FALL 2007

Computer Law

 
Course No.  9200 711 001
Th 6:30 - 9:30 p.m.
Room W-214
Professor Jay Dratler, Jr.
Room 231D (IP Alcove)
(330) 972-7972
dratler@uakron.edu, dratler@neo.rr.com
Copyright © 2000, 2001, 2002, 2004, 2007   Jay Dratler, Jr.   For permission, see CMI.
 

United States v. Microsoft Corp.

(Tying Claim and Remedy)

253 F.3d 34 (D.C. Cir. 2001)

Before: Edwards, Chief Judge, Williams, Ginsburg, Sentelle, Randolph, Rogers and Tatel, Circuit Judges.  

* * * [*84] * * *

[For the statement of the case and factual background, please see Microsoft III (Section 2 Claims)]

IV.  TYING

Microsoft also contests the District Court's determination of liability under § 1 of the Sherman Act.  The District Court concluded that Microsoft's contractual and technological bundling of the IE web browser (the "tied" product) with its Windows operating system ("OS") (the "tying" product) resulted in a tying arrangement that was per se unlawful. Conclusions of Law, at 47-51.  We hold that the rule of reason, rather than per se analysis, should govern the legality of tying arrangements involving platform software products. * * *  [T]he arrangement before us . . . offer[s] the first up-close look at the technological integration of added functionality into software that serves as a platform for third-party applications.  There being no close parallel in prior antitrust cases, simplistic application of per se tying rules carries a serious risk of harm.  Accordingly, we vacate the District Court's finding of a per se tying violation and remand the case.  Plaintiffs may on remand pursue their tying claim under the rule of reason.  

The facts underlying the tying allegation substantially overlap with those set forth . . . in connection with the § 2 monopoly maintenance claim.  The key District Court findings are that (1) Microsoft required licensees of Windows 95 and 98 also to license IE as a bundle at a single price . . .; (2) Microsoft refused to allow OEMs to uninstall or remove IE from the Windows desktop . . .; (3) Microsoft designed Windows 98 in a way that withheld from consumers the ability to remove IE by use of the Add/Remove Programs utility . . .; and (4) Microsoft [*85] designed Windows 98 to override the user's choice of default web browser in certain circumstances . . . .  The court found that these acts constituted a per se tying violation. . . .  Although the District Court also found that Microsoft commingled operating system-only and browser-only routines in the same library files, . . . it did not include this as a basis for tying liability despite plaintiffs' request that it do so . . . .

There are four elements to a per se tying violation: (1) the tying and tied goods are two separate products; (2) the defendant has market power in the tying product market; (3) the defendant affords consumers no choice but to purchase the tied product from it; and (4) the tying arrangement forecloses a substantial volume of commerce.  See Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 461-62, 119 L. Ed. 2d 265, 112 S. Ct. 2072 (1992); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12-18, 80 L. Ed. 2d 2, 104 S. Ct. 1551 (1984).  

Microsoft does not dispute that it bound Windows and IE in the four ways the District Court cited.  Instead it argues that Windows (the tying good) and IE browsers (the tied good) are not "separate products," . . . and that it did not substantially foreclose competing browsers from the tied product market . . .  (Microsoft also contends that it does not have monopoly power in the tying product market, . . . but, for reasons given in Section II.A, we uphold the District Court's finding to the contrary.)  

* * *

A.  Separate-Products Inquiry Under the Per Se Test

The requirement that a practice involve two separate products before being condemned as an illegal tie started as a purely linguistic requirement: unless products are separate, one cannot be "tied" to the other.  Indeed, the nature of the products involved in early tying cases—intuitively distinct items such as a movie projector and a film, . . .—led courts either to disregard the separate-products question, . . . or to discuss it only in passing . . . .  It was not until Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 97 L. Ed. 1277, 73 S. Ct. 872 (1953), that the separate-products issue became a distinct element of the test for an illegal tie.  Even that case engaged in a rather cursory inquiry into whether ads sold in the morning edition of a paper were a separate product from ads sold in the evening edition.  

The first case to give content to the separate-products test was Jefferson Parish[.]  That case addressed a tying arrangement in which a hospital conditioned surgical care at its facility on the purchase of anesthesiological services from an affiliated [*86] medical group.  The facts were a challenge for casual separate-products analysis because the tied service—anesthesia—was neither intuitively distinct from nor intuitively contained within the tying service—surgical care.  A further complication was that, soon after the Court enunciated the per se rule for tying liability in International Salt Co. v. United States, 332 U.S. 392, 396, 92 L. Ed. 20, 68 S. Ct. 12 (1947), and Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5-7, 2 L. Ed. 2d 545, 78 S. Ct. 514 (1958), new economic research began to cast doubt on the assumption, voiced by the Court when it established the rule, that "‘tying agreements serve hardly any purpose beyond the suppression of competition,'" id. at 6 (quoting Standard Oil of Cal. v. United States, 337 U.S. 293, 305-06, 93 L. Ed. 1371, 69 S. Ct. 1051 (1949)) . . . .

The Jefferson Parish Court resolved the matter in two steps.  First, it clarified that "the answer to the question whether one or two products are involved" does not turn "on the functional relation between them. . . ."  Jefferson Parish, 466 U.S. at 19; see also 466 U.S. at 19 n.30.  In other words, the mere fact that two items are complements, that "one . . . is useless without the other," does not make them a single "product" for purposes of tying law. . . .  Second, reasoning that the "definitional question [whether two distinguishable products are involved] depends on whether the arrangement may have the type of competitive consequences addressed by the rule [against tying]," . . .  the Court decreed that "no tying arrangement can exist unless there is a sufficient demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital service[.]" . . .

The Court proceeded to examine direct and indirect evidence of consumer demand for the tied product separate from the tying product.  Direct evidence addresses the question whether, when given a choice, consumers purchase the tied good from the tying good maker, or from other firms.  The Court took note, for example, of testimony that patients and surgeons often requested specific anesthesiologists not associated with a hospital. . . .  Indirect evidence includes the behavior of firms without market power in the tying good market, presumably on the notion that (competitive) supply follows demand.  If competitive firms always bundle the tying and tied goods, then they are a single product. . . .  Here the Court noted that only 27% of anesthesiologists in markets other than the defendant's had financial relationships with hospitals, and that, unlike radiologists and pathologists, anesthesiologists were not usually employed by hospitals, i.e., bundled with hospital services. . . .  With [*87] both direct and indirect evidence concurring, the Court determined that hospital surgery and anesthesiological services were distinct goods.  

To understand the logic behind the Court's consumer demand test, consider first the postulated harms from tying.  The core concern is that tying prevents goods from competing directly for consumer choice on their merits, i.e., being selected as a result of "buyers' independent judgment," . . . .  With a tie, a buyer's "freedom to select the best bargain in the second market [could be] impaired by his need to purchase the tying product, and perhaps by an inability to evaluate the true cost of either product. . . ."  Direct competition on the merits of the tied product is foreclosed when the tying product either is sold only in a bundle with the tied product or, though offered separately, is sold at a bundled price, so that the buyer pays the same price whether he takes the tied product or not.  In both cases, a consumer buying the tying product becomes entitled to the tied product; he will therefore likely be unwilling to buy a competitor's version of the tied product even if, making his own price/quality assessment, that is what he would prefer.  

But not all ties are bad.  Bundling obviously saves distribution and consumer transaction costs.  9 PHILLIP E. AREEDA, ANTITRUST LAW ¶ 1703g2, at 51-52 (1991).  This is likely to be true, to take some examples from the computer industry, with the integration of math co-processors and memory into microprocessor chips and the inclusion of spell checkers in word processors. . . .  Bundling can also capitalize on certain economies of scope.  A possible example is the "shared" library files that perform OS and browser functions with the very same lines of code and thus may save drive space from the clutter of redundant routines and memory when consumers use both the OS and browser simultaneously. . . .  Indeed, if there were no efficiencies from a tie (including economizing on consumer transaction costs such as the time and effort involved in choice), we would expect distinct consumer demand for each individual component of every good.  In a competitive market with zero transaction costs, the computers on which this opinion was written would only be sold piecemeal—keyboard, monitor, mouse, central processing unit, disk drive, and memory all sold in separate transactions and likely by different manufacturers.  

Recognizing the potential benefits from tying, . . . the Court in Jefferson Parish forged a separate-products test that, like those of market power and substantial foreclosure, attempts to screen out false positives under per se analysis.  The consumer demand test is a rough proxy for whether a tying arrangement may, on balance, be welfare-enhancing, and unsuited to per se condemnation.  In the abstract, of course, there is always direct separate demand for products: assuming choice is available at zero cost, consumers will prefer it to no choice.  Only when the efficiencies from bundling are dominated by the benefits to choice for enough consumers, however, will we actually observe consumers making independent purchases.  In other words, perceptible separate demand [*88] is inversely proportional to net efficiencies.  On the supply side, firms without market power will bundle two goods only when the cost savings from joint sale outweigh the value consumers place on separate choice.  So bundling by all competitive firms implies strong net efficiencies.  If a court finds either that there is no noticeable separate demand for the tied product or, there being no convincing direct evidence of separate demand, that the entire "competitive fringe" engages in the same behavior as the defendant, . . . then the tying and tied products should be declared one product and per se liability should be rejected.  

Before concluding our exegesis of Jefferson Parish's separate-products test, we should clarify two things.  First, Jefferson Parish does not endorse a direct inquiry into the efficiencies of a bundle.  Rather, it proposes easy-to-administer proxies for net efficiency.  In describing the separate-products test we discuss efficiencies only to explain the rationale behind the consumer demand inquiry.  To allow the separate-products test to become a detailed inquiry into possible welfare consequences would turn a screening test into the very process it is expected to render unnecessary. . . .

Second, the separate-products test is not a one-sided inquiry into the cost savings from a bundle. Although Jefferson Parish acknowledged that prior lower court cases looked at cost-savings to decide separate products, . . . the Court conspicuously did not adopt that approach in its disposition of tying arrangement before it.  Instead it chose proxies that balance costs savings against reduction in consumer choice.  

With this background, we now turn to the separate products inquiry before us.  The District Court found that many consumers, if given the option, would choose their browser separately from the OS. Findings of Fact ¶ 151 (noting that "corporate consumers . . . prefer to standardize on the same browser across different [OSs]" at the workplace).  Turning to industry custom, the court found that, although all major OS vendors bundled browsers with their OSs, these companies either sold versions without a browser, or allowed OEMs or end-users either not to install the bundled browser or in any event to "uninstall" it.  The court did not discuss the record evidence as to whether OS vendors other than Microsoft sold at a bundled price, with no discount for a browserless OS, perhaps because the record evidence on the issue was in conflict. . . .

Microsoft does not dispute that many consumers demand alternative browsers.  But on industry custom Microsoft contends that no other firm requires non-removal because no other firm has invested the resources to integrate web browsing as deeply into its OS as Microsoft has. . . . (We here use the term "integrate" in the rather simple sense of converting individual goods into components of a single physical object [*89] (e.g., a computer as it leaves the OEM, or a disk or sets of disks), without any normative implication that such integration is desirable or achieves special advantages.  Cf.  United States v. Microsoft Corp., 331 U.S. App. D.C. 121, 147 F.3d 935, 950 (D.C. Cir. 1998) ("Microsoft II").)  Microsoft contends not only that its integration of IE into Windows is innovative and beneficial but also that it requires non-removal of IE.  In our discussion of monopoly maintenance we find that these claims fail the efficiency balancing applicable in that context.  But the separate-products analysis is supposed to perform its function as a proxy without embarking on any direct analysis of efficiency.  Accordingly, Microsoft's implicit argument—that in this case looking to a competitive fringe is inadequate to evaluate fully its potentially innovative technological integration, that such a comparison is between apples and oranges—poses a legitimate objection to the operation of Jefferson Parish's separate-products test for the per se rule.  

In fact there is merit to Microsoft's broader argument that Jefferson Parish's consumer demand test would "chill innovation to the detriment of consumers by preventing firms from integrating into their products new functionality previously provided by standalone products—and hence, by definition, subject to separate consumer demand." . . .   The per se rule's direct consumer demand and indirect industry custom inquiries are, as a general matter, backward-looking and therefore systematically poor proxies for overall efficiency in the presence of new and innovative integration. . . .  The direct consumer demand test focuses on historic consumer behavior, likely before integration, and the indirect industry custom test looks at firms that, unlike the defendant, may not have integrated the tying and tied goods.  Both tests compare incomparables—the defendant's decision to bundle in the presence of integration, on the one hand, and consumer and competitor calculations in its absence, on the other.  If integration has efficiency benefits, these may be ignored by the Jefferson Parish proxies.  Because one cannot be sure beneficial integration will be protected by the other elements of the per se rule, simple application of that rule's separate-products test may make consumers worse off.  

In light of the monopoly maintenance section, obviously, we do not find that Microsoft's integration is welfare-enhancing that it should be absolved of tying liability.  Rather, we heed Microsoft's warning that the separate-products element of the per se rule may not give newly integrated products a fair shake.  


B.  Per Se Analysis Inappropriate for this Case.

We now address directly the larger question as we see it: whether standard per se analysis should be applied "off the shelf" to evaluate the defendant's tying arrangement, one which involves software that serves as a platform for third party applications.  There is no doubt that "it is far too late in the history of our antitrust jurisprudence to question the proposition that certain tying arrangements pose an unacceptable risk of stifling competition and therefore are unreasonable ‘per se.'"  Jefferson Parish, 466 U.S. at 9 (emphasis added).  But there are strong reasons to doubt that the integration of additional software functionality into an OS falls among these arrangements.  Applying per se analysis to such an amalgamation creates undue risks of [*90] error and of deterring welfare-enhancing innovation.  

The Supreme Court has warned that "‘it is only after considerable experience with certain business relationships [**142]that courts classify them as per se violations. . . .'"  Broad. Music, 441 U.S. at 9 (quoting Topco Assocs., 405 U.S. at 607-08) . . .  Yet the sort of tying arrangement attacked here is unlike any the Supreme Court has considered.  The early Supreme Court cases on tying dealt with arrangements whereby the sale or lease of a patented product was conditioned on the purchase of certain unpatented products from the patentee. . . .  Later Supreme Court tying cases did not involve market power derived from patents, but continued to involve contractual ties. See Times-Picayune, 345 U.S. 594, 97 L. Ed. 1277, 73 S. Ct. 872 (1953) (defendant newspaper conditioned the purchase of ads in its evening edition on the purchase of ads in its morning edition); N. Pac. Ry. v. United States, 356 U.S. 1, 78 S. Ct. 514, 2 L. Ed. 2d 545 (1958) (defendant railroad leased land only on the condition that products manufactured on the land be shipped on its railways); United States v. Loew's Inc., 371 U.S. 38, 9 L. Ed. 2d 11, 83 S. Ct. 97 (1962) (defendant distributor of copyrighted feature films conditioned the sale of desired films on the purchase of undesired films); U.S. Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610, 51 L. Ed. 2d 80, 97 S. Ct. 861 (1977) ("Fortner II") (defendant steel company conditioned access to low interest loans on the purchase of the defendant's prefabricated homes); Jefferson Parish, 466 U.S. 2, 80 L. Ed. 2d 2, 104 S. Ct. 1551 (1984) (defendant hospital conditioned use of its operating rooms on the purchase of anesthesiological services from a medical group associated with the hospital); Eastman Kodak, 504 U.S. 451, 119 L. Ed. 2d 265, 112 S. Ct. 2072 (1992) (defendant photocopying machine manufacturer conditioned the sale of replacement parts for its machines on the use of the defendant's repair services).  

In none of these cases was the tied good physically and technologically integrated with the tying good.  Nor did the defendants ever argue that their tie improved the value of the tying product to users and to makers of complementary goods.  In those cases where the defendant claimed that use of the tied good made the tying good more valuable to users, the Court ruled that the same result could be achieved via quality standards for substitutes of the tied good. . . .  Here Microsoft argues that IE and Windows are an integrated physical product and that the bundling of IE APIs with Windows makes the latter a better applications platform for third-party software. It is unclear how the benefits from IE APIs could be achieved by quality standards for different browser manufacturers.  We do not pass judgment on Microsoft's claims regarding the benefits from integration of its APIs.  We merely note that these and other novel, purported efficiencies suggest that judicial "experience" provides little basis for believing that, "because of their pernicious [*91] effect on competition and lack of any redeeming virtue," a software firm's decisions to sell multiple functionalities as a package should be "conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use."  N. Pac. Ry., 356 U.S. at 5 (emphasis added).  

Nor have we found much insight into software integration among the decisions of lower federal courts. . . .

* * * [*92] * * *

While the paucity of cases examining software bundling suggests a high risk that per se analysis may produce inaccurate results, the nature of the platform software market affirmatively suggests that per se rules might stunt valuable innovation.  We have in mind two reasons.  

First, as we explained in the previous section, the separate products test is a poor proxy for net efficiency from newly integrated products.  Under per se analysis the first firm to merge previously distinct functionalities (e.g., the inclusion of starter motors in automobiles) or to eliminate entirely the need for a second function (e.g., the invention of the stain resistant carpet) risks being condemned as having tied two separate products because at the moment of integration there will appear to be a robust "distinct" market for the tied product. . . .  Rule of reason analysis, however, affords the first mover an opportunity to demonstrate that an efficiency gain from its "tie" adequately offsets any distortion of consumer choice. . . .

The failure of the separate-products test to screen out certain cases of productive integration is particularly troubling in platform [*93] software markets such as that in which the defendant competes.  Not only is integration common in such markets, but it is common among firms without market power.  We have already reviewed evidence that nearly all competitive OS vendors also bundle browsers.  Moreover, plaintiffs do not dispute that OS vendors can and do incorporate basic internet plumbing and other useful functionality into their OSs. . . .   Firms without market power have no incentive to package different pieces of software together unless there are efficiency gains from doing so.  The ubiquity of bundling in competitive platform software markets should give courts reason to pause before condemning such behavior in less competitive markets.  

Second, because of the pervasively innovative character of platform software markets, tying in such markets may produce efficiencies that courts have not previously encountered and thus the Supreme Court had not factored into the per se rule as originally conceived.  For example, the bundling of a browser with OSs enables an independent software developer to count on the presence of the browser's APIs, if any, on consumers' machines and thus to omit them from its own package. . . .  It is true that software developers can bundle the browser APIs they need with their own products, . . . but that may force consumers to pay twice for the same API if it is bundled with two different software programs.  It is also true that OEMs can include APIs with the computers they sell, . . . but diffusion of uniform APIs by that route may be inferior.  First, many OEMs serve special subsets of Windows consumers, such as home or corporate or academic users.  If just one of these OEMs decides not to bundle an API because it does not benefit enough of its clients, ISVs that use that API might have to bundle it with every copy of their program.  Second, there may be a substantial lag before all OEMs bundle the same set of APIs—a lag inevitably aggravated by the first phenomenon.  In a field where programs change very rapidly, delays in the spread of a necessary element (here, the APIs) may be very costly.  Of course, these arguments may not justify Microsoft's decision to bundle APIs in this case, particularly because Microsoft did not merely bundle with Windows the APIs from IE, but an entire browser application (sometimes even without APIs . .).  A justification for bundling a component of software may not be one for bundling the entire software package, especially given the malleability of software code. . . .  Furthermore, the interest in efficient API diffusion obviously supplies a far stronger justification for simple price-bundling than for Microsoft's contractual or technological bars to subsequent removal of functionality.  But our qualms about redefining the boundaries of a defendant's product and the possibility of consumer gains from simplifying the work of applications developers makes us question any hard and fast approach to tying in OS software markets. [*94]

There may also be a number of efficiencies that, although very real, have been ignored in the calculations underlying the adoption of a per se rule for tying.  We fear that these efficiencies are common in technologically dynamic markets where product development is especially unlikely to follow an easily foreseen linear pattern. * * *

These arguments all point to one conclusion: * * * We do not have enough empirical evidence regarding the effect of Microsoft's practice on the amount of consumer surplus created or consumer choice foreclosed by the integration of added functionality into platform software to exercise sensible judgment regarding that entire class of behavior.  (For some issues we have no data.)  "We need to know more than we do about the actual impact of these arrangements on competition to decide whether they . . . should be classified as per se violations of the Sherman Act." White Motor, 372 U.S. at 263.  Until then, we will heed the wisdom that "easy labels do not always supply ready answers," Broad. Music, 441 U.S. at 8, and vacate the District Court's finding of per se tying liability under Sherman Act § 1.  We remand the case for evaluation of Microsoft's tying arrangements under the rule of reason. . . .  That rule more freely permits consideration of the benefits of bundling in software markets, particularly those for OSs, and a balancing of these benefits against the costs to consumers whose ability to make direct price/quality tradeoffs in the tied market may have been impaired. . . . [*95] . . .

Our judgment regarding the comparative merits of the per se rule and the rule of reason is confined to the tying arrangement before us, where the tying product is software whose major purpose is to serve as a platform for third-party applications and the tied product is complementary software functionality.  While our reasoning may at times appear to have broader force, we do not have the confidence to speak to facts outside the record, which contains scant discussion of software integration generally.  Microsoft's primary justification for bundling IE APIs is that their inclusion with Windows increases the value of third-party software (and Windows) to consumers. . . .  Because this claim applies with distinct force when the tying product is platform software, we have no present basis for finding the per se rule inapplicable to software markets generally.  Nor should we be interpreted as setting a precedent for switching to the rule of reason every time a court identifies an efficiency justification for a tying arrangement.  Our reading of the record suggests merely that integration of new functionality into platform software is a common practice and that wooden application of per se rules in this litigation may cast a cloud over platform innovation in the market for PCs, network computers and information appliances.  

C. On Remand

Should plaintiffs choose to pursue a tying claim under the rule of reason, we note the following for the benefit of the trial court:

First, on remand, plaintiffs must show that Microsoft's conduct unreasonably restrained competition.  Meeting that burden "involves an inquiry into the actual effect" of Microsoft's conduct on competition in the tied good market, Jefferson Parish, 466 U.S. at 29, the putative market for browsers.  To the extent that certain aspects of tying injury may depend on a careful definition of the tied good market and a showing of barriers to entry other than the tying arrangement itself, plaintiffs would have to establish these points. . . .  But plaintiffs were required—and had every incentive—to provide both a definition of the browser market and barriers to entry to that market as part of their § 2 attempted monopolization claim; yet they failed to do so. . . .  Accordingly, on remand of the § 1 tying claim, plaintiffs will be precluded from arguing any theory of harm that depends on a precise definition of browsers or barriers to entry (for example, network effects from Internet protocols and extensions embedded in a browser) other than what may be implicit in Microsoft's tying arrangement.  

Of the harms left, plaintiffs must show that Microsoft's conduct was, on balance, anticompetitive.  Microsoft may of course offer procompetitive justifications, and it is plaintiffs' burden to show that the anticompetitive effect of the conduct outweighs its benefit.  

Second, the fact that we have already considered some of the behavior plaintiffs allege to constitute tying violations [*96] in the monopoly maintenance section does not resolve the § 1 inquiry.  The two practices that plaintiffs have most ardently claimed as tying violations are, indeed, a basis for liability under plaintiffs' § 2 monopoly maintenance claim.  These are Microsoft's refusal to allow OEMs to uninstall IE or remove it from the Windows desktop, . . .and its removal of the IE entry from the Add/Remove Programs utility in Windows 98. . . .   In order for the District Court to conclude these practices also constitute § 1 tying violations, plaintiffs must demonstrate that their benefits—if any, . . .—are outweighed by the harms in the tied product market. See Jefferson Parish, 466 U.S. at 29.  If the District Court is convinced of net harm, it must then consider whether any additional remedy is necessary.  

[W]e also considered another alleged tying violation—the Windows 98 override of a consumer's choice of default web browser.  We concluded that this behavior does not provide a distinct basis for § 2 liability because plaintiffs failed to rebut Microsoft's proffered justification by demonstrating that harms in the operating system market outweigh Microsoft's claimed benefits.  On remand, however, although Microsoft may offer the same procompetitive justification for the override, plaintiffs must have a new opportunity to rebut this claim, by demonstrating that the anticompetitive effect in the browser market is greater than these benefits.  

Finally, the District Court must also consider an alleged tying violation that we did not consider under § 2 monopoly maintenance: price bundling.  First, the court must determine if Microsoft indeed price bundled—that is, was Microsoft's charge for Windows and IE higher than its charge would have been for Windows alone?  This will require plaintiffs to resolve the tension between Findings of Fact ¶ ¶ 136-37, which Microsoft interprets as saying that no part of the bundled price of Windows can be attributed to IE, and Conclusions of Law, at 50, which says the opposite. . . .  

If there is a positive price increment in Windows associated with IE (we know there is no claim of price predation), plaintiffs must demonstrate that the anticompetitive effects of Microsoft's price bundling outweigh any procompetitive justifications the company provides for it. . . . [*97] . . .

If OS vendors without market power also sell their software bundled with a browser, the natural inference is that sale of the items as a bundle serves consumer demand and that unbundled sale would not, for otherwise a competitor could profitably offer the two products separately and capture sales of the tying good from vendors that bundle.  * * *

Of course price bundling by competitive OS makers would tend to exonerate Microsoft only if the sellers in question sold their browser/OS combinations exclusively at a bundled price.  If a competitive seller offers a discount for a browserless version, then—at least as to its OS and browser—the gains from bundling are outweighed by those from separate choice.  The evidence on discounts appears to be in conflict. . . .  If [it] is correct that nearly all OS makers do not offer a discount, then the harm from tying—obstruction of direct consumer choice—would be theoretically created by virtually all sellers: a customer who would prefer an alternate browser is forced to pay the full price of that browser even though its value to him is only the increment in value over the bundled browser.  (The result is similar to that from non-removal, which forces consumers who want the alternate browser to surrender disk space taken up by the unused, bundled browser.)  If the failure to offer a price discount were universal, any impediment to direct consumer choice created by Microsoft's price-bundled sale of IE with Windows would be matched throughout the market; yet these OS suppliers on the competitive fringe would have evidently found this price bundling on balance efficient. . . .


V.  TRIAL PROCEEDINGS AND REMEDY

    [The D.C. Circuit vacated the district court's remedial decree " for three independent reasons: (1) the court failed to hold a remedies-specific evidentiary hearing although facts relating to the remedy were disputed; (2) the court failed to provide adequate reasons for its decreed remedies; and (3) this Court has revised the scope of Microsoft's liability and it is impossible to determine to what extent that should affect the remedies provisions."]
* * * [*105] * * *

F.  On Remand

As a general matter, a district court is afforded broad discretion to enter that relief it calculates will best remedy the conduct it has found to be unlawful. . . . This is no less true in antitrust cases. . . .  And divestiture is a common form of relief in successful antitrust prosecutions: it is indeed "the most important of antitrust remedies."  See, e.g., United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 331, 6 L. Ed. 2d 318, 81 S. Ct. 1243 (1961).  

On remand, the District Court must reconsider whether the use of the structural remedy of divestiture is appropriate with respect to Microsoft, which argues that it is a unitary company.  By and large, cases upon which plaintiffs rely in arguing for the split of Microsoft have involved the dissolution of entities formed by mergers and acquisitions. * * * [*106]

One apparent reason why courts have not ordered the dissolution of unitary companies is logistical difficulty.  As the court explained in United States v. ALCOA, 91 F. Supp. 333, 416 (S.D.N.Y. 1950), a "corporation, designed to operate effectively as a single entity, cannot readily be dismembered of parts of its various operations without a marked loss of efficiency."  A corporation that has expanded by acquiring its competitors often has preexisting internal lines of division along which it may more easily be split than a corporation that has expanded from natural growth.  Although time and corporate modifications and developments may eventually fade those lines, at least the identifiable entities preexisted to create a template for such division as the court might later decree.  With reference to those corporations that are not acquired by merger and acquisition, Judge Wyzanski accurately opined in United Shoe:
    "United conducts all machine manufacture at one plant in Beverly, with one set of jigs and tools, one foundry, one laboratory for machinery problems, one managerial staff, and one labor force.  It takes no Solomon to see that this organism cannot be cut into three equal and viable parts."  
United States v. United Shoe Machine Co., 110 F. Supp. 295, 348 (D. Mass. 1953).  

Depending upon the evidence, the District Court may find in a remedies proceeding that it would be no easier to split Microsoft in two than United Shoe in three.  Microsoft's Offer of Proof in response to the court's denial of an evidentiary hearing included proffered testimony from its President and CEO Steve Ballmer that the company "is, and always has been, a unified company without free-standing business units.  Microsoft is not the result of mergers or acquisitions."  Microsoft further offered evidence that it is "not organized along product lines," but rather is housed in a single corporate headquarters and that it has
    "only one sales and marketing organization which is responsible for selling all of the company's products, one basic research organization, one product support organization, one operations department, one information technology department, one facilities department, one purchasing department, one human resources department, one finance department, one legal department and one public relations department."  
If indeed Microsoft is a unitary company, division might very well require Microsoft to reproduce each of these departments in each new entity rather than simply allocate the differing departments among them.  

In devising an appropriate remedy, the District Court also should consider whether plaintiffs have established a sufficient causal connection between Microsoft's anticompetitive conduct and its dominant position in the OS market.  "Mere existence of an exclusionary act does not itself justify full feasible relief against the monopolist to create maximum competition."  3 AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 650a, at 67.  Rather, structural relief, which is "designed to eliminate the monopoly altogether . . . requires a clearer indication of a significant causal connection between the conduct and creation or maintenance of the market power."  Id. ¶ 653b, at 91-92 (emphasis added).  Absent such causation, the antitrust defendant's unlawful behavior should be remedied by "an injunction against continuation of that conduct."

.. . . [W]e have found a causal connection between Microsoft's exclusionary conduct and its continuing position in the operating systems [*107 ]market only through inference. . . .  Indeed, the District Court expressly did not adopt the position that Microsoft would have lost its position in the OS market but for its anticompetitive behavior.  Findings of Fact ¶ 411 ("There is insufficient evidence to find that, absent Microsoft's actions, Navigator and Java already would have ignited genuine competition in the market for Intelcompatible PC operating systems.").  If the court on remand is unconvinced of the causal connection between Microsoft's exclusionary conduct and the company's position in the OS market, it may well conclude that divestiture is not an appropriate remedy.  

While we do not undertake to dictate to the District Court the precise form that relief should take on remand, we note again that it should be tailored to fit the wrong creating the occasion for the remedy.  

G. Conclusion

In sum, we vacate the District Court's remedies decree for three reasons.  First, the District Court failed to hold an evidentiary hearing despite the presence of remedies-specific factual disputes.  Second, the court did not provide adequate reasons for its decreed remedies.  Finally, we have drastically altered the scope of Microsoft's liability, and it is for the District Court in the first instance to determine the propriety of a specific remedy for the limited ground of liability which we have upheld.

VI. JUDICIAL MISCONDUCT
* * *
    [The D.C. Circuit disapproved the conduct of the trial judge and disqualified him from hearing the remedial phase of the case.  The disqualification was based upon Judge Jackson's public comments on the case, often in ways unfavorable to Microsoft.
    The trial judge had reportedly given reporters secret interviews after the close of evidence but the entry of his final judgment, on the understanding that their reporting would await the entry of his final judgment.  After entering final judgement, but before ruling on the case's remedial phase, he also had spoken liberally about the case to reporters, as well as to a few groups, in ways unfavorable to Microsoft.  In the appellate court's view, these actions violated Canons 2 and 3A(6) of the Code of Conduct for United States judges which required, respectively, avoiding "impropriety and the appearance of impropriety" and refraining from "public comment on the merits" of pending cases.
    The appellate court apologized for using media reports of the trial judge's comments (which could be hearsay) as evidence, but it saw the weight of the evidence as so strong that it would be needlessly inefficient to remand the case for fact-finding on these points. (A representative sample of the judge's reported public comments is reproduced in the second Note below.)
    For two reasons, the appellate court did not vacate all of the trial judge's findings of fact.  First, "the most serious judicial misconduct occurred near or during the remedial stage[.]"  Second, Rule 52(a) of the Federal Rules of Civil Procedure, which require deference to trial courts on matters of fact, provided "no middle ground."   Reasoning it would have to accept or reject all of the trial courts' findings, the court accepted all of his findings of fact and vacated only the remedial order, remanding for an evidentiary hearing on the remedy and a determination of what remedy was proper.]

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