The Antitrust Butlc.'iii/'Wiiuer 2001 645
Standard Oil and Microsoft— intriguing parallels or limping analogies?
BY JOHN J. FLYNNf
I. Introduction
The computer industry and the law of antitrust have been pre occupied with the struggle between the federal and several state governments and Microsoft for most of the past decade, Microsoft’s use of its domination over the personal computer (PC)
* Hugh B, Brown Professor of Law, College of Law, University of Utah. AUTHOR’S NOTE: I appreciate the comments and criticisms of earlier drafts of this article by Professor Harry First and Professor Darren Bush. Neither is responsible for any of the views or conclusions expressed herein. The views expressed in this article are mine and have not been solicited, encouraged, supported or paid for by any person, cor poration. think tank or other entity with any relationship to any litiga tion, legislation, ideology or legal or economic issue of any kind related to this topic. I did give some thought to creating a "Foundation ” like the Truth and Justice Foundation or “Institute" like the Institute for the Pro tection of the Competitive Process and the American Way and designat ing myself as President or Fellow thereof. A lack of funding overcame the temptation.
& 2002 by Federal Legal Publications, Inc. 6 4 1) : The antitrust bulletin Standard oil and insert)soft : 64?
industry by virtue of its control of the operating system software can only speculate what the market for petroleum products might for the ubiquitous persona] computer has been the focus of contin look like today if a single firm continued io dominate the refining uing antitrust controversy. This article began as a response to an and the transportation of crude and refined petroleum products, effort to discount the similarities between monopolization charges just as one can only speculate what the PC market would look like against Microsoft brought by the Antitrust Division and several 10, 20 or 50 years from today if a single firm controls the operat Kates and those launched almost a century before against the ing system, application program interfaces and the Internet com Standard Oil Company of New Jersey. It evolved into a broader munications link for PCs. Suffice it to say, it has long been article as it became apparent that seemingly modern concepts like assumed that the consequences of such a state of affairs inex "strategic conduct," "raising a rival’s cost,” "predatory pricing," orably lead to the policy judgment that either a monopolized ;ind “network effects.’' are really not that new and were tactics activity be regulated by a competitive process or by affirmative used by Standard Oil to gain mastery over the refining and trans government regulation. The economic, political and social conse portation of crude and refined oil in the latter pari of the 19th cen quences of the alternative of leaving uncontrolled monopoly con tury, In the M icrosoft case, allegations that Microsoft engaged in trol over a basic industry or technology in private hands and free "strategic conduct" in licensing its dominant Windows operating from the discipline of a competitive process are assumed to be too system and used the power of the “network effects” conferred by dire for the good of society. The M icrosoft case2 however, raises its installed base on the vast majority of PCs to maintain its the deeper question in the minds of a few of whether this policy monopoly of the operating system market for PCs evoked echoes judgment should any longer be entertained or addressed in the from the similar allegations made against Standard Oil gaining and context of an antitrust lawsuit in light of the dynamic and com maintaining its monopoly over oil refining. While the tactics fol plex industry involved—an additional policy position explored lowed by Microsoft and Standard Oil look place in quite different and rejected by this article. businesses having characteristics unique to the products they each The M icrosoft case is significant for several additional rea produced, the consequences of the exclusionary behavior followed sons: it is a case with substantial implications for the evolution of have been similar—domination of the industries they each oper a new and revolutionary technology of basic importance to the ated in and the acquisition of power to determine the price, innova economy; it is a case shifting the focus of antitrust policy from a tion and other efficiencies at all levels of those industries and the preoccupation with short-term or static allocative efficiency to rights of competitors to succeed or fail on the competitive merits. one emphasizing the long-run economic significance of innova Standard Oil was broken into 34 parts pursuant to an antitrust tion efficiency as a value protected by antitrust policy; it is a case decree affirmed by the United Stales Supreme Court in 1911. Its challenging the ability of the legal process to deal expeditiously market share of refining declined from 80% in 1910 to a market and effectively with alleged displacements of the competitive pro share for the divested parts of Standard Oil of 40% in 1940.1 One cess in the context of a complex and dynamic industry; and, it is a case raising the significance of workable remedies to the effec 1 See William S. Comanor & F.M. Scherer, Rewriting History: The tiveness of antitrust policy. Each of these implications of the Eitrlv Shaman Act Monopolization Cases, 2 I n t’l J. Econ. & Bus. 263 1 1995); William S. Comanor, The Problem of Remedy in Monopolization 2d Cities: The Microsoft Case as an Example, 44 Antitrust Bull. 115, 119 3 United States v. Microsoft Corp., 84 F. Supp. 9 (D.D.C. 1999} 2d 30 2000) (2001). Professor Comanor points out that in major monopolization cases (hereinafter, Findings of Fact); 87 F, Supp. (D.D.C. (here lost by the government against U.S. Steel, United States Steel, American inafter, Conclusions of Law); a ff d in part and rev 'd in part, 253 F, id 34 (D C-Cir. 2001). Can and International Harvester the successful defendants in those cases “invariably failed in the marketplace.1’ Id. at 120. 648 The antitrust bulletin Standard oil and microsoft : 649
M icro so ft case bear a striking resemblance to the Standard Oil ogy threatening their monopoly over a key part of the industry in case at the beginning of the 20th century.3 which they operated. The M icro soft case, like the Standard Oil case of 1911, with claims of tying, price discrimination, raiding A comparison of the two cases and the facts giving rise to rivals’ costs and strategic conduct, offers the opportunity to com antitrust challenges to their domination of a new and basic tech pare the tactics followed to gain and/or maintain monopoly power. nology suggests that both firms also followed a similar exclusion This article concludes that the Standard Oil case of 1911 offers ary path in achieving and maintaining dominance of the intriguing parallels and not limping analogies for the M icrosoft technology. Through a combination of the good fortune of being case of 2000. And both cases challenge the historic resolve of the m the right place at the right time, the foresight to appreciate what common law that an antitrust policy enforced through the judicial pari of a new industry would be the key to future power over the process can and must maintain a competitive process as the basic industry, the entrepreneurial drive of a single individual to capture standard under which private economic activity must and shall be control of those key parts of the industry, and a willingness to governed in significant and basic areas of the economy.5 engage in practices generally incompatible with a competitive process determining success or failure in the industry. Standard Property and Sovereignty, 13 C ornell L.Q. 8 (1928); Roscoe Pound. Oil and Microsoft gained, maintained or extended monopoly Liberty of Contract, 18 V a l e L . J. 454 (1909). A logically consistent, if power over their respective industries by means found to be in simplistic, position opposed to any government interference with “free violation of the Shennan Act. Both firms were found to have used markets,” for example, ought lo oppose all government interference with related industries to exclude competitors in violation of the man property and contract rights, including the recognition and enforcement date of antitrust policy that a "‘competitive process”—not collu of such rights. Might makes right would then be the order of the day rather than the complex mass of government interferences in the market sion or market power—govern trade and commerce in our like contract law, property law, tori Jaw, commercial law, intellectual economy wherever possible.-* Both firms coopted a new technol- property regimes and so on, either assumed or relied upon by opponents of government interference with the exercise of property and contract ■ United States v. Standard Oil Co., 173 F. 177 (E.D. Mo. 1909) rights. “Markets” cannot exist for the benefit of all without government Uiff'd, with remand on timing of remedy) Standard Oil Co. v. United defining and enforcing contract, property and a host of other lights and States, 221 U.S. 1(1911). liabilities—the scope of, limitation upon and means for enforcement of such rights. A significant infrastructure of law has been created to do just 4 The antitrust laws are designed to maintain a “competitive pro that—a public benefit recipient of these rights cannot take advantage of cess” as the rule of trade, not protect “compedDon” or competitors. The without bearing the burdens necessarily attached to the benefit created; concept of "competition’7 has become synonymous with “allocative effi burdens necessary to foster and protect the rights of all to those same ciency only” in the minds of many. The concept of “competitive process” benefits. See John J. Flynn, An Antitrust AUegory, 38 H a stin g s L .J, 517, connotes a broader range of economic, political and social goals for 537-38 (1987). ' antitrust policy. A consequence of invoking the connotation of a broader range of antitrust policy goals is to denote a greater range of structural 5 Early in the history of the common law and down to the present and behavioral practices falling within the prohibitions of the antitrust day, a judicially implemented policy that property and contract rights be laws. See John J. Flynn, Antitrust Policy and the Concept of a Competi exercised within the limitations of a state-maintained competitive process tive Process, 35 N.Y.L. Sen. L. Rev. 893 (1990). has been recognized as an inherent and essential part of and limitation Government responsibility for maintaining a “competitive process” upon the definition and enforcement of contract and property rights. It also makes clearer the role of government defined and protected property has long been recognized that one person’s property and contract rights and contract rights to the protection and existence of competitive process may not be used to deny or infringe upon the property and contract rights open to all members of society. It may be a paradox to some, but such of others by displacing the competitive process determining their success rights have long been recognized as state defined and enforced rights, not or failure and where an injury to the public could be identified as a result some sort of inherent right created out of “the ether.” See Felix Cohen, of competition being displaced. Some of those injuries were identified in 650 : Tiit1 antitrust bulletin Standard oil and micro sot! : 651
In nn article titled Microsoft and Standard Oil: Radical W. Folsom3 purport to compare the Standard OH case of 1911s* Lessons for Antitrust Reform,6 Donald J. Boudreaux7 and Burton w ith the M icro soft case of 2000.lc> Their comparison finds no sim ilarity between the two cases other than neither firm deserved to die Case of Monopolies, 16 Coke 84, 7? Eng. Rep. 1260 fKmg’s Bench be condemned as an unlawful monopolist under the Sherman Act and that boih firms were models of economic “efficiency" and There are three inseparable incident* to every monopoly; (1) That “innovation." The comparison misstates the findings of fact and ihe price will be raised, (2) After the monopoly grant, the iommad- law of the Standard Oil case, ignores the exclusionary practices of ity is not so good as it was before. (3) It lends to the impoverish Standard Oil and Microsoft, misses the legal/econonuc objectives ment of divers artificers and others who before by their labour had of both cases, and misrepresents the purposes of the antitrust laws maintained themselves and their families, who now will of neces sity be constrained to live in idleness and beggary. . . . A society and law' generally. Aside from these limitations and its ranting in which a tew men are the employers and the great body are tone, the article is a spirited polemic, if not an illuminating or merely the employees or servants, is not the mosl desirable in a informative exploration of either the Standard Oil case or the republic; and it should be as much the policy of the laws to multi M icro soft case. ply the numbers engaged in independent pursuits or in the profits of production as to cheapen the price to consumers. This article both responds to Boudreaux and Folsom’s critique o f the Standard Oil and M ic ro so ft cases and explores the deeper A n even more significant long-term injury to the public raised by per sistent monopoly power from an economic view is the delay or denial of question of which tactics used by a firm to gain or maintain domi new innovations being brought to the market: because of lack of a com nance of an industry should or should not be declared unlawful petitive need or incentive to do so where restraints of trade or monopoly under the antitrust laws. The record in the M icrosoft case is a well power displace the competitive process determining technological change documented one of the company orchestrating a series of actions and open market access for new innovation. See Joseph Brodley, The with suppliers and customer* to maintain Microsoft’s monopoly Economic Goals of Antitrust: Efficiency. Consumer Welfare, and Techno power over the operating system, application program instructions logical Progress, 62 N.Y.U. L. R e v , 1020. 1027 (1987); John J. Flynn, Antitrust Policy, Innovation Efficiencies and the Suppression of Technol ogy, 66 A n t it r u s t L. J. 487 (1998). Both the Standard Oil and Microsoft nomic Education. The foundation sponsors “Freeman Society Discussion cases posed this most basic economic concern to the future of the indus Groups’’ and apparently publishes books that appear to range from con tries they came to dominate by erecting substantial entry barriers to new servative to right wing in ideology. Funding sources for the foundation innovation. are not revealed in the Web site. 6 Donald J. Boudreaux & Burton W. Folsom, Microsoft atid Stan * Folsom is identified as the “Chief Historian, for the Center for the dard Oil: Radical Lemons for Antitrust Reform, 44 Antitrust B u l l . 555 American Idea,” located in Houston, Texas. The Web page for the Cen (1999). ter,
trade and commerce in petroleum products by securing from jargon of today, Standard Oil engaged in “strategic conduct” in “common carriers preferential rates and rebates”; acquisitions of collusion with a cartel of railroads raising the costs of Standard’s competitors; agreements with competitors limiting production and rivals.16 By conspiring with railroads to raise the transportation output and dividing markets; operating companies represented to rates of competing refiners while cutting its own. Standard Oil be independent when they were not; securing information from was able to acquire or drive out of business refinery competitors railroad employees to destroy the business of competitors; and victimized by its practices. Standard Oil gained and maintained its selling products below cost to drive out competitors.13 As clearly monopoly over refining and ultimately over crude and product demonstrated by the widely accepted study of Standard Oil’s pipelines by manipulating a railroad cartel that it managed, not by practices by Elizabeth Granitz & Benjamin Klein,N competitors local price discrimination as some would have it.17 were either driven from the market by manipulation and orchestra tion of transportation rates in combination with the railroads public officials; or, its numerous acquisitions of competitors and market transporting crude oil to refineries and refined product to market; divisions. Nor is there any mention of the leading article by Gran it/ it Klein, supra note 14, destroying the myth that the Standard Oil case was bought out under threat of being driven from the market by dis premised upon a claim of predatory pricing and that Standard Oil gained criminatory transportation rates; or, were persuaded to join the its monopoly by being more efficient than its competitors. Standard Oil Trust and enjoy the fruits of its growing monopoly 1" For an extensive review of Standard Oil’s role in organizing and over refining and transportation of crude and refined oil products enforcing a railroad cartel between the Erie Railroad, The New York under the threat of being driven from the market by virtue of Centra] and The Pennsylvania Railroad fixing the price for transporting Standard’s control over transportation rates and refining.13 In the oil and dividing the market between the otherwise competing railroads, .fee Granitz & Klein, supra note 14. The concept of raising a rival's cost ^ Standard Oil Co.. 173 F. at 190. Professor David N. Chalmers in as a means for restraining or monopolizing trade is set forth in Thomas his introduction to a 1966 edition of Ida Tarbell’s, The History of the G. Krauenmaker & Steven C, Salop. Anticompetitive Exclusion: Rat sing Standard Oil Comjahv originally primed as a series of articles in a Rival's Cost to Achieve Power Over Price, 92 Yale L. J. 209 (1986) McClure's Magazine beginning in 1902, commented thal John D. Rocke 17 Boudreaux & Folsom appear to assume thal the government's case feller and his associates “fought their way to control by rebate and draw was based solely on a claim that Standard Oil gained its monopoly as a back, bribe and blackmail, espionage and price cutting, and perhaps even result of “predatory price-cutting,” supra note 6. at 559. They rely upon a more important, by ruthless, never slothful efficiency of organization and study by one they call ^the authority on this issue,” John J. McGee. production.” Id. at xiii, Although Rockefeller's Standard Oil obtained its Predatory Pricc Cutting: The Standard Oil (N.J.) Case, 1 J. L. Econ. 137 monopoly by means “not honestly industrial”—indeed, often ruthlessly, (1958). McGee’s study, in light of the record of the case charging Stan it was also operated as .in efficient, if not always a progressive and inno dard Oil with a variety of strategic conduct well beyond “predatory iocat vative. enterprise. price cutting," misrepresents ihe basis of the Sherman Act case against N Elizabeth Granitz & Benjamin Klein, Monopolization by "Raising Standard Oil. They also rely upon Frank H. Easterbrook, Predatory a Rival's Cost: ” The Standard Oil Case, 39 J. L, & Econ, 1 (1996). Strategies and Counterstrategies, 48 U. Chi. L. Rev. 263 (1981), which also characterizes the Standard Oil case as one involving “price cutting” 15 Boudreaus & Folsom, supra note 6, at 560 assert: “Standard Oil’s driving competitors into bankruptcy. Id. at 265. Much of ihe rest of East- large market share resulted from Rockefeller’s obsession with increasing erbrook’s article consists of an abstract analysis premised upon staric its operating and distribution efficiencies. . . Some monopolists, at economic models, not often encountered in reality or elsewhere, knock least in the short run, can be efficient. The question is whether their ing down the siraw-person of predatory pricing under conditions of per monopoly is gained or maintained by legitimate means. No mention is fect competition erected at the beginning of the article. Instead of made about the practices of Standard Oil organizing and managing a rail analyzing the facts of the case in light of the law, the article ends up ana road cartel to drive out competing refineries; its coercive tactics lyzing the conclusions of the model in light of its assumptions. Empiri employed to take over the new technology of oil pipelines; bribery of cally based economic analysis has demonstrated thal predatory pricing 6 5 6 : The antitrust bulletin Standard oil and microsaft : 657
Standard Oil's manipulation of transportation rates driving out Cleveland refinery, and refined product from Cleveland to product competitors and gaining control over the means of transporting markets in New York City and other major markets for sale and/or crude and refined product was first used early in the history of the export.19 Rockefeller engineered an agreement between the three company in an event called the Cleveland Massacre. Transporting leading railroads (the Pennsylvania, Erie and New York Central) crude oil to refineries and refined product to consumer markets and a shell corporation, The South Improvement Corporation constituted a significant cost factor for producers and refiners.iS (SIC) chartered by the Pennsylvania Legislature and controlled by John D. Rockefeller, operating a refinery in Cleveland, recognized Rockefeller and a few other Cleveland refiners.20 The railroads, this fact early in the development of the industry and managed to anxious to end cutthroat rate competition among themselves,11 not secure substantial and secret rebates on transportation charges via See. Chernow supra note II, at 112-17, 133-48. One secret pipeline and rail from crude oil fields in Pennsylvania to his rebate was 75% on oil shipped through a pipeline controlled by Jay Gould from the Pennsylvania oil fields to Cleveland, and comparable viewed through the lens of strategic conduct is far more common than secret rebates from railroads serving the same routes. There was substan Eusterbrook and the courts have assumed and that it is a practice compe tial overcapacity of rail transport in the area and Rockefeller offered as tition policy should evaluate with great care and not dismiss out of hand. an incentive to the rail lines for rebates the efficiency of consolidating See Joseph Brodley, Patrick Bolton & Michael Riordan, Predatory Pric shipments of refined product from Cleveland to New York. In addition, ing; Strategic Theory and Legal Policy. 88 Geo. L.J. 2239 (2000). Rockefeller agreed to divide up shipments among the railroads in The Standard Oil case was not one based exclusively or even primar exchange for managing the cartel, rebates on shipments by Standard Oil ily on predatory local price cutting but was a case of raising rivals’ costs (25%—45% on refined product and 40%-50% on crude) not accorded to by manipulation of rail and pipeline transportation rates driving competi competitors, “drawbacks"—payments to Standard on the petroleum tors from the market or into the hands of the Standard Oil Trust. While shipped by Standard’s competitors over the railroads, and specific infor predatory local price cutting was a pan of Standard Oil's overall tactics mation on all oil shipped by competitors over the railroads. In effect, the to control local distribution of kerosene, Standard’s primary weapon for railroads entered into a price-fixing and market division cartel with Stan gaining and maintaining control of refining was the orchestration of dard Oil acting as manager of the cartel. The railroads paid Standard for transportation rales to the advantage of Standard Oil and the disadvan its service as cartel manager by price cuts and payments by the railroads tage of competing refineries and for the purpose of taking over control of to Standard (drawbacks) for shipments made by Standard’s competitors transportation of oil by independent long-distance pipelines. For a com over the lines of the cartel members. Sec Hans B. Thorelli, The Federal prehensive review of the case refuting McGee’s study, see Granitz & Antitrust Policy: Origination of an American Tradition 92-103 (1954). Klein, supra note 14. Analyzing a case by assuming it was based on one x See Chernow, supra note 11, at 135-37. Ida Tarbell. despite her set of facts when it was based on another set of facts may fit the demands possible bias against Standard Oil as the daughter of a victimized oil pro of the ideology underlying the assumptions of a static model of perfect ducer in the Pennsylvania area where oil was first discovered, carefully competition concerned solely with allocative efficiency, but hardly meets documented the extensive collusion between the railroads and Standard the requirements of a serious legal, economic or historical analysis. Oil destroying competition by small producers and refiners in The His 1:3 In the early history of the oil industry, most crude oil was refined tory of the Standard Oil Company (Chapman ed. 1966). to produce kerosene and a large percentage of kerosene was exported to 21 The natural monopoly characteristics of railroads made inevitable foreign markets where the demand was much greater than in the United rate wars between competing long-haul lines. The absence of effective States. Because refining reduced the volume of crude substantially, total rate regulation and excess capacity generated repealed rate wars between transportation costs for kerosene including the cost of transporting crude railroads competing for the oil business and drove rates below any ability to the refinery constituted 40% of the export price. Gaining a significant to recover fixed costs. The only alternative to being driven into cost advantage in crude oil deliveries, carried with it a substantial price bankruptcy was for railroads to form cartels fixing prices and allocating advantage in transporting and selling refined product. See Granitz & traffic among themselves. The cartels soon fell victim to cheating by Klein, supra note 14, at 5. members of the cartel and repeatedly fell apart until Standard Oil. a dom inant customer, organized and managed the cartel agreement of the rail- t>58 : The itiitiH u u bulletin Standard oil and micros oft : 659 only gave members of SIC re bales up to 50% on crude and refined sacre began a pattern of manipulation of transportation rales and oil shipments they made, but also "drawbacks” or payments to control of transportation for crude and refined petroleum products Standard Oil on every barrel of oil or refined product shipped by by Standard Oil to the substantial disadvantage of competitors, refiners competing with Standard O il.- the acquisition or elimination of competitors under the threat of being driven from the market, the manipulation of rail rates Transportation rebates and the imposition of higher rates on to destroy and then take over new technologies like the trans competing refineries with drawbacks paid by competing refiners portation of crude and refined product by pipeline, and the ulti to the railroads and turned over to Standard Oil gave Rockefeller mate domination of the entire oil industry by the Standard Oil a substantial price advantage over competing refiners in Cleve Com pany.14 land. as well as those in Pittsburgh and Philadelphia. All hough ihe SIC scheme collapsed once ihe secret terms of the agreement denied he had a primary role in the formation of SIC. C hlrncw maintains became public, the threat of ruinous transportation rates was suffi that “he look a leading role and zealously promoted it.” Id. ul 137. Stan cient to enable Rockefeller to take over 22 of his 26 Cleveland dard Oil became what Thomas G. Krattenmaker & Stephen C. Salop, refinery competitors over a 6-week period.-3 The Cleveland Mas- supra note J6, at 238. called a “cartel ringmaster” by inducing collusion between the railroads to both discriminate in transportation rates and roads o'.er oil shipments. As Herbert Hovenkamp observed: "In no other refuse to deal with Standard's refining competitors on an equal looting, a industry have attempts at both legal and illegal cartelization been so per pattern of conduct Standard Oil carried on for several years after the col sistent, widespread, systematic, or ultimately doomed to failure," Herbert lapse of the SIC scheme. Hovenkamp, Regulatory Failure tit the Gilded Age: Federalism and the :J Standard Oil also gained control of tank cars for carrying oil Railroad Problem. 91 Y a l e L.X. 1017, 1(353 (1988). State regulatory through investments in rolling stock when railroads refused to do so. authority was limited lo regulation of short-haul traffic originating and Rockefeller then used his overwhelming dominance over lank cars owned ending within the regulatory stale and federal regulation, not instituted by Standard Oil to gain discriminatory rates from railroads in need of his until 18S7, was limited to regulation of rates for traffic physically cross lank ears to transport oil. See C h e r n o w , supra note II, at J70. Rocke ing state lines by virtue of narrow court interpretations of the Commerce feller belatedly recognized the advantage of transporting crude and Clause of the United States Constitution. By stepping in as manager, in refined product by pipeline and launched the American Transfer Com effect, of a railroad cartel for oil shipments. Standard Oil was able to pany to build Standard’s own pipeline system, while secretly taking over benefit the railroads by eliminating rate wars over the traffic between United Pipe Lines to build an integrated pipeline system and gain dis members of the cartel and prevent cheating by cartel members while ben criminatory pipeline rates and quotas for Standard Oil from the combined efiting Standard Oil by using its preferential rales to drive out or take system. See id at 171-72. over competing refineries. An attempt by the Pennsylvania Railroad to challenge Standard’s Chernow also attributes the willingness of the railroads to enter crude transportation stranglehold in IS77 was met with a refusal to deal into the agreement to their desire to end the fierce competition between with the Pennsylvania Railroad, a closing of Standard refineries served lhem for shipping crude and refined product and Standard’s agreement lo by (he Pennsylvania, increased throughput from other Standard refineries, even oui shipments by dividing the market between the previously com directions to undersell the Pennsylvania Railroad’s refineries, and dis petitive railroads and enforcing the cartel agreement. Chernow. supra criminatory freight rates negotiated by Standard with the Erie Railroad note 11. at 136. and New York Central forcing the Pennsylvania to cut rates. In coping with the all-out economic warfare launched by Standard Oil, the Pennsyl :s Id. at 144. John D. Rockefeller’s brother Frank, testified that Stan vania Railroad laid off workers, reduced wages and increased workloads. dard Oil told Cleveland refiners that the combination with the railroads Railroad workers struck and triggered a bloody strike that resulted in would enable Standard to “buy out all the refiners in Cleveland” and thai widespread violence, destruction of equipment and buildings ultimately those who refused “will be crushed.” Id. at 195. The threat of being forcing the Pennsylvania to sell out its refining and transportation assets forced from business because of discriminatory rail rates was the primary to Standard Oil. As part of the arrangement, Standard received a 10% incentive tor competitors to sell out to Rockefeller Although Rockefeller 660 : The antitrust bulletin Standard oil and micro soft : 661
In order to maintain control over its then patchwork pipeline Maryland, Standard bought an exclusive pipeline franchise from system and discriminatory railroad rates. Standard engaged in a the State of Maryland, bought up storage tank manufacturer number of exclusionary tactics to prevent the new innovation of capacity, obtained agreements from railroads to prohibit compet long-distancc pipelines delivering crude to competing refineries ing pipelines from crossing their right of way, and bought up from taking place.15 To prevent a pipeline from being built across strips of land from farmers to block access for the new pipeline.24 When these steps failed to stop construction of the new long-dis rebate on every barrel of oil il shipped over the Pennsylvania Railroad, tance pipeline. Standard Oil turned to bribery of elected officials [he power to allocate shipments between the competing railroads, and a in Pennsylvania and New York to prevent the new pipelines from 20-cent per barrel drawback on every barrel of crude shipped over the using ihe power of eminent domain to construct their lines.-' Pennsylvania Railroad by Standard's competitors. id. at 201-03. Despite these efforts, a major independent crude line was finally Simultaneously, Standard Oil also obtained control over the pipeline competing with the Baltimore &. Ohio Railroad (B&Oi and control over completed to the east coast provoking a price and supply war crude oil supplies to Baltimore and West Virginia refineries enabling between Standard and the new pipeline. Standard acquired the Standard to squeeze them from the market and force them to sell out to east coast refiner}' customers of the new pipeline, thereby depriv Standard Oil. ing it of customers for its throughput of crude, filed harassing Extensive hearings on Standard Oil’s discriminatory rail rates were lawsuits and began a whispering campaign attacking the financial held by a committee of the New York State Legislature resulting in the Hepburn Report outlining an extensive pattern of discriminatory rail rates solvency of the Company operating the line.-8 Within a year of its for large shippers. The report stated that railroad rate favoritism toward completion, Standard Oil’s tactics drove the pipeline owners to Standard Oil was “ihe most shameless perversion of the duties of a com mon carrier to private ends . . . in the history of the world.” Quoted in pipelines to all major refining areas despite its long-standing opposition id. at 214. While some states attempted to regulate railroad rates during to relying upon the new technology. The Tidewater affair caused Stan this period and federal regulation was instituted over interstate traffic in dard to realize the future for transportation in the industry lay with 1887, neither was effective because of the division of federal and state pipelines and signaled to competitors that resistance to Standard Oil was jurisdiction under the then narrow interpretations of the Commerce futile. See id. at 215. Clause of the United States Constitution. Rate discrimination between Boudreaux & Folsom, supra cote 6, at 561, claim Standard Oil had a short-haul and long-haul traffic complicated the issue politically and the “proven record of creative innovation.’' No evidence is cited in support of complexity of regulating long-haul traffic effectively generated continued this claim. A more accurate assessment is that Standard Oil had a proven pressure to form cartels. See Hovenkamp, supra note 21. record of bare knuckled exclusionary conduct and was willing to use any means to exclude competitors. While Standard Oil operated its facilities -5 Standard Oil made substantial campaign contributions to politi efficiently and was innovative in finding uses for crude oil by-products in cians, including President Garfield, in order to block construction of oil its refining operations, its primary means for competing included manag pipelines. See Chernow, supra note 11, at 210-11. When those tactics did ing a railroad rate cartel excluding its competitors, taking over competi not succeed in blocking construction of the first major pipeline to bring tors, using assorted strong-arm tactics to take over the new innovation of crude oil to the east coast, the Tidewater Pipeline, some Standard Oil long-distance pipelines, market divisions, price discrimination, manipula officials advocated sabotaging the pipeline. Id. at 211. Rockefeller tion of the political process, bribery and related exclusionary tactics that opposed that tactic and instead began a campaign to cut the pipeline off would not be tolerated in modem times. from its crude oil shippers, buy up its independent refinery customers and cut prices on its own pipelines to dry up shipments over the Tidewater -° Chernow, supra note 11, at 207-08. Pipeline. The owner of the Tidewater Pipeline made peace with Standard 27 Id. at 209-10. within a year of completing its pipeline by agreeing with Standard to raise pipeline rates, sell a minority interest in the pipeline to Standard -s Thorelli, supra note 19, at 94, Thorelli went on to observe: . . and divide the market for crude oil shipments from Pennsylvania. See id. Standard’s monopolization of transportation facilities held the key to its at 214-15. Thereafter, Standard began a major program of building oil success,” Id. 66 2 : The antitrust bulletin Standard oil and micros oft : 663 the edge of financial failure and Standard took over the new tion from owning the stock of other corporations.3- Rockefeller pipeline and gained a stranglehold over the transportation of crude organized the multitude of different companies into a trust in 1879 and refined oil product in the Eastern United States.-9 managed by three employees of Standard of Ohio designated as Thereafter, Standard Oil relentlessly tracked refined product trustees to hold the stock of the separately incorporated compa shipments by independents and by targeted price cuts, exclusive nies controlled by Standard Oil of Ohio. -3 Thereafter, the trust dealing and manipulation of transportation rates, drove out com was revised to own the stock of separately incorporated Standard petitors and maintained a monopoly over the refining and distri Oil and other companies whose shareholders transferred their bution of petroleum products.30 Sales below cost were used to stock to the trust and were paid dividends based on the proportion drive out local competitors, although Standard recognized the of their stock to the dividends generated. By welding together the political value in tolerating marginal competitors to exist in order various companies. Standard controlled 90% of American oil to avoid "public sentiment . . . against us if we refined all the refineries and pipelines and created an integrated firm monopoliz o il."31 ing the refining and transportation sectors of the industry.54
As Standard Oil grew in size and complexity, the overall orga During this same period, a time when the bulk of Standard's nization of the company had to contend with the absence of a cor production was being exported, new competition arose in Euro poration law that might permit the organization of its many pean markets because of the discovery of major oil fields in Rus separately incorporated entities into a single corporation to man sia. and in Asia.35 Standard was able to maintain a large share of age all of its affairs. State corporation laws of the period either the European market because of the superior quality of its refined limited the authorized capital of a corporation, limited the scope kerosene, the failure of Russian producers and refiners to organize of the business permitted under its charter or prohibited a corpora-
29 C h l r n o w , supra note 11, at 214—15. 3- Justice Brandeis summarized the history of the reluctance to per mit business enterprise to make use of the corporate form to carry on 50 Id. at 256. Tactics included b r ib in g competitor employees to fur business activity in his dissent in Liggett Co. v. Lee, 288 U.S. 517, 541 nish intelligence to Standard Oil and instructions to Standard’s operatives (1933) and stated the reason for that reluctance wras “fear”: “Fear of to main Lai n at least an 85% market share in local markets. encroachment upon the liberties and opportunities of the individual. Fear 51 Id. at 259, quoting John D. Rockefeller. Chernow goes on to of the subjection of labor to capital. Fear of monopoly. Fear that the observe: “Rockefeller kept prices low enough to retain control of the absorption of capital by corporations, and their perpetual life, might bring market but not so low as to wripe out all lingering competitors.” Id. A evils similar to those which attended mortmain. There was a sense of contemporary observer of some note described Standard Oil as “an octo some insidious menace inherent in large aggregations of capital, particu pus that held the trade in its tentacles and the few actual concerns that larly when held by corporations." Liggett, 288 U.S. at 548-49. kept alive were allowed to exist by sufferance merely to maintain an 33 During the decade in which the Standard Oil Trust was in exis appearance of competition.” William Howard Taft, The Anti-Trust Act tence, 1882-1892. it was estimated that the trust acquired stock in 78 and the Supreme C ourt 86 {1914). Standard Oil significantly influenced crude oil prices, but did not fix more companies and dismantled 50 refineries. T h o r e l u , supra note 19, at them directly, by its control of storage tank capacity, railroad tank cars 96. and pipelines. Its primary control was over refined products until the 34 See Chernow, supra note 11, at 225-27 for a description of the depletion of the Pennsylvania oil fields. In the 1890s Standard began to process by which the trust was organized and management and control vertically integrate into crude oil production, beginning with large acqui were centralized. sitions in and around a new field in Lima, Ohio, to secure crude oil sup plies for its transportation and refining network. Chernow , supra note 11, 55 See id. at 243-49 describing international developments in this at 286-88. period. 664 : Tlu' aniirrusl buiittir: Standard oil and microsott : 665 their operations efficiently, and periodic agreements with foreign of the county enabling Standard Oil to divide the United States producers and refiners dividing particular markets. into 11 marketing districts in 1886 and manage each as an autonomous region under the direction and control of the New Standard also tightened its control over the domestic market York headquarters of Standard Oil. Invasions of any territory by by continuing to press for discriminatory railroad rates using not competitors were swiftly met by tracing the source of product only its buying power, but also its control over railroads as the through railroad agents and employees of competitors on Stan major supplier of railroad lubricants, ownership of most of the dard’s payroll and localized price cuts designed to prevent a com tank cars leased to railroads and growing financial investments in petitor from gaining a foothold in even the most local of markets. major rail lines.36 At the same time. Standard began a program of An espionage network was built up and maintained to trace the vertically integrating into the wholesale and retail markets for dis shipment of individual barrels of oil and refined product shipped tributing its products, particularly kerosene. While Standard did by competitors so that local competition could be swiftly so initially to capture the middleman profit on kerosene, bring excluded by localized price cutting with the full knowledge and order to what was an otherwise chaotic distribution network and support of Rockefeller. 50 insure the integrity of its product, the marketing arm of Standard wus "conducted with such controlled ferocity that they became Rockefeller justified bis actions in altruistic terms: lo bring the most hated part of the entire organization.7’37 Local managers light to even the poorest in society through the operation of a high went to great lengths to force competitors from retail markets, volume, low cost and continually growing company designed to using tactics like giving away kerosene free to exclude competi achieve the largest share of the business. Standard lowered prices tors and establishing retail grocery stores to drive out competing to meet and exclude competition and kept prices high where there retail groceries that would not sell Standard's product. was none, and often engaged in subsidizing prices at or b elo w cost in markets where it faced competition from profits in markets Standard also acquired a substantial interest in companies like where it did not face competition,40 Sales below cost were used to the Waters-Pierce Company, which dominated the oil trade west drive out local competitors, although Standard recognized the of the Mississippi, and was operated by Henry Clay Pierce, a political value in tolerating marginal competitors to exist but only businessman of whom it was said: "He couldn’t do a thing at Standard Oil’s sufferance and to minimize public fear and straight if it could be done crooked.”33 Other subsidiaries were resentment of the company.41 Rockefeller appeared to be moti created to take over the distribution business throughout the rest vated by a hostility to competition and in favor of cooperation as ^ id. at 2 5 1—52. a way to manage the oil business, so long as the terms of coopera 3‘ id. at 253. Section 2 of the Clayton Act, adopted in 1914, pro- tion were dictated by Standard Oil, Standard’s retail practices of (libiting price discrimination was enacted because of “the common prac driving out competitors and eliminating middlemen was the tice of great and powerful combinations—notably the Standard Oil Co. source of considerable criticism of the company and the and the American Tobacco Co. . . .to lower prices of their commodi widespread misconception that the company gained its monopoly ties, oftentimes below the cost of production in certain communities and sections where they had competition with the intent to destroy and make unprofitable the business of their competitors, and with the ultimate pur 39 Id. at 257. Tactics including bribing competitor employees to fur pose in view of thereby acquiring a monopoly in the particular locality or nish intelligence to Standard Oil and instructions to Standard’s operatives section in which the discriminatory price is made.” S. Rep, No. 698, at 3 to maintain at least an 85% market share in local markets. (I9I4). The Senate Report went on to describe the practice as “evil,” * Id. at 258. “unfair and unjust.” id. 41 See note 31, supra. :,a C h e r n o w , supra note 11, at 255, 6 6 6 The anriirust bulletin Standard oil and microsofl : 667 over refining by retail price discrimination and sales below cost4- 1890 the attorney general of Ohio filed an action in quo warranto despite the fact that commentators of the day, the historical record seeking repeal of Standard Oil Company of Ohio’s charter and and the government’s monopolization case make clear that Stan challenging transfer of the control of the Ohio corporation to a dard Oil gained control over the refining and transportation of trust combining Standard with more than 40 other companies crude and refined products by collusion with the railroads to fix engaged in various parts of the oil business.44 The trust arrange railroad rates and discriminate in favor of Standard Oil and ment involved the transfer of the stock in the Ohio corporation against com peting refiners.'*3 and the related companies to seven trustees and control over the affairs of the corporations to the trust under the direction and con Widespread popular hostility toward Standard Oii beyond that trol of John D. Rockefeller, The Ohio Supreme Court found this which had long prevailed among oil producers began to be divorcement of ownership from control and vesting it in the hands expressed in the form of legal actions brought by state attorneys of the trustees under the direction of Rockefeller was done “to genera] against Standard Oil and other members of the trust. In establish a virtual monopoly of the business of producing petroleum, and of manufacturing, refining and dealing in it and all 4- McGee, supra note 17, at 1.17, for example, made this unsubstanti its product throughout the country, and by which it might not ated assertion in his article: “Perhaps the most famous of all the monopo merely control the production, but the price, at is pleasure.”45 The lizing techniques thal Standard is supposed to have used is local price trust was found to be “contrary to the policy of our state, and cutting." Standard's monopolization of the refining business occurred well before it launched iis campaign of localized price discrimination and void.”46 Standard Oil of Ohio was enjoined from participating in was achieved by the establishment of a railroad cartel managed by Stan the trust and the parties were enjoined from transferring their dard Oil to drive out competing refiners and ultimately control the trans shares in the company to the trust and transferring control of the portation of crude and refined product. See Granitz & Klein, supra note company to the trust.47 Similar suits were filed against members 14. By gaining control over crude and refined oil transportation by rail and pipeline, local price discrimination and overwhelming domination of •“ State v. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279 (1892). refining. Standard was able to maintain its monopoly and fend off all Similar actions by slate attorneys general were brought against the for competitors in refining, transportation and retail distribution of petroleum mation of the Colton Oil Trust, the Sugar Trust and the Whiskey Trust. products. See T h o r e l l i, supra note 19, at 78-83. 43 See, C hf.r n o w , supra note 11. at 443. Additional hostility toward 4* Standard Oil Co., 30 N.E. at 290. Standard Oil resulted from the economic distress of producers in Kansas and Oklahoma who brought in large new oil fields producing far more oil 46 The court went on to observe that while it may be true that the than the market could handle. Overproduction brought a precipitous trust had improved the quality and cheapened the cost of petroleum to the decline in the price for crude oil and producers blamed Standard Oil for consumer, ‘‘ it is the policy of the law to regard not what may, but what manipulating prices for crude despite Standard’s efforts to explain other usually happens. Experience shows that it is not wise to trust human wise. See 1 Ral.ph W. Hidy & M uriel E, Hidy, History of Standard Oil cupidity where it has the opportunity to aggrandize itself at the expense 671-76 (1955). of others.” Id. And, quoting the Case on Monopolies, Darcy v. Allcin, Boudreaux & Folsom, supra note 6, at 560-61, attribute the declining Coke, 16, 84 at pt. 11, 84b, supra note 5, the court found that a monopoly price of kerosene lo “efficiencies that permitted Standard continually to results “in prices being raised, the commodity is not so good and mer lower prices it charged consumers,” No support is cited for the claimed chantable as before and it tend to the impoverishment of others who will "efficiencies,” While Rockefeller attributed one-half of the substantial now of necessity be contained to live in idleness and beggary.” drop in kerosene prices to Standard Oil’s efficient management, a 1900 41 A second cause of action against Standard Oil and its related com Bureau of Corporations study attributed most, if not all, of the drop in panies charging violations of the Ohio antitrust statute for forming and price to “a sharp decline in crude oil prices,” C h e r n o w , supra note 11, at operating a trust of 19 companies to fix the price and regulate the produc 258. tion of oil and refined products and divide the market for sale of refined 063 : The antitrust bulletin Standard oil tifiJ Microsoft : 669 of the Standard Oil Trust in other slates resulting in the exclusion authorizing corporations to own stock in other corporations4*5 and of members of the trust from doing business in individual states reorganized the trust arrangement into a New Jersey holding com for violations of the state’s antitrust laws.48 pany, Standard Oil Company of New Jersey, owning the stock of the same collection of corporations. Those in control of The Standard Oil Trust responded to these actions by taking the trust remained in control of Standard Oil Company of New advantage of an amendment to the New Jersey Corporation Act Jersey and the new corporation controlled the same corporations that had been placed in the trust and that had come to dominate products was upheld by the Ohio Supreme Court in 1900. rejecting the refining and transportation of oil and the products made from defenses that the Ohio antitrust statute of 1S9S was unconstitutional. il. Rockefeller’s efforts to devise an efficient structure to manage Slate v. Buckeye Pipe-Line Co., 6J Ohio St. 520, 56 N.E, 464 (1900/. the complex affairs of a large and sprawling enterprise should be j; See Waters-Pierce Oil Co. v. State, 44 S.W. 936 (Tex. Ct. App. counted as a major contribution to the development of a means for 1X98); 103 S.W. S36 (Tex. Ct. App. 1907): 105 S.W. 851 (Tex. Ct. App. managing a large and complex business.bureaucracy and a mark 1907); 106 S.W. 918 (Tex. Ct. App. 1908) (action excluding Waters- Vierce, a Missouri corporation and member of the Standard Oil Trust, of his organizational genius, even though these efforts carried on from doing business in Texas for violations of the Texas antitrust statute the monopolization of the transportation and refining of oil.30 and fining the company S I,549,500}; Stale v. Standard Oil Co., 91 S.W. 1062 fMo. 1906), 116 S.W. 902 (S Cl, Mo. 1908) (action to exclude The involvement of the federal government in the affairs of Standard Oil Co. of Indiana, Waters-Pierce Oil Co. of Missouri and Standard Oil increased significantly with the election of President Republic Oil Co. of New York from doing business in Missouri for viola Theodore Roosevelt in 1904 despite efforts by Standard to influ tions of the Missouri Antitrust Act). State actions were also brought ence the election by campaign contributions to Roosevelt.51 In charging Standard Oil with driving out retail competition by giving away 1906, Roosevelt signed the Hepburn Act strengthening the Inter its product in markets where competitors sought to enter. See Standard state Commerce Commission’s (ICC) regulatory authority over Oil v. Slate, 117 Tenn. 618, 100 S.W. 705 (Tenn. 1906). For a partial list of slate cases brought against Standard Oil during this time period set- I railroad rates and extending ICC jurisdiction over the rales Hiov & H id y , supra note 43, at 633. charged by oil pipelines. In November 1906, the federal govern Standard Oil’s national market share in refining began to decline as a ment filed ils antitrust suit against Standard Oil of New Jersey, 65 result of the discovery of new oil fields in Texas and California. The companies under its control and a number of individuals including actions of several states in excluding Standard Oil or its subsidiaries from John D. Rockefeller.5- A combination and conspiracy in violation engaging in business within the state lor violations of stale antitrust laws and the inability of even Standard Oil to keep control over a rapidly expanding crude oil market led to Standard's overall loss of market share J!’ Laws of New Jersey, chap. 265. §4 (1889) The formation and nationally, if not in the then major population areas of the country. See structure of Standard Oil of New Jersey under this law is described m i C h e r n o w . supra noie 11, at 431 describing the ouster of the Standard Hidy & Hidy, supr# note 43, at 305-38. Oil’s widely haled subsidiary Waters^Pierce Oil Company from Texas for See id. at 40-75. violating the Texas antitrust laws on the eve of the historic oil strike al Spindle top. By 1905, Texas accounted for 25% of U.S. domestic oil out 51 Standard Oil made substantial contributions to the Roosevell cam put ‘'It is important to recognize that even after discovery of these new paign, but he soon turned out to be the company's primary antagonist. A fields and Standard’s loss of control of the U.S. refining industry. Stan Standard officer was said to have remarked about Roosevell: ““We bought dard continued to maintain its monopsony power in the purchase of crude the son of a bitch, hut he wouldn’t stay bought.” C h lh n o w , supra note 11. from in the Oil Regions. This is because Standard continued to retain at 519. control of transportation from the Oil Regions.” Granitz & Klein, supra note 14, at 39. 5- The complaint is summarized in United States v. Standard Oil Co., 173 U.S. 177 (E.D. Mo. 1909). 6 7 0 : Tht' antitrust bulletin Standard oil and microsof! : 67 1 of section 1 of the Sherman Act was charged by contracts secur control that was used by Standard to set high prices for trans ing discriminatory transportation rates and rebates from common portation of crude to oil producers and to deny access to crude carriers; contracts with competitors limiting the production, out and refined product transportation to independent refiners.55 put and markets of competitors; the operation of supposed com The trial court held that the combined Standard Oil companies petitors that were not in fact competitors; espionage against violated section 1 of the Sherman Act by transferring control of competitors by conspiracies with railroad employees for the pur otherwise competing companies to Standard Oil and through the pose of destroying competitors; and, agreements to sell refined control they exercised over transportation rates by agreements product below cost to drive out competitors and raising the price with railroads for discriminatory rates and agreements with in markets where there was no competition to subsidize below- pipelines that were used to stifle competition in oil refining. By cost pricing in markets where the company faced competition.51 the same token. Standard Oil was found to have also violated sec The complaint also included a charge that Standard Oil unlaw-, tion 2 of the Act by combining and conspiring to monopolize the fully monopolized the oil industry by obtaining discriminatory refining and transportation of crude and refined product.56 In railroad rates; used pipelines it controlled to exclude competition; effect, Standard Oil was deemed to have originally formed a made agreements with competitors to limit production and divide transportation cartel with the railroads to gain a monopoly over markets; and formed a monopoly over refining and transportation refining and then used its monopoly over refining to monopolize of oil products through the creation of the Standard Oil Company the transportation of crude and refined product by using its rail of New Jersey by transferring control of otherwise competitive road transportation cartel and refinery monopoly to exclude com companies to a combination for the purpose of eliminating com peting refineries and the new technology of oil pipelines to petition among them while engaging in predatory pricing, indus maintain its control of refining, the price of crude and the sale of trial espionage and the secret ownership of competitors.54 Central refined product. Related practices like industrial espionage and to the government's monopolization charge was the control exer local price discrimination and sales below cost were not, some cised by Standard Oil over transportation by rail and pipeline; commentators to the contrary notwithstanding, the central grounds upon which the government complaint was based and the 53 Standard Oil Co., 173 Fed. at 190. grounds the trial court found the Standard Oil combination to be 34 The formation of the original Standard Oil Trust and ihe successor in violation of both sections 1 and 2 of the Sherman Act. Standard Oil Company were alleged to be for the purpose of acquiring a The United States Supreme Court affirmed the lower court "commanding volume of the oil business in . . . and it has since exer decision with the modification that the time for implementing the cised and is using, the power to prevent competition between the compa nies which it controls, to fix for them the purchase price of the crude oil, dissolution of the Standard Oil Trust be extended beyond that set the rates for its transportation, and the selling price of its products. It has by the trial court.57 In the Supreme Court, the government’s argu prevented, and is preventing, any competition in interstate and interna ment focused on the combining of otherwise competing refinery tional commerce in petroleum and its products between its subsidiary companies and between those companies and itself.” Standard Oil Co., 173 Fed, at 183. When the lawsuit was filed, Standard Oil controlled the ss See 2 Hidy & Hioy, supra note 43, at 691. There was also evi market for 87% of all kerosene produced, 87% of exported kerosene and dence of sustained monopoly profits realized by Standard Oil. Between 1882 and 1905 it was estimated that Standard earned profits of $700 mil 89% of domestic kerosene. C h e r n o w , supra note 11, at 537. Control over refining and transportation of crude and refined product was estimated by lion on an initial investment of $70 million. Id. at 692. the trial court at over 80% of the oil from the Pennsylvania and Indiana 56 Standard Oil Co., 173 Fed. at 191. oil fields, fields producing over 75% of domestic crude at the time of the case. Standard Oil Co., 173 Fed. at 1S3. 57 Standard Oil Co. v. United States, 221 U.S. 1 (1911). 672 : The antitrusi bulletin Standard oil and microsoft ; 673 and transportation companies into a single firm with overwhelm over 40 refining and transportation companies was transferred to a ing control of refinery and transportation facilities for the oil busi trust under the control of John D. Rockefeller. The Court ness and the use of discriminatory rail and pipeline rates in reviewed the quo warranto proceedings in Ohio dissolving the obtaining and maintaining monopoly control over refining. trust because it violated Ohio corporation law and the antitrust laws of Ohio. The Court then summarized the third period The Court reviewed the history of Standard Oil from 1870 by (1889-1907) as one where Rockefeller and the members of the considering three distinct periods in the development of the com unlawful trust created Standard Oil of New Jersey lo circumvent pany: (1) 1870-1882; (2) 1882-1889; and (3) 1889- and the filing the Ohio decision enjoining the formation of the Standard Oil of the complaint in 1907. While recognizing that conduct during Trust by transferring stock ownership of the corporations previ the first two periods took place before the adoption of the Sher ously held by the trust to the New Jersey holding company. man Act in 1890, the Court nevertheless considered the evidence of how the defendant gained its market power relevant to the After reviewing this history, the Court summarized the evi assessment of whether the defendant should be considered a dence showing that Standard Oil had obtained and was maintain monopolist in violation of the Sherman Act after 1890.5S During ing its monopoly unlawfully over the refining and transportation the first period, the Court noted thal Rockefeller and Standard Oil of oil by means of: gained control of refining in Cleveland by ‘"large preferential rates Rebates, preferences and other discriminatory practices in favor of the and rebates in many and devious ways over their competitors from combination by railroad companies; restraint and monopolization by various railroad companies, and that by means of the advantage railroad companies; restraint and monopolization by control of pipe thus obtained, many, if not virtually all, competitors were forced lines, and unfair practices against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competition, such either to become members of the combination or were driven out as local price cutting at the points where necessary to suppress compe of business. . . The Court found that similar tactics were tition; espionage of the business of competitors, the operation of bogus used to gain control of refineries in New York, Pennsylvania, independent companies, and payment of rebates on oil, with the like Ohio and elsewhere,60 It was further found that Standard used intent; the division of the United States into districts and limiting of similar tactics to gain control over the transportation of crude oil the operations of the various subsidiary corporations as to such dis from oil fields to refineries in Cleveland, Pittsburgh, Titusville, tricts so that competition in the sale of petroleum products between such corporations had been entirely eliminated and destroyed; and Philadelphia, New York State and New Jersey and that during this finally reference was made to what was alleged to be the “enormous period *‘had obtained complete mastery over the oil industry, con and unreasonable profits” earned by the Standard Oil Trust and the trolling 90% of the business of producing, shipping, refining and Standard Oil Company as a result of the alleged monopoly; which pre selling petroleum and its products, and thus was able to fix the sumably was averred as a means of reflexly [s/c] inferring Lhe scope price of crude and refined petroleum and to restrain and monopo and power acquired by the alleged combination.6- lize all interstate commerce in those products.”61 The Court held that the unification of the stock of the several cor During the second period, (1882—1889) the Court found the porations producing and transporting oil and oil products was defendants entered into a trust agreement by which the stock of done for the purpose and with the effect of gaining a monopoly over the oil business; that i4no disinterested mind” can survey ** Standard Oil Co., 221 U.S. at 46-47. the periods leading up to the formation of the Standard Oil w Id. at 33. C om pany « Id. Id. at 42-43. <-1 Id. 674 : The antitrust bulletin Standard oil and micro soft ; 675
without being irresistibly driven to the conclusion that ihe very genius monopoly over refining by creating and managing a cartel of rail for commercial development and organization which it would seem roads to drive out competitors and then used its monopoly over was manifested from the beginning soon begot an intent and purpose refining and cartel over rail transportation to capture and maintain to exclude others which was frequently manifested by acts and dealing control over the innovation of delivering crude and refined prod wholly inconsistent with the theory that they were made with the sin gle conception of advancing the business by usual methods, but which uct by oil pipeline.6* By gaining monopoly control over refining on the contrary necessarily involved the intent to drive others from the and transportation Standard had effective control over oil produc field and to exclude them from their right to trade and thus accomplish tion and was beginning to vertically integrate into crude oil pro the mastery which was the end in view.65 duction by virtue of its monopoly over refining and transportation The Court singled out steps taken by Standard to obtain control of of oil. The Supreme Court finding that Standard had violated the transportation and the division of markets as clear grounds for Sherman Act and the combination should be dissolved, even finding an intent to exclude others and that the fact that the com though it did not order a complete divestiture of overlapping stock bination had little control over crude production as of no rele ownership in the resulting companies, liberated the industry from vance because absolute control over refining and transportation the hands of Rockefeller and his small group of associates and carried with it control over production of crude oil.64 began the process of bringing competition and innovation to the oil industry.67 It is impossible to read the history of the formation of the Standard Oil Company and the antitrust case of 1911 ordering the to dismiss evidence of whether a firm has monopoly power or not or of a breakup of the company for violations of sections 1 and 2 of the violation of law. there would never be any cases finding monopoly power Sherman Act as being based solely or even primarily on Stan or violations of law. If they meant to say that Standard Oil did not “monopolize” because dard’s practice of selling petroleum products below cost and it acted as if it had competition by continuing to attempt to maximize engaging in retail price discrimination. It is also inconceivable profits, every economic theory' recognizes that all firms seek to maximize that anyone can fairly read the record as one of a firm succeeding profits. Indeed, a hallmark of a “monopolizing” monopolist is that it is and being unjustly punished because of superior business acumen, free to and often does ‘‘maximize profits.” Standard Oil acted in confor innovation or production efficiencies.63 Standard Oil gained its mity with this hallmark. “ Granitz & Klein, supra note 14. conclude that Standard’s vertical 65 Id. at 76. relationship with and enforcement of the horizontal conspiracy of rail roads fixing rail rates and dividing the oil transportation market in w Id. at 77. exchange for discriminatory rates and drawbacks given Standard Oil was 65 Boudreaux & Folsom, supra note 6, at 561 claim that “the most the source of Standard gaining and maintaining monopoly power over important of our thesis—even when Standard enjoyed its largest market refining. Once Standard gained its monopoly over refining and completed share it never acted like a monopolist. It always behaved as though it its integrated pipeline network, it also gained power over the railroads faced stiff competition. In our view, the firm’s own observed behavior is and was able to exercise that power to keep a lid on new and emerging the best evidence of whether or not the firm enjoyed monopoly power.” competition in refining in the areas it dominated. Standard’s pipeline and There can be little doubt that Standard Oil “enjoyed monopoly refinery dominance were also key to its power over oil producdon, an power’ and that it used that power to unlawfully monopolize. One can activity it was beginning to enter aggressively when the federal antitrust only read Boudreaux & Folsom’s proclamation of faith in what they view action was initiated. as Standard’s behavior as wholly at odds with the historical record, the o’ One of the earliest innovations following the breakup of Standard legal standards followed in monopolization cases, and—in short—as an Oil was the invention of the cracking process in 1913 for obtaining a absurd standard for determining whether a firm has, in fact, monopoly much higher percentage of gasoline from crude oil than had been the power. If the proclaimed subjective belief of defendants were sufficient case. The development and patenting of the process was attributed to the 676 : The antitrust bulletin Standard oil and microsoft : 677
Rockefeller remained ail enigma throughout most of the his than his competitors, but by contracts and conspiracies with rail tory of the formation, evolution and dissolution of the Standard roads raising his rivals’ costs to gain a monopoly over refining, Oil Company. Ron Chernow’s excellent biography of Rockefeller, taking over the innovation of others to maintain Standard's refin Than: The Life of John D. Rockefeller. Sr., paints a portrait of a ery monopoly and managing his empire with a single-minded complex individual, deeply religious, ambitious and ruthless in attention to every detail to prevent any erosion of his monopoly his devotion to gaining control of the oil industry. At the same control over the oil industry. time. Rockefeller had the insight to recognize refining as more crucial than oil production and that gaining control of the trans III. United States v. M icrosoft Corp. portation of crude and refined product along with the refining function conferred control of upstream and downstream parts of Like the latter part of the 19th century and the development of the business. He defended the creation of the trust and had no the oil industry transforming most of the economy and society, the regrets about his often ruthless business tactics.68 He believed end of the 20th century saw the rapid growth and dissemination of Standard Oil to be a beloved organization “worshiped by the a new and transforming technology, the personal computer. Most masses for bringing them cheap oil” and that Standard Oil was of the economy has been impacted by the new technology and just one of the “most remarkable undertakings of all times.”69 Beneath as the oil industry made fundamental changes to the national and the benign exterior of his later life and his benevolence however, international economies and economic infrastructure, the com Rockefeller harbored a deep anger for those who attacked him puter industry is producing similar fundamental change to calling them “socialists and anarchists”; persons who "produce economies and infrastructures. Like the centralized control of nothing" and who ‘"subsist as suckers on what honest men, frugal transportation and refining in the oil industry held by Standard Oil and industrious, produce.”™ at the end of the 19th century, the new technology of computing He apparently did not believe that a competitive process has key segments of the business dominated by firms that have should govern the organization and operation of the oil business, captured a substantial share of the market for computer chips and and believed that only he and Standard Oil could bring the bene for software essential to the internal functions of a PC, applica fits of the new technology of refining oil to the masses. Like tions programs and Internet browsers for communications between many single-minded entrepreneurs, one either did it his way or not computers. The intriguing parallels between Standard Oil and at all, and once he had acquired the power to do so he made cer Microsoft however, go far beyond this—particularly the means tain that others engaged in the oil business did as he saw fit and used by Microsoft to dominate and maintain its dominance of the not as a competitive process may have dictated. And, he gained PC business. the power to do so not by being more efficient and innovative Central to M icrosoft’s birth, growth and dominance of the software market for PCs has been William Gates, the cofounder of freeing up of the parts of the Standard Oil monopoly from the heavy hand of a “top heavy bureaucracy.” C h e r n o w , supra note 11, at 558. Standard Microsoft.71 Gates and his cofounder, Paul Allen, realized that the of Indiana realized significant profits from the patent but restricted sales of cracked gasoline to its “cousin companies” in their pre-1911 marketing 71 See generally K en A u l e t t a , W o r ld W a r 3.0: M ic r o s o f t a n d I ts territories. E n e m ie s (2001); J o h n H e il e m a n n , P r id e B e f o r e t h e F a l l : T he T ria ls o f /d .a i6 1 7 . B ill G a t e s a n d th e E n d o f t h e M ic r o s o f t E r a (2001), An earlier version of Heilemann’s report of the Microsoft trial appeared in W i r e d Id. M a g a z in e , Nov. 2000, at 261 under the title: The Whole Truth and Noth 70 Id. at 618. ing But the Truth: The Untold Story of the Microsoft Antitrust Case. See 678 : The anti tin si bulletin Standard oil and microsoft : 679 newly emerging PC had potential lo be used by boih business and and mistakes by Apple in refusing to license its software for use in the home if it had the appropriate software. While the major on non-Apple produced machines, Microsoft and Intel were able manufacturers of computers concentrated on large computers to dominate the market for PCs through their control of the oper for business and the manufacturing of PC hardware, Gates and ating system software and chips.73 While the Antitrust Division Allen saw that software to run PCs could be the key to a more did not charge Microsoft with gaining its monopoly over operat widespread use of computer technology. Like Rockefeller’s vision ing system software for Intel-compatible PCs by means similar to for the oil business, gaining control over an essential part of the the means used by Standard Oil to gain control over the refining process of bringing the innovation of computers to the masses could be far more significant and profitable than being engaged in 71 A l l c t t a , supra note 71, at 149. Intel encountered antitrust diffi the upstream part of the business of producing oil or manufactur culties when it was charged by the FTC with suppressing competition in innovation by threatening to withhold access to technical information to ing computers. In the case of oil, the essential process was refin three firms developing new chip designs, Intel allegedly demanded the ing and transportation of oil. In the case of PCs, it was operating companies cease innovation in new chip designs and license their tech software for computers which performs basic functions like allo nology to Intel or be cut off from receiving Intel technical information cating memory, controlling the function of peripheral devices like necessary to design computer systems based on new generation Intel printers and keyboards and serves as the platform by which appli chips. See. Intel Corp., Complaint Dkt. # 9288. 5 Trade Reg. Rep. (CCH) cation programs like word processing are integrated with a com 1124,440 (June 8. 1998). The case was resolved by a consent order pro hibiting Intel from refusing to deal or withholding technical information puter’s operation. from a customer for ‘'reasons related to an intellectual property dispute Beginning in 1975, Gates and Allen began providing software with □ customer.^ Intel Corp., Consent Order, Dkt. # 9288, 5 Trade Reg. Rep. (CCH) H24,575 (Aug. 3, 1999). See also Intergraph Corp. v. Intel for the Altair 8800 called Basic 2.0 and began selling the software Corp., 195 F.3d 1346 (Fed. Cir. 1999) (private suit by Intergraph where to other customers.7- Their new firm, Microsoft, had the good for the Federal Circuit reversed the grant of preliminary injunction against tune to be chosen by IBM in 1980 to provide the operating sys Intel for refusing to grant access to information about new Intel chips to a tem—MS-DOS (Microsoft Disk Operating System) for IBM’s plaintiff developing technology for the graphics markets). In apparent first personal computer using Intel’s 16-bit chip design. There disregard for the antitrust concern with protecting innovation competi tion, the court held: '‘Unilateral conduct that may adversely affect after, Microsoft introduced its version of the mouse, first used by another’s business situation, but is not intended to monopolize that busi Apple, and Microsoft WTord which came to displace WordPerfect ness does not violate the Sherman Act.” Such a broad generality would as the leading word processing program. IBM belatedly recog appear to be at odds with cases like United States v. Griffith, 334 U.S. nized operating system software as the key to the emerging tech 100, 106-07 (1948): nology and developed its own operating system—OS/2, which Section 2 is not restricted to conspiracies and combinations to failed to displace Microsoft Windows. By working closely with monopolize, but also makes it a crime for any person to monopolize Intel and the development of ever more powerful chips by Intel, or attempt to monopolize any part of interstate trade or commerce. the inability of IBM to develop a competing operating system, . . , It is indeed ‘'unreasonable p er se to foreclose competitors from any substantial market." . . . The anti-trust laws are as much vio lated by the prevention of competition as by its destruction. . . . It also J o e l B r in k l e y Sl S t e v e L o h r , U .S . v. M ic r o so ft : T h e In s id e S tory follows a fortiori that the use of monopoly power, however law o f t h e L a n d m a r k C a s e (2001); J am es W a l l a c e & J im E r ic k s o n , B il l fully acquired, to foreclose competition, to gain a competitive G a t e s a n d t h e M a k in g o f t h e M ic r o s o f t E m pire (1992); J a m e s W a l l a c e , advantage, or to destroy a competitor is unlawful. O v e r d r iv e : B il l G a t e s a n d t h e R a c e t o C o n t r o l C y b e r spa c e (1997). See Flynn, supra note 5, setting forth standards for antitrust cases alleg 7- See A u l e t t a , supra note 71, at 145^6; H e il e m a n n , supra note 71, ing claims of the suppression of innovation. at 56-57. 68 0 : The antitrust bulletin Standard oil and micro soft : 681 and transportation of oil,74 its tactics in maintaining and extending By the early 1990s. Microsoft’s business plan was based on its monopoly over computer operating systems and related appli seeing to it that Microsoft operating system software was installed cations programs began to take on the characteristics of intriguing by original equipment manufacturers (OEMs) on new Intel-based parallels to Standard Oil's exclusionary conduct rather than limp PCs and to constantly upgrade the Window's program as an ongo ing analogies,75 ing source of revenue for the company.76 With the advent of the Internet by the mid-1990s, Microsoft saw the business for content supplied to the Internet as a new source of revenue, and it made 74 Others did c la im Microsoft gained its monopoly over the operat ing system market for Intel-based PCs by means not honestly industrial. several investments in content companies, AT&T’s cable system See Caldera. inc. v. Microsoft Corp., 72 F.Supp. 2d 1295 (D.C. Utah and Time Warner's cable modem and acquired all or part of 130 1999) (claims that Microsoft tied its DOS operating system to its graphi companies between 1994 and 1999.77 Gates and Microsoft's c a l interface system by its Windows program to exclude plaintiff’s com- genius lies in seeing and implementing business opportunities peiing DOS system). Anticompetitive conduct alleged included rather than technological innovation.78 Microsoft's core revenue preannouncement of products known not to be ready for the market (vaporware); claimed misrepresentations about plaintiffs DOS system; imposition of licensing agreements on equipment makers requiring them to pay a license fee on a ll machines produced, minimum commitments valuation exceeding that of General Motors at the time of the monopo subject to forfeiture and increased license duration; and making Windows lization trial. Id. at 49. That amount now is estimated to exceed $30 bil incompatible with plaintiffs DOS program. The case was settled by lion in cash on hand. See Greene, supra. Persistent high profitability, a Microsoft paying a rumored sum in excess of $250 million after the court characteristic of Microsoft through most of the 1990s, was recognized by rejected Microsoft’s motion to dismiss and while the Antitrust Division Microsoft’s economic expert at trial, Professor Richard Sehmalensee, as monopolization ease against Microsoft was pending. "a good indication of long run power” in: Another Look at Market Power, IBM”s OS/2 operating system program also failed to compete effec 95 H a r v . L. R e v . 1789, 1806 (1982), When confronted at trial concerning tively with Microsoft's Windows program in part because it used more Microsoft’s profits on operating systems sales, Sehmalensee had to con memory, few applications programs were written for it and restrictive fess he did not know what they might be because Microsoft's accounting contracts between Microsoft and independent software vendors (ISVs) systems did not provide that information. limiting ISVs from selling their programs to Window’s competitors. See, On the innovation issue, Microsoft was often a follower rather than a A u l e t t a , supra note 71, at 115. leader in innovation, produced a product often subject to malfunctions, and muscled firms like Apple, Intel, IBM and Sun Microsystems into 75 Boudreaux & Folsom, su pra note 6, at 564, assert that if dropping plans to use or bring innovative software to market. See Find Microsoft were a monopolist “then Microsoft would behave like a ings of Fact, supra note 2, at 94—132; 386—407; H eile m a n m , supra note monopolist. It would restrict output and raise prices. . . . [I]ndustry 71, at 49,91, 93 & 151. “Microsoft is less famous for innovation than for studies would reveal a slowdown in innovation, a hike in prices (or a popularizing the innovation of others." A u l e t t a , supra note 71, at 159. In softening of a secular downward trend in prices), and a restriction in out addition, its pattern of buying up firms with innovative ideas, combined put.” Each of these features of Microsoft’s behavior was evident, along with its huge cash reserves and power to continue intimidate others, sug with other indicators of what most observers conceded—Microsoft had a gests that Microsoft need not be innovative when it can simply buy up monopoly over operating software for PCs. It has been reported that any new innovation that comes on the scene, Microsoft’s cash on hand now stands at 5>30 billion and that the company is adding $1 billion per month to its bank account “thanks to its Windows 76 A u l e t t a , supra note 71, at 150. and office monopolies.” Jay Greene, Microsoft: How It Became Stronger 77 Id. at 151-52. Than Ever, Bus. Wk., June 4, 2001, at 75-76. There was also an abundance of evidence at trial that Microsoft exer 76 Id. at 159: “Microsoft's great successes—DOS, the graphical user cised its monopoly power. Microsoft’s profits were 40 cents on each dol interface, Windows have been clones,” Auletta quotes computer science lar o f revenue in 1998 and its 1999 after-tax profits were 39%. A u le tt a , professor David Gelernter of Yale as describing Gates as: “[T]he Bing supra note 71, at 304. It had nearly $20 billion in excess cash and a stock Crosby of American technology, borrowing a tune here and a tune there 682 : The antitrust bulletin Standard oil and micro soft : 683
producer was the Windows operating system and Office program than system.51"1 The Antitrust Division challenged this practice and and the company took steps to protect its monopoly of these sys a consent decree was entered prohibiting the per processor license tems by engaging in steps reminiscent of tactics employed by fee and long-term licensing contracts with OEMs, a consent Standard Oil more than a century before. decree the federal district court refused to enter because it did not go far enough in prohibiting Microsoft's exclusionary tactics the Microsoft initially offered a per processor license for its oper trial court believed anticompetitive.** The court of appeals ating system to Intel-based OEMs which required that they pay a reversed the district court on the ground that the court had royalty for Windows on all computers they manufactured whether exceeded its authority under the Tunnev Act,s: remanded the case the Windows operating system was installed on a particular to a different judge (it turned out to be Judge Jackson who was machine or not.7"1 The effect was akin to Standard Oil's organiza then assigned the subsequent Antitrusl Division case against tion of a railroad cartel favoring Standard Oil through discrimina Microsoft) and ordered the consent decree be entered.SJ tory transportation rates and imposing a tax on shipments by competitors and turned over 10 Standard as a ‘'drawback." Stan dard’s tactics forced existing competitors out of business or into 6l) See Caldera. /2 F. Supp. 2d at 1301, the arms of Standard Oil and erectcd a substantial entry barrier to 61 Uniled States v. Microsoft Corp., supra note 79. Curiously. new refiners. Microsoft organized what was in effect a reluctant Boudreaux & Folsom ignore this conduct by Microsoft along with its cartel. Although it was not a tight-knit agreement like that subsequent OEM contracts excluding Netscape from being installed or enforced by Standard Oil for the railroads, OEMs favoring featured on the PCs they manufactured. They assert that because M icrosoft’s operating system and paying a long-term licensing fee Microsoft "acts as though it faccs competitive rivalry,” that fact “is the on a per processor basis created an effective entry barrier to com best evidence that Microsoft in fact does face competitive rivalry.” Supra note 6. at 569. Such a claim is the equivalent of saying that because a peting operating systems. OEMs paying a fee for Windows based person charged with murder believed the victim was out to injure him 011 ail the computers they manufactured, whether Windows was that the murderer’s belief is the best evidence that the murderer did face a installed on every machine or not, were not likely to install a com threat in fact of being injured by the victim. Surely the circularity of such peting operating system on their machines and pay an additional reasoning and its implicit invitation to ignore reality is the best cvidcncc license fee to a competitor and incur the costs of servicing more of the shallowness of such an analysis. The first issue is a factual one— did Microsoft face “competitive rivalry” and second, if it did, were the tactics used by Microsoft to compete legitimate ones consistent with a and turning them all into great botfo hits—by dint of heroic teats of competitive process or not. The first issue cannot be answered by circular repackaging and sheer Herculean blandness.” reasoning divorced from reality but must confront the actual facts and 7l) In 1988, Microsoft offered OEMs the option of a per processor circumstances unique to the case. The second issue is, unavoidably, a legal issue and is a policy question that must be both faced and answered license, a per copy license for each copy actually installed or a per sys in light of the policies behind the law and the consequences of the deci tem license on the machine or model the operating system was actually sion. For a thoughtful exploration of these issues in the context of the installed. By 1993, the per processor license came to dominate the OEM channel. While the consent decree challenging the per processor license M icrosoft case rather than a simplistic and illogical attempt 10 avoid them, see Peter C. Carstensen, Remedying the Microsoft Monopoly: and term of the license enjoined these practices, the trial conn initially presented with the decree for its approval held that the decree did not go Monopoly Law, the Rights of Buyers and the Enclosure Movement in far enough in restraining the alleged use of vaporware and manipulation Intellectual Property, 44 A n t i t r u s t Bull. 527 (1999). of the operating system 10 prevent a competitors’ application programs 65 15 U.S.C. 5 lt>. fro in functioning effectively with Microsoft’s DOS program. See United States v. Microsoft Corp., 159 F.R.D. 318 (D.D.C. 1995). 83 United States v. Microsoft Corp., 1995-2 Trade Cas. (CCHI 1171,096 (D.D.C. 1995). 684 : The a mil rust bulletin Standard oil and Microsoft : 685
A key term of ihe consent decree that would become central to the risk to Standard Oil's control over refining through its cartel a subsequent attack on M icrosoft's bundling of its Internet arrangement with the railroads posed by the innovation of oil Explorer program with its Windows operating system provided: pipelines. Standard Oil snuffed out that risk by use ol the raib oad cartel it managed to engage in price discrimination against inde Microsoft shall not enter into any License Agreement in which the terms ol that agreement arc expressly or impliedly conditioned upon: pendent oil refineries; buying up the refineries served by compet ing oil pipelines; obstructions placed in the way of the new (1) any licensing of any other Covered Product, Operatinc System technology of oil pipelines seeking to serve independent refinery Software product or other product (provided, however, that this provi sion in and of itself shall not be construed to prohibit Microsoft front competitors; and then taking over the new technology of pipelines developing integrated products) . . . ,8J to protect and extend its refinery monopoly.1*7 Microsoft sought to
Microsoft was caught unaware of the full potential of the forced to write program1; compatible with Microsoft's Window >, opt rat Internet as a challenge to both its monopoly over Ihe operating ing svsteni and have access to Microsoft’s APIs in order to insure their system for PCs and its power as a potential alternative platform programs worked with the dominant operating systems software. This “applications program barrier” in turn excluded the opportunity for rival for applications programs for all personal computers. 85 The Inter operating systems and c row-pi at form systems capable of translating doc net challenge was po.ced by Netscape, organized in 1094, which uments from one operating system to another to compcte with rapidly became the primary Internet browser for PC users. Microsoft’s operating system. Microsoft viewed the potential of the Microsoft finally realized that the Internet posed a threat to its Internet and cross-plat form programs like Java as a threat to its mainte dominance over the operating system market and the control it nance of control over the “applications barrier” and dominance of the be.uowed over applications programs because applications pro operating systems market. United States v. Microsoft. 65 F. Supp. 2d 1, 10-22 (D.D.C. 1999). See also A u l e t t a , supra note 71 at xx: "[Iff a sim grams could be located on the Internet and accessed directly by an ple browser could sit atop Windows or any other operating system, Internet connection using a universal language code and open employing a universal language code such as Java, and if developers ‘'application program interfaces” (APIs) by Netscape without the could hook into the APIs of the browser, then the vital software on a PC necessity of having to rely upon Microsoft’s proprietary applica might no longer be Windows but the browser.” tions program interfaces.** The risk faced by Microsoft was like The trial court found that the "applications barrier” enhanced the monopoly Microsoft possessed over the operating system market for Intel-compatible PCs as a matter of law. Findings of Law, supra note 2, ^ Consent Decree, supra note 83. HIV E,(i) (emphasis added). at 3b. relying upon United States v. A.T. & T. Co., 524 F. Supp. 1336, S1 Intel’s market share for PC chips has begun to decline in recent 1147—48 (D.D.C, 1981). years as other chip manufacturers have made inroads into its dominance 41 When long-distance oil pipelines first appeared on the scene. of the chip market for PCs. The chips of other manufacturers necessarily Standard Oil “became a benighted custodian of the status quo, squelching are manufactured lo be compatible with Microsoft’s Windows program. progress to safeguard its own interests.” C h e r n o w , supra note 11. al 207. In addition. Apple’s market share continues to decline and it is more Standard initiated several obstructionist tactics to prevent construction of accurate to define the market currently dominated by Microsoft as "the the Equitable and Tidewater Pipelines to carry1 crude oil to the east coast personal computer market" rather than just Intel-based PCs. Microsoft’s including buying up a connecting railroad to serve the Equitable pipeline, dominance of the operating system market for PCs has also conferred refusals to deal with pipe companies dealing with the new pipelines, dis upstream monopoly power over the development and evolution of the connecting Standard pipelines from refiners dealing with the pipelines, chip market for PCs generally and OEM manufacturers, as well as the buying an exclusive charter from the Maryland Legislature to prevent a downstream applications market and Internet browser market. new pipeline from running through the state, buying up independent Rn By virtue of the “network effects" of having over 90% of the PC refineries the new line was meant lo serve, purchasing strips of land the new pipeline would have to cross, and wholesale bribery of state legisla- operating systems market, developers of applications programs were 6 8 6 : The antitrust bulletin Standard oil and micro soft : 687 snuff out the risk to its operating system monopoly and its accom product” ambiguous with regard to whether it applied to panying applications entry barrier by developing its own browser Microsoft’s bundling of its browser with Window's in light of the (Internet Explorer), bundling it with its Windows operating sys proviso excluding “integrated products” from the prohibition. The tem for installation by OEMs on all PCs they manufactured and court refused to find Microsoft guilty of contempt because of the offering the program “free.’7 The Antitrust Division responded by ambiguity of the consent decree, but did agree with the govern filing an action for contempt claiming M icrosoft’s action in ment's interpretation of the decree that it was designed to prohibit bundling its Internet browser with its Windows operating system unlaw'ful tying under the antitrust laws.89 The issue became cast as routinely installed by OEMs on Intel-based PCs violated the ear one of whether the bundling of the Windows operating system and lier consent decree’s prohibition upon licensing agreements the M icrosoft’s Internet browser constituted the tying of two prod requiring the licensing of any “other Covered Product . . . or ucts or whether the bundle should be considered a single ‘inte other product (provided, however that this provision in and of grated product.” Relying upon Supreme Court decisions itself shall not be construed to prohibit Microsoft from developing emphasizing a “consumer demand test” for determining w'helher integrated products )/,i>6 there was one product or two products,90 the district court found sufficient evidence that the operating system and Internet browser Judge Jackson found the prohibition of the consent decree for programs constituted two separate products for purposes of the bidding a licensing agreement requiring the licensing of an “other per se rule prohibiting tying arrangements to issue a preliminary injunction against the bundling of the two programs into one lures. Despite all these obstructionist tactics the Tidewater line was com pleted. The Tidewater pipeline was finally brought to heel by Standard pending a full trial of the issue. Oil buying up control of refineries it was intended to supply and a Microsoft appealed and the court of appeals, treating the ruinous price war implemented through its railroad cartel. Standard Oil action as a motion for clarification of the consent decree reversed purchased the pipeline 1 year after it was completed, id. at 214-15. Stan dard Oil only belatedly recognized the significance of oil pipelines and the issuance of the preliminary injunction.91 A majority of the formed United Pipelines to both gain control of pipelines and hold the court of appeals, viewing the matter as one calling for review on threat of pipeline competition over the beads of railroads tempted to get the existing record of a request for a preliminary injunction and in the business or deviate from Standard’s rail rates. See id. at 171. that the consent decree prohibition in question did not embody all Microsoft's response to Netscape and the threat posed to its operating tying law under the Sherman Act,9- held the terms of the consent system and applications barrier monopoly was similar to Standard Oil's response to a new technology threatening its refinery monopoly: a decree did not bar the bundling of Microsoft’s Internet browser belated recognition of the importance of the new technology and its program with its Windows 95 operating system.113 But the court threat to the existing system for delivering product; steps taken to either buy out or drive out the new technology; and then taking over the new fi,; M a t 541. technology by bundling it with its operating system program for market ing through its OEM channel to secure its monopoly control over a key w See, Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 part of the industry threatening its operating system monopoly. OEMs (1984); Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451 faced with the ultimate threat of retaliation by Microsoft if they did not (1992). include its browser on the machines they manufactured and the increased 91 United Slates v. Microsoft Corp., 147 F,3d 935 (D.C. Cir. 1998) cost of servicing their customers having problems with the programs on (Circuit Judges Williams & Randolph). their machines, particularly if there were more than one version of a browser program, were made into an entry barrier to competing browser 92 Id. at 946. programs by Microsoft’s marketing scheme. The consent decree was directed at a complaint by Novell that ** United States v. Microsoft Corp., 980 F. Supp. 537 (D.D.C. 1997). Microsoft was tying its MS-DOS operating program with the graphical 688 : The antitrust bulletin Standard oil and micro soft : 689 did not stop with a literal reading of the consent decree in light of good) . . . separate marketing of the tied good actually mitigates the circumstances of its adoption. The court, in dicta, speculated the posited harm by facilitating entry into the market for the tying that a monopolist who markets goods that are “complements used good.”95 Thus the court concluded, the consent decree exception in fixed proportions” has no “obvious reason to market the tied for integrated products should be read as permitting “any genuine good separately . . . since all buyers of the tied good will also technological integration, regardless of whether elements of the take the tied good.”‘M And the court held that: “if the concern is integrated package are marketed separately.”M And the court that the tie-in makes it more difficult for competitors to enter the defined “integrated product” as a product that combines function market for the tying good (because they must also offer the tied alities (which may also be marketed separately and operated together) in a way that offers advantages if the functionalities are interface provided by Windows 3.11 and was enforcing the tie by its brought separately and combined by the purchaser,9"7 Concluding licensing practices with OEMs by requiring them to pay a per processor that Microsoft had "clearly met the burden of ascribing facially and per system license fee. The court thus saw the question of whether plausible benefits to its integrated design as compared to an oper the purpose of the consent decree was analogous to the bundling of Win ating system combined with a stand-alone browser”^ the court dows 95 widi Internet Explorer (IE). In a separate treble damage action reversed the district court’s grant of a preliminary injunction. involving the same facts and issues that triggered the consent decree, Caldera, Inc. v. Microsoft Corp., 72 F. Supp.2d 1295 (D.D.C. Utah Judge Wald’s dissent pointed out the failure of the majority 1999), Judge Benson rejected the tying analysis of the D.C. Circuit in the opinion to take account of the “backdrop of antitrust law” and the Microsoft case. Caldera Corp.. 11 F. Supp.2d at 1319-28, and held there was sufficient evidence on the tying count to send the question to a jury. traditional test for “two products” of whether there was a “suffi Like the issue of “relevant markets’7 in monopolization and merger cient consumer demand so that it is efficient for a firm to provide litigation, the issue of whether there is one product or two products for [the first product] separately from [the second].”99 Moreover, she purposes of tying analysis has become an end unto itself and divorced saw the test adopted by the majority of sanctioning a design com from the reason for why the question is being asked. Tying by a firm with bining functionalities in a way that offers ultimate users some power in the tying product market ought to be viewed as a problem of plausible advantage otherwise unobtainable “as to safe a harbor leveraging market power from one area of the economy to another with out a functional and necessary' justification for doing so. See notes 163 & 165, infra. In such circumstances, competition on the merits does not Id. Entry into both markets subsequently proved not to be '‘miti determine success or failure in the lied product market and can be used to gated.” Manipulation of the OEM market and APIs for other browsers, maintain power in the tying market. Power in the tying product market restrictive contracts with Internet access providers (IAPs), independent determines success or failure, a competitive process does not. Framing software vendors (ISVs) and blocking removal of Microsoft’s browser the actions of Microsoft as a tying case focused the case on the one prod from the Windows program were all proved to be devices relied upon by uct versus two product issue instead of the more important question of Microsoft to wage its battle with Netscape and reduce Netscape's ability whether Microsoft was leveraging what had become an essential facility to reach the market in the subsequent monopolization case against (its operating system monopoly) into the related markets of Internet and Microsoft. See A u l e t t a , supra note 71, at 193-208. application programs to protect its monopoly in the operating system market without a justification for doing so and proof that a less restrictive Microsoft Corp., 147 F.3d at 948. alternative was unavailable. For an analysis focusing on market power as ^ Id. the key to tying cases rather than one product versus two products, see Thomas A. Piraino, Jr., An Antitrust Remedy for Monopoly Leveraging by 1,8 Id. al 950. Electronic Networks, 93 Nw, U. L. Rev. 1, 5-6 (1998), Id. at 958. Quoting the test adopted in Eastman Kodak Co. v. w Microsoft Corp., 147 F. 3d at 948. What the court meant by “com Image Technical Services, Inc., 504 U.S. 451, 462 (1992). pliments used in fixed proportions” is not precisely clear. 690 : The antitrust bulletin Stctndard oil and micros oft : 691
The majority opinion reads like a tax opinion construing some with too easily navigable an entrance.”100 Of even more signifi obscure part of the Internal Revenue Code in light of the com cance, the dissent noted: plexities of computer programming. It is an opinion divorced [A]ntitrust law cannot avoid determining whether a particular techno from the overall context in which the case arose, including preda logical development has occurred because it is efficient or merely tory pricing;106 the objectives of antitrust policy, including the because it permits a monopolist to extend its monopoly to a new mar k e t. , . . ltl1 sumers and the freedom of ultimate consumers to choose ihe mix of [The] courts must consider whether the resulting product confers bene browser and other programs they deem best for their needs. In addition, fits on the consumer that justify a product's bridging of two formerly OEMs and IAPs are deprived of the revenue, revenue captured by separate markets.11)2 Microsoft, from the sale of programs installed on their machines or [I]f there are clearly two distinct markets, then Microsoft would need browsers. The effect was similar to Standard Oil buying up oil refineries to demonstrate substantial synergies in order to compel OEMs to oil producers intended to serve through an independent pipeline: an accept a new •'integrated" product that bridges those markets.Ja; insurmountable entry barrier to the ultimate market for the product of other browsers by capturing the capacity of OEMs and IAPs to offer While not avoiding completely the "one product” or “two prod competing browsers and applications programs. uct” metaphysical debate, the dissent at least called for a more J(K’ Microsoft not only gave away its IE “free,” but it also paid sub searching inquiry in light of the reason antitrust policy has singled stantial sums to OEMs and valuable consideration lo others to promote out tying arrangements for special treatment1W and the fact that Microsoft's browser. See Franklin M. Fisher & Daniel L. Rubinfeld, U.S. the alleged tying arrangement in this instance was being imposed v. M icrosoft—An Economic Analysis. 46 A n t it r u s t B u l l . 1, 28-35 by a firm with monopoly power in the claimed tying product mar (2001). Foregoing a return on the claimed millions of dollars devoted lo developing the program and giving large subsidies to promote it can only ket— a product that had become an essential facility for OEMs, be “rational” if its purpose was to recover the investment in the long run applications programs and Internet access providers.10’ after competition had been eliminated or to protect the (monopoly) prof its being realized on the Windows program. The issue of whether ihe 100 Microsoft Corp., 147 F.3d at 957. present analysis of “predatory pricing” can ever be shown in cases where there is a large capital investment in plant or research and development >■" Id. at 958. The dissent might have also considered the effect of the costs and low variable cosls is problematic if the courts follow the stan tying arrangement on preserving a monopoly in the tying product market. dards adopted in cases like Brooke Group Ltd v. Brown & Williamson |i;'- Id. Tobacco Corp., 509 U.S. 209 (1993) and United States v, American Air lines, 2001 Trade Cas. (CCH) H 73,251 (D. Kansas 2001). Adopting a Id. at 959. Judge Wald defined “synergies” as “real benefits to the variable cost standard for products like a complex computer program consumer associated with integrating two software products.” Id. at 958. costing millions to develop and pennies to reproduce and distribute by a '** Clayton Act, § 3, 15U.S.C. § 14. computer disk or downloading the program from the Internet is an invi tation for firms with monopoly power like Microsoft to distribute pro 1 “ One might have also raised the question of who is the “consumer” grams like IE for a few cents per copy despite the substantial investment of the products involved for purposes of determining whether there was a costs in its development. Adopting such a standard is a case of analyzing consumer demand for the products to be considered separate products. In the conclusions of an unrealistic model in light of its assumptions rather the case of sales of a PC operating system and Internet browser pro than analyzing the facts and circumstances unique to a particular case in grams, sophisticated OEMs and IAPs constituted a substantial share of light of the policies behind the law involved and the consequences of the the market for the programs. Presumably, they have the technical sophis decision. tication and competitive interest to select the best combination of operat A more appropriate standard would be one premised on long-run ing, Internet and applications programs for their customers. Microsoft’s average incremental cost: “the firm’s total production cost {including the bundling of products restricts the competitive freedom of OEMs and product), less what the firm’s total cost would have been had it not pro- lAPs to offer the mix of programs they deem best to offer ultimate con- 6 9 2 : The antitrust bulletin Standard oil and microsoft : 693 maintenance of open markets to insure innovation efficiencies can over personal computer operating systems; the fact that take place; the reality that Microsoft had and has monopoly pow er Microsoft’s operating system had become an essential facility; and that its bundling of the operating system and browser func tions was forced on the direct market of OEMs and the ultimate duced the product, divided by the quantity of the product produced.” Brodley, Bolton, &. Riordan, supra note 17, at 2272. It is a standard con market of retail consumers by Microsoft's insistence that both be sistent with both reality and common sense. There should be the further installed by OEMs together or not at all.1”7 While the majority requirement of a specific inlent to exclude competition in order to avoid opinion may be legally justified by the reality that it was inter making legitimate competitive responses meeting competition unlawful. preting the terms of a consent decree aimed at a different factual Otherwise, a standard based on average variable cos Is only as the test for circumstance,108 the consequences of its decision were that it predatory pricing means thal pricing tactics can he used with impunity to exclude legitimate competition by any dominant firm in industries like appeared to sanction Microsoft’s aggressive marketing practices airlines, chip manufacturing and computer programs where there are high and made inevitable litigating a broader case challenging total costs and low variable costs. Microsoft’s maintenance of a monopoly over the computer soft It has been argued that the revenue generated by the bundling of a ware operating system software market in particular and the appli browser with other Internet technology and revenue from advertisers ben cations software market generally through the uses being made of efiting from the browser connection should be considered as revenue its Windows operating system monopoly combined with its Inter front the “sale” of the browser. See Benjamin Klein, Did Microsoft Engage in Anticompetitive Exclusionary Behavior?, 46 A n titru st B ull. net browser. 71, 81-S3 (2001), It is clear that Microsoft's browser pricing policy was During the pendency of the appeal of the interpretation of the designed "to cut off Netscape’s air supply” and the claim that Microsoft consent decree and whether it banned a tying arrangement, con was motivated by a desire to earn revenue from Internet advertising and promotion of its Windows operating system is a posttrial rationalization siderable lobbying by Microsoft’s victims or enemies, depending rather than a proven fact. See Fisher & Rubin feld, supra. upon one’s perspective, took place to convince the Department of It lias also been argued that free browsers are like free newspapers or Justice to file a broader case against Microsoft.109 The emerging broadcast television thal charge advertisers for placing advertisements. consensus was to charge Microsoft’s aggressive tactics aimed at See John E. Lopatka & William H. Page, Antitrust on Internet Time: Microsoft and the Law and Economics of Exclusion. 7 Sup. Ct. Ecgm. Rev. ;|JT In response to Judge Jackson’s preliminary injunction and while 157, 209-10 (1999). Unlike Microsoft, free newspapers do not have con the appeal was pending, Microsoft offered OEMs a choice of a 2-yeai-old trol over the primary distribution kiosk in a community, and television version of Windows without its browser or a current version that did not stations do not have the power to have a consumer’s television set pre function. After Judge Jackson’s law clerk ran the uninstall feature of programmed to receive only their channel and rigged to make it difficult W'indows 95 and made IE disappear, Microsoft agreed to make a version to receive any other. Aside from these considerations, there is no evi of Windows 95 available with the browser function disabled. See H±:il e - dence indicating what, if any, revenue received from bundling other ser mann, supra note 71, at 68-69. This event apparently generated a mis vices or advertising may be or whether it is sufficient to cover the costs trust of Microsoft in Judge Jackson's mind; a mistrust that contributed to associated with generating the revenue realized from the advertising, let the court’s decision to order a breakup of the company as the only effec alone the long-run average incremental cost of the browser program and tive remedy that would avoid future manipulations by Microsoft to cir the subsidies incurred to promote it. The trial court found as a matter of cumvent constraints upon its conduct. Id. at 69—70. fact, for example, that Microsoft’s pricing of its referral server for LAPs far exceeded its cost of providing the service to the favored LAPs, Find Klf; See note 92, supra. ings of Fact, supra note 2, at 261, and that substantial financial incentives J09 Just as the states had been active before the federal government in in the fonn of royalty reductions on the Windows operating system were pressing antitrust issues against Standard Oil, state attorneys general, par extended to large OEMs and others to favor Microsoft’s IE over ticularly Assistant Attorney General Mark Tobey of Texas, became active Netscape. Id. at 230-3S. leaders in the campaign to bring a broader federal antitrust case against Microsoft. See, Hellemann, supra note 71, at 2 J-22. 694 : 7lie antitrust bulletin Standard oil and micrmufi : 695 control of the Internet browser market wrere part and parcel of a While Gates claimed that Microsoft was engaged in innova scheme to maintain its monopoly position in the operating system tion by combining Microsoft’s browser with its Window's program market.110 The most important antitrust value at stake was innova just like automobile companies were engaged in innovation when tion efficiency,111 because Microsoft’s tactics were aimed at any they decided to include radios in the cars they manufactured,115 innovalive threat to its lucrative monopoly over the PC operating the analogy was a limping— if not stumbling—one. There is not system market, the power to take over whatever innovative appli much question that automobiles and car radios are “two separate cations markets it chose to take over and its power over OEMs to products” and that, even in the absence of monopoly power in the dictate ilie terms and conditions of innovative computer programs automobile market, competitive issues might be raised by lying installed on the machines they make and sell.,i; automobiles- and car radios.JJJ Those issues to one side, automo bile manufacturers do not possess monopoly power over the man
llu See id. at 75-94 describing the effort to organize a campaign lo ufacturing of automobiles. A better analogy to the Microsoft convince the Department of Justice to file a new and broader case against circumstance would be where a single firm has a monopoly over Microsoft. Persons as diverse in views as Judge Robert Bork, Ralph Nader the fuel used in automobiles and insists that automobile manufac and Senator Orrin Halch were enlisted in the cause against Microsoft, turers purchase the engines, radios or tires they install in their Judge Bork was apparently impressed by the similarity between the tactics autos from the fuel monopolist. Although the end product of a involved in Lorain Journal v. United States, 342 U.S. 143 (1951) (refusal consumer-convenient integrated automobile with an engine, radio to deal by monopoly newspaper with advertisers dealing with a local radio stauon competing for advertising) and those employed by Microsoft and tires designed for use with a common fuel may be the result, gainst Netscape. Senator Hatch had concerns about tactics used by the impact of the practice on competition in the auto manufaclur Microsoft against Utah firms like Novell and Caldera. Sun Microsystems ing market and pricing and innovation in the separate products of financed Projcct Sherman, a group of leading economists and lawyers, to fuel, engines, radios and tires would predictably be less than opti convince the Department of Justice for a renewed antitrust attack upon mum and a violation of the antitrust laws.115 Monopoly power in Microsoft. The thrust of their analysis of Microsoft’s conduct was that the fuel market would be used both to extend the monopoly to Microsoft’s conduct was imposing a long-term cost to innovation by deterring competition with Microsoft in any market Microsoft entered or might enter. See, Heilemann, supra note 71, at 93. 113 See id, at 42, ■u By the mid to late 1990s for example, “there was almost no R & D 114 See Town Sound &. Custom Tops, Inc. v. Chrysler Motors Corp., on operating systems anymore.” Heilemann, su p ra note 71, al 93, 959 F.2d 468 (3d Cir. 1992), cen. denied, 506 U.S. 868 (1992>; Auto Microsoft's overwhelming share of the operating system market meant matic Radio Mfg. Co. v. Ford Motor Co.. 242 F. Supp. 852
Microsoft was also found to have used its monopoly power threat of innovation posing risks to its operating system monopoly over the Intel-compatible operating system market to suppress the by leading firms in the computer industry in ways similar to Stan dard Oil’s attempts to suppress the innovation of long-distance oil pose to exclude others which was frequently manifested by acts and pipelines. The trial court found Microsoft coerced Intel into drop dealings wholly inconsistent with the theory ihat they were made ping its effort to develop software providing interfaces indepen wilh a single conception of advancing the development of business dent of its operating system by pressuring OEMs to not install power by usual methods, but which on the contrary necessarily Intel’s new software and threatening to stop dealing with Intel;131 involved the inlent to drive others from the field and to exclude them from their right to trade and thus accomplish the mastery coerced Apple Computer into adopting IE as its default browser which was the end in view1. . . . The exercise of the power which and dropping its development of a multimedia playback software resulted . , , fortifies the foregoing conclusions since the develop for Windows;132 forced Real networks to integrate its software for ment which came, the acquisition here and there which ensued of streaming audio and video with Microsoft’s platform for doing every efficient means by which competition could have been so;133 attempted to subvert the cross-platform capability of Sun’s asserted, the slow but resistless methods which followed by which Java program by creating a corrupted version of the program and means of transportation were absorbed and brought under control, the system of marketing which was adopied by which the country deceptively promoting it with program developers;1-14 and was divided into districts and the trade in each district in oil was turned over lo a designated corporation within the combination and Internet Explorer can explain the length to which Microsoft has all others were excluded, all lead the mind to the conviction of gone. In fact, Microsoft has expended wealth and foresworn oppor a purpose and intent which we think is so certain as practically tunities to realize more in a manner and to an extent that can only to cause the subject not to be within the domain of reasonable represent a rational investment if its purpose was to perpetuate the contention. applications barriers to entry. . . . Because Microsoft’s business Judge Jackson concluded his analysis of Microsoft's conduct to prevent practices ‘‘would not be considered profit maximizing except for entry into a “middleware” role by competitors as unlawful monopoliza the expectation that . , . ihe entry of potential rivals” into ihe mar tion in violation of § 2 of the Sherman Act as follows: ket for In tel-compatible PC operating systems will be “blocked or delayed” . . . , Microsoft’s campaign must be deemed predatory. Only when ihe separate categories of conduct are viewed . . . as a Since the Court has already found that Microsoft possesses single, well-coordinated course of action does the full extent of the monopoly power . . . , the predatory nature of the firm’s conduct violence that Microsoft has done to the competitive process reveal compels the Court to hold Microsoft liable under § 2 of the itself. . . . In essence, Microsoft mounted a deliberate assault upon Sherman Act. entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the Microsoft Corp., 87 F. Supp.3d at 44. market for Intel-compatible PC operating systems. . . .Microsoft’s iJ1 Findings of Fact, supra note 2. at 94—103, Microsoft viewed the anticompetitive actions trammeled the competitive process through Intel software as posing the threat of developing an alternative platform which the computer software industry generally stimulates innova to Windows. tion and conduces to the optimum bene 111 of consumers. 1,; Id. at 104—10. Viewing Microsoft’s conduct as a whole also reinforces the con viction that it was predacious. Microsoft paid vast sums of money, Id. at 111-14. and renounced many millions more in lost revenue every year, in order to induce firms to take actions that would help enhance Inter 134 Id . al 386-407; Findings of Law, su p r a note 2, at 43-44. net Explorer’s share of browser usage at Navigator’s expense. Microsoft’s version of Java, JVM, was found to undermine ihe portability Microsoft has no intention of ever charging for licenses to use or of programs written for JVM with Sun’s Java compliant program and distribute its browser. . . . Moreover, neither the desire to bolster vice-versa. The trial court found the effects of this conduct was “to mini demand for Windows nor the prospect of ancillary revenues from mize Navigator’s usage” with Sun’s version of Java, to prevent “the development of easily portably Java applications” and to induce develop- 7 0 6 : Tht cmiirrmt bulletin Standard oil and Microsoft : 707 attempted to coerce IBM from developing und promoting its OS/2 Microsoft, control of alternative methods for delivering product operating system and Office applications by charging it higher (oil, in the case of Standard and applications programs and alter licensing fees and delaying IBM access to Windows APIs essen native computer platforms in the case of Microsoft) posed threats tial lo installing the latest Microsoft software on IBM PCs.135 The to their monopoly control over the key part of the entire industry court relied on this conduct as evidence of "Microsoft’s business (refineries in the case of Standard and the operating system pro strategy of directing its monopoly power toward inducing other gram in the case of M icrosoft).138 And in both cases, the steps companies to abandon projects that threatened Microsoft and taken to protect that control involved the suppression of indepen toward punishing those companies that resist.”136 dent providers of the new technology and then assumption of con trol over the technologies.T he efficiencies realized by new This evidence is also similar to Standard Oil's use of its innovation are often of more long-term competitive value than monopoly power to discipline members of its railroad cartel and other forms of efficiencies— both because of the value of the new exclude the threat of competition via the new technology of inde innovation and the competitive stimulus provided lo those in con pendent oil pipelines.1’7 In both the case of Standard Oil and
Lines, and gave small stock interests in the line to the New York Central crs to use the corrupted JVM version thereby limiting the number of and the Lake Shore Railroad lo increase his influence over those lines, applications that are easily portable. Chernow, supra note 11, at 171-72. I3-- Findings of Fact, supru note 2, at 115-32, 138 In combating the cross-platform threat from Sun Microsystems’ 13lJ Id. at 132. Microsoft continues its aggressive campaign of Java, the court found Microsoft created a Java implementation that bundling more features into its Windows operating system even while the undermined portability and was incompatible with other implementa case is on appeal. For example, the latest version of Windows, Windows tions, Findings of Fact, supra note 2, at 387-94. The court further found XP, bundles instant messaging, streaming audio, business applications, that Microsoft bundled its corrupted version of Java with its Windows etc. into its operating system and makes it more difficult to locate third- operating program and pressured Intel not to share its technology with party services. See Rebecca Buekman & Julia Angwin, Microsoft, AOL Sun or Netscape to enable their version of Java to operate on the Win Bathe on Windtw j XP, W all St. J., June 4, 2001, at A-3. dows operating system. Id. at 395-403. The effect was to force applica tions programs to be written for Microsoft’s version of Java lather lhan Chernow , supra note 11, at 200-04 describing Standard Oil’s the more open and flexjble version offered by Sun and Neiscape The response io The Pennsylvania Railroad’s attempt lo escape from Stan court found the effect of Microsoft's conduct was to enhance the applica dard's control by operating a subsidiary, the Empire Transportation Com tion barrier to its operating system monopoly. Id. at 43—44. pany with 500 miles of pipelines and 1000 tank cars. Empire acquired refineries in New York City, Philadelphia and Pittsburgh and began lay 13’ A further parallel between the modus operand! of the two compa ing pipe to a new oil field in Bradford, Pennsylvania. Standard responded nies is ihe use of political campaign contributions to buy favor with well- by declaring war on the Pennsylvania Railroad and diverted shipments placed politicians. As previously mentioned, during Standard Oil’s era from the Pennsylvania Railroad to other members of its railroad cartel, the practice went beyond campaign contributions and included outright shut down Standard’s Pittsburgh refineries and promised to undersell bribery. Microsoft began spending several million dollars per year on Hmpire’s refineries in every market where they attempted lo sell political activities as its difficulties with antitrust scrutiny by government kerosene. The Pennsylvania slashed wages, upped working hours and increased. Some of its tactics were particularly ham-handed like the doubled the length of trains without a corresponding increase in the size effort to have the Antitrust Division’s budget cut during the pendency of crews. In 1877, the employees of the Pennsylvania struck in one of the of the antitrust case against it. See Editorial, Wash. Post, Oct. 24, 1999, bloodiest strikes of the era. The Pennsylvania's stock tumbled and the at B-4. Olher noticeably clumsy efforts included using business groups railroad capitulated and sold all of its refineries, storage, pipelines, as fronts for negative campaign advertising in a Senate race. See John steamships, barges and docks to Standard Oil. Standard also began devel R. Wilkes, Microsoft Is Source of 'Soft Money ’ Funds Behind Ads in oping its own pipeline network through a front company. United Pipe M ichigan j Senate Race, W all St. J., Ocl. 16. 2000. at B-l. 708 : The antitrust bulletin Standard oil and Microsoft : 709 trol of related technologies affected by the new innovation.140 The court further found that Microsoft's 95% plus share of the operating system market for Intel-compatible PCs created an While more difficult to prove, clear-cut cases of the use of monopoly power to suppress innovation, whether for its own sake applications program barrier to other operating systems because or some other objective like protecting related monopolies, justify programmers had to write programs compatible with Microsoft's condemnation of the conduct under section 2 of the Sherman Act operating system should they hope to have any market success, when monopoly power is used to accomplish the suppression.141 and were unlikely to write programs for other operating sys tems.143 The court proceeded to affirm the district court's findings The court of appeals affirmed the finding that Microsoft held a that Microsoft's licensing practices with OEMs, IAPs, and ISVs monopoly over the operating system for Intel-compatible PCs.14- were designed to maintain M icrosoft's operating system monopoly by foreclosing the threat of independent browsers Some commentators assume that ‘L[a]ntitrust prohibits only atiti- developing an alternative platform for applications programs. In eoiupetiive practices that exclude a rival in ways that reduce allocative particular the court of appeals singled out as unlawful conduct efficiency and enhance monopoly power” Lopatka & Page, supra note aimed at maintaining Microsoft’s operating system monopoly: 106, at 190. Lopatka & Page also view Microsoft as innovative and that the regular upgrades of its operating system are indicators of Microsoft's 1. OEM licensing restrictions prohibiting OEMs from altering the innovation. Both assumptions are open to serious question. Many main Windows desktop including removal of the IE icon and inclusion tain that Microsoft is not innovative and that its regular upgrades of the of the Netscape icon;1" operating system are aimed at bringing Microsoft additional monopoly 2. Integrarion of IE with the Windows program by excluding the profits and not significant innovation to consumers. Add/remove function,145 designing Windows to prevent a con Whatever the ments of these arguments, it is submitted that among the economic ‘’efficiencies'' promoted by a reliance upon a competitive process, innovation and production efficiencies are of far greater eco rather silly argument on its face, were c\cluded from the market because nomic significance than is allocative efficiency. Sec Brodley,, supra note they “fall far short of performing all of the functions of a PC . . . And 5. The use of monopoly power to prevent, suppress or coopt market other middleware software was found not to expose enough APIs to serve access by competitors seeking to bring innovation, production or alloca as a platform for most popular applications programs or to take over the tive efficiencies has been held to be unlawful ever since the C ase o f PC operating system market. 253 F.3d at 52-54. Monopolies, supra note 5. And it is apparent that both Standard Oil and 143 Tbe applications barrier to entry was found to stem from two char Microsoft engaged in such conduct on a wholesale basis. While the acteristics of the software market “(1) most consumers prefer operating antitrust laws may not prohibit a firm from gaining a monopoly, they do systems for which a large number of applications have already been writ prohibit the conduct of a firm acquiring or maintaining a monopoly by ten; and, i 2) most developers prefer to write for operating systems that means not honestly industrial—i.e., by means inconsistent with a compet already have a substantia] consumer base." 253 F,3d at 55. itive process determining success or failure in a market. 144 Including more than one browser on the desktop posed the risk of Ul See Thomas M. JoRot & David J. Teece, Antitrust, [novation substantial cost increases for OEMs in servicing customer problems with amj Competitiveness (1992)-, Brodley, supra note 5; Flynn, supra note 5, the programs installed on their machines, Microsoft also sought to claim its 14' United States v. Microsoft Corp., 253 F.3d 34 (D.D.C. 2001). licensing restrictions were a justified exercise of the rights of a copyright Microsoft’s argument that the relevant product market should include holder. Hie court of appeals rejected this defense, noting that it “bordered Macintosh computers, operating systems for non-PC devices like hand on the frivolous,” to argue that the exercise of intellectual property rights held devices and middleware products or software products with their cannot give rise to antitrust liability. The court observed: “That is no more own application programming interfaces. Macintosh computers were correct than the proposition that the use of one’s personal property, such as found to be in a separate market because they operate on a different pro a baseball bat, cannot give rise to tort liability.” 253 F.3d at 63. cessor, had far fewer application programs written for them and cost con 145 The court affirmed the finding that the purpose of doing so was to siderably more to supporl. Operating systems for non-PC devices, a reduce the use of rival browsers and exclusionary because it was not 710 The antitrust bulletin Standard oil and micro soft : 711
4, Exclusive dealing contracts with ISVs whereby Microsoft sumer from using an alternative browser,N(’ and commingling code extended preferential support and access to new versions of Win specific to Web browsing in the same file as code providing oper dows in exchange for making IE the default browser for browsing ating system functions with the result that deleting any file con software ISVs develop and use a “help” function on their pro taining browsing-specific routines would eliminate operating system code crucial to the functioning of Windows:1-*7 grams only accessible through 5. Threatening Apple Computer with terminating Microsoft's pro 3. Exclusive dealing contracts with leading lAPs placing the lAP’s duction of the Mac Office application program, a vital program icon on Windows desktop and agreeing not to supply competing for Apple’s survival, unless Apple ceased using Netscape as its browsers like Netscape to an lAP’s customers ;l4i! default browser and adopted IE as its default browser and securing an agreement with Apple doing so;1*1 based on competition on the merits of competing browsers. 253 F.3d at 67. from posing a threat to Microsoft's operating system monopoly. 253 F.3d N'J The court affirmed the finding that this conduct was anticompeti at 71. tive be cause it reduced the market share of rivals and was not based on The court rejected the additional claim that giving the IE program to competition on the merits. 253 F.3d at 67. The court refused to affirm the lAPs for “free” and in some cases paying them substantial promotional trial court’s finding that interesting IE code with the Windows operating and other sums for promoting the program to the exclusion of other system code to override a user’s choice of a default browser was unlaw browsers did not constitute predatory pricing. The court’s analysis of this ful. Microsoft claimed that the design of Windows made it technically claim is summary and less than convincing. The court held lhat “the necessary lo override the user’s browser preference for some of the antitrust laws do noi condemn even a monopolist for offering its product nearly 30 ways lo access the Internet. The court held ihe government at an attractive price 253 F.3d at 68, While that statement may be failed to rebut Microsoft’s justification on this issue, id, at 67, true in the abstract, the clear effect of Microsoft giving its browser away free and subsidizing its distribution was to mortally wound Netscape’s l4; The court affirmed the trial court’s finding of disputed fact thal ability to remain in the market by depriving it of an important source of this conduct was exclusionary because it deterred OEMs from installing revenue. The government argued that Microsoft was able to recoup the competing browsers. 253 F.2d at 66. Microsoft has sought a rehearing on cosl of developing and promoting its browser from monopoly profits on this issue because it is crucial to Microsoft’s plans for its Windows XP its Windows operating system, while also protecting its monopoly from program bundling music, video, instant messaging and electronic busi erosion. The court disposed of the argument by finding the trial court did ness programs into the XP system. See Microsoft Requests That Appeals not predicate liability on this predatory pricing theory and the govern Court Rehear Pan of Case, W all St. J., July 19, 2001, at A2. Commin ment did not press the argument on appeal. 253 F.3d at 68. The argument gling code with browser and applications programs so that deleting a should have been pressed aggressively because substantial cross-platform function can prevent a user from choosing some other program or none al competition from alternative browsers may have helped erode all without disabling the operating system on their computer is obviously Microsoft’s operating system monopoly and reduced the monopoly price exclusionary' and a means to extend the basic monopoly of the operating of it. See note 106, supra, system to any Internet or application program Microsoft might choose to take over. The class of consumers immediately affected includes OEMs 149 253 F.3d at 72. The effect of these contracts was to make IE the and lAPs, “consumers” the court of appeals did not focus upon. They are, only browser available on the most popular applications software and to however, the “consumers” whose hands would be tied by such a restric exclude competing browsers from this channel of distribution, thereby tion in offering their customers—ultimate “consumers”—the most inno maintaining Microsoft’s operating system monopoly. vative and attractive package of programs. Competition between the A similar challenge to Microsoft’s contracts with ICPs was found to OEM and the IAP consumers for browser and application program rev be unsupported by Ihe district court because of a lack of evidence that the enue is also eliminated by Microsoft’s tactics. contracts had a significant impact on Netscape’s market share. 14,1 The court found this conduct exclusionary because it foreclosed 150 This conduct was found to have a “substantial effect upon the dis competitors from an important distribution channel and a substantial tribution of rival browsers . . . 253 F.3d at 74 and to be exclusionary opportunity for browser distribution, thereby foreclosing rival browsers - in violation of § 2 of the Sherman Act, 712 : TUt'awitntst bulteii)i Standard oil and mtcrosojf : 7 13
fi. Using its license for the Java cross-platform program to imple While the court of appeals rejected the additional ground that ment a scheme lo undermine its use by issuing a Microsoft cor Microsoft’s overall pattern of conduct constituted a separate cate rupted version of the program Java Virtual Machine (JVM), which gory of conduct evidence to support the charge of violating sec generated incompatibilities between applications for JVM and tion 2 by conduct unlawfully maintaining a monopoly,134 the their use with other platforms and vice-versa, and inducing IS Vs to use JVM exclusively thereby fragmenting cross-platform use of specific grounds found by the court of appeals amount to an over Java;1'’1 ’ * all pattern of conduct clearly aimed at protecting Microsoft’s operating system monopoly from erosion by alternative platforms. 7. Causing Intel to stop developing high-performance Java software compatible with Microsoft's JVM version of Java to prevent the They are also analogous to the course of conduct followed by threat of such software to Microsoft’s operating system monopoly Standard Oil to choke off ihe risk to its maintenance of its refin by threatening to refuse to deal with Intel by bundling its tech ery monopoly by mourning an all out war on the new technology nologies with Windows.1'-' of transporting crude and refined oil by long-distance pipeline. In both cases, monopoly power was used to orchestrate related busi Each category of conduct involved the use of Microsoft's nesses dependent upon that monopoly power to foreclose compe monopoly power to erect substantial barriers to competition that tition in the monopolized market—refining in the case of could have eroded its monopoly power in the operating system Standard Oil and PC operating systems in the case of Microsoft. market. And, like the conduct engaged in by Standard Oil to pro Monopoly control was then used to extend the monopoly to tect its refinery monopoly, each category of conduct was found related markets—pipelines in the case of Standard Oil and Inter sufficient to establish a violation of section 2 of the Sherman Act net browsers in the case of Microsoft. The extension of monopoly for unlawfully using monopoly power to maintain its monopoly.'55 power to the key transportation function was then used to begin moving into related businesses, oil production in the case of Stan 151 253 F.3d at 75-77. While the court held that changes made by dard Oil and Internet applications in the case of Microsoft. And in Microsoft to ihe Java program allowed the program to operate more the case of Microsoft, the tactics followed indicate an overall quickly and it could not be held liable for making such changes, the strategy and intent— similar to that of Standard Oil—of using any imposition of exclusive dealing com rads on IS Vs, deception of JVM developers by not disclosing incompatibility problems and coercion of means available to prevent competition on the merits with not Intel into dropping its effort to develop a faster Java cross-platform pro only its monopoly operating system but also with any application gram by threatening (o deal with another chip manufacturer were all held program or content it finds profitable to capture and dominate. to be exclusionary conduct in violation of § 2, The trial court also found that Microsoft attempted to monop This conduct was found to be exclusionary in violation of § 2 of olize the browser market in violation of section 2 of the Sherman the Sherman Aci. 253 F.3d at 78-79. Act.155 While the trial court found the alleged 1995 proposal made 111 Microsoft attempted to argue that there was no evidence of a by Microsoft to Netscape that the two firms divide the market to causal connection between its conduct and the maintenance of its operat the great advantage of Microsoft was sufficient to sustain an ing system monopoly because there was no evidence the alternatives of an independent browser like Netscape and cross-platform programs attempt to monopolize charge,156 the court also found that the like Java would have "ignited competition for Intel-compatible PC oper ating systems.” 253 F.3d at 77. The court of appeals rejected this argu 253 F.3d at 78. ment with the observation: “We may infer causation when exclusionary conduct is aimed at producers of oascent competitive technologies as 155 Findings of Law, supra note 2, at 45—46. well as when il is aimed at producers of established substitutes.” 253 15(1 The court found that despite the fact that Netscape had 70% of Ihe f.3d at 79. browser market at the lime the proposal was made, the fact that Microsoft 7 1 4 ; The antitrust bulletin Standard oil and microsoft : 715 predatory course of conduct Microsoft followed after Netscape The court of appeals treatment of the attempt to monopolize rejected the alleged offer to divide the browser market was suffi claim centered on its assertion that the trial court had failed to cient to prove a dangerous probability of Microsoft monopolizing define the relevant market Microsoft was charged with attempting the browser market. Netscape’s market share declined rapidly in to monopolize and the plaintiff's claimed failure to offer evidence the face of Microsoft's tactics locking in OEMs to installing its defining the parameters of the relevant m arket.T he court’s browser program with Windows, below-cost pricing, exclusive assertion with respect to the specificity with which a market must contracts with access providers, and other exclusive arrangements be defined for purposes of an attempt to monopolize claim is less with firms like Apple to use M icrosoft's IE browser. Correspond ingly, M icrosoft’s browser market share increased rapidly to ture with rolling slock needed for the project; gave price concessions above 50% by the time the case was decided and was predicted to (like Microsoft did lo OEMs and others) to refiners using Standard’s exceed 60% by January 2001.137 Although the Standard Oil ca se pipelines; bought up any remaining independent refiners that might make use of the new pipeline; and bought up strips of land (including an entire did not involve a comparable attempt-to-monopolize issue, sev valley) to prevent the new pipeline from crossing its planned route. Id. at eral actions taken by Standard Oil during its formative years could 207—OS. Despite these actions by Standard Oil to prevent cons [ruction of have been considered attempts to monopolize if the Sherman Act the pipeline, it was completed in 1879 and everyone held their breath to had been in place when the acts occurred. Acts designed to take see “if crude oil would actually scale the intervening mountains." Id. at over competing oil pipelines and refineries located in cities Stan 211. After 7 days of pumping. crude began trickling out of the line at the dard either wished to take over or drive out of business often were Williamsport end of the line promising relief for producers and indepen dent refiners from Standard Oil’s refining monopoly. Id, at 211. undertaken with the power to accomplish the objective of monop Relief was short lived. Standard Oil attempted to bottle up Tidewa olizing refining, the specific purpose of doing so and the danger ter’s access to crude and bought up New York refineries before they ous probability of doing so.158 could become Tidewater customers. Standard reduced rates on Standard Oil pipelines and railroad rates to such levels that il was said ‘‘they was the only other significant competitor in the browser market, could scarcely covered the wheel grease.” and the price war forced Tidewater leverage its power from the operating system market to dominate any to operate at half capacity. Id. at 214, Ultimately, Standard bought an potential entrant and would have gained a monopoly over the browser interest in Tidewater and in 1882 entered into an agreement dividing up market if the proposal had been accepted, was sufficient to find the act of the Pennsylvania pipeline business with Standard having 88.5% of the proposing the division of markets to the disadvantage of Netscape an market and Tidewater 11.5%, id. at 215, an agreement with consequences unlawful attempt to monopolize, 87 F, Supp.2d at 46. similar to that Microsoft proposed to impose on Netscape.
i:; id. 159 The court pointed to the absence of evidence describing the tech nological components or functionalities provided by a browser and why 136 Standard Oil’s reaction to the first major attempt to transport products like browser shells and Internet extensions were not included in crude oil by long-distance pipeline was similar to Microsoft’s reaction to the market defined. 253 F.3d at 81-82. the initial stages of the development of the Internet—a wary ignoring of The independent status of the attempt to monopolize offense under the effort and then a swift response on all fronts to stamp out the threat to § 2, has been considerably diminished by the Supreme Court’s decision in its domination of the industry once the pipeline became a success. The Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993) converting the Tidewater Pipeline project sought to transport crude oil from Oil City, offense from an attempt to “monopolize” (fix prices or exclude competi Pennsylvania to Baltimore. Standard QO became “the benighted custo tors) to an attempt to “monopoly” (gain a monopoly over a relevant mar dian of the status quo, squelching progress to safeguard its own inter ket). Aside from contradicting the specific language of the statute, the ests.” Chernow, supra note 11, at 207. It did so, by buying an exclusive decision immunizes a considerable range of potentially anticompetitive pipeline franchise from the Maryland Legislature (spending $40,000 to unilateral conduct by firms with market power like that engaged in by do so) forcing the new pipeline to cross 2600-foot mountains; bought up Standard Oil and Microsoft. tank car manufacturers’ capacity to prevent them from supplying the ven- 7 1 6 : The antitrust bulletin Standard oil and micros oft : 717 than convincing. The court had recognized the '‘browser market’7 “monopolize” the browser market by excluding specific browser earlier in its opinion when dealing with the issue of Microsoft competitors. The lower court’s finding that Microsoft’s conduct unlawfully maintaining a monopoly over the operating system constituted an unlawful attempt to monopolize the browser market market'60 and recognized that several of M icrosoft’s licensing appears to have become a reality in fact if not in the mind of the practices were designed to maintain its monopoly over the operat court of appeals, with the rapid domination of the browser market ing system market, preserve the applications barrier and prevent by Microsoft and its expanding domination of the browser market cross-platform competition from Internet browsers. Browser cus by being bundled with the operating system preloaded on most tomers, both the important middleman customers like OEMs and PC s, IAPs (customers ignored as “consumers” by the court of appeals) The further claim that initially appeared to be the central issue and ultimate consumers buying computers with preinstalled pro in the Department of Justice’s monopolization claim, that grams or downloading their own, treated browsers as a separate Microsoft violated the Sherman Act by unlawfully tying its oper “market.” The fact that all concerned simply assumed the obvi ating system program to its browser program in order to restrain ous, that browsers were a separate market, may explain the lack of trade in the browser market, became a secondary claim to the evidence proving the obvious but does not justify the court of more central monopolization case the government built against appeals ignoring the obvious. Microsoft. In the most controversial and confrontational part of While the aLiempt to monopolize claim was not essential to his substantive decision, Judge Jackson found that the District of the case, with the possible exception of remedies that might have Columbia Circuit Court finding in the earlier case interpreting the otherwise been considered for such a violation,14,1 the court’s anal consent decree as not prohibiting the bundling of M icrosoft’s ysis of the issue leaves the impression that it was unwilling for browser with its operating system program “is at odds with the some unspoken reason to permit the case to go off in the direction Supreme Court’s own approach” to tying cases .162 of finding what appears to have been an unlawful attempt to both gain a monopoly of the browser market and an attempt to 165 87 F. Supp.2d at 49. While Judge Jackson recognized that the court of appeals’ decision involved the interpretation of the earlier consent decree and was not an application of antitrust tying doctrine, he appeared See, e.g., 253 F.3d at 60: “The reason that market share in the to go out of his way in a confrontational challenge to the court’s earlier browser market affects market power in the operating system market is opinion reversing his interpretation of the consent decree. Judge Jackson complex . . . '‘Therefore, Microsoft’s efforts to gain market share in need not have done so, but couid have simply treated the case as one rais one market (browsers) served to meet the threat lo Microsoft’s monopoly ing an issue not decided by the prior court of appeals decision interpreting in another market (operating systems) by keeping rival browsers from a consent decree and not antitrust tying doctrine generally. His analysis of gaining the critical mass of users. . . the tying issue, relying upon Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984) and Eastman Kodak Co. v. Image Technical Services, 141 A finding that Microsoft had unlawfully monopolized the browser Inc., 504 U.S. 451 (1992) was sufficient to establish a basis for holding market, would suggest a structural solution to remedy the attempt to that existing tying doctrine as developed by the Supreme Court justified monopolize as the primary way to rectify the violation or a stringent pro holding that the operating system and the browser were two separate prod hibition upon requiring buyers to take both the operating system program ucts in view of consumer demand and the ability to provide the two prod and the browser program as a package with equal access to Windows ucts separately. The “consumer demand” test for determining one or two APIs for competing browsers. In view of the fact that the browser war is products is the analysis followed by Judge Benson in Caldera, Inc. v. now over with Microsoft having successfully gained dominance in the Microsoft Corp., 72 F. Supp.2d 1295 (D.D.C. Utah 1999) involving a browser market, the more appropriate remedy would be to require claim that Microsoft unlawfully tied its operating system software to its Microsoft to reduce its share of the browser market by a structural graphical user interface to exclude compering operating system software remedy. on the PCs they manufactured or assembled. 7 1 8 : The antitrust bulletin Standard oil and micro sot! : 719
The tacts undoubtedly presented a clear case of at least three While the court found there was a demand for the two products as of the four elements of a tying case (1 > power in the tying product separate products, the “consumer” focused upon was the ultimate (Windows operating system); (2) an effect upon a substantial consumer of PCs and no mention was made of other classes of amount of commerce; and (3) a forcing of consumers to take the consumers—the OEMs required to install Microsoft’s browser tied product (browser) in order to get the tying product (the Win along with its operating system, and IAPs and ISVs induced to dows operating system). The trial court found the fourth element use Microsoft's browser and exclude Netscape’s browser from of “two separate products'’ must be determined by whether there their programs. OEMs, IAPs and ISVs had expressed a continuing is consumer demand for the two products as separate products. interest in providing Netscape’s browser separate from Microsoft's operating system but were precluded from doing so by “In the instant case, the commercial reality is thal consumers Microsoft’s requirement of OEMs that they either took the operat today perceive operating systems and browsers as ‘separate products,’ for ing system and the browser together or not at all, and by exclusive which I he re is separate demand. . . . This is true notwithstanding the dealing arrangements with IAPs and ISVs to use IE,164 fact that the software code supplying their discrete functionalities can be commingled in virtually infinite combinations, rendering each indistin By locking in the OEMs and Apple to IE, Microsoft locked in guishable from the whole in terms of files of code or any other taxon most buyers of PCs, extended its monopoly over the installed base om y.” Microsoft Corp., 87 F. Supp.2d at 49. The court of appeals to include new buyers and replacement buyers with preinstalled majority opinion is clearly inconsistent with prior Supreme Court prece Microsoft browser software, eroded Netscape’s market share, and dent. See Norman H. Hawker, Consistently Wrong: The Single Product further enhanced the applications barrier for alternatives to Issue and the Tying Claims Against Microsoft, 35 C a l . W . L . R ev . 1 (2000) for an extensive analysis of the court of appeals decision inter Microsoft’s operating system. Consequently, it is difficult to preting the consent decree and prior Supreme Court and lower court anal understand how Microsoft’s bundling of its IE browser with its ysis of the two product issue in tying cases. monopoly operating system program does not constitute an For a view critical of Judge Jackson’s findings on the tying issue by a unlawful tying arrangement under section 1 of the Sherman Act, Microsoft consultant, see J. Gregory Sidak, An Antitrust Rule for Software Integration, 18 Yale J. Reg. 1 (2001). Sidak proposes a far more complex rule for defining the legality of tying arrangements in the context of what making a presumably rational choice in favor of offering a non-Microsoft he describes as ‘‘technologically dynamic markets.” Sidak’s test is depen browser if they chose to do so rather than being forced to accept dent upon a showing that the market involved is a “technologically Microsoft’s browser in order to install Microsoft’s monopoly operating dynamic market,” that there are economies of scope in having a single system on the machines they produced. There was no evidence that firm integrate the “separate functionalities,” and appears to defer to the bundling was essential to the functioning of the operating sysiem other paternalism of the dominant firm’s decision as to whether it is best that than to protect it from erosion by browsers with published APIs posing a the products be sold as an integrated package rather than market demand threat to Microsoft’s monopolized operating system market. making that decision. To defer to the firm imposing the tie as to whether 164 Auletta, supra note 71, at 294—97. Microsoft not only gave away to sell the product as a bundle, particularly where the firm has a monopoly its browser "free,” but also engaged in bartering services to IAPs and over the tying product, would exempt a decision to do so from judicial ICPs for preferential placement of its browser system, prevented OEMs review of whether the decision was justified. Justification of a tie where from removing IE from the bundled Windows package, deleted a method the firm imposing a tie has a monopoly in the tying product market should for ultimate consumers not wanting an Internet program on their com be limited to circumstances where offering the separate functions as a puter Lo remove IE, forbid OEMs and other suppliers from altering the bundle is essential to the operation of the tying product and there is no display of icons on the opening screen, and extended price breaks on less restrictive alternative to bundling to achieve that end. Windows to OEMs agreeing to promote IE and curtail distribution of In the case of integration of the operating system and a particular Netscape. See Findings of Fact, supra note 2, at 149-71. Similar steps browser program, the “consumers” involved were largely OEMs and were taken with IAPs and ICPs to induce them to promote LE and drop lAPs, equally sophisticated decision-makers who were precluded from Netscape. Id. at 272-336. 720 ; The amitrusT bulletin Standard oil and micro soft : 721 and an act of unlawful monopolization under section 2 of the The court of appeals reversed the trial court’s finding that Sherman Act, particularly where there is the less restrictive alter Microsoft unlawfully tied its operating system and browser pro native of offering both programs separately along with offering gram on the grounds that the trial court applied a per se standard them as a bundle.ltl5 instead of a rule of reason standard to the conduct. While the practice of tying is less "per se” than the trial court appeared to Elsewhere, I have argued that per si; rules like that prohibiting claim,1”6 tying is and should be considered more ‘“unreasonable” lying arrange mentis ought to be considered evidentiary presumptions of than the court of appeals appeared to allow.167 The court assumed illegality subject to justification or excuse. John J. Flynn, R ethinking the concern with tying arrangements to be the impact in the tied Sherman Act Sec non I Analysis: Three Proposals for Reducing the C haos, 49 A ntitrust L.J. 1593 (1980). In view of Microsoft’s monopoly product market and appeared to ignore the potential of a tying power over the operating system market and the status of its operating arrangement to impair competition in the tying product market as system program as the only practical alternative for most PCs, the only well, particularly competition from innovation in the tied product justification that might offset a finding of illegality once it is shown that market. And the court considered the test developed for identify there are two separate products, forcing and a not insubstantial amount of ing whether there were two products, the consumer demand test,lt,B commerce involved should be a clear and convincing showing that only by combining the two programs can an essential functional benefit in the O ffense, 61 O hio S t . L.J. 1035, 1042 (2000). Professor Hovenkamp lying operating system market be realized. Even in those circumstances it points out, quite correctly, that the M icro so ft case applies the most ought to be required that the less restrictive alternative of making it pos "orthodox of antitrust principles” to the kind of practices “that have been sible for competitors in the tied market to also offer the same technologi condemned by the antitrust laws for generations." Id. at 1047. cal advantages should be required in view of the adverse efficiency effects upon innovation in both the tied and tying markets likely to take 106 The degree of per se illegality of tying is often litigated under the place should a single firm monopolize both markets. See note 163, supra. rubric of whether there is one product or two involved, Jefferson Parish Providing equal and timely access to the Windows APIs for competing Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984); whether there is “power” browsers if there is some functional benefit to the operating system by in the tying product market assuming there are two products, Fortner virtue of bundling it with a browser function might constitute a less Enterprises v. U.S. Sled Co., 394 U.S. 495 (1969), 429 U.S. 610 (1977); restrictive alternative. S ee International Salt Co. v. United States, 332 Jefferson Parish Hosp. Dist. No. 2 v. Hyde, supra at 26; whether the tie U.S. 392 (1947) (specifications of salt quality a less restrictive alternative affects an appreciable amount of commerce in the tied product market, than requiring lessees of salt processing machines to purchase salt Eastman Kodak v. Image Technical Services, Inc., 504 U.S. 451 (1992); requirements for use in patented machines from defendant International or, whether there are justifications for the tying arrangement, Dehydrat Salt). ing Process Co. v. A.O. Smith, Corp., 292 F.2d 653 (1st Cir.), cert, The essence of the § 2 monopolization conduct standard applicable to denied, 368 U.S. 931 (1961). such conduct is summarized in Jonathan Baker, Promoting Innovation 16- Where there is monopoly power in the tying product market, past Through the Aspen/Kodak Rule, 7 Geo, Mason U.L. Rev. 495, 496 Supreme Court decisions have given short shrift to rule of reason analysis (1999): “[A] firm with monopoly power violates Sherman Act §2 if it once the conduct is identified as a tying of two separate products and a excludes rivals from the monopolized market by restricting complimen use of monopoly power in the tying market to force purchases in the tying tary or collaborated relationships without adequate business justifica product market. See Motion Picture Patents Co. v. Universal Film Mfg. tion.” Microsoft’s exclusionary campaign against Netscape even appears Co., 243 U.S. 502 (1917); International Salt v. United States, 332 U.S. to satisfy the more restrictive test proposed by Herbert Hovenkamp: 392 (1947); Northern Pacific Railway Co. v. United States, 356 U.S. 1 "[W]e can define unlawful monopolistic conduct as acts that 11) are rea (1958). As the Court stated in Jefferson Parish, “Per se condemnation— sonably capable of creating, enlarging or prolonging monopoly power by condemnation without inquiry into actual market conditions—is only impairing the opportunities of rivals; and, either do not benefit consumers appropriate if the existence of forcing is probably,” 466 U.S. at 15. at all, or (b) are unnecessary for the particular consumer benefits that the acts produce, or produce harms that are out of reasonable proportion to 16t A lest developed in Jefferson Parish Hosp. Dist. No. 2 v. Hyde, the resulting benefits.” Herbert Hovenkamp, The Monopolization supra note 165. 722 : The antitrust bulletin Standard ol! and microsoft : 723 as a "pro.\y for whether a tying arrangement may, on balance, be Throughout its discussion of the tying issue, the court of welfare-enhancing, and unsuited to per se condemnation.’*169 The appeals appeared to measure the impact of the bundling of the court did not succeed in evading the one versus two product issue Windows program with IE in light of its impact upon ultimate with its dubious "proxy,” but shifted the analysis to one of assum consumers. While ultimate consumers were forced to take the two ing there were two products, whether there was a justification for products together without a clear justification for doing so, the tie— a “welfare-enhancing innovation”—justifying the another and arguably more important class of “consumers'’ was bundling of Microsoft’s operating system with its browser pro ignored. OEMs and IAPs are the primary consumers of browser gram. The sidestep was followed by a ducking of the issue raised programs as a practical matter. They have an interest in and the because of the court’s inexperience with the technology involved, sophistication of choosing and installing the best combination of a hesitancy to interfere with judgments in a technologically browser and other programs to offer their customers. Microsoft’s dynamic industry and the lack of judicial experience with the bundling of Windows and IE into one package and steps taken to issue where the tying and tied products are physically intermin prevent its unbundling (found to be unlawful maintenance of a gled.17'1 The court of appeals remanded the entire issue for an monopoly over the operating system) locked in. both OEMs and evaluation under an ill-defined rule of reason analysis generating IAPs to installation of IE,173 The impact of this bundling deprived more ambiguity than it resolved.'71 OEMs and IAPs from exercising their judgment of what combina tion of programs to install or not install, eliminated competition lf,c 253 F.3d at 87. No support is cited for reading this implication between OEMs and IAPs on the products they could offer ultimate into ihe Jefferson Parish case. It has the appearance of an analysis consumers and foreclosed them from revenue they might have designed lo circumvent the earlier confrontation between the district gained from sale of access for browsers and programs to their court and court of appeals over the consent decree and whether it banned tying ‘‘two separate products” and the lower court’s analysis in this case basing its per se analysis in part on a consumer demand test for identify tying market and that Microsoft be permitted to assert a presumably wide ing products as separate products for purposes of tying analysis. It is also range of ill-defined pro competitive justifications for the tying arrange an unnecessary conversion of the test for one or two products into a legal ment despite its monopoly power in the tying market; 2. To show the concept like "proximate cause”—a confusing legal concept used lo practice of refusing to permit OEMs to uninstall IE or remove it from the express a variety of policies without saying so and greatly complicating desktop is an unlawful tying arrangement under § 1, the plaintiffs must the litigation of ton cases. The court should have continued the relatively show the benefits are outweighed by the harms in the tied product market simple “consumer demand” test developed by Jefferson Parish and left wiih no mention made of the impact of the practice in the tying market, the question of whether there was any justification for tying, assuming it what benefits are and are not permitted to be considered, and the fact lhat was found there were two products and the other elements of a tying case Microsoft has a monopoly in the tying product market; and 3. To show had been shown, to proof of the affirmative defense outlined, supra notes “price bundling” or the price for Windows with IE would have been 163 & 165. The need for hospitals offering 24-four hour surgical services higher than the price for Windows alone constitute unlawful tying, the to have staff anesthesiologists who work with staff surgeons to provide plaintiffs must demonstrate a positive price increment and that the anti the surgical services offered, rather than depend upon patients enlisting competitive effects of the practice must outweigh the procompetilive their own anesthesiologists, should justify the sale of the two services as effects of the practice. No mention is made of the import and issue of the a package in cases like Jefferson Parish, impact of the practice of price bundling upon innovation in either the tied or tying product markets or how the balance of pro and ami benefits is to 253 F.3d at 93-95. be struck. 171 Id. The court set forth the broad outlines of an analytical process 172 Findings of Fact, supra note 2, al 157-74. The court of appeals for evaluating the tying claim in this case: 1. That the plaintiffs show affirmed these findings and found them to be unlawful exclusionary con Microsoft’s conduct '‘unreasonably restrained competition” in the tied duct designed to maintain Microsoft’s operating system monopoly, 253 market of browsers with no mention of the impact of the practice on the F.3d at 26-35. 724 : The antitrust bu!Serin Stim dard 01! and microsof! : 725 machines or Web sites. The effect of the tying arrangement was to ket, the use of power to impose the tie should be considered pre organize OEMs and IAPs into cartels managed by Microsoft, just sumptively unlawful subject to a defense that the tie is justified. as Standard Oil managed a cartel of railroads, to promote The justification defense, particularly where there is monopoly Microsoft’s goals of maintaining its operating system monopoly power in the tying product market, should then be limited to a and extend that monopoly to the browser market to both prevent technological one, clear evidence that the tying arrangement is an erosion of its monopoly and extend its monopoly power into essential to the functioning of the tying product and that there are related Internet markets. no less restrictive alternatives available to resolve the technologi cal difficulty other than selling the two products as one. Justifying The court’s treatment of the tying issues is complex and con a tie by a monopolist on the vague standard of whether it is “wel fused and may also have been adopted with the problem of reme fare enhancing” to consumers is too ambiguous and open-ended a dies in mind. If bundling of Windows and IE is found to be an standard, particularly where there are sophisticated “consumers” unlawful tying arrangement, it is difficult to envision a remedy like OEMs and IAPs capable of determining whether to bundle short of a structural one that can resolve the problem over the the products or not and compete with one another in the package long term. While properly recognizing the evolution of tying doc of programs they offer consumers with the machines they manu trine has proceeded to a place short of a traditional per se analy facture. The court of appeals analysis of the tying issue makes it sis, the court’s opinion does not appear to appreciate fully the unlikely that the lower court on remand will wend its way through risks of tying when it is engaged in by a firm with an overwhelm the ambiguities to find what appears to be an unlawful tying ing market share in the tying product market. If the Standard Oil arrangement on its face is in fact the selling of two separate prod case had included a tying claim, which it could have conceivably- ucts despite the realities of the marketplace for the tied product, done with Standard’s monopoly control over long-distance the effect of the practice on maintaining Microsoft’s operating pipelines forcing oil producers to ship only to Standard’s refiner system monopoly, and the consequences likely to follow in the ies, a violation would certainly have been found. More important, tied product market of Internet browsers and Internet services if the remedy for the violation would have included the remedy that the practice is allowed to continue. was ultimately imposed in the Standard Oil case—divestiture of the pipelines from Standard’s control and their operation as a common carrier. IV. Conclusion
A more appropriate and understandable standard for analyzing Courts wrestling with issues raised by cases like Standard Oil tying arrangements should remove the analytical burden from and Microsoft are engaged in determining the basic ground rules "surrogates” like the one product versus two product issue and for firms and individuals to realize and exercise state created, explicitly recognize that some tying arrangements by a firm with state protected and state defined property and contract rights. The market power may be justified where there is a technological antitrust constraints limiting these state defined rights have been necessity for the functioning of the tying product that other prod recognized since early common law as necessary and essential to ucts be bundled with it. The issue of whether there is one or two society’s interest in the fair and efficient use of these rights and in products involved could continue to be litigated on the basis of order to protect the rights of others to enjoy and use their property whether there is an independent consumer (including middleman) and contract rights for the benefit of society generally. Among the demand for the products independent of one another. If there is, objectives long recognized as justifying the imposition of antitrust and there is power in the tying product market and a not insub constraints upon the gaining, maintaining and exercising of prop stantial amount of commerce is affected in the tied product mar erty and contract rights have been prohibitions upon certain means 72 6 : The antitrust bulletin Standard oil and microsoft : 727 for obtaining, exercising or maintaining monopoly power over an In Standard Oil, a railroad transportation cartel managed by identifiable form of economic activity and contracts or conspira Standard Oil was used to gain a monopoly over oil refining and cies displacing the competitive process as the rule of trade. Soci the monopoly over oil refining was then used along with preda eties adopting and enforcing these policies do so in the belief that tory railroad transportation pricing, acquisitions of pipeline cus reliance upon a competitive process will ensure the efficient allo tomers and refusals to deal to gain a monopoly over the new cation of resources, that production efficiencies will be maxi technology of delivering crude and refined product by pipeline to mized, that innovation will not only take place but will be prevent an erosion of Standard’s refining monopoly. In Microsoft, stimulated by a free and open competitive process, and that undue while there were claims that some tactics used to gain its wealth transfers from consumers to those displacing the competi monopoly over Intel-compatible PC operating systems were anti tive process by conduct monopolizing markets17* and other politi competitive. it is clear that the monopoly thus gained over virtu cal and social ills174 will be constrained by law. ally all of the PC operating systems market has been maintained by means engaged in with both a purpose and an effect of exclud As mentioned at the outset, the most important of the economic ing competitors and preventing the competitive process from values, significant political and social values to one side, is the determining price, production efficiencies and innovation via an promotion of innovation. It is also the most difficult to assess independent Internet browser and alternative operating system whether innovation is being thwarted or promoted by market struc platforms. Once having gained a monopoly over the operating tures or practices because proving what innovation might or might system market, Microsoft has maintained lhat monopoly by anti not have taken place but for the existence of an existing market competitive licensing restrictions, blatant attempts to suppress structure or agreement presents the difficulty of proving a nega new innovations like Java and Intel’s efforts to develop Java soft tive. Thus, in cases like Standard Oil and Microsoft, proof of both ware, predatory pricing and suppressing and ultimately taking a purpose and an effect of excluding competition was and should over an alternative cross-platform (the browser market) for the be required to distinguish conduct that is honestly industrial and delivery of applications programs. The conduct Microsoft adopted innovative from that which is not. In addition, and as clearly to foster its operating system monopoly and protect it from ero proved in both cases, a connection between the use of monopoly sion by alternatives to its operating system is analogous to that power or anticompetitive agreements and the displacement of the often condemned in past antitrust monopolization cases, not the competitive process should be required because the essence of the least of which is the Standard Oil case of 1911. offense is not the possession of monopoly power but the way in which it was obtained or maintained that is made unlawful.*75 The consequences in both cases were the acquisition of com plete pricing discretion over the price for the monopolized prod ucts and the power to prevent innovation by others that may have 173 See, Robert H. Lande, Wealth Transfers as the Original and Pri mary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 generated new and better products for the consuming public. Both Hastings L.J. 65 (19S2); Robert H. Lande, Proving the Obvious: The firms were able to dominate and maintain their dominance over Antitrust Laws Were Passed to Protect Consumers (Not Just to Increase business and technology basic to the economy by means not hon Efficiency) 50 Hastings L.J. 959 (1999), estly industrial. The impact upon innovation in the Microsoft case 174 See Flynn (1990), supra note 4; James May, Antitrust in the For has been apparent, despite Microsoft’s claim to be innovative mative Era: Political and Economic Theory in Constitutional and itself and having spent billions of dollars in innovation. It is Antitrust Analysis 1880—1918, 50 Onto St. L.J. 257 (1989). widely acknowledged that most of the new innovation in PC tech l7i United States v. Aluminum Co., 148 F.2d 416, 428-30 (2d Cir. nology and programming has taken place outside Microsoft, 1945). which has then copied and bought up or sought to suppress 728 : The antitrust bulletin Standard oil and micro soft : 729 sources of new innovation like DOS, the mouse, the graphic inter by Microsoft-—of Microsoft trying the trial court’s ethics and face, word processing programs, business applications, the Inter objectivity on appeal rather than the merits of the devastating net browser function, Internet services like streaming audio and monopolization case made out by the Antitrust Division and the cross-platform programs like Java.1™ states at trial. While this conduct did not result in overturning the trial court's findings o f fact or law', it should and did result in a While the Microsoft trial court's public and inflammatory stern reprimand by the court of appeals and the removal of the rhetoric in disagreeing with the court of appeals earlier opinion on trial judge from further proceedings on rem and.7" violation of the consent decree by tying the operating system and browser program did not, understandably, earn the wholehearted The further step of the trial court ordering the breakup of endorsement of the court of appeals, it is an understandable state Microsoft in order to remedy the violations found, while certainly ment of frustration with what appeared to be an excessively legal appropriate in view of the type of violations found, Microsoft’s istic interpretation of the earlier consent decree and a uncooperative compliance with the consent decree and the diffi misstatement of the standards for determining whether a tying culty of fashioning a workable behavioral remedy, was also found arrangement was in fact imposed by Microsoft bundling its vulnerable by the court of appeals because the trial court entered browser program with its monopoly operating system program. the breakup order following an abbreviated hearing and only after The court of appeals response, while legitimately expressing a a few days of deliberation.178 Doing so, denied Microsoft and oth concern for determining whether any technological concerns justi ers an opportunity to have a fair hearing on the appropriate rem fied the tying arrangement, muddled the tying issue further by edy and lent credence to the claim of bias by the trial court even adopting a complex and confusing set of standards for determin though there were substantial grounds for the trial court to believe ing whether bundling of the operating system and the browser that Microsoft could not be trusted to comply with a less drastic programs violated section 1 of the Sherman Act, The judge deal regulatory decree requiring a high level of cooperation. ing with the case on remand faces a daunting task in sorting out Microsoft’s earlier apparent attempt to circumvent the trial the variables outlined by the court of appeals when a much clearer court’s antitying temporary restraining order and often less than and more straightforward test recognizing that a tying arrange credible performance during trial of the monopolization case ment by a firm with a monopoly in the tying market is presump might ultimately have justified, in part, the more serious step of tively unlawful and laying out the limited circumstances in which ordering that Microsoft be split in two or more parts rather than it might be justified, including the requirement that there be no be trusted to comply w'ith complex conduct remedies requiring less restrictive alternatives. extensive supervision. Standing alone how'ever, such conduct did The inexplicable and more questionable action of the not justify short-circuiting a full and fair hearing on what is a Microsoft trial court discussing the case with journalists prior to most complicated issue of how to prevent future actions by his decision, left open the more serious problem—fully exploited Microsoft maintaining its operating system monopoly or extend ing its power over the Internet to new markets. 17(1 Internet sites devote considerable space to the issue of Microsoft’s The court of appeals further observation that a structural rem claim that it is an innovator. Comments range from praise and awards for edy of divestiture was questionable except in cases aside from Microsoft’s innovation to assertions that the only innovation that monopolies obtained or maintained by merger, overstated the his- Microsoft has made are that it is the first software company to have the gall to charge people to test their unfinished products. For a more bal anced view see Competition, Innovation and the Microsoft Monopoly: l7‘ 253 F.3d at 107-1 S. A ntitrust in the Digital Marketplace (A. Eisenach ed, 1999). ™ Id. at 97-107. 7 3 0 The antitrust bulletin Standard oil and Microsoft : 731 torical record. 17‘* A structural remedy should remain a serious larly the case in light of the fact that Microsoft controls a strate alternative in light of the continued monopoly power Microsoft gic and essential facility— the operating system for virtually all enjoys in the operating system market, the virtual elimination of PCs, much like AT&T's control over the telephone network and alternative browsers from the browser market, the exclusion of Standard Oil’s control over the transportation system for crude .lava from Microsoft’s new Windows XP program,iao and steps and refined product. So long as control over what is a bottleneck underway to extend Microsoft’s Internet presence by bundling ser in the computer industry is in the hands of a single firm free to vices like audio, video, instant messaging, commercial transaction engage in upstream and downstream tactics to both maintain its features and business applications into its new Windows XP sys control over the bottleneck and exploit related opportunities, a tem indicating a continued company policy of extending its com petitive process will not be fully functional in any part o f the monopoly power from one market to related markets. PC industry. Conduct remedies like requiring open access to Microsoft’s APIs: equal access to its operating system and Inter [( is difficult to imagine how a workable conduct remedy can net programs by OEMs, IAPs and ISVs without fear of blatant or be effectively enforced when changing a few lines of computer subtle retaliation; and limitations upon further bundling of related code or mingling operating system code with applications code programs would all require constant and long-term supervision by can generate incompatibilities between application programs a knowledgeable special master or judge with little else to occupy dependent upon a common operating system under the control of their time. In any event, a substantial and significant remedy, ii competitor or disable the operating system program if a con whether structural or behavioral, needs to be implemented lest sumer attempts to use non-Microsoft programs.181 This is particu recurring litigation is required to rein in Microsoft’s continuing aggression in related and emerging markets such as instant mes I7V id. ai 105. While courts have been reluctant to order divestiture in saging, streaming audio and video and widespread uses of the eases of integrated firms. United States v. National Lead Co., 332 U.S. Internet for variety of other ends and to free up competition in the 319 (1947), they have done so in significant monopolization cases where OEM, IAP and ISV markets from Microsoft’s dictates. dissolution or divestiture is necessary to prevent the continued abuse of a monopolized market structure. Sec United States v, Standard Oil Co., 221 Whatever the subsequent history of the Microsoft case might U.S. I (.1411); Uniied States v. Paramount Pictures, Inc., 334 U.S. 131 be in light of the vulnerabilities of the trial court’s opinion, rem- ( 1948), United States v. United Shot Machinery Corp., 1969 Trade Cas, (CCH( ^72,6£& Mass) (divestiture ordered after earlier decree failed 1 l> remedy anticompetitive effects); United Slates v. American Telephone providers of applications programs would have a substantial interest in & Telegraph Co., 552 F. Supp. (D.D.C. 1982j. o ff d. sub nom., Maryland installing and writing programs having the widest possible market appeal. v Uniied Stales. 460 U.S. 1001 (1983) (conscm decree and injunction Piraino has also argued that breaking up Microsoft rather than relying breaking up AT&T after trial court rejccled earlier consent decree sought upon conduct remedies would likely inhibit innovation by Microsoft with to be entered in a different court). regard to its operating system. Thomas A. Piraino. Jr., Identifying Monopolists' Illegal Conduct Under the Sherman Act, 75 N.Y.U. L. Rev. 1!t0 See M icrosoft Pulls Back Its Support for Java, W a ll S t. J., 809, 887 {2000}. Aside from the fact that there has been little innovation July 18, 2001. at A3. in the operating system market by Microsoft in recent years other than JS1 For an argument in favor of a behavioral remedy se e Piraino, Jr., bundling more innovations made by others with ihe operating system program, one would assume that part of Microsoft left with the operating supra note 93, at 44-50. Piraino believes a structural remedy would system under a structural remedy would have an incentive to engage in imperil standardization in the operating system, market. Such a risk is not innovation should it face any realistic threats to its operating system mar likely because a separate operating system essential facility would have a primary interest in maintaining standardization while making its platform ket share. For a thoughtful exploration of these and related issues con available to the widest range of applications. Similarly, OEMs and cerning remedies in monopolization cases, including the M icrosoft case, see Comanor, supra note 1, 732 The antitrust bulletin Standard oil and micro soft : 733 edy and conduct, and ihe court of appeals’ questionable analysis play between individuals and such powerful institutions as the of the attempt to monopolize and tying claims, it is an intriguing trusts.”13-1 replay of many of ihe practices and issues raised by the S ta n d a r d Standard Oil v. United States is a striking precedent dictating O il case despite the differences in the industries and technologies the conclusion that Microsoft has violated the antitrust laws of the involved and the fact that no two cases are ever the same. Rather United States and those of several states by unlawfully maintain than the Standard Oil case being no or a limping analogy for the ing its monopoly of the market for operating systems for PCs. It M ic r o s o f t ease, it is an intriguing parallel of two firms seeking to has also used its monopoly power over that market to take over dominate industries basic to the economy by similar tactics. the browser market and erect unlawfully entry barriers to the mar While Boudreaux and Folsom appear to believe government ket for applications programs for PCs. Standard Oil also stands should have no role in overseeing markets to insure they are gov for the need to seriously consider a structural remedy for the vio erned by a competitive proc ess,ls: the experience of the common lations found in M ic ro so ft rather than trust in the w illingness of law since the Case of Monopolies and that of the Sherman Act for an otherwise unwilling and aggressive firm to subject its conduct the past century is not so naive. As Woodrow Wilson observed: to the demands that all markets be subject to the competitive pro ‘‘Without the watchful eye of government, there can be no fair cess unless otherwise affirmatively regulated by a government agency. Price competition and the future of the technologies ls: The emphasis of our straightforward point is indeed radical. The involved require that innovation be allowed to have its way under specialization and entrepreneurial creativity lying at the heart of a the regime of a competitive process and not be subject to the dic market economy are fundamentally at odds with antitrust over tates of a single firm that believes it, and only it, knows what is sight by administrators, judges and jurors who necessarily have no specialized knowledge nor experience of the kinds that are neces best and uses its monopoly power unlawfully to achieve that end. sary' for success in the industries in question. To have nonspecial Friedrich von H ayek’s Road to Serfdom1*4 can be built and paved ists sit in judgment of business decisions of specialists—and, by the centralized planning of a private corporation dominating a moreover, specialists with experience and their own wealth at technology basic to the economy and not subject to the legal con stake—promises for more consumer harm than benefit. It is best to straints of a competitive process, just as it can by government strip administrators and courts of such powers. centralized planning unresponsive to individual human needs and Boudreaux & Folsom, supra note 6, at 575. creativity sorted out by a free and competitive market wherever One wonders why Boudreaux. & Folsom stop with just jettisoning possible. government antitrust oversight. The same argument can be made for stripping administrators, judges and jurors of the power to define and enforce contract, property, tort, criminal, intellectual property, securities and a host of other legal regimes necessary to the functioning of the economy and society in general. The entire infrastructure of law could be turned over to a corporate elite “with their wealth at stake’7 in legal mat ters of every sort. One could argue the process is well underway with regard to the federal and state legislative and executive branches of gov ernment given the abuses of campaign financing now extant. Since the filing of the M icrosoft case, it is apparent that Microsoft now appreciates the importance of financing politicians willing to promote Microsoft’s 1S3 Q uoted in Arthur M. Schlesinger, Jr., A Question of Power, The interests. One should be careful in doing so, however, in light of Standard Am. Prospect, April 23, 2001, at 26,27. Oil’s experience with President Teddy Roosevelt. See note 51. supra. lfr* Friedrich A. von Hayek, T he Road to Serfdom (1994).