exclusive agreements were held to violate Section 1. Nor do plaintiffs explain why Navigator's usage share continued to decline long after the expiration of Microsoft's ISP and ICP agreements if those agreements were so critical to the success of Internet Explorer. (See Findings ¶¶ 372-74.)
Finally, plaintiffs seek to distinguish the Ninth Circuit's decision in Omega Environmental, Inc. v. Gilbarco, Inc., 127 F.3d 1157 (9th Cir. 1997), cert. denied, 119 S. Ct. 46 (1998), by arguing that Omega "involved agreements covering only 120 of 500 distributors and no finding that these were particularly important ones." (Pls. Reply at 21.)3 Both arguments fall well short of the mark. As an initial matter, the fact that the defendant in Omega entered into exclusive agreements with only 120 of 500 authorized distributors does not distinguish Omega from this case. Microsoft entered into Windows 95 referral server agreements with only ten of the more than 4,000 ISPs in the United States (Findings ¶ 256), and it entered into Channel Bar agreements with only 24 of the approximately 5,400 ICPs in the United States that operate commercially significant Web sites (id. ¶¶ 317-18).
Moreover, the plaintiffs in Omega expressly argued that the distributors that had entered into exclusive agreements were the most important ones. In particular, the plaintiffs complained that alternative channels of distribution were "inadequate substitutes for the existing distributors" and asserted that "almost all [of] the 500 existing distributors -- who have proven finances, abilities and customer relationships -- are restricted by exclusive dealing." Omega, 127 F.3d at 1163. The Ninth Circuit dismissed those facts as irrelevant because the defendant's competitors had alternative means to reach the ultimate consumers of their products:
The short answer is that the antitrust laws were not designed to equip the plaintiffs' hypothetical competitor with [the defendant's] legitimate competitive advantage. Competitors are free to sell directly, to develop alternative distributors, or to compete for the services of the existing distributors. Antitrust laws require no more.
Id. (citations omitted). The Ninth Circuit's language applies with equal force to plaintiffs' claims based on alleged foreclosure of the OEM and IAP channels of distribution.
3.Microsoft's OEM license agreements do not constitute an unlawful restraint of trade. Having failed to contest the validity of Microsoft's copyrights for Windows 95 and Windows 98, plaintiffs cannot—indeed, do not—argue that those copyrights are invalid. Instead, plaintiffs seek to rehabilitate their claim that Microsoft's refusal to grant OEMs the right to modify Windows without Microsoft's permission violates the antitrust laws by pecking around the edges of Microsoft's copyright argument. What plaintiffs completely fail to establish is that Microsoft is doing anything more than exercise rights conferred on it by the Copyright Act -- actions that cannot run afoul of Section 1 of the Sherman Act.
Plaintiffs contend that Microsoft failed to prove that specific portions of Windows "could be deemed an 'expression' . . . protected by copyright" (Pls. Reply at 25 n.18), but Microsoft had no such obligation. The Court found that "Windows 95 and Windows 98 are covered by copyright registrations" (Findings ¶ 228), which made it plaintiffs' burden to challenge Microsoft's presumptively valid registrations -- which they failed to do. See 17 U.S.C. § 410(c) ("In any judicial proceedings the certificate of a registration made before or within five years after first publication of the work shall constitute prima facie evidence of the validity of the copyright and of the facts stated in the certificate."); Fonar Corp. v. Domenick, 105 F.3d 99, 104 (2d Cir.) (copyright registration "shifts to [plaintiffs] the burden of proving the invalidity of the copyright"), cert. denied, 522 U.S. 908 (1997). Plaintiffs offer no contrary authority.4
Plaintiffs complain that Microsoft has not identified "which statutory right would be infringed" if Microsoft were forced to allow OEMs to make unauthorized modifications to its copyrighted works. (Pls. Reply at 25.) That complaint ignores this Court's prior holding that "Microsoft undoubtedly enjoys some 'right against mutilation' in its software." 1998 WL 614485, at *16. As plaintiffs concede, Section 106 of the Copyright Act gives Microsoft a statutory right "to distribute copies of" its copyrighted works. (Pls. Reply at 24 n.16.) In exercising that right with regard to Windows 95 and Windows 98, Microsoft is entitled to require its distributors -- including OEMs -- to deliver its copyrighted operating systems to users as Microsoft designed them.
Microsoft relies on three cases that recognize that federal copyright law enables a copyright holder to prohibit unauthorized modification of its copyrighted work. See WGN Continental Broad. Co. v. United Video, Inc., 693 F.2d 622, 625 (7th Cir. 1982) (Posner, J.); Gilliam v. ABC, 538 F.2d 14, 21 (2d Cir. 1976); National Bank of Commerce v. Shaklee Corp., 503 F. Supp. 533, 544 (W.D. Tex. 1980). Plaintiffs fail to address these cases on their merits.
Instead, plaintiffs criticize Gilliam and Shaklee for not involving "the current Copyright Act." (Pls. Reply at 26 n.21.)5 Plaintiffs offer no support, however, for their implicit assertion that the Copyright Act of 1976 provides Microsoft with fewer rights than it would have enjoyed under the Copyright Act of 1909. "There is no evidence that Congress in the Copyright Act of 1976 intended to abrogate rights created under the previous Act." Stewart v. Abend, 495 U.S. 207, 239 n.1 (1990) (Stevens, J., dissenting); cf. Broadcast Music, Inc. v. CBS, 441 U.S. 1, 18 (1979) ("[N]othing in the Copyright Act of 1976 indicates in the slightest that Congress intended to weaken the rights of copyright owners to control the public performance of musical compositions."). In WGN, Judge Posner cited both Gilliam and Shaklee with approval, 693 F.2d at 625-26, not once referring to the fact that they were decided under the prior incarnation of federal copyright law. Plaintiffs are wrong in suggesting that WGN "turned on a statutory issue" unrelated to preserving the integrity of copyrighted works. (Pls. Reply at 26 n.21.) Judge Posner held that the plaintiff "proved copyright infringement" based on defendant's unauthorized deletion of a portion of plaintiff's copyrighted work. 693 F.2d at 628.6
In the face of Microsoft's valid copyrights, plaintiffs argue that courts have rejected "intellectual property defenses to conduct that violates the antitrust laws." (Pls. Reply at 28.) This is another straw man. The question here is not whether Microsoft's copyrights entitle it to "absolute immunity" from the antitrust laws (id.), but whether Microsoft may unilaterally refuse to grant OEMs the right to make unauthorized modifications to Windows without running afoul of the antitrust laws. Because Microsoft's "copyright[s] [have] been lawfully acquired, subsequent conduct permissible under the . . . copyright laws cannot give rise to any liability under the antitrust laws." In re Indep. Serv. Orgs. Antitrust Litig., 989 F. Supp. 1131, 1134 (D. Kan. 1997). Consequently, Microsoft's "unilateral refusal to sell or license [the right to modify] its copyrighted expression does not constitute unlawful exclusionary conduct under the antitrust laws." Id. at 1144.7
Plaintiffs do not even attempt to distinguish In re Independent Service Organizations Antitrust Litigation—a glaring omission given that the court there flatly rejected the very argument plaintiffs are making to this Court. Nor do they respond to the clear weight of authority establishing that a patent owner may freely exercise its rights under the patent laws without violating the antitrust laws. See, e.g., SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1206 (2d Cir. 1981) ("[W]here a patent has been lawfully acquired, subsequent conduct permissible under the patent laws cannot trigger any liability under the antitrust laws."), cert. denied, 455 U.S. 1016 (1982). The patent cases are particularly applicable to the realm of computer software where copyrighted works reflect an exercise of invention akin to that found in the patent context. See Cable/Home Communication Corp. v. Network Prods., Inc., 902 F.2d 829, 849 (11th Cir. 1990) ("Since the Copyright Act is the congressional implementation of a constitutional directive to encourage inventors by protecting their exclusive rights in their discoveries, copyright interests also must be guarded under the Constitution . . . .").
Plaintiffs ultimately concede that if Microsoft's actions are "'reasonably necessary' to effectuate" rights granted by the Copyright Act, its actions cannot be per se violations of the Sherman Act. (Pls. Reply at 28 n.24 (quoting Broadcast Music, 441 U.S. at 19).) Plaintiffs thus are reduced to arguing that Microsoft's refusal to allow OEMs to modify Windows without its permission violates the rule of reason. (Id.)8 Contrary to plaintiffs' assertion, Microsoft need not proffer a business justification, or any justification for that matter, for engaging in conduct clearly authorized by federal copyright law. See In re Indep. Serv. Orgs. Antitrust Litig., 989 F. Supp. at 1141; cf. III Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 705b, at 156 (1996) (recommending against "grounding § 2 liability on findings of fact about the motivations with which research or patenting was undertaken"). Further, it makes perfect sense that, having spent hundreds of millions of dollars designing, developing and testing operating systems that it thinks consumers will like, Microsoft does not want OEMs modifying those operating systems without its permission. In any event, although plaintiffs refuse to acknowledge it, Microsoft affords OEMs considerable latitude to modify the initial Windows startup sequence and to customize the Windows desktop to promote competing Web browsing software such as Netscape Navigator. (Findings ¶ 219; MS Conclusions at 33-34.)
Given the strength of Microsoft's interest in protecting its intellectual property and the lack of any foreclosure resulting from Microsoft's OEM license agreements -- which give OEMs carte blanche to preinstall Netscape's Web browsing software and place icons for that software on the Windows desktop and in the Start menu (Findings ¶ 217) -- plaintiffs' attack on those license agreements fails under the rule of reason as well.
4.Plaintiffs' attempted monopolization claim flies directly in the face of settled law. After grudgingly acknowledging that the Court's findings with regard to attempted monopolization are "less direct . . . than on the monopolization" (Pls. Reply at 22), plaintiffs essentially repeat, with virtually no citations to supporting case law, the arguments set forth in their opening brief. Those misguided arguments are no more persuasive the second time around.
a.Microsoft did not act with a specific intent to monopolize Web browsing software. As the Federal Circuit recently stated, "[u]nilateral conduct that may adversely affect another's business situation, but is not intended to monopolize that business, does not violate the Sherman Act." Intergraph, 195 F.3d at 1354-55. In fact, the Supreme Court has held that "the notion that proof of unfair or predatory conduct alone is sufficient to make out the offense of attempted monopolization is contrary to the purpose and policy of the Sherman Act." Spectrum Sports, 506 U.S. at 457.
Plaintiffs concede that the specific intent element of attempted monopolization required them to prove that Microsoft "had 'a purpose to acquire monopoly power.'" (Pls. Reply at 23 (quoting Association for Intercollegiate Athletics for Women v. NCAA, 735 F.2d 577, 585 (D.C. Cir. 1984).) More specifically, according to the Court of Appeals, plaintiffs must show that Microsoft's objective was to obtain a monopoly on Web browsing software "by driving [its] rival from the market by exclusionary or predatory means." Intercollegiate Athletics for Women, 735 F.2d at 585. This Court expressly found, however, that "the evidence is insufficient to find that Microsoft's ambition is a future in which most or all of the content available on the Web would be accessible only through its own browsing software." (Findings ¶ 384.) As in Intercollegiate Athletics for Women, it is apparent that Microsoft "contemplated co-existence" with Netscape, 735 F.2d at 585, and Microsoft certainly has not driven Netscape from the market. If anything, Netscape is more formidable now as part of AOL (soon to be AOL Time Warner) than it was in 1995 as a fledgling startup.9
As they did in their proposed conclusions, plaintiffs point to the Court's finding that "Microsoft's specific intent was to 'maximize Internet Explorer's share of browser usage at Netscape's expense' (¶ 133) and 'to win' (¶ 166 (quoting Microsoft))." (Pls. Reply at 23 (emphasis in original).) They contend that such mundane observations are sufficient to demonstrate specific intent to monopolize. Of course, plaintiffs cite no case in which a court found that the goal of winning as much business as possible at the expense of a rival satisfies the specific intent element of attempted monopolization. Instead, plaintiffs baldly assert, without explanation, that such a goal "goes far beyond an intent to 'compete vigorously'" (id. (quoting Spectrum Sports, 506 U.S. at 459)) "or 'to increase its market share'" (id. (quoting Richter Concrete Corp. v. Hilltop Concrete Corp., 691 F.2d 818, 826 (6th Cir. 1982))).
It is well established, however, that "[a] desire to increase market share or even drive a competitor out of business through rigorous competition on the merits is not sufficient" to establish a specific intent to monopolize. Abcor Corp. v. AM Int'l, Inc., 916 F.2d 924, 927 (4th Cir. 1990)10. In fact, courts have expressly held that "[m]ore than an intent to win every sale, even if that would result in the demise of a competitor, is required before it can be concluded that a defendant has the type of exclusionary intent condemned by the antitrust law." In re IBM Peripheral EDP Devices Antitrust Litig., 481 F. Supp. 965, 1010 (N.D. Cal. 1979) [hereinafter Transamerica], aff'd sub nom. Transamerica Computer Co. v. IBM, 698 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955 (1983). Indeed, if an intent to win business from a rival were sufficient, then all competitive companies would harbor the specific intent to monopolize.
b.There is no dangerous probability that Microsoft will obtain monopoly power in Web browsing software. The Court did not find any likelihood that Microsoft will obtain the ability "to control prices or exclude competition" in Web browsing software. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). Rather, the Court found that "most developers continue to insist that their Web content be more-or-less as attractive when accessed with Navigator as it is when accessed with Internet Explorer" and that "Navigator will retain an appreciable usage share through the end of 2000." (Findings ¶ 385.) If Netscape remains a force to be reckoned with -- which is more apparent on a daily basis as AOL becomes a corporate behemoth -- then there is no chance of Microsoft's monopolizing Web browsing software.
Statistics regarding browser usage, which plaintiffs concede are "not conclusive" (Pls. Reply at 23), do not establish a dangerous probability of monopolization under the case law. (See MS Conclusions at 41 n.24 (collecting cases).) Although plaintiffs argue—again, without citation to decided cases—that these figures establish a sufficient "closeness" to monopoly power (Pls. Reply at 23), neither the Court's finding that Internet Explorer's usage share is 50% or less (Findings ¶ 360) nor the Court's prediction that this usage share will exceed 60% by 2001 (id. ¶ 373) is an adequate basis to conclude that it is likely -- much less dangerously probable -- that Microsoft will monopolize Web browsing software. See, e.g., Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 894-95 (10th Cir. 1991) (60% insufficient). In fact, the Court expressly found that "Navigator's installed base will continue to grow" (Findings ¶ 378), hardly what one would expect in a business on the verge of monopolization by a rival.
Plaintiffs' failure to satisfy the dangerous probability element is underscored by the fact that Netscape (in the hands of AOL) remains a formidable competitor to Microsoft in the development and marketing of Web browsing software. Achieving monopoly power in the face of such a formidable competitor is much less likely than if Microsoft faced an array of competitors that were all small and relatively weak. See Transamerica, 481 F. Supp at 975 ("Defendant's share is more likely to indicate monopoly power if the rest of the market is widely distributed among many small competing suppliers than it would be if the size of competitors and the market share held by them approached defendant's size and share.") (citing Greyhound Computer Corp. v. IBM, 559 F.2d 488, 496-97 (9th Cir. 1977), cert. denied, 434 U.S. 1040 (1978), and Pacific Coast Agric. Export Ass'n v. Sunkist Growers, Inc., 526 F.2d 1196, 1204 (9th Cir. 1975), cert. denied, 425 U.S. 959 (1976)).
5.Microsoft did not engage in anticompetitive conduct that contributed significantly to the maintenance of a monopoly. As the introduction to plaintiffs reply makes clear, plaintiffs premise their entire case on this Court's finding of monopoly power, claiming that this finding is critically important "to showing the anticompetitive character" of the challenged conduct. (Pls. Reply at 1.) Yet, this Court made that finding without any briefing on the applicable legal standards. Analyzed under the proper standards, the individual facts found by the Court do not establish monopoly power in a relevant antitrust market.
Assuming, arguendo, that Microsoft possesses monopoly power in a properly defined antitrust market, plaintiffs do not contend that Microsoft acquired that power unlawfully, and "Section 2 of the Sherman Act does not punish the mere possession of monopoly power." Colorado Interstate Gas Co. v. Natural Gas Pipeline Co. of Am., 885 F.2d 683, 692 n.15 (10th Cir. 1989). As the Federal Circuit recently observed in rejecting antitrust claims against Intel:
The antitrust law has consistently recognized that a producer's advantageous or dominant market position based on superiority of a commercial product and ensuing market demand is not the illegal use of monopoly power prohibited by the Sherman Act.
Intergraph, 195 F.3d at 1353. Plaintiffs do not deny that "[a] monopolist, no less than any other competitor, is permitted and indeed encouraged to compete aggressively on the merits . . . ." Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 544 (9th Cir. 1983) (emphasis added), cert. denied, 465 U.S. 1038 (1984). Nor do they deny that, "having been urged to compete," a successful company such as Microsoft "must not be turned upon when [it] wins," even if such competition threatens to injure fatally rivals. United States v. ALCOA, 148 F.2d 416, 430 (2d Cir. 1945) (Hand, J.).
Perhaps most importantly, to establish a violation of Section 2 of the Sherman Act, a plaintiff must do more than show that a monopolist engaged in conduct that is anticompetitive under the controlling standards. The plaintiff must prove that the "reprehensible behavior has contributed significantly to the achievement or maintenance of the monopoly." III Areeda & Hovenkamp, supra ¶ 650c, at 69. Plaintiffs did not prove, and the Court did not find, that the challenged conduct contributed significantly to the maintenance of a monopoly. If anything, the Court affirmatively disavowed any such causal connection. (See Findings ¶ 411.)
a.Products need not be complete substitutes to be included in the same relevant product market. On the issue of market definition, plaintiffs argue that products must be complete substitutes to be included in the same relevant product market. As a result, they contend that middleware -- which the Court found to be the most serious competitive threat to Microsoft's operating systems -- is "not properly included in the market because it must be used with an operating system and is not a substitute for an operating system." (Pls. Reply at 3.) Yet, plaintiffs do not cite a single case in which all serious competitive threats to an alleged monopoly product were excluded from the relevant product market. Not surprisingly, the antitrust laws do not endorse such a restrictive approach to market definition.
In fact, even a case on which plaintiffs rely (Pls. Reply at 11 n.8) eschews overly narrow market definitions. In Forsyth v. Humana, Inc., 114 F.3d 1467, 1476 (9th Cir. 1997), aff'd, 525 U.S. 299 (1999), the Ninth Circuit stated that market definition "is simply the recognition of a field in which meaningful competition is said to exist." Given this expansive view, the Ninth Circuit held that the relevant market includes "the group of sellers or producers who have the 'actual or potential ability to deprive each other of significant levels of business.'" Id. (quoting Thurman Indus., Inc. v. Pay'N Pak Stores, Inc., 875 F.2d 1369, 1374 (9th Cir. 1989)). Similarly, the Supreme Court has stated it is not "a proper interpretation of the Sherman Act to require that products be fungible to be considered in the relevant market." du Pont, 351 U.S. at 394; accord Intergraph, 195 F.3d at 1353 ("[T]he relevant product market [is] the 'area of effective competition' between the defendant and plaintiff."). If the law were otherwise, the Supreme Court noted, "only physically identical products would be a part of the market," which would result in far too narrow a market definition for antitrust law purposes. du Pont, 351 U.S. at 394.
In view of these principles, courts have rejected attempts to limit the relevant market to perfect substitutes. For example, in an antitrust action brought by Transamerica against IBM, the court rejected Transamerica's attempt to limit the relevant product market to computer systems (i.e., the combination of hardware and software needed to satisfy data processing requirements):
Transamerica's definition of the systems market is, however, too narrow. Only suppliers of complete systems are included, suppliers of parts of systems are ignored. Firms which offer the user parts of systems have become a major competitive force in the computer industry, and, because they significantly constrain IBM's power to control the price of the systems it sells, a market definition that ignores them is incorrect.
Transamerica, 481 F. Supp. at 977-78. As the Transamerica court properly observed, "[a] market definition should 'recognize competition where, in fact, competition exists,' and should include all significant competition even though that competition differs in form or nature." Id. at 978 (footnotes omitted) (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 326 (1962)). "By assuming that only manufacturers offering complete systems compete with IBM," the court stated, Transamerica ignores a "significant constraining force." Id. "A market definition that ignores this," the court held, "cannot be accepted." Id. Plaintiffs here similarly ignore middleware as a significant constraining force on Microsoft by arguing that only vendors of complete operating systems compete with Windows.
In short, the relevant market inquiry "boils down to whether there are products that restrain a defendant's ability to act without regard for other manufacturers and suppliers." ILC Peripherals Leasing Corp. v. IBM, 458 F. Supp. 423, 428 (N.D. Cal. 1978), aff'd sub nom. Memorex Corp. v. IBM, 636 F.2d 1188 (9th Cir. 1980), cert. denied, 452 U.S. 972 (1981). The competing technologies identified in Microsoft's proposed conclusions of law (MS Conclusions at 47-49) all constrain Microsoft's actions and thus should be included in the relevant product market. Indeed, applying the correct legal standards, the only sensible product market in this case is software development platforms, which is the key area of competition identified by plaintiffs and the focus of their allegations of anticompetitive conduct.
b.Microsoft does not have the power to control prices or exclude competition in the relevant market, the touchstone of monopoly power. Plaintiffs do not dispute that market share is "not legally conclusive" of monopoly power. (Pls. Reply at 4.) They also grudgingly acknowledge the absence of any finding that Microsoft has ever charged a supra-competitive price for Windows, noting that "Microsoft may have charged 'what seems like a low short-term price'" for Windows. (Id. at 7 (quoting Findings ¶ 65).)11 Moreover, plaintiffs do not dispute that Microsoft does not control the productive assets needed to develop and market software and thus has no ability to restrict the total output of operating systems. (See id. at 5.) Recognizing that Microsoft's lack of control over the means of production is fatal to their claim of monopoly power, plaintiffs seek to hide behind the so-called "applications barrier to entry," a concept of their own creation.
As one court put it, "the entry barriers faced by an entrepreneur with a software package to sell are truly insignificant." Transamerica, 481 F. Supp. at 978. Plaintiffs do not dispute that entry into the operating system business is not limited by any of the traditional barriers that exist in other industries like mining and manufacturing. (Pls. Reply at 5.) Although they now argue that the operating system business is characterized by "the need for huge front-end investments" (id.), that would come as quite a surprise to Linus Torvalds, the Finnish graduate student who created the Linux operating system in his spare time.
Plaintiffs continue to proclaim that the "applications barrier to entry" is a true entry barrier even though both new entrants and incumbents must work hard to persuade software developers to take advantage of the features and functionality of their platforms. (Id. at 6.) As the FTC observed, however, it "is now widely accepted in the legal and economic communities" that "an entry barrier [should] be defined as additional long-run costs that must be incurred by an entrant relative to the long-run costs faced by incumbent firms." In re Echlin Mfg. Co., 105 F.T.C. 410, 485 (1985). The large stock of 32-bit Windows applications is an indicator of Microsoft's success in providing software developers with a platform they like, but nothing prevents other platform vendors from battling Microsoft for the hearts and minds of software developers by providing superior technology and technical support.
Finally, "[m]onopoly is also expected to result in technological stagnation." Transamerica, 481 F. Supp. at 976-77. As a result, "the rate of technological progress in the industry is relevant." Id. What the Transamerica court said about the computer industry more than twenty years ago still rings true today:
This is not the story of a stagnant, dominated industry. There is no doubt that the pace of technological progress in the computer industry is extraordinary. Commentators are fond of saying that had the auto industry kept pace over the last 30 years, a Rolls Royce would cost $2.50 today and would have an EPA gas rating of 2,000,000 miles per gallon.
Id. at 982. In fact, the Court expressly found that the software industry is "characterized by dynamic, vigorous competition" (Findings ¶ 59), a fact that plaintiffs do not dispute.
c.Microsoft's so-called "binding of Internet Explorer to Windows" was not anticompetitive because it resulted in improvements to the operating system. Plaintiffs dismiss as "irrelevant" the body of cases relied on by Microsoft (MS Conclusions at 57-58) for the proposition that product design changes that result in product improvements cannot form the basis for a Section 2 claim, but they do not even attempt to distinguish those cases (Pls. Reply at 8). Plaintiffs cite one case (id. at 8 n.5), Transamerica, that articulated a "more generalized standard," 481 F. Supp. at 1003, but they fail to mention that the Transamerica court sustained all but one of the design changes at issue there because they resulted in improvements to the product and that the only design change it condemned actually resulted in degradation of the product with no countervailing benefits, see id. at 1004-08. See also IIIA Areeda & Hovenkamp, supra ¶ 776c6, at 253 (discussing Transamerica decision).
Plaintiffs contend that the "pertinent question" is not whether the inclusion of Internet Explorer in Windows resulted in improvements to the operating system, but whether there were benefits of not offering consumers a version of Windows 98 without Internet Explorer. (Pls. Reply at 8-9.) That is a legal fabrication for which plaintiffs cite no supporting authority -- because there is none.
Plaintiffs also disregard the Court of Appeals' admonition that judicial review of product design decisions should be deferential. (Id. at 9.) As Professors Areeda and Hovenkamp have explained:
[I]t is worth emphasizing that most innovation is attended by considerable ex ante uncertainty as to final outcome, that adverse effects on rivals are not by themselves grounds for objection, that product improvements are regarded as beneficial notwithstanding such effects on rivals, that product quality can be a complex technical-economic as well as an aesthetic issue, that judges and juries are not highly qualified to make these decisions or to choose between alternative product designs, and that subjecting innovating firms to judicial second-guessing could chill innovation, which is the single most important force for improving productivity and national economic welfare.
IIIA Areeda & Hovenkamp, supra ¶ 776c6, at 253 (emphasis added).
d.Microsoft's various agreements were not anticompetitive because they did not result in substantial foreclosure. Plaintiffs claim that Microsoft seeks to defend its ICP, ISP and OLS agreements on the ground that they "did not absolutely 'prevent Netscape from getting Navigator into the hands of consumers.'" (Pls. Reply at 10 (emphasis added) (quoting MS Conclusions at 60).) Plaintiffs further describe Microsoft's position as "some notion of absolute foreclosure." (Id. at 11 n.8 (emphasis added).) That is a flagrant mischaracterization. Microsoft has argued consistently that the challenged agreements were not anticompetitive because they did not "foreclose Netscape's access to a significant percentage of potential users." (MS Conclusions at 60.) Plaintiffs have little to say in response to this dispositive fact, which is not surprising given that Netscape distributed 160 million copies of its Web browsing software in 1998 alone and users have access to that software from multiple sources.
Plaintiffs further argue that the challenged agreements were anticompetitive because they "discouraged" customers from using Navigator and raised Netscape's costs. (Pls. Reply at 11 & n.8.) That cannot be the law. It is simply not workable to tell business people "who may think no further than 'Let's get more business'" that they cannot engage in conduct that discourages customers from purchasing their competitors' products or that raises their competitors' costs. Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 232 (1st Cir. 1983). Application of such an inherently vague standard would serve only to deter competitive conduct, to the obvious detriment of consumers. As the Federal Circuit put it, "the purpose of the antitrust laws is to foster competition in the public interest." Intergraph, 195 F.3d at 1360.
e.Microsoft had no duty to predisclose information to Netscape about Windows 95. Plaintiffs concede that Microsoft had no general duty to disclose information to Netscape about Windows 95 before its release. (Pls. Reply. at 11.) Plaintiffs nevertheless contend that Microsoft engaged in anticompetitive conduct because it withheld information about Windows 95 when "Netscape declined to collude." (Id. at 12.) Even accepting plaintiffs' distorted characterization of the facts, they fail to cite a single case holding that a company's failure to predisclose information to a competitor about a new product under development violates Section 2 if it follows an unsuccessful attempt to collude.
f.Microsoft did not engage in predatory pricing. Plaintiffs stubbornly press their predatory pricing claim (Pls. Reply at 12-13), even though it is contrary to settled law. Plaintiffs now claim to be focused exclusively on "Microsoft's campaign to distribute stand-alone versions of its browser" (id. at 12 n.10 (emphasis in original)), thus excluding from their predatory pricing claim the free distribution of Internet Explorer as part of Windows. Taken to its logical extreme, plaintiffs' position would condemn any company with a leading product that separately distributes free upgrades of that product to its installed base of users -- a routine practice in the software industry that benefits consumers. There is no support in the decided cases for that extreme position.
Although plaintiffs contend that they have "satisfie[d] the below-cost requirement of Brooke Group" (id. at 12) -- a point Microsoft vigorously disputes -- they admit that they did not establish a dangerous probability that Microsoft will be able to recoup its investment in purportedly below-cost pricing by charging a supra-competitive price for Internet Explorer (id. at 13). As the Supreme Court stated in Brooke Group, without recoupment, "predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced." 509 U.S. at 224. A plaintiff thus "must demonstrate that there is a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it." Id. at 225. Plaintiffs assert that such a showing of recoupment was "unnecessary" here (Pls. Reply at 13), but they fail to cite a single case in support of that assertion.
g.Conduct that admittedly came to naught cannot form the basis of a monopolization claim. Plaintiffs admit that the remainder of the alleged anticompetitive acts "fail[ed] to bear immediate fruit." (Pls. Reply at 13.) They nevertheless contend, without reference to supporting cases, that such acts may form the basis for a monopoly maintenance claim under Section 2. (Id. at 13-14.) In particular, plaintiffs assert, relying on language that originated with the Areeda and Hovenkamp antitrust treatise, that Section 2 "requires no more than capability to make a significant contribution to maintaining monopoly." (Id. at 13 (emphasis in original).)12
Professors Areeda and Hovenkamp expressly recognized, however, that the effect of anticompetitive conduct "may in fact be marginal or even inconsequential," such as when it is "abandoned before it could have had any such effect." III Areeda & Hovenkamp, supra ¶ 651c, at 77. Accordingly, "it must at least appear plausible to an informed observer that the exclusionary act could have had, or would probably have, a significant relationship to the defendant's monopoly." Id. ¶ 651c, at 78. No matter how reprehensible, conduct that admittedly came to nothing, like conduct that was abandoned before it had any effect, cannot be said to have had any causal relationship to a monopoly, much less a significant one. Indeed, "[e]ven an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws." Brooke Group, 509 U.S. at 225.
Plaintiffs also argue that the Court's findings "readily meet the standards for a relevant pattern and practice" under Rule 406 of the Federal Rules of Evidence. (Pls. Reply at 14.) To start, plaintiffs no longer argue that Microsoft's discussions with Netscape, Apple, Intel and RealNetworks constituted per se unlawful market divisions. Nor could they given that the DOJ's own guidelines for collaborations among competitors expressly recognize that "[i]n order to compete in modern markets, competitors sometimes need to collaborate." 1999 DOJ & FTC Guidelines for Collaborations Among Competitors at 1. Plaintiffs also fail to cite a single case in which a defendant's unrelated discussions with four companies over a five-year period were held to constitute a corporate pattern or practice within the meaning of Rule 406.
h.Plaintiffs' "monopoly broth" theory of antitrust liability is unavailing. Plaintiffs contend that Microsoft's conduct was anticompetitive when considered as a whole, relying on the Seventh Circuit's dictum in City of Mishawaka v. American Electric Power Co., 616 F.2d 976, 986 (7th Cir. 1980), cert. denied, 449 U.S. 1096 (1981), that it was "the mix of the various ingredients of utility behavior in a monopoly broth that produce[d] the unsavory flavor." (Pls. Conclusions at 50-51.) This attempt to shore up their deficient monopoly maintenance claim by arguing that "everything should be taken together" fails for two reasons.
(i)The "monopoly broth" theory has been largely discredited, most recently by the Federal Circuit in Intergraph. Plaintiffs mock Microsoft's assertion that "where multiple claims of anticompetitive conduct are advanced, these claims must be separately considered in the context of the evidence as a whole," claiming that "Microsoft's point is anything but clear." (Pls. Reply at 14.) The quoted language is not Microsoft's, but rather Judge Richey's in Southern Pacific Communications Co. v. AT & T, 556 F. Supp. 825, 888 n.69 (D.D.C. 1982), aff'd, 740 F.2d 980 (D.C. Cir. 1984), cert. denied, 470 U.S. 1005 (1985). The point that apparently eludes plaintiffs is that each theory of antitrust liability must be considered separately based on all of the evidence.
Plaintiffs also argue that "Microsoft's objection to adding together several legally deficient theories simply does not apply to any argument plaintiffs have made." (Pls. Reply at 15.) The Federal Circuit's decision in Intergraph belies this argument. The plaintiff in Intergraph relied on several different legal theories in support of its claims under Sections 1 and 2 of the Sherman Act:
(1) the essential facility theory and the corollary theory of refusal to deal, (2) leveraging and tying, (3) coercive reciprocity, (4) conspiracy and other acts in restraint of trade, (5) improper use of intellectual property, and (6) retaliatory enforcement of non-disclosure agreements.
195 F.3d at 1353. The Federal Circuit separately analyzed all six of these theories, rejecting each of them as a legal and factual matter. See id. at 1356-66. The Federal Circuit then rejected the argument that "the degrees of support for each legal theory should be added up." Id. at 1367.
Plaintiffs here likewise assert several different legal theories in support of their claims under Sections 1 and 2: (1) tying, (2) exclusive dealing, (3) other acts in restraint of trade, (4) failure to predisclose technical information, (5) predatory pricing, and (6) attempted market divisions. As shown above, each of those theories is legally and factually deficient. Like the plaintiff in Intergraph, plaintiffs cannot remedy these deficiencies by arguing that the degrees of support for each legal theory should be added up. As the Federal Circuit held, "[e]ach legal theory must be examined for its sufficiency and applicability." Id. at 1367. Without the application of such intellectual rigor, the antitrust laws would lack clearly defined standards that businesses can follow, and courts would be unable to distinguish between vigorous competition -- which the antitrust laws seek to promote -- and truly anticompetitive conduct.
(ii)Even if Microsoft's conduct is considered as a whole, plaintiffs failed to establish the requisite causal connection between that conduct and maintenance of monopoly power. Plaintiffs do not dispute that a Section 2 monopolization claim contains a causation element. (Pls. Reply at 15.) Such a requirement is implicit in the Supreme Court's statement that a plaintiff must show "the willful acquisition or maintenance" of monopoly power. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). Nor do plaintiffs contend that they proved, or that the Court found, that Microsoft's challenged conduct contributed significantly to the maintenance of a monopoly. Plaintiffs instead refer to practical difficulties in estimating the causal connection between conduct and power. (Pls. Reply at 15.) Even accepting those difficulties, the Court 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 ¶ 411.) That finding was not gratuitous, and it demonstrates the absence of the requisite causal connection.
Microsoft has not violated Section 1 or Section 2 of the Sherman Act.
William H. Neukom
February 1, 2000
John L. Warden (Bar No. 222083)
Counsel for Defendant
CERTIFICATE OF SERVICE
I hereby certify that on this 1st day of February, 2000, I caused a true and correct copy of the foregoing Defendant Microsoft Corporation's Sur-Reply in Response to Plaintiffs' Joint Reply to be served by hand upon:
A. Douglas Melamed, Esq.
U.S. Department of Justice
950 Pennsylvania Avenue, N.W.
Washington, D.C. 20530
Richard L. Schwartz, Esq.
Deputy Chief, Antitrust Bureau
New York State Attorney General's Office
120 Broadway, Suite 2601
New York, New York 10271
And by facsimile and overnight carrier upon:
Phillip R. Malone, Esq.
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
Bradley P. Smith
1Plaintiffs argue that "Microsoft challenges the conclusion of a Section 1 violation only with respect to Windows 98." (Pls. Reply at 16 (emphasis in original).) Not so. Microsoft focused its atten-tion on Windows 98 because that is the product of current significance. As the Court of Appeals held in the Consent Decree case, "Microsoft has clearly met the burden of ascribing facially plausible benefits to its integrated design [of Windows 95] as compared to an operating system combined with a stand-alone browser such as Netscape's Navigator." 147 F.3d at 950. At trial, plaintiffs failed to show that any of those benefits, including the various examples listed by the Court of Appeals, see id. at 950-51, could be obtained by combining an operating system "with a stand-alone browser such as Netscape's Navigator."
2Plaintiffs assert that the Court of Appeals "specifically refer[red] to combinations of two Microsoft products, not a combination of Windows and a non-Microsoft product." (Pls. Reply at 17 (emphasis in original) (citing 147 F.3d at 948 n.11).) That assertion ignores the Court of Appeals' express reference to "a stand-alone browser such as Netscape's Navigator." 147 F.3d at 950. Further, in the very same footnote cited by plaintiffs, the Court of Appeals framed the issue as whether the benefits of the Windows 95/Internet Explorer combination could be obtained by "adding a rival browser." Id. at 948 n.11. And, in discussing the combination of a Microsoft operating system and mouse, the Court of Appeals expressly noted that physical products like mice are different "because their physical existence makes it easier to identify the act of combination." Id.
3Plaintiffs also note that the Ninth Circuit stated that exclusive dealing arrangements imposed on distributors rather than end users "are generally less cause for antitrust concern." (Pls. Reply at 21 (emphasis in original) (quoting Omega, 127 F.3d at 1162).) The Ninth Circuit used the word "generally" because it is not always possible to reach the ultimate consumers of a product if a sufficient number of distributors are covered by exclusive agreements. The Ninth Circuit made clear, however, that "[i]f com-petitors can reach the ultimate consumers of the product by employing existing or potential alternative channels of distribution" or by "direct sales to end-users," then "it is unclear whether such restrictions foreclose from competition any part of the relevant market." 127 F.3d at 1163 (emphasis added).
4Plaintiffs' reliance (Pls. Reply at 25) on Lotus Development Corp. v. Borland International Inc., 49 F.3d 807 (1st Cir. 1995), aff'd by an equally divided court, 516 U.S. 233 (1996), is misplaced. That case concerned the copyrightability of a "menu command hierarchy," not the copyrightability of software code -- which is what plaintiffs seek to give OEMs the right to modify. Id. at 813. "It is now well settled that the literal elements of computer programs, i.e., their source and object codes, are the subject of copyright protection." Computer Assocs. Int'l, Inc. v. Altai, Inc., 982 F.2d 693, 702 (2d Cir. 1992) (citing cases). Even authority relied on by plaintiffs (Pls. Reply at 25) confirms that "the source and object codes to computer software are . . . individually subject to copyright protec-tion." NLFC, Inc. v. Devcom Mid-Am., Inc., 45 F.3d 231, 234-35 (7th Cir.), cert. denied, 515 U.S. 1104 (1995).
5Plaintiffs claim that Paramount Pictures Corp. v. Video Broadcasting Systems, Inc., 724 F. Supp. 808 (D. Kan. 1989), supports their view that Gilliam should be read narrowly. (Pls. Reply at 27 n.21.) To the contrary, the Paramount Pictures court recognized that Gilliam, Shaklee and WGN establish a copyright holder's "right to check distortion or truncation of a copyrighted work." 724 F. Supp. at 821. The court thus rejected Paramount's infringement claim only after noting that Paramount's copyrighted motion pictures were not "altered, mutilated, edited, or changed in any manner" by defendant's advertise-ments, which were added to the beginning of videotapes before the start of the movie itself. Id. at 819.
6Plaintiffs argue that Microsoft's copyright argument "would undo settled antitrust law" and "preclude all antitrust scrutiny" of copyright licensing. (Pls. Reply at 28.) To start, plaintiffs' reliance on United States v. Loew's, Inc., 371 U.S. 38 (1962), and United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948), is misguided. Those cases concerned the "block booking" of separately copyrighted films. More important, Judge Posner in WGN specifically considered and rejected the argument plaintiffs now make, stating that although licensing a copyrighted work as a unified whole might sometimes sound like a "tie-in," the "echo is too faint to guide [the court's] interpretation of the Copyright Act." 693 F.2d at 626. Lastly, plaintiffs' suggestion that Windows may be "multiple copyrightable works . . . registered on a single form" (Pls. Reply at 27 n.22) is irrelevant. The cases cited by plaintiffs, see Gamma Audio & Video, Inc. v. Ean-Chea, 11 F.3d 1106, 1115 (1st Cir. 1993); Walt Disney Co. v. Powell, 897 F.2d 565, 568-69 (D.C. Cir. 1990), did not address the substantive rights of copyright holders, but rather concerned only the "statutory damages" a plaintiff could recover based on the number of "works" infringed by a defendant. These cases in no way undermine the rights that federal copyright law confers on copyright holders. Thus, even if the Court accepted plaintiffs' assertion that Windows 95 or Windows 98 consti-tutes multiple products covered by a single copyright registration, Microsoft's right to prevent OEMs from making unauthorized modifications to the software code that comprises those copyrighted works would remain unchanged.
7Plaintiffs rely on Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), cert. denied, 523 U.S. 1094 (1998), and Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147 (1st Cir. 1994), to support their contention that Microsoft's exercise of its intellectual property rights may violate the antitrust laws. (Pls. Reply at 28.) The antitrust laws, however, do not negate the rights of copyright holders. See Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1362 (Fed. Cir. 1999). In Kodak, the court found "no reported case in which a court has imposed antitrust liability for a unilateral refusal to sell or license a patent or copyright." 125 F.3d at 1216. Moreover, the Kodak court distinguished earlier patent cases involving the unilateral refusal to license patents -- which is clearly permissible -- from Kodak's refusal to supply both patented and unpatented spare parts. Id. at 1219.
8Plaintiffs neglect to mention that after the Supreme Court held in Broadcast Music that the challenged copyright licensing arrangement was not a per se violation of the Sherman Act, 441 U.S. at 24, the Second Circuit found on remand that the arrangement did not violate the rule of reason either, CBS v. ASCAP, 620 F.2d 930, 939 (2d Cir. 1980), cert. denied, 450 U.S. 970 (1981).
9Plaintiffs argue that Microsoft's intent was unlawful even if Microsoft's objective was "to prevent Navigator from becoming the standard." (Pls. Reply at 23.) Not surprisingly, that radical notion finds no support in decided cases. The relevant inquiry is whether Microsoft acted with specific intent to obtain monopoly power, not whether Microsoft sought to prevent Netscape from wielding such power.
10See also General Indus. Corp. v. Hartz Mountain Corp., 810 F.2d 795, 801 (8th Cir. 1987) ("Specific intent does not merely mean intent to prevail over one's rivals; it goes beyond that to include an intent to control prices or to restrain competition unreasonably."); Great Escape, Inc. v. Union City Body Co., 791 F.2d 532, 541 (7th Cir. 1986) ("All lawful competition aims to defeat and drive out competitors. Therefore, the mere intention to exclude competition and to expand one's own business is not sufficient to show a specific intent to monopolize."); Microsoft, 1998 WL 614485, at *23 ("The Supreme Court has held that intent to injure or destroy a rival and to expand one's own business are, standing alone, insufficient to produce an antitrust violation . . . .").
11Moreover, "[s]upracompetitive pricing entails a restriction in output." Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 233 (1993). Plaintiffs have not shown such a restric-tion of output; to the contrary, output of operating systems has been expanding at an extraordinary pace since Microsoft released the first version of MS-DOS in 1981.
12Plaintiffs argue that Microsoft stopped Intel's promotion of NSP software. (Pls. Reply at 14.) Plaintiffs cannot seriously contend, however, that Microsoft's discussions with Intel, a company that the Court found had no ambitions to create a platform to challenge Windows (Findings ¶ 101), contributed significantly to maintenance of Microsoft's alleged operating system monopoly. Even accepting the Court's findings, the competitive effect of Microsoft's conduct vis-ŕ-vis Intel was marginal at best. As the Federal Circuit stated, "the Sherman Act does not convert all harsh commercial actions into antitrust violations." Intergraph, 195 F.3d at 1354. And here, the Court expressly found that Microsoft's conduct was motivated at least in part by legitimate concerns about product quality. (Findings¶¶ 98-99.)