United States V. Microsoft Corp., Nesses Plus Two Rebuttal Witnesses

34 253 FEDERAL REPORTER, 3d SERIES

1. Monopolies O12(1.3) UNITED STATES of America, Offense of monopolization under Sher- Appellee, man Act has two elements: (1) possession v. of monopoly power in relevant market and MICROSOFT CORPORATION, (2) willful acquisition or maintenance of Appellant. that power as distinguished from growth or development as a consequence of a su- Nos. 00–5212 and 00–5213. perior product, business acumen, or histor- United States Court of Appeals, ic accident. Sherman Act, § 2, as amend- District of Columbia Circuit. ed, 15 U.S.C.A. § 2.

Argued Feb. 26 and 27, 2001. 2. Federal Courts O776 Decided June 28, 2001. Court of Appeals reviews legal ques- Rehearing Denied Aug. 2, 2001. tions de novo.

3. Monopolies O12(1.3) United States and individual states While merely possessing monopoly brought antitrust action against manufac- power is not itself an antitrust violation, it turer of personal computer operating sys- is a necessary element of a monopolization tem and Internet web browser. The Unit- charge. Sherman Act, § 2, as amended, ed States District Court for the District 15 U.S.C.A. § 2. of Columbia, Thomas Penfield Jackson, J., concluded that manufacturer had commit- 4. Monopolies O12(1.3) ted monopolization, attempted monopoliza- Firm is a ‘‘monopolist’’ if it can profit- tion, and tying violations of the Sherman ably raise prices substantially above the Act, 87 F.Supp.2d 30, and issued remedial competitive level. Sherman Act, § 2, as order requiring manufacturer to submit amended, 15 U.S.C.A. § 2. proposed plan of divestiture, 97 F.Supp.2d See publication Words and Phras- 59. Manufacturer appealed, and states pe- es for other judicial constructions titioned for certiorari. The Supreme Court and definitions. declined to hear direct appeal, denied pe- 5. Monopolies O12(1.3) tition, and remanded, 530 U.S. 1301, 121 S.Ct. 25, 147 L.Ed.2d 1048. The Court of Monopoly power may be inferred from Appeals held that: (1) manufacturer com- a firm’s possession of a dominant share of mitted monopolization violation; (2) manu- a relevant market that is protected by facturer did not commit attempted mo- entry barriers; ‘‘entry barriers’’ are fac- nopolization violation; (3) rule of reason, tors, such as certain regulatory require- rather than per se analysis, applied to ments, that prevent new rivals from timely tying claim; (4) remand was required to responding to an increase in price above determine if manufacturer committed ty- the competitive level. Sherman Act, § 2, ing violation; (5) vacation of remedies de- as amended, 15 U.S.C.A. § 2. cree was required; and (6) district judge’s See publication Words and Phras- comments to the press while the case was es for other judicial constructions and definitions. pending required his disqualification on remand. 6. Monopolies O12(1.3) Affirmed in part, reversed in part, and Because the ability of consumers to remanded in part. turn to other suppliers restrains a firm U.S. v. MICROSOFT CORP. 35 Cite as 253 F.3d 34 (D.C. Cir. 2001)

from raising prices above competitive lev- that manufacturer possessed monopoly el, the relevant market in monopolization power, as required to support monopoliza- case must include all products reasonably tion claim. Sherman Act, § 2, as amend- interchangeable by consumers for the ed, 15 U.S.C.A. § 2. same purposes. Sherman Act, § 2, as amended, 15 U.S.C.A. § 2. 10. Monopolies O12(1.3) Although existence of monopoly power 7. Federal Courts O763.1 ordinarily may be inferred from the pre- Court of Appeals would adhere to dominant share of the market, because of district court’s decision to exclude non- the possibility of competition from new Intel compatible operating systems, and entrants, looking to current market share operating systems for non-PC devices alone can be misleading when evaluating from relevant market for purposes of mo- monopolization claim. Sherman Act, § 2, nopolization claim against manufacturer of as amended, 15 U.S.C.A. § 2. personal computer (PC) operating system, where manufacturer did not point to evi- 11. Monopolies O28(7.5) dence contradicting district court’s find- Direct proof of monopoly power was ings or allege that supporting record evi- not required to support monopolization dence was insufficient. Sherman Act, § 2, claim against manufacturer of operating as amended, 15 U.S.C.A. § 2. system for personal computers, even as- 8. Monopolies O12(1.3) suming that software market was uniquely Relevant market for monopolization dynamic in the long term, where no claim against manufacturer of personal prompt substitutes for manufacturer’s op- computer operating system did not include erating system were available. Sherman ‘‘middleware’’ products that could eventu- Act, § 2, as amended, 15 U.S.C.A. § 2. ally take over operating system functions; 12. Monopolies O12(1.3) consumers could not abandon their operating systems and switch to middleware in A firm violates Sherman Act’s monop- response to sustained price for manufac- olization provision only when it acquires or turer’s operating system above competitive maintains, or attempts to acquire or main- level, and it was unlikely that middleware tain, a monopoly by engaging in exclusion- would overtake manufacturer’s operating ary conduct as distinguished from growth system as primary platform for software or development as a consequence of a su- development in near future. Sherman perior product, business acumen, or histor- Act, § 2, as amended, 15 U.S.C.A. § 2. ic accident. Sherman Act, § 2, as amended, 15 U.S.C.A. § 2. 9. Monopolies O28(7.5) Evidence that manufacturer of operat- 13. Monopolies O12(1.2) ing system for personal computers had To be condemned as exclusionary, a more than 95% market share and that monopolist’s act must have an ‘‘anticom- consumer preference for operating sys- petitive effect,’’ that is, it must harm the tems for which substantial number of ap- competitive process and thereby harm con- plications had been written and software sumers. Sherman Act, § 2, as amended, developer preference for operating sys- 15 U.S.C.A. § 2. tems with substantial consumer base cre- See publication Words and Phras- ated barrier to entry into operating system es for other judicial constructions market was sufficient to support finding and definitions. 36 253 FEDERAL REPORTER, 3d SERIES

14. Monopolies O12(1.3), 28(1.4) volves, for example, greater efficiency or Harm to one or more competitors will enhanced consumer appeal, then the bur- not suffice to establish anticompetitive ef- den shifts back to the plaintiff to rebut fect under Sherman Act’s monopolization that claim. Sherman Act, § 2, as amend- provision. Sherman Act, § 2, as amended, ed, 15 U.S.C.A. § 2. 15 U.S.C.A. § 2. 20. Monopolies O28(7.1) 15. Monopolies O12(1.3) If monopolist’s procompetitive justifi- Sherman Act directs itself not against cation for its conduct stands unrebutted, conduct which is competitive, even severe- then plaintiff in monopolization case must ly so, but against conduct which unfairly demonstrate that the anticompetitive harm tends to destroy competition itself. Sher- of the conduct outweighs the procompeti- man Act, § 2, as amended, 15 U.S.C.A. tive benefit. Sherman Act, § 2, as amend- § 2. ed, 15 U.S.C.A. § 2. 16. Monopolies O28(7.2) 21. Monopolies O12(1.8) Plaintiff in monopolization case, on whom the burden of proof rests, must In considering whether monopolist’s demonstrate that the monopolist’s conduct conduct on balance harms competition and indeed has the requisite anticompetitive is therefore condemned as exclusionary for effect. Sherman Act, § 2, as amended, 15 purposes of Sherman Act’s monopolization U.S.C.A. § 2. provision, court’s focus is upon the effect of that conduct, not upon the intent behind 17. Monopolies O28(1.4) it; evidence of the intent behind the con- In monopolization case brought by a duct of a monopolist is relevant only to the private plaintiff, the plaintiff must show extent it helps courts understand the likely that its injury is of the type that the effect of the monopolist’s conduct. statute was intended to forestall; no less in a case brought by the Government, it must 22. Monopolies O12(1.8) demonstrate that the monopolist’s conduct Licensing restrictions imposed on harmed competition, not just a competitor. original equipment manufacturers by man- Sherman Act, § 2, as amended, 15 ufacturer of operating system for personal U.S.C.A. § 2. computers, including the prohibition of the 18. Monopolies O28(7.2) removal of desktop icons, folders, and Start menu entries, and modifications to If a plaintiff successfully establishes a initial boot sequence, had anticompetitive prima facie case under Sherman Act’s mo- effect, supporting monopolization claim; re- nopolization provision by demonstrating strictions prevented promotion of multiple anticompetitive effect, then the monopolist Internet access providers and browsers may proffer a procompetitive justification and reduced rival browsers’ usage share. for its conduct. Sherman Act, § 2, as Sherman Act, § 2, as amended, 15 amended, 15 U.S.C.A. § 2. U.S.C.A. § 2. 19. Monopolies O28(7.1) 23. Monopolies 12(5, 15) If monopolist asserts a procompetitive O justification for its conduct, a nonpretextu- Intellectual property rights do not al claim that its conduct is indeed a form of confer a privilege to violate the antitrust competition on the merits because it in- laws. U.S. v. MICROSOFT CORP. 37 Cite as 253 F.3d 34 (D.C. Cir. 2001)

24. Monopolies O12(1.8) 28. Monopolies O12(1.8) License restriction imposed on origi- Manufacturer’s integration of its In- nal equipment manufacturers by manufac- ternet browser into its operating system turer of operating system for personal for personal computers had an anticompet- computers which prohibited automatically itive effect, for purposes of Sherman Act’s launching a substitute user interface upon monopolization provision; excluding manu- completion of the boot process was neces- facturer’s browser from operating system’s sary to prevent substantial alteration of ‘‘Add/Remove Programs’’ utility had effect operating system manufacturer’s copy- of significantly reducing usage of rivals’ righted work, and was not an exclusionary products, system’s override feature de- practice that violated Sherman Act’s mo- terred consumers from using rival brow- nopolization provision. Sherman Act, § 2, sers, and its commingling of browsing and as amended, 15 U.S.C.A. § 2. non-browsing code deterred original equipment manufacturers from pre-installing ri- 25. Monopolies O28(7.5) val browsers. Sherman Act, § 2, as Evidence was insufficient to establish amended, 15 U.S.C.A. § 2. that licensing restrictions imposed on original equipment manufacturers by 29. Monopolies O28(7.5) manufacturer of operating system for per- Evidence in antitrust action was suffi- sonal computers, including altering the cient to support finding that manufacturer appearance of the desktop or promoting of operating system for personal comput- programs in the boot sequence, were nec- ers placed code specific to Web browsing essary to prevent actions that would sub- in the same files as code that provided stantially reduce value of its copyrighted operating system functions, prohibiting work, as defense to monopolization claim. original equipment manufacturers from re- Sherman Act, § 2, as amended, 15 moving manufacturer’s Internet browser; U.S.C.A. § 2. government expert testified that manufacturer designed its browser so that some of 26. Monopolies O12(1.8) the code it used co-resided in same library Licensing restrictions imposed on files as other code needed for the operat- original equipment manufacturers by man- ing system. ufacturer of operating system for personal computers which made it more difficult to 30. Monopolies O12(1.8) distribute competing Internet browser vio- Manufacturer’s exclusion of its Inter- lated Sherman Act’s monopolization provi- net browser from the ‘‘Add/Remove Pro- sion, even though restrictions did not com- grams’’ utility in its personal computer pletely bar competitor from distributing its operating system and its commingling of browser, where restrictions barred rivals browser and operating system code was from all cost-efficient means of distribu- exclusionary conduct, in violation of Sher- tion. Sherman Act, § 2, as amended, 15 man Act’s monopolization provision; such U.S.C.A. § 2. actions increased manufacturer’s browser usage share, and manufacturer failed to 27. Monopolies O12(1.4) show that its conduct served a purpose Judicial deference to product innova- other than protecting its operating system tion does not mean that a monopolist’s monopoly. Sherman Act, § 2, as amend- product design decisions are per se lawful. ed, 15 U.S.C.A. § 2. 38 253 FEDERAL REPORTER, 3d SERIES

31. Monopolies O12(1.8) 36. Monopolies O17.5(1) Manufacturer of operating system for Manufacturer of operating system personal computers did not violate Sher- for personal computers did not violate man Act’s monopolization provision by de- Sherman Act’s monopolization provision veloping software package that allowed In- by granting Internet content providers ternet access providers to customize title free licenses to bundle manufacturer’s In- bar for manufacturer’s Internet browser ternet browser and offering inducements and offering the package to providers free not to offer competitor’s browser, absent of charge. Sherman Act, § 2, as amended, evidence that such restrictions had sub- 15 U.S.C.A. § 2. stantial deleterious impact on competi- 32. Monopolies O12(1.4) tor’s usage share. Sherman Act, § 2, as Antitrust laws do not condemn even a amended, 15 U.S.C.A. § 2. monopolist for offering its product at an attractive price. 37. Monopolies O12(1.3) 33. Monopolies O17(2.2) Agreements between manufacturer of operating system for personal computers Personal computer operating system and independent software vendors, under manufacturer’s exclusive dealing agree- which developers agreed to use manufac- ments with Internet access providers, un- turer’s Internet browser as default brows- der which providers agreed not to promote ing software for any software they devel- Internet browsers of manufacturer’s competitors, violated Sherman Act’s monopoli- oped with hypertext-based user interface, zation provision; by ensuring that majority violated Sherman Act’s monopolization of all providers’ subscribers were offered provision; by keeping rival browsers from manufacturer’s browser either as default gaining widespread distribution, the deals browser or as the only browser, manufac- had a substantial effect in preserving man- turer’s deals with the providers had signif- ufacturer’s operating system monopoly, icant effect in preserving manufacturer’s and manufacturer offered no procompeti- operating system monopoly. Sherman tive justification. Sherman Act, § 2, as Act, § 2, as amended, 15 U.S.C.A. § 2. amended, 15 U.S.C.A. § 2.

34. Monopolies O17(2.2) 38. Monopolies O17(2.2) When exclusive deal is challenged in Personal computer operating system antitrust action, plaintiff must both define manufacturer’s exclusive dealing arrange- relevant market and prove the degree of ment with computer company, under which foreclosure. operating system manufacturer agreed to 35. Monopolies O17(2.2) release up-to-date versions of business Monopolist’s use of exclusive con- productivity software compatible with com- tracts, in certain circumstances, may give pany’s computers in exchange for compa- rise to a monopolization violation under ny’s agreement to make manufacturer’s Sherman Act even though the contracts Internet browser the default browser on foreclose less than the roughly 40% or 50% its computers, violated Sherman Act’s mo- share usually required in order to establish nopolization provision; arrangement had a restraint of trade violation. Sherman substantial effect in restricting distribution Act, §§ 1, 2, as amended, 15 U.S.C.A. of rival browsers, and manufacturer of- §§ 1, 2. fered no procompetitive justification. U.S. v. MICROSOFT CORP. 39 Cite as 253 F.3d 34 (D.C. Cir. 2001)

Sherman Act, § 2, as amended, 15 the operating system or the acumen of its U.S.C.A. § 2. makers. Sherman Act, § 2, as amended, 15 U.S.C.A. § 2. 39. Monopolies O12(1.3) Manufacturer’s development and pro- 42. Monopolies O12(1.8) motion of a ‘‘Java Virtual Machine’’ (JVM) Personal computer operating system which translated bytecode into instructions manufacturer’s threat to retaliate against for manufacturer’s personal computer op- microprocessor manufacturer if it did not erating system and allowed Java applica- stop developing a fast, cross-platform tions to run faster on its operating system ‘‘Java Virtual Machine’’ (JVM) was exclu- than competitor’s JVM did not violate sionary conduct, in violation of Sherman Sherman Act’s monopolization provision; Act’s monopolization provision; develop- although manufacturer’s JVM was incom- ment of such a JVM would have threat- patible with competitor’s product, it al- ened operating system manufacturer’s mo- lowed applications to run more swiftly and nopoly in operating system market, and did not itself have any anticompetitive ef- manufacturer offered on procompetitive fect. Sherman Act, § 2, as amended, 15 justification for its conduct. Sherman Act, U.S.C.A. § 2. § 2, as amended, 15 U.S.C.A. § 2.

40. Monopolies O12(1.8) 43. Monopolies O12(1.3) Personal computer operating system Personal computer operating system manufacturer’s contracts with independent manufacturer could not be held liable un- software vendors, which required use of der Sherman Act’s monopolization provi- manufacturer’s ‘‘Java Virtual Machine’’ sion based on its general ‘‘course of con- (JVM) as default in their Java applications, duct,’’ where specific acts by manufacturer were exclusionary, in violation of Sherman that harmed competition were not identi- Act’s monopolization provision; agreements fied. Sherman Act, § 2, as amended, 15 were anticompetitive because they fore- U.S.C.A. § 2. closed a substantial portion of the field for JVM distribution and, in so doing, protect- 44. Monopolies O24(7.1) ed manufacturer’s operating system mo- Causal link between maintenance of nopoly from a middleware threat, and manufacturer’s personal computer operat- manufacturer offered no procompetitive ing system monopoly and its anticompeti- justification. Sherman Act, § 2, as tive conduct in foreclosing distribution amended, 15 U.S.C.A. § 2. channels for rival Internet browser and Java technologies was not required to hold 41. Monopolies O12(1.8) manufacturer liable for monopolization vio- Personal computer operating system lation in action seeking injunctive relief. manufacturer’s deception of Java develop- Sherman Act, § 2, as amended, 15 ers regarding the operating system-specif- U.S.C.A. § 2. ic nature of software development tools it created to assist independent software 45. Monopolies O12(1.3) vendors in designing Java applications was To establish a Sherman Act violation exclusionary conduct, in violation of Sher- for attempted monopolization, a plaintiff man Act’s monopolization provision; manu- must prove (1) that the defendant has facturer’s conduct served to protect its engaged in predatory or anticompetitive monopoly in its operating system in man- conduct with (2) a specific intent to monop- ner not attributable either to superiority of olize and (3) a dangerous probability of 40 253 FEDERAL REPORTER, 3d SERIES

achieving monopoly power. Sherman Act, of attempted monopolization claim, unless § 2, as amended, 15 U.S.C.A. § 2. that market is, or will be, similarly protected. Sherman Act, § 2, as amended, 15 46. Monopolies O12(1.3) U.S.C.A. § 2. Because the Sherman Act does not identify the activities that constitute the 51. Monopolies O12(1.3) offense of attempted monopolization, the Even assuming that Internet browser court must examine the facts of each case, market was adequately defined, manufac- mindful that the determination of what turer of personal computer operating sys- constitutes an attempt is a question of tem could not be held liable for attempted proximity and degree. Sherman Act, § 2, monopolization of browser market, absent as amended, 15 U.S.C.A. § 2. evidence that manufacturer would likely erect significant barriers to entry into that 47. Monopolies O12(1.3) market upon acquisition of a dominant Manufacturer of personal computer market share. Sherman Act, § 2, as operating systems could not be held liable amended, 15 U.S.C.A. § 2. for attempted monopolization of the Inter- net browser market, absent determination 52. Monopolies O12(1.10) of relevant market; no evidence was identi- Rule of reason, rather than per se fied as to what constituted a browser and analysis, should govern the legality of ty- why other products were not reasonable ing arrangements involving platform soft- substitutes. Sherman Act, § 2, as amend- ware products. Sherman Act, § 2, as ed, 15 U.S.C.A. § 2. amended, 15 U.S.C.A. § 2.

48. Monopolies O12(1.3) 53. Monopolies O17.5(2) A court’s evaluation of an attempted Rule of reason, rather than per se monopolization claim must include a defini- analysis, applied to claim that manufactur- tion of the relevant market; such a defini- er’s contractual and technological bundling tion establishes a context for evaluating of its Internet browser with its personal the defendant’s actions as well as for computer operating system resulted in a measuring whether the challenged conduct tying arrangement. Sherman Act, § 2, as presented a dangerous probability of mo- amended, 15 U.S.C.A. § 2. nopolization. Sherman Act, § 2, as 54. Monopolies O17.5(2) amended, 15 U.S.C.A. § 2. There are four elements to a per se 49. Monopolies O28(8) tying violation: (1) the tying and tied Determination of a relevant market is goods are two separate products; (2) the a factual question to be resolved by the defendant has market power in the tying District Court in attempted monopolization product market; (3) the defendant affords action. Sherman Act, § 2, as amended, 15 consumers no choice but to purchase the U.S.C.A. § 2. tied product from it; and (4) the tying arrangement forecloses a substantial vol- 50. Monopolies O12(1.3) ume of commerce. Sherman Act, § 2, as Because a firm cannot possess monop- amended, 15 U.S.C.A. § 2. oly power in a market unless that market is also protected by significant barriers to 55. Federal Courts O951.1 entry, a firm cannot threaten to achieve To show on remand that manufactur- monopoly power in a market, for purposes er’s contractual and technological bundling U.S. v. MICROSOFT CORP. 41 Cite as 253 F.3d 34 (D.C. Cir. 2001)

of its Internet browser with its personal 59. Federal Civil Procedure O2251 computer operating system resulted in a Trial courts have extraordinarily tying arrangement under rule of reason, broad discretion to determine the manner plaintiffs were precluded from arguing any in which they will conduct trials; this is theory of harm that depended on a precise particularly true in a case where the pro- definition of browsers or barriers to entry ceedings are being tried to the court with- other than what may have been implicit in out a jury. the alleged tying arrangement, where plaintiffs had failed to provide both a defi- 60. Federal Courts O891 nition of the browser market and barriers Where the proceedings are being tried to entry to that market as part of their to the court without a jury, an appellate attempted monopolization claim. Sherman court will not interfere with the trial Act, §§ 1, 2, as amended, 15 U.S.C.A. court’s exercise of its discretion to control §§ 1, 2. its docket and dispatch its business except upon the clearest showing that the proce- 56. Federal Courts O951.1 dures have resulted in actual and substan- To show on remand that manufactur- tial prejudice to the complaining litigant. er’s contractual and technological bundling 61. Federal Civil Procedure O1951 of its Internet browser with its personal computer operating system resulted in a Factual disputes must be heard in tying arrangement under rule of reason, open court and resolved through trial-like plaintiffs were required to demonstrate evidentiary proceedings. that benefits, if any, of manufacturer’s 62. Monopolies O28(8) practices were outweighed by the harms in Evidentiary hearing was required the tied product market. Sherman Act, during remedies phase of antitrust action § 1, as amended, 15 U.S.C.A. § 1. against manufacturer of personal computer 57. Monopolies O17.5(13) operating system, where parties disputed a number of facts during remedies phase, Manufacturer’s alleged price bundling including the feasibility of dividing manu- of its Internet browser with its personal facturer, the likely impact on consumers, computer operating system could result in and the effect of divestiture on sharehold- a tying arrangement under rule of reason ers, and manufacturer repeatedly asserted if it were determined on remand that there its right to an evidentiary hearing and was a positive price increment in operating submitted two offers of proof. system associated with browser and that anticompetitive effects of price bundling 63. Federal Civil Procedure O1951 outweighed any procompetitive justifica- Party has the right to judicial resolu- tions. Sherman Act, § 1, as amended, 15 tion of disputed facts not just as to the U.S.C.A. § 1. liability phase, but also as to appropriate relief. 58. Federal Civil Procedure O1992, 2251 Adopting an expedited trial schedule 64. Federal Civil Procedure O1951 and receiving evidence through summary A hearing on the merits—i.e., a trial witnesses were with District Court’s dis- on liability—does not substitute for a re- cretion in antitrust action against manufac- lief-specific evidentiary hearing unless the turer of personal computer operating sys- matter of relief was part of the trial on tem, where case was tried to court. liability, or unless there are no disputed 42 253 FEDERAL REPORTER, 3d SERIES

factual issues regarding the matter of re- 70. Federal Civil Procedure O2582 lief. Generally, a district court is afforded broad discretion to enter that relief it cal- 65. Federal Courts O932.1 culates will best remedy the conduct it has Remedies decree in antitrust case found to be unlawful. must be vacated whenever there is a bona fide disagreement concerning substantive 71. Federal Courts O612.1 items of relief which could be resolved only Motion to disqualify district judge by trial. who presided over antitrust action against manufacturer of personal computer operat- 66. Federal Courts O893 ing system could be considered for first Claimed surprise at the district time on appeal, even though motion was court’s decision to consider permanent in- based on press accounts of judge’s com- junctive relief does not, alone, merit rever- ments about case, rather than on record sal. evidence, where plaintiffs did not dispute comments attributed to judge in the press, 67. Monopolies O28(8) and did not request evidentiary hearing.

Remedies decree requiring divestiture 72. Judges O49(1) of personal computer operating system Federal disqualification provisions re- manufacturer found to violate antitrust flect a strong federal policy to preserve laws was not supported by adequate expla- the actual and apparent impartiality of the nation, where decree did not discuss rele- federal judiciary; judicial misconduct may vant objectives for such decrees. implicate that policy regardless of the 68. Federal Courts O932.1 means by which it is disclosed to the public. Determination on appeal that manufacturer of personal computer operating 73. Federal Courts O611 system did not commit attempted monopo- Matter of what questions may be tak- lization violation and that remand was re- en up and resolved for the first time on quired on tying claim required vacation of appeal is one left primarily to the discre- remedies decree requiring manufacturer’s tion of the courts of appeals, to be exer- divestiture, where decree was based in cised on the facts of individual cases. part on findings that manufacturer had committed attempted monopolization and 74. Judges O11(2) tying violations. Sherman Act, §§ 1, 2, as District Judge who presided over anti- amended, 15 U.S.C.A. §§ 1, 2. trust action against manufacturer of personal computer operating system violated 69. Federal Courts O932.1 Code of Conduct for United States Judges Where sweeping equitable relief is by making comments about factual and employed to remedy multiple antitrust vio- legal aspects of case in secret interviews lations, and some of the findings of remedi- with reporters while case was pending; able violations do not withstand appellate comments violated canons forbidding scrutiny, it is necessary to vacate the rem- judges from commenting publicly on mer- edy decree since the implicit findings of its of a pending or impending action, from causal connection no longer exist to war- considering ex parte communications, and rant deferential affirmance. requiring the avoidance of an appearance U.S. v. MICROSOFT CORP. 43 Cite as 253 F.3d 34 (D.C. Cir. 2001)

of impropriety. ABA Code of Jud.Con- 79. Federal Civil Procedure O1969 duct, Canons 2, 3, subd. A(4, 6). Federal Courts O856 75. Judges O49(2) District judge’s findings of fact in antitrust action against manufacturer of per- District judge’s interviews with re- sonal computer operating system were porters, during which he commented about subject to clearly erroneous review, al- pending antitrust action against manufac- though judge’s comments during inter- turer of personal computer operating sys- views with reporters while case was still tem, created appearance that he was not pending created appearance that he was acting impartially, within meaning of dis- not acting impartially. Fed.Rules Civ. qualification statute; members of public Proc.Rule 52(a), 28 U.S.C.A. could reasonably question whether judge’s desire for press coverage influenced his 80. Federal Courts O776, 850.1 judgments. 28 U.S.C.A. § 455(a). There is no de novo appellate review 76. Judges O49(2), 56 of fact findings and no intermediate level between de novo and clear error, not even Appearance that district judge was for findings the Court of Appeals may not acting impartially, created when he consider sub-par. Fed.Rules Civ.Proc. commented about pending antitrust action Rule 52(a), 28 U.S.C.A. against manufacturer of personal computer operating system during secret interviews 81. Federal Courts O850.1, 932.1, 941 with reporters, required judge’s disqualifi- Mandatory nature of rule requiring cation retroactive to date he entered reme- review of district court’s fact findings for dial order, rather than retroactive to an clear error does not compel Court of Ap- earlier part of the proceedings; full retro- peals to accept fact findings that result active disqualification would have unduly from the district court’s misapplication of penalized plaintiffs, who were unaware of governing law or that otherwise do not the misconduct, and manufacturer neither permit meaningful appellate review, nor alleged nor demonstrated that judge’s mis- must Court of Appeals accept findings that conduct rose to level of actual bias or are utterly deficient in other ways; in such prejudice. 28 U.S.C.A. § 455(a). a case, Court of Appeals vacates and re- mands for further factfinding. Fed.Rules 77. Judges O56 Civ.Proc.Rule 52(a), 28 U.S.C.A. At a minimum, statute making disqualification mandatory for conduct that 82. Federal Courts O850.1, 932.1 calls a judge’s impartiality into question When there is fair room for argument requires prospective disqualification of the that the district court’s fact findings offending judge, that is, disqualification should be vacated in toto, the Court of from the judge’s hearing any further pro- Appeals should be especially careful in de- ceedings in the case. 28 U.S.C.A. termining that the findings are worthy of § 455(a). the deference the clear error standard of review prescribes. Fed.Rules Civ.Proc. 78. Judges O56 Rule 52(a), 28 U.S.C.A. There need not be a draconian remedy for every violation of statute making disqualification mandatory for conduct that Appeals from the United States District calls a judge’s impartiality into question. Court for the District of Columbia (No. 28 U.S.C.A. § 455(a). 98cv01232) (No. 98cv01233). 44 253 FEDERAL REPORTER, 3d SERIES

Richard J. Urowsky and Steven L. Hol- brey, Director, Catherine G. O’Sullivan, ley argued the causes for appellant. With Robert B. Nicholson, Adam D. Hirsh, An- them on the briefs were John L. Warden, drea Limmer, David Seidman, and Chris- Richard C. Pepperman, II, William H. topher Sprigman, Attorneys, Eliot Spitzer, Neukom, Thomas W. Burt, David A. Hein- Attorney General, State of New York, er, Jr., Charles F. Rule, Robert A. Long, Richard L. Schwartz, Assistant Attorney Jr., and Carter G. Phillips. Christopher J. General, and Kevin J. O’Connor, Office of Meyers entered an appearance. the Attorney General, State of Wisconsin. Lars H. Liebeler, Griffin B. Bell, Lloyd John Rogovin, Kenneth W. Starr, John N. Cutler, Louis R. Cohen, C. Boyden F. Wood, Elizabeth Petrela, Robert H. Gray, William J. Kolasky, William F. Ad- Bork, Theodore W. Ullyot, Jason M. Mah- kinson, Jr., Jeffrey D. Ayer, and Jay V. ler, Stephen M. Shapiro, Donald M. Falk, Prabhu were on the brief of amici curiae Mitchell S. Pettit, Kevin J. Arquit, and The Association for Competitive Technolo- Michael C. Naughton were on the brief for gy and Computing Technology Industry amici curiae America Online, Inc., et al., in Association in support of appellant. support of appellee. Paul T. Cappuccio entered an appearance. David R. Burton was on the brief for amicus curiae Center for the Moral De- Lee A. Hollaar, appearing pro se, was fense of Capitalism in support of appellant. on the brief for amicus curiae Lee A. Hollaar. Robert S. Getman was on the brief for amicus curiae Association for Objective Carl Lundgren, appearing pro se, was Law in support of appellant. on the brief for amicus curiae Carl Lund- gren. Jeffrey P. Minear and David C. Freder- ick, Assistants to the Solicitor General, Before: EDWARDS, Chief Judge, United States Department of Justice, and WILLIAMS, GINSBURG, SENTELLE, John G. Roberts, Jr., argued the causes for RANDOLPH, ROGERS and TATEL, appellees. With them on the brief were A. Circuit Judges. Douglas Melamed, Acting Assistant Attor- ney General, United States Department of Opinion for the Court filed PER Justice, Jeffrey H. Blattner, Deputy Assis- CURIAM. tant Attorney General, Mary Jean Molten- TABLE OF CONTENTS SummaryTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT44

I. Introduction TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT47 A. Background TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT47 B. Overview TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT48 II. MonopolizationTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT50 A. Monopoly PowerTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT51 1. Market Structure TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT51 a. Market definition TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT51 b. Market power TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT54 2. Direct Proof TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT56 B. Anticompetitive ConductTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT58 1. Licenses Issued to Original Equipment Manufacturers TTTTTTTTTTTTTTTTTTT59 a. Anticompetitive effect of the license restrictions TTTTTTTTTTTTTTTTTTTTT60 b. Microsoft’s justifications for the license restrictions TTTTTTTTTTTTTTTTTT62 2. Integration of IE and Windows TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT64 a. Anticompetitive effect of integrationTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT65 U.S. v. MICROSOFT CORP. 45 Cite as 253 F.3d 34 (D.C. Cir. 2001) b. Microsoft’s justifications for integrationTTTTTTTTTTTTTTTTTTTTTTTTTTTTT66 3. Agreements with Internet Access Providers TTTTTTTTTTTTTTTTTTTTTTTTTTTT67 4. Dealings with Internet Content Providers, Independent Software Vendors, and Apple Computer TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT71 5. Java TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT74 a. The incompatible JVM TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT74 b. The First Wave Agreements TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT75 c. Deception of Java developersTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT76 d. The threat to Intel TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT77 6. Course of ConductTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT78 C. CausationTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT78 III. Attempted Monopolization TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT80 A. Relevant MarketTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT81 B. Barriers to Entry TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT82 IV. Tying TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT84 A. Separate–Products Inquiry Under the Per Se Test TTTTTTTTTTTTTTTTTTTTTTTTTT85 B. Per Se Analysis Inappropriate for this Case TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT89 C. On Remand TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT95 V. Trial Proceedings and Remedy TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT97 A. Factual BackgroundTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT98 B. Trial Proceedings TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT100 C. Failure to Hold an Evidentiary Hearing TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT101 D. Failure to Provide an Adequate ExplanationTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT103 E. Modification of Liability TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT103 F. On Remand TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT105 G. Conclusion TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT107 VI. Judicial MisconductTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT107 A. The District Judge’s Communications with the Press TTTTTTTTTTTTTTTTTTTTTTT107 B. Violations of the Code of Conduct for United States Judges TTTTTTTTTTTTTTTTT111 C. Appearance of Partiality TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT114 D. Remedies for Judicial Misconduct and Appearance of Partiality TTTTTTTTTTTTTT116 1. Disqualification TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT116 2. Review of Findings of Fact and Conclusions of LawTTTTTTTTTTTTTTTTTTTTT117 VII. Conclusion TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT118

PER CURIAM: ed States v. Microsoft Corp., 87 F.Supp.2d Microsoft Corporation appeals from 30 (D.D.C.2000) (‘‘Conclusions of Law’’). judgments of the District Court finding The District Court then found that the the company in violation of §§ 1 and 2 of same facts that established liability under the Sherman Act and ordering various §§ 1 and 2 of the Sherman Act mandated remedies. findings of liability under analogous state The action against Microsoft arose pur- law antitrust provisions. Id. To remedy suant to a complaint filed by the United the Sherman Act violations, the District States and separate complaints filed by Court issued a Final Judgment requiring individual States. The District Court de- Microsoft to submit a proposed plan of termined that Microsoft had maintained a divestiture, with the company to be split monopoly in the market for Intelcompati- into an operating systems business and an ble PC operating systems in violation of applications business. United States v. § 2; attempted to gain a monopoly in the Microsoft Corp., 97 F.Supp.2d 59, 64–65 market for internet browsers in violation (D.D.C.2000) (‘‘Final Judgment’’). The of § 2; and illegally tied two purportedly District Court’s remedial order also con- separate products, Windows and Internet tains a number of interim restrictions on Explorer (‘‘IE’’), in violation of § 1. Unit- Microsoft’s conduct. Id. at 66–69. 46 253 FEDERAL REPORTER, 3d SERIES

Microsoft’s appeal contests both the le- with respect to the state law counterparts gal conclusions and the resulting remedial of the plaintiffs’ Sherman Act claims. order. There are three principal aspects We also find merit in Microsoft’s chal- of this appeal. First, Microsoft challenges lenge to the Final Judgment embracing the District Court’s legal conclusions as to the District Court’s remedial order. all three alleged antitrust violations and also a number of the procedural and factu- There are several reasons supporting this al foundations on which they rest. Second, conclusion. First, the District Court’s Fi- Microsoft argues that the remedial order nal Judgment rests on a number of liabil- must be set aside, because the District ity determinations that do not survive ap- Court failed to afford the company an evi- pellate review; therefore, the remedial dentiary hearing on disputed facts and, order as currently fashioned cannot stand. also, because the substantive provisions of Furthermore, we would vacate and re- the order are flawed. Finally, Microsoft mand the remedial order even were we to asserts that the trial judge committed ethi- uphold the District Court’s liability deter- cal violations by engaging in impermissible minations in their entirety, because the ex parte contacts and making inappropri- District Court failed to hold an evidentia- ate public comments on the merits of the ry hearing to address remedies-specific case while it was pending. Microsoft ar- factual disputes. gues that these ethical violations compro- Finally, we vacate the Final Judgment mised the District Judge’s appearance of on remedies, because the trial judge en- impartiality, thereby necessitating his dis- gaged in impermissible ex parte contacts qualification and vacatur of his Findings of by holding secret interviews with members Fact, Conclusions of Law, and Final Judg- of the media and made numerous offensive ment. comments about Microsoft officials in pub- After carefully considering the volumi- lic statements outside of the courtroom, nous record on appeal—including the Dis- giving rise to an appearance of partiality. trict Court’s Findings of Fact and Conclu- Although we find no evidence of actual sions of Law, the testimony and exhibits bias, we hold that the actions of the trial submitted at trial, the parties’ briefs, and judge seriously tainted the proceedings be- the oral arguments before this court—we fore the District Court and called into find that some but not all of Microsoft’s question the integrity of the judicial pro- liability challenges have merit. According- cess. We are therefore constrained to va- ly, we affirm in part and reverse in part cate the Final Judgment on remedies, re- the District Court’s judgment that Micro- mand the case for reconsideration of the soft violated § 2 of the Sherman Act by remedial order, and require that the case employing anticompetitive means to main- be assigned to a different trial judge on tain a monopoly in the operating system remand. We believe that this disposition market; we reverse the District Court’s will be adequate to cure the cited impro- determination that Microsoft violated § 2 prieties. of the Sherman Act by illegally attempting to monopolize the internet browser mar- In sum, for reasons more fully explained ket; and we remand the District Court’s below, we affirm in part, reverse in part, finding that Microsoft violated § 1 of the and remand in part the District Court’s Sherman Act by unlawfully tying its brow- judgment assessing liability. We vacate in ser to its operating system. Our judgment full the Final Judgment embodying the extends to the District Court’s findings remedial order and remand the case to a U.S. v. MICROSOFT CORP. 47 Cite as 253 F.3d 34 (D.C. Cir. 2001)

different trial judge for further proceed- almost exclusively on Microsoft’s varied ings consistent with this opinion. efforts to unseat Netscape Navigator as the preeminent internet browser, plaintiffs I. INTRODUCTION charged four distinct violations of the A. Background Sherman Act: (1) unlawful exclusive dealing arrangements in violation of § 1; (2) In July 1994, officials at the Department unlawful tying of IE to Windows 95 and of Justice (‘‘DOJ’’), on behalf of the United Windows 98 in violation of § 1; (3) unlaw- States, filed suit against Microsoft, charg- ful maintenance of a monopoly in the PC ing the company with, among other things, unlawfully maintaining a monopoly in the operating system market in violation of operating system market through anticom- § 2; and (4) unlawful attempted monopoli- petitive terms in its licensing and software zation of the internet browser market in developer agreements. The parties subse- violation of § 2. The States also brought quently entered into a consent decree, thus pendent claims charging Microsoft with vi- avoiding a trial on the merits. See United olations of various State antitrust laws. States v. Microsoft Corp., 56 F.3d 1448 The District Court scheduled the case (D.C.Cir.1995) (‘‘Microsoft I’’). Three on a ‘‘fast track.’’ The hearing on the pre- years later, the Justice Department filed a liminary injunction and the trial on the civil contempt action against Microsoft for merits were consolidated pursuant to FED. allegedly violating one of the decree’s pro- R.CIV.P. 65(a)(2). The trial was then visions. On appeal from a grant of a scheduled to commence on September 8, preliminary injunction, this court held that 1998, less than four months after the com- Microsoft’s technological bundling of IE plaints had been filed. In a series of 3.0 and 4.0 with Windows 95 did not violate pretrial orders, the District Court limited the relevant provision of the consent de- each side to a maximum of 12 trial wit- cree. United States v. Microsoft Corp., nesses plus two rebuttal witnesses. It re- 147 F.3d 935 (D.C.Cir.1998) (‘‘Microsoft quired that all trial witnesses’ direct testi- II’’). We expressly reserved the question mony be submitted to the court in the whether such bundling might independent- form of written declarations. The District ly violate §§ 1 or 2 of the Sherman Act. Court also made allowances for the use of Id. at 950 n. 14. deposition testimony at trial to prove sub- On May 18, 1998, shortly before issuance ordinate or predicate issues. Following of the Microsoft II decision, the United the grant of three brief continuances, the States and a group of State plaintiffs filed trial started on October 19, 1998. separate (and soon thereafter consolidat- After a 76–day bench trial, the District ed) complaints, asserting antitrust viola- Court issued its Findings of Fact. United tions by Microsoft and seeking preliminary States v. Microsoft Corp., 84 F.Supp.2d 9 and permanent injunctions against the (D.D.C.1999) (‘‘Findings of Fact’’). This company’s allegedly unlawful conduct. triggered two independent courses of ac- The complaints also sought any ‘‘other pre- tion. First, the District Court established liminary and permanent relief as is neces- a schedule for briefing on possible legal sary and appropriate to restore competi- conclusions, inviting Professor Lawrence tive conditions in the markets affected by Lessig to participate as amicus curiae. Microsoft’s unlawful conduct.’’ Gov’t’s Second, the District Court referred the Compl. at 53, United States v. Microsoft case to mediation to afford the parties an Corp., No. 98–1232 (D.D.C.1999). Relying opportunity to settle their differences. The 48 253 FEDERAL REPORTER, 3d SERIES

Honorable Richard A. Posner, Chief Judge Microsoft filed a notice of appeal within of the United States Court of Appeals for a week after the District Court issued its the Seventh Circuit, was appointed to Final Judgment. This court then ordered serve as mediator. The parties concurred that any proceedings before it be heard by in the referral to mediation and in the the court sitting en banc. Before any choice of mediator. substantive matters were addressed by Mediation failed after nearly four this court, however, the District Court cer- months of settlement talks between the tified appeal of the case brought by the parties. On April 3, 2000, with the parties’ United States directly to the Supreme briefs having been submitted and consid- Court pursuant to 15 U.S.C. § 29(b), while ered, the District Court issued its conclu- staying the final judgment order in the sions of law. The District Court found federal and state cases pending appeal. Microsoft liable on the § 1 tying and § 2 The States thereafter petitioned the Su- monopoly maintenance and attempted mo- preme Court for a writ of certiorari in nopolization claims, Conclusions of Law, at their case. The Supreme Court declined 35–51, while ruling that there was insuffi- to hear the appeal of the Government’s cient evidence to support a § 1 exclusive case and remanded the matter to this dealing violation, id. at 51–54. As to the court; the Court likewise denied the pendent State actions, the District Court States’ petition for writ of certiorari. Mi- found the State antitrust laws contermi- crosoft Corp. v. United States, 530 U.S. nous with §§ 1 and 2 of the Sherman Act, 1301, 121 S.Ct. 25, 147 L.Ed.2d 1048 thereby obviating the need for further (2000). This consolidated appeal followed. State-specific analysis. Id. at 54–56. In those few cases where a State’s law re- B. Overview quired an additional showing of intrastate Before turning to the merits of Micro- impact on competition, the District Court soft’s various arguments, we pause to re- found the requirement easily satisfied on flect briefly on two matters of note, one the evidence at hand. Id. at 55. practical and one theoretical. Having found Microsoft liable on all but The practical matter relates to the tem- one count, the District Court then asked poral dimension of this case. The litiga- plaintiffs to submit a proposed remedy. tion timeline in this case is hardly proble- Plaintiffs’ proposal for a remedial order matic. Indeed, it is noteworthy that a case was subsequently filed within four weeks, of this magnitude and complexity has pro- along with six supplemental declarations ceeded from the filing of complaints and over 50 new exhibits. In their propos- through trial to appellate decision in a al, plaintiffs sought specific conduct reme- mere three years. See, e.g., Data Gen. dies, plus structural relief that would split Corp. v. Grumman Sys. Support Corp., 36 Microsoft into an applications company F.3d 1147, 1155 (1st Cir.1994) (six years and an operating systems company. The from filing of complaint to appellate deci- District Court rejected Microsoft’s request sion); Transamerica Computer Co., Inc. v. for further evidentiary proceedings and, IBM, 698 F.2d 1377, 1381 (9th Cir.1983) following a single hearing on the merits of (over four years from start of trial to the remedy question, issued its Final appellate decision); United States v. Unit- Judgment on June 7, 2000. The District ed Shoe Mach. Corp., 110 F.Supp. 295, 298 Court adopted plaintiffs’ proposed remedy (D.Mass.1953) (over five years from filing without substantive change. of complaint to trial court decision). U.S. v. MICROSOFT CORP. 49 Cite as 253 F.3d 34 (D.C. Cir. 2001)

What is somewhat problematic, however, The second matter of note is more theo- is that just over six years have passed retical in nature. We decide this case since Microsoft engaged in the first con- against a backdrop of significant debate duct plaintiffs allege to be anticompetitive. amongst academics and practitioners over As the record in this case indicates, six the extent to which ‘‘old economy’’ § 2 years seems like an eternity in the com- monopolization doctrines should apply to puter industry. By the time a court can firms competing in dynamic technological assess liability, firms, products, and the markets characterized by network effects. marketplace are likely to have changed In markets characterized by network ef- dramatically. This, in turn, threatens fects, one product or standard tends to- enormous practical difficulties for courts wards dominance, because ‘‘the utility that considering the appropriate measure of re- a user derives from consumption of the lief in equitable enforcement actions, both good increases with the number of other in crafting injunctive remedies in the first agents consuming the good.’’ Michael L. instance and reviewing those remedies in Katz & Carl Shapiro, Network Externali- the second. Conduct remedies may be ties, Competition, and Compatibility, 75 unavailing in such cases, because innova- AM. ECON. REV. 424, 424 (1985). For exam- tion to a large degree has already ren- ple, ‘‘[a]n individual consumer’s demand to dered the anticompetitive conduct obsolete use (and hence her benefit from) the tele- (although by no means harmless). And phone network TTT increases with the broader structural remedies present their number of other users on the network own set of problems, including how a court whom she can call or from whom she can goes about restoring competition to a dra- receive calls.’’ Howard A. Shelanski & J. matically changed, and constantly chang- Gregory Sidak, Antitrust Divestiture in ing, marketplace. That is just one reason Network Industries, 68 U. CHI. L. REV. 1, 8 why we find the District Court’s refusal in (2001). Once a product or standard the present case to hold an evidentiary achieves wide acceptance, it becomes more hearing on remedies—to update and flesh or less entrenched. Competition in such out the available information before seri- industries is ‘‘for the field’’ rather than ously entertaining the possibility of dra- ‘‘within the field.’’ See Harold Demsetz, matic structural relief—so problematic. Why Regulate Utilities?, 11 J.L. & ECON. See infra Section V. 55, 57 & n.7 (1968) (emphasis omitted). We do not mean to say that enforcement actions will no longer play an important In technologically dynamic markets, role in curbing infringements of the anti- however, such entrenchment may be tem- trust laws in technologically dynamic mar- porary, because innovation may alter the kets, nor do we assume this in assessing field altogether. See JOSEPH A. SCHUMPET- the merits of this case. Even in those ER, CAPITALISM, SOCIALISM AND DEMOCRACY cases where forward-looking remedies ap- 81–90 (Harper Perennial 1976) (1942). pear limited, the Government will continue Rapid technological change leads to mar- to have an interest in defining the contours kets in which ‘‘firms compete through in- of the antitrust laws so that law-abiding novation for temporary market dominance, firms will have a clear sense of what is from which they may be displaced by the permissible and what is not. And the next wave of product advancements.’’ threat of private damage actions will re- Shelanski & Sidak, at 11–12 (discussing main to deter those firms inclined to test Schumpeterian competition, which pro- the limits of the law. ceeds ‘‘sequentially over time rather than 50 253 FEDERAL REPORTER, 3d SERIES

simultaneously across a market’’). Micro- terized by rapid innovation, both forces soft argues that the operating system mar- may be operating and can be difficult to ket is just such a market. isolate.’’). Whether or not Microsoft’s characteriza- Moreover, it should be clear that Micro- tion of the operating system market is soft makes no claim that anticompetitive correct does not appreciably alter our misconduct should be assessed differently in sion in assessing the alleged antitrust vio- technologically dynamic markets. It lations in the present case. As an initial claims only that the measure of monopoly matter, we note that there is no consensus power should be different. For reasons among commentators on the question of whether, and to what extent, current mo- fully discussed below, we reject Microsoft’s nopolization doctrine should be amended to monopoly power argument. See infra Sec- account for competition in technologically tion II.A. dynamic markets characterized by net- With this backdrop in mind, we turn to work effects. Compare Steven C. Salop & the specific challenges raised in Microsoft’s R. Craig Romaine, Preserving Monopoly: appeal. Economic Analysis, Legal Standards, and Microsoft, 7 GEO. MASON L. REV. 617, 654– 55, 663–64 (1999) (arguing that exclusion- II. MONOPOLIZATION ary conduct in high-tech networked indus- [1, 2] Section 2 of the Sherman Act tries deserves heightened antitrust scruti- makes it unlawful for a firm to ‘‘monopo- ny in part because it may threaten to deter lize.’’ 15 U.S.C. § 2. The offense of mo- innovation), with Ronald A. Cass & Keith nopolization has two elements: ‘‘(1) the N. Hylton, Preserving Competition: Eco- possession of monopoly power in the rele- nomic Analysis, Legal Standards and Mi- vant market and (2) the willful acquisition crosoft, 8 GEO. MASON L. REV. 1, 36–39 or maintenance of that power as distin- (1999) (equivocating on the antitrust impli- guished from growth or development as a cations of network effects and noting that consequence of a superior product, busi- the presence of network externalities may ness acumen, or historic accident.’’ Unit- actually encourage innovation by guaran- ed States v. Grinnell Corp., 384 U.S. 563, teeing more durable monopolies to inno- vating winners). Indeed, there is some 570–71, 86 S.Ct. 1698, 16 L.Ed.2d 778 suggestion that the economic consequences (1966). The District Court applied this of network effects and technological dy- test and found that Microsoft possesses namism act to offset one another, thereby monopoly power in the market for Intel- making it difficult to formulate categorical compatible PC operating systems. Focus- antitrust rules absent a particularized ing primarily on Microsoft’s efforts to sup- analysis of a given market. See Shelanski press Netscape Navigator’s threat to its & Sidak, at 6–7 (‘‘High profit margins operating system monopoly, the court also might appear to be the benign and neces- found that Microsoft maintained its power sary recovery of legitimate investment re- not through competition on the merits, but turns in a Schumpeterian framework, but through unlawful means. Microsoft chal- they might represent exploitation of cus- lenges both conclusions. We defer to the tomer lock-in and monopoly power when District Court’s findings of fact, setting viewed through the lens of network eco- them aside only if clearly erroneous. FED nomicsTTTT The issue is particularly com- R. CIV. P. 52(a). We review legal questions plex because, in network industries charac- de novo. United States ex rel. Modern U.S. v. MICROSOFT CORP. 51 Cite as 253 F.3d 34 (D.C. Cir. 2001)

Elec., Inc. v. Ideal Elec. Sec. Co., 81 F.3d only rarely available, courts more typically 240, 244 (D.C.Cir.1996). examine market structure in search of cir- We begin by considering whether Micro- cumstantial evidence of monopoly power. soft possesses monopoly power, see infra 2A AREEDA ET AL., ANTITRUST LAW ¶ 531a, at Section II.A, and finding that it does, we 156; see also, e.g., Grinnell, 384 U.S. at turn to the question whether it maintained 571, 86 S.Ct. 1698. Under this structural this power through anticompetitive means. approach, monopoly power may be in- Agreeing with the District Court that the ferred from a firm’s possession of a domi- company behaved anticompetitively, see nant share of a relevant market that is infra Section II.B, and that these actions protected by entry barriers. See Rebel contributed to the maintenance of its mo- Oil, 51 F.3d at 1434. ‘‘Entry barriers’’ are nopoly power, see infra Section II.C, we factors (such as certain regulatory require- affirm the court’s finding of liability for ments) that prevent new rivals from timely monopolization. responding to an increase in price above the competitive level. See S. Pac. Com- A. Monopoly Power munications Co. v.AT & T, 740 F.2d 980, 1001–02 (D.C.Cir.1984). [3–5] While merely possessing monopoly power is not itself an antitrust viola- The District Court considered these tion, see Northeastern Tel. Co. v. AT & T, structural factors and concluded that Mi- 651 F.2d 76, 84–85 (2d Cir.1981), it is a crosoft possesses monopoly power in a rel- necessary element of a monopolization evant market. Defining the market as charge, see Grinnell, 384 U.S. at 570, 86 Intel-compatible PC operating systems, S.Ct. 1698. The Supreme Court defines the District Court found that Microsoft has monopoly power as ‘‘the power to control a greater than 95% share. It also found prices or exclude competition.’’ United the company’s market position protected States v. E.I. du Pont de Nemours & Co., by a substantial entry barrier. Conclu- 351 U.S. 377, 391, 76 S.Ct. 994, 100 L.Ed. sions of Law, at 36. 1264 (1956). More precisely, a firm is a Microsoft argues that the District Court monopolist if it can profitably raise prices incorrectly defined the relevant market. substantially above the competitive level. It also claims that there is no barrier to 2A PHILLIP E. AREEDA ET AL., ANTITRUST LAW entry in that market. Alternatively, Mi- ¶ 501, at 85 (1995); cf. Ball Mem’l Hosp., crosoft argues that because the software Inc. v. Mut. Hosp. Ins., Inc., 784 F.2d industry is uniquely dynamic, direct proof, 1325, 1335 (7th Cir.1986) (defining market rather than circumstantial evidence, more power as ‘‘the ability to cut back the mar- appropriately indicates whether it possess- ket’s total output and so raise price’’). es monopoly power. Rejecting each argu- Where evidence indicates that a firm has ment, we uphold the District Court’s find- in fact profitably done so, the existence of ing of monopoly power in its entirety. monopoly power is clear. See Rebel Oil 1. Market Structure Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 a. Market definition (9th Cir.1995); see also FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 460–61, [6, 7] ‘‘Because the ability of consum- 106 S.Ct. 2009, 90 L.Ed.2d 445 (1986) (users to turn to other suppliers restrains a ing direct proof to show market power in firm from raising prices above the compet- Sherman Act § 1 unreasonable restraint of itive level,’’ Rothery Storage & Van Co. v. trade action). Because such direct proof is Atlas Van Lines, Inc., 792 F.2d 210, 218 52 253 FEDERAL REPORTER, 3d SERIES

(D.C.Cir.1986), the relevant market must only by saying: ‘‘the district court’s mar- include all products ‘‘reasonably inter- ket definition is so narrow that it excludes changeable by consumers for the same Apple’s Mac OS, which has competed with purposes.’’ du Pont, 351 U.S. at 395, 76 Windows for years, simply because the S.Ct. 994. In this case, the District Court Mac OS runs on a different microproces- defined the market as ‘‘the licensing of all sor.’’ Appellant’s Opening Br. at 84. This Intel-compatible PC operating systems general, conclusory statement falls far worldwide,’’ finding that there are ‘‘cur- short of what is required to challenge find- rently no products—and TTT there are not ings as clearly erroneous. Pendleton v. likely to be any in the near future—that a Rumsfeld, 628 F.2d 102, 106 (D.C.Cir. significant percentage of computer users 1980); see also Terry v. Reno, 101 F.3d worldwide could substitute for [these oper- 1412, 1415 (D.C.Cir.1996) (holding that ating systems] without incurring substan- claims made but not argued in a brief are tial costs.’’ Conclusions of Law, at 36. waived). Microsoft neither points to evi- Calling this market definition ‘‘far too nar- dence contradicting the District Court’s row,’’ Appellant’s Opening Br. at 84, Mi- findings nor alleges that supporting record crosoft argues that the District Court improperly excluded three types of products: evidence is insufficient. And since Micro- non-Intel compatible operating systems soft does not argue that even if we accept (primarily Apple’s Macintosh operating these findings, they do not support the system, Mac OS), operating systems for District Court’s conclusion, we have no non-PC devices (such as handheld comput- basis for upsetting the court’s decision to ers and portal websites), and ‘‘middleware’’ exclude Mac OS from the relevant market. products, which are not operating systems Microsoft’s challenge to the District at all. Court’s exclusion of non-PC based compet- We begin with Mac OS. Microsoft’s itors, such as information appliances (han- argument that Mac OS should have been dheld devices, etc.) and portal websites included in the relevant market suffers that host serverbased software applica- from a flaw that infects many of the com- tions, suffers from the same defect: the pany’s monopoly power claims: the compa- company fails to challenge the District ny fails to challenge the District Court’s Court’s key factual findings. In particular, factual findings, or to argue that these the District Court found that because in- findings do not support the court’s conclu- formation appliances fall far short of per- sions. The District Court found that consumers would not switch from Windows to forming all of the functions of a PC, most Mac OS in response to a substantial price consumers will buy them only as a supple- increase because of the costs of acquiring ment to their PCs. Findings of Fact ¶ 23. the new hardware needed to run Mac OS The District Court also found that portal (an Apple computer and peripherals) and websites do not presently host enough ap- compatible software applications, as well plications to induce consumers to switch, as because of the effort involved in learn- nor are they likely to do so in the near ing the new system and transferring files future. Id. ¶ 27. Again, because Micro- to its format. Findings of Fact ¶ 20. The soft does not argue that the District court also found the Apple system less Court’s findings do not support its conclu- appealing to consumers because it costs sion that information appliances and portal considerably more and supports fewer ap- websites are outside the relevant market, plications. Id. ¶ 21. Microsoft responds we adhere to that conclusion. U.S. v. MICROSOFT CORP. 53 Cite as 253 F.3d 34 (D.C. Cir. 2001)

[8] This brings us to Microsoft’s main Direct Testimony of Paul Maritz ¶ ¶ 234– challenge to the District Court’s market 36, reprinted in 6 J.A. at 3727–29. Be- definition: the exclusion of middleware. cause of this, a middleware product writ- Because of the importance of middleware ten for Windows could take over some or to this case, we pause to explain what it is all of Windows’s valuable platform func- and how it relates to the issue before us. tions—that is, developers might begin to Operating systems perform many func- rely upon APIs exposed by the middleware tions, including allocating computer memo- for basic routines rather than relying upon ry and controlling peripherals such as the API set included in Windows. If mid- printers and keyboards. See Direct Testi- dleware were written for multiple operat- mony of Frederick Warren–Boulton ¶ 20, ing systems, its impact could be even reprinted in 5 J.A. at 3172–73. Operating greater. The more developers could rely systems also function as platforms for soft- upon APIs exposed by such middleware, ware applications. They do this by ‘‘ex- the less expensive porting to different op- posing’’—i.e., making available to software erating systems would be. Ultimately, if developers—routines or protocols that per- developers could write applications relying form certain widely-used functions. These exclusively on APIs exposed by middle- are known as Application Programming ware, their applications would run on any Interfaces, or ‘‘APIs.’’ See Direct Testi- operating system on which the middleware mony of James Barksdale ¶ 70, reprinted was also present. See Direct Testimony of in 5 J.A. at 2895–96. For example, Win- Avadis Tevanian, Jr. ¶ 45, reprinted in 5 dows contains an API that enables users to J.A. at 3113. Netscape Navigator and draw a box on the screen. See Direct Java—both at issue in this case—are mid- Testimony of Michael T. Devlin ¶ 12, re- dleware products written for multiple op- printed in 5 J.A. at 3525. Software devel- erating systems. Findings of Fact ¶ 28. opers wishing to include that function in an Microsoft argues that, because middle- application need not duplicate it in their ware could usurp the operating system’s own code. Instead, they can ‘‘call’’—i.e., platform function and might eventually use—the Windows API. See Direct Testi- take over other operating system functions mony of James Barksdale ¶ ¶ 70–71, re- (for instance, by controlling peripherals), printed in 5 J.A. at 2895–97. Windows the District Court erred in excluding Navi- contains thousands of APIs, controlling ev- gator and Java from the relevant market. erything from data storage to font display. The District Court found, however, that See Direct Testimony of Michael Devlin neither Navigator, Java, nor any other ¶ 12, reprinted in 5 J.A. at 3525. middleware product could now, or would Every operating system has different soon, expose enough APIs to serve as a APIs. Accordingly, a developer who platform for popular applications, much writes an application for one operating less take over all operating system func- system and wishes to sell the application to tions. Id. ¶ ¶ 28–29. Again, Microsoft users of another must modify, or ‘‘port,’’ fails to challenge these findings, instead the application to the second operating simply asserting middleware’s ‘‘potential’’ system. Findings of Fact ¶ 4. This pro- as a competitor. Appellant’s Opening Br. cess is both timeconsuming and expensive. at 86. The test of reasonable interchange- Id. ¶ 30. ability, however, required the District ‘‘Middleware’’ refers to software prod- Court to consider only substitutes that ucts that expose their own APIs. Id. ¶ 28; constrain pricing in the reasonably fore- 54 253 FEDERAL REPORTER, 3d SERIES

seeable future, and only products that can ready well-developed enough to serve as enter the market in a relatively short time present substitutes. See infra Section can perform this function. See Rothery, II.C. Because market definition is meant 792 F.2d at 218 (‘‘Because the ability of to identify products ‘‘reasonably inter- consumers to turn to other suppliers re- changeable by consumers,’’ du Pont, 351 strains a firm from raising prices above U.S. at 395, 76 S.Ct. 994, and because the competitive level, the definition of the middleware is not now interchangeable ‘relevant market’ rests on a determination with Windows, the District Court had good of available substitutes.’’); see also Find- reason for excluding middleware from the ings of Fact ¶ 29 (‘‘[I]t would take several relevant market. years for middleware TTT to evolve’’ into a b. Market power product that can constrain operating system pricing.). Whatever middleware’s ul- [9] Having thus properly defined the timate potential, the District Court found relevant market, the District Court found that consumers could not now abandon that Windows accounts for a greater than their operating systems and switch to mid- 95% share. Findings of Fact ¶ 35. The dleware in response to a sustained price court also found that even if Mac OS were for Windows above the competitive level. included, Microsoft’s share would exceed Findings of Fact ¶ ¶ 28, 29. Nor is mid- 80%. Id. Microsoft challenges neither dleware likely to overtake the operating finding, nor does it argue that such a system as the primary platform for soft- market share is not predominant. Cf. ware development any time in the near Grinnell, 384 U.S. at 571, 86 S.Ct. 1698 future. Id. (87% is predominant); Eastman Kodak Alternatively, Microsoft argues that the Co. v. Image Technical Servs., Inc., 504 District Court should not have excluded U.S. 451, 481, 112 S.Ct. 2072, 119 L.Ed.2d middleware from the relevant market be- 265 (1992) (80%); du Pont, 351 U.S. at 379, cause the primary focus of the plaintiffs’ 391, 76 S.Ct. 994 (75%). § 2 charge is on Microsoft’s attempts to suppress middleware’s threat to its operat- [10] Instead, Microsoft claims that ing system monopoly. According to Mi- even a predominant market share does not crosoft, it is ‘‘contradict[ory],’’ 2/26/2001 by itself indicate monopoly power. Al- Ct. Appeals Tr. at 20, to define the rele- though the ‘‘existence of [monopoly] power vant market to exclude the ‘‘very competi- ordinarily may be inferred from the pretive threats that gave rise’’ to the action. dominant share of the market,’’ Grinnell, Appellant’s Opening Br. at 84. The pur- 384 U.S. at 571, 86 S.Ct. 1698, we agree ported contradiction lies between plaintiffs’ with Microsoft that because of the possibil- § 2 theory, under which Microsoft pre- ity of competition from new entrants, see served its monopoly against middleware Ball Mem’l Hosp., Inc., 784 F.2d at 1336, technologies that threatened to become vi- looking to current market share alone can able substitutes for Windows, and its theo- be ‘‘misleading.’’ Hunt-Wesson Foods, ry of the relevant market, under which Inc. v. Ragu Foods, Inc., 627 F.2d 919, 924 middleware is not presently a viable sub- (9th Cir.1980); see also Ball Mem’l Hosp., stitute for Windows. Because middle- Inc., 784 F.2d at 1336 (‘‘Market share re- ware’s threat is only nascent, however, no flects current sales, but today’s sales do contradiction exists. Nothing in § 2 of the not always indicate power over sales and Sherman Act limits its prohibition to ac- price tomorrow.’’) In this case, however, tions taken against threats that are al- the District Court was not misled. Con- U.S. v. MICROSOFT CORP. 55 Cite as 253 F.3d 34 (D.C. Cir. 2001) sidering the possibility of new rivals, the small percentage of these applications. Id. court focused not only on Microsoft’s pres- As the District Court explained, however, ent market share, but also on the structur- the applications barrier to entry gives con- al barrier that protects the company’s fu- sumers reason to prefer the dominant op- ture position. Conclusions of Law, at 36. erating system even if they have no need That barrier—the ‘‘applications barrier to to use all applications written for it: entry’’—stems from two characteristics of The consumer wants an operating sys- the software market: (1) most consumers tem that runs not only types of applica- prefer operating systems for which a large tions that he knows he will want to use, number of applications have already been but also those types in which he might written; and (2) most developers prefer to develop an interest later. Also, the con- write for operating systems that already sumer knows that if he chooses an oper- have a substantial consumer base. See ating system with enough demand to Findings of Fact ¶ ¶ 30, 36. This ‘‘chick- support multiple applications in each en-and-egg’’ situation ensures that applica- product category, he will be less likely to tions will continue to be written for the find himself straitened later by having to already dominant Windows, which in turn use an application whose features disap- ensures that consumers will continue to point him. Finally, the average user prefer it over other operating systems. knows that, generally speaking, applica- Id. tions improve through successive ver- Challenging the existence of the applica- sions. He thus wants an operating sys- tions barrier to entry, Microsoft observes tem for which successive generations of that software developers do write applica- his favorite applications will be re- tions for other operating systems, pointing leased—promptly at that. The fact that out that at its peak IBM’s OS/2 supported a vastly larger number of applications approximately 2,500 applications. Id. ¶ 46. are written for Windows than for other This misses the point. That some develop- PC operating systems attracts consumers write applications for other operating ers to Windows, because it reassures systems is not at all inconsistent with the them that their interests will be met as finding that the applications barrier to en- long as they use Microsoft’s product. try discourages many from writing for Findings of Fact ¶ 37. Thus, despite the these less popular platforms. Indeed, the limited success of its rivals, Microsoft ben- District Court found that IBM’s difficulty efits from the applications barrier to entry. in attracting a larger number of software Of course, were middleware to succeed, developers to write for its platform seri- it would erode the applications barrier to ously impeded OS/2’s success. Id. ¶ 46. entry. Because applications written for Microsoft does not dispute that Windows multiple operating systems could run on supports many more applications than any any operating system on which the middle- other operating system. It argues instead ware product was present with little, if that ‘‘[i]t defies common sense’’ to suggest any, porting, the operating system market that an operating system must support as would become competitive. Id. ¶ ¶ 29, 72. many applications as Windows does (more But as the District Court found, middle- than 70,000, according to the District ware will not expose a sufficient number of Court, id. ¶ 40) to be competitive. Appel- APIs to erode the applications barrier to lant’s Opening Br. at 96. Consumers, Mi- entry in the foreseeable future. See id. crosoft points out, can only use a very ¶ ¶ 28–29. 56 253 FEDERAL REPORTER, 3d SERIES

Microsoft next argues that the applica- ORGANIZATION OF INDUSTRY 67 (1968) (ex- tions barrier to entry is not an entry barri- cluding these costs). We need not resolve er at all, but a reflection of Windows’ this issue, however, for even under the popularity. It is certainly true that Win- more narrow definition it is clear that dows may have gained its initial dominance there are barriers. When Microsoft en- in the operating system market competi- tered the operating system market with tively—through superior foresight or qual- MS–DOS and the first version of Win- ity. But this case is not about Microsoft’s dows, it did not confront a dominant rival initial acquisition of monopoly power. It is operating system with as massive an in- about Microsoft’s efforts to maintain this stalled base and as vast an existing array position through means other than compe- of applications as the Windows operating tition on the merits. Because the applica- systems have since enjoyed. Findings of tions barrier to entry protects a dominant Fact ¶ ¶ 6, 7, 43. Moreover, when Micro- operating system irrespective of quality, it soft introduced Windows 95 and 98, it was gives Microsoft power to stave off even able to bypass the applications barrier to superior new rivals. The barrier is thus a entry that protected the incumbent Win- characteristic of the operating system mar- dows by including APIs from the earlier ket, not of Microsoft’s popularity, or, as version in the new operating systems. asserted by a Microsoft witness, the com- See id. ¶ 44. This made porting existing pany’s efficiency. See Direct Testimony of Windows applications to the new version Richard Schmalensee ¶ 115, reprinted in of Windows much less costly than porting 25 J.A. at 16153–14. them to the operating systems of other Finally, Microsoft argues that the Dis- entrants who could not freely include trict Court should not have considered the APIs from the incumbent Windows with applications barrier to entry because it their own. reflects not a cost borne disproportionate- ly by new entrants, but one borne by all 2. Direct Proof participants in the operating system market. According to Microsoft, it had to [11] Having sustained the District make major investments to convince soft- Court’s conclusion that circumstantial evi- ware developers to write for its new oper- dence proves that Microsoft possesses mo- ating system, and it continues to ‘‘evan- nopoly power, we turn to Microsoft’s alter- gelize’’ the Windows platform today. native argument that it does not behave Whether costs borne by all market partic- like a monopolist. Claiming that software ipants should be considered entry barriers competition is uniquely ‘‘dynamic,’’ Appel- is the subject of much debate. Compare lant’s Opening Br. at 84 (quoting Findings 2A AREEDA & HOVENKAMP, ANTITRUST LAW of Fact ¶ 59), the company suggests a new § 420c, at 61 (arguing that these costs are rule: that monopoly power in the software entry barriers), and JOE S. BAIN, BARRIERS industry should be proven directly, that is, TO NEW COMPETITION: THEIR CHARACTER AND by examining a company’s actual behavior CONSEQUENCES IN MANUFACTURING INDUS- to determine if it reveals the existence of TRIES 6–7 (1956) (considering these costs monopoly power. According to Microsoft, entry barriers), with L.A. Land Co. v. not only does no such proof of its power Brunswick Corp., 6 F.3d 1422, 1428 (9th exist, but record evidence demonstrates Cir.1993) (evaluating cost based on ‘‘[t]he the absence of monopoly power. The com- disadvantage of new entrants as compared pany claims that it invests heavily in re- to incumbents’’), and GEORGE STIGLER, THE search and development, id. at 88–89 (cit- U.S. v. MICROSOFT CORP. 57 Cite as 253 F.3d 34 (D.C. Cir. 2001)

ing Direct Testimony of Paul Maritz ¶ 155, dows—is inconsistent with the possession reprinted in 6 J.A. at 3698 (testifying that of such power. Conclusions of Law, at 37. Microsoft invests approximately 17% of its The R&D expenditures Microsoft points to revenue in R&D)), and charges a low price are not simply for Windows, but for its for Windows (a small percentage of the entire company, which most likely does not price of an Intel-compatible PC system possess a monopoly for all of its products. and less than the price of its rivals, id. at Moreover, because innovation can increase 90 (citing Findings of Fact ¶ ¶ 19, 21, 46)). an already dominant market share and further delay the emergence of competi- Microsoft’s argument fails because, even tion, even monopolists have reason to in- assuming that the software market is vest in R&D. Findings of Fact ¶ 61. Mi- uniquely dynamic in the long term, the crosoft’s pricing behavior is similarly District Court correctly applied the struc- equivocal. The company claims only that tural approach to determine if the compa- it never charged the short-term profit- ny faces competition in the short term. maximizing price for Windows. Faced Structural market power analyses are with conflicting expert testimony, the Dis- meant to determine whether potential sub- trict Court found that it could not accu- stitutes constrain a firm’s ability to raise rately determine what this price would be. prices above the competitive level; only Id. ¶ 65. In any event, the court found, a threats that are likely to materialize in the price lower than the short-term profit- relatively near future perform this function maximizing price is not inconsistent with to any significant degree. Rothery, 792 possession or improper use of monopoly F.2d at 218 (quoting LAWRENCE SULLIVAN, power. Id. ¶ ¶ 65–66. Cf. Berkey Photo, ANTITRUST § 12, at 41 (1977)) (only substi- Inc. v. Eastman Kodak Co., 603 F.2d 263, tutes that can enter the market ‘‘prompt- 274 (2d Cir.1979) (‘‘[I]f monopoly power ly’’ should be considered). The District has been acquired or maintained through Court expressly considered and rejected improper means, the fact that the power Microsoft’s claims that innovations such as has not been used to extract [a monopoly handheld devices and portal websites price] provides no succor to the monopo- would soon expand the relevant market list.’’). Microsoft never claims that it did beyond Intel-compatible PC operating sys- not charge the long-term monopoly price. tems. Because the company does not Micosoft does argue that the price of Win- challenge these findings, we have no rea- dows is a fraction of the price of an Intel- son to believe that prompt substitutes are compatible PC system and lower than that available. The structural approach, as ap- of rival operating systems, but these facts plied by the District Court, is thus capable are not inconsistent with the District of fulfilling its purpose even in a changing Court’s finding that Microsoft has monopo- market. Microsoft cites no case, nor are ly power. See Findings of Fact ¶ 36 (‘‘In- we aware of one, requiring direct evidence tel-compatible PC operating systems other to show monopoly power in any market. than Windows [would not] attract[ ] signifi- We decline to adopt such a rule now. cant demand TTT even if Micosoft held its Even if we were to require direct proof, prices substantially above the competitive moreover, Microsoft’s behavior may well level.’’). be sufficient to show the existence of mo- More telling, the District Court found nopoly power. Certainly, none of the con- that some aspects of Microsoft’s behavior duct Microsoft points to—its investment in are difficult to explain unless Windows is a R&D and the relatively low price of Win- monopoly product. For instance, accord- 58 253 FEDERAL REPORTER, 3d SERIES ing to the District Court, the company set that it did not engage in any exclusionary the price of Windows without considering conduct. rivals’ prices, Findings of Fact ¶ 62, some- Whether any particular act of a monopo- thing a firm without a monopoly would list is exclusionary, rather than merely a have been unable to do. The District form of vigorous competition, can be diffi- Court also found that Microsoft’s pattern cult to discern: the means of illicit exclu- of exclusionary conduct could only be ra- sion, like the means of legitimate competi- tional ‘‘if the firm knew that it possessed tion, are myriad. The challenge for an monopoly power.’’ Conclusions of Law, at antitrust court lies in stating a general 37. It is to that conduct that we now turn. rule for distinguishing between exclusionary acts, which reduce social welfare, and B. Anticompetitive Conduct competitive acts, which increase it. [13–15] From a century of case law on [12] As discussed above, having a mo- monopolization under § 2, however, sever- nopoly does not by itself violate § 2. A al principles do emerge. First, to be confirm violates § 2 only when it acquires or demned as exclusionary, a monopolist’s act maintains, or attempts to acquire or main- must have an ‘‘anticompetitive effect.’’ tain, a monopoly by engaging in exclusion- That is, it must harm the competitive pro- ary conduct ‘‘as distinguished from growth cess and thereby harm consumers. In or development as a consequence of a su- contrast, harm to one or more competitors perior product, business acumen, or histor- will not suffice. ‘‘The [Sherman Act] di- ic accident.’’ Grinnell, 384 U.S. at 571, 86 rects itself not against conduct which is S.Ct. 1698; see also United States v. Alu- competitive, even severely so, but against minum Co. of Am., 148 F.2d 416, 430 (2d conduct which unfairly tends to destroy Cir.1945) (Hand, J.) (‘‘The successful com- competition itself.’’ Spectrum Sports, Inc. petitor, having been urged to compete, v. McQuillan, 506 U.S. 447, 458, 113 S.Ct. must not be turned upon when he wins.’’). 884, 122 L.Ed.2d 247 (1993); see also In this case, after concluding that Micro- Brooke Group Ltd. v. Brown & William- soft had monopoly power, the District son Tobacco Corp., 509 U.S. 209, 225, 113 Court held that Microsoft had violated § 2 S.Ct. 2578, 125 L.Ed.2d 168 (1993) (‘‘Even by engaging in a variety of exclusionary an act of pure malice by one business acts (not including predatory pricing), to competitor against another does not, with- maintain its monopoly by preventing the out more, state a claim under the federal effective distribution and use of products antitrust lawsTTTT’’). that might threaten that monopoly. Spe- [16, 17] Second, the plaintiff, on whom cifically, the District Court held Microsoft the burden of proof of course rests, see, liable for: (1) the way in which it integrat- e.g., Monsanto Co. v. Spray–Rite Serv. ed IE into Windows; (2) its various deal- Corp., 465 U.S. 752, 763, 104 S.Ct. 1464, 79 ings with Original Equipment Manufactur- L.Ed.2d 775 (1984); see also United States ers (‘‘OEMs’’), Internet Access Providers v. Arnold, Schwinn & Co., 388 U.S. 365, (‘‘IAPs’’), Internet Content Providers 374 n. 5, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (‘‘ICPs’’), Independent Software Vendors (1967), overruled on other grounds, Cont’l (‘‘ISVs’’), and Apple Computer; (3) its ef- T.V., Inc. v. GTE Sylvania Inc., 433 U.S. forts to contain and to subvert Java tech- 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), nologies; and (4) its course of conduct as a must demonstrate that the monopolist’s whole. Upon appeal, Microsoft argues conduct indeed has the requisite anticom- U.S. v. MICROSOFT CORP. 59 Cite as 253 F.3d 34 (D.C. Cir. 2001) petitive effect. See generally Brooke thus harmonized with TTT the first, it be- Group, 509 U.S. at 225–26, 113 S.Ct. 2578. comes obvious that the criteria to be re- In a case brought by a private plaintiff, the sorted to in any given case for the purpose plaintiff must show that its injury is ‘‘of of ascertaining whether violations of the ‘the type that the statute was intended to section have been committed, is the rule of forestall,’ ’’ Brunswick Corp. v. Pueblo reason guided by the established Bowl–O–Mat, Inc., 429 U.S. 477, 487–88, lawTTTT’’). As the Fifth Circuit more re- 97 S.Ct. 690, 50 L.Ed.2d 701 (1977) (quot- cently explained, ‘‘[i]t is clear TTT that the ing Wyandotte Transp. v. United States, analysis under section 2 is similar to that 389 U.S. 191, 202, 88 S.Ct. 379, 19 L.Ed.2d under section 1 regardless whether the 407 (1967)); no less in a case brought by rule of reason label is appliedTTTT’’ Mid- the Government, it must demonstrate that Texas Communications Sys., Inc. v. AT & the monopolist’s conduct harmed competi- T, 615 F.2d 1372, 1389 n. 13 (5th Cir.1980) tion, not just a competitor. (citing Byars v. Bluff City News Co., 609 [18, 19] Third, if a plaintiff successfully F.2d 843, 860 (6th Cir.1979)); see also Cal. establishes a prima facie case under § 2 Computer Prods., Inc. v. IBM Corp., 613 by demonstrating anticompetitive effect, F.2d 727, 737 (9th Cir.1979). then the monopolist may proffer a ‘‘pro- [21] Finally, in considering whether competitive justification’’ for its conduct. the monopolist’s conduct on balance harms See Eastman Kodak, 504 U.S. at 483, 112 competition and is therefore condemned as S.Ct. 2072. If the monopolist asserts a exclusionary for purposes of § 2, our focus procompetitive justification—a nonpretex- is upon the effect of that conduct, not upon tual claim that its conduct is indeed a form the intent behind it. Evidence of the in- of competition on the merits because it tent behind the conduct of a monopolist is involves, for example, greater efficiency or relevant only to the extent it helps us enhanced consumer appeal—then the bur- understand the likely effect of the monopo- den shifts back to the plaintiff to rebut list’s conduct. See, e.g., Chicago Bd. of that claim. Cf. Capital Imaging Assocs., Trade v. United States, 246 U.S. 231, 238, P.C. v. Mohawk Valley Med. Assocs., Inc., 38 S.Ct. 242, 62 L.Ed. 683 (1918) (‘‘knowl- 996 F.2d 537, 543 (2d Cir.1993). edge of intent may help the court to inter- [20] Fourth, if the monopolist’s pro- pret facts and to predict consequences’’); competitive justification stands unrebut- Aspen Skiing Co. v. Aspen Highlands Ski- ted, then the plaintiff must demonstrate ing Corp., 472 U.S. 585, 603, 105 S.Ct. that the anticompetitive harm of the con- 2847, 86 L.Ed.2d 467 (1985). duct outweighs the procompetitive benefit. With these principles in mind, we now In cases arising under § 1 of the Sherman consider Microsoft’s objections to the Dis- Act, the courts routinely apply a similar trict Court’s holding that Microsoft violat- balancing approach under the rubric of the ed § 2 of the Sherman Act in a variety of ‘‘rule of reason.’’ The source of the rule of ways. reason is Standard Oil Co. v. United States, 221 U.S. 1, 31 S.Ct. 502, 55 L.Ed. 1. Licenses Issued to Original Equip- 619 (1911), in which the Supreme Court ment Manufacturers used that term to describe the proper inquiry under both sections of the Act. See The District Court condemned a number id. at 61–62, 31 S.Ct. 502 (‘‘[W]hen the of provisions in Microsoft’s agreements li- second section [of the Sherman Act] is censing Windows to OEMs, because it 60 253 FEDERAL REPORTER, 3d SERIES found that Microsoft’s imposition of those gaining the critical mass of users neces- provisions (like many of Microsoft’s other sary to attract developer attention away actions at issue in this case) serves to from Windows as the platform for software reduce usage share of Netscape’s browser development. Plaintiffs also argue that and, hence, protect Microsoft’s operating Microsoft’s actions injured competition in system monopoly. The reason market the browser market—an argument we will share in the browser market affects mar- examine below in relation to their specific ket power in the operating system market claims that Microsoft attempted to monop- is complex, and warrants some explana- olize the browser market and unlawfully tion. tied its browser to its operating system so Browser usage share is important be- as to foreclose competition in the browser cause, as we explained in Section II.A market. In evaluating the § 2 monopoly above, a browser (or any middleware prod- maintenance claim, however, our immedi- uct, for that matter) must have a critical ate concern is with the anticompetitive ef- mass of users in order to attract software fect of Microsoft’s conduct in preserving developers to write applications relying its monopoly in the operating system mar- upon the APIs it exposes, and away from ket. the APIs exposed by Windows. Applica- In evaluating the restrictions in Micro- tions written to a particular browser’s soft’s agreements licensing Windows to APIs, however, would run on any comput- OEMs, we first consider whether plaintiffs er with that browser, regardless of the have made out a prima facie case by dem- underlying operating system. ‘‘The over- onstrating that the restrictions have an whelming majority of consumers will only anticompetitive effect. In the next subsec- use a PC operating system for which there tion, we conclude that plaintiffs have met already exists a large and varied set of TTT this burden as to all the restrictions. We applications, and for which it seems rela- then consider Microsoft’s proffered justifi- tively certain that new types of applica- cations for the restrictions and, for the tions and new versions of existing applica- most part, hold those justifications insuffi- tions will continue to be marketedTTTT’’ cient. Findings of Fact ¶ 30. If a consumer could have access to the applications he a. Anticompetitive effect of the license desired—regardless of the operating sys- restrictions tem he uses—simply by installing a partic- [22] The restrictions Microsoft places ular browser on his computer, then he upon Original Equipment Manufacturers would no longer feel compelled to select are of particular importance in determin- Windows in order to have access to those ing browser usage share because having applications; he could select an operating an OEM pre-install a browser on a com- system other than Windows based solely puter is one of the two most cost-effective upon its quality and price. In other methods by far of distributing browsing words, the market for operating systems software. (The other is bundling the would be competitive. browser with internet access software dis- Therefore, Microsoft’s efforts to gain tributed by an IAP.) Findings of Fact market share in one market (browsers) ¶ 145. The District Court found that the served to meet the threat to Microsoft’s restrictions Microsoft imposed in licensing monopoly in another market (operating Windows to OEMs prevented many OEMs systems) by keeping rival browsers from from distributing browsers other than IE. U.S. v. MICROSOFT CORP. 61 Cite as 253 F.3d 34 (D.C. Cir. 2001)

Conclusions of Law, at 39–40. In particu- Microsoft’s Gayle McClain played to the lar, the District Court condemned the li- court) (explaining that redundancy of icons cense provisions prohibiting the OEMs may be confusing to end users); 02/18/99 from: (1) removing any desktop icons, pm Tr. at 46–47 (trial testimony of John folders, or ‘‘Start’’ menu entries; (2) alter- Rose of Compaq), reprinted in 21 J.A. at ing the initial boot sequence; and (3) oth- 14237–38 (same); 11/17/98 am Tr. at 68 erwise altering the appearance of the Win- (deposition of John Kies of Packard Bell– dows desktop. Findings of Fact ¶ 213. NEC played to the court), reprinted in 9 The District Court concluded that the J.A. at 6016 (same); 11/17/98 am Tr. at 67– first license restriction—the prohibition 72 (trial testimony of Glenn Weadock), re- upon the removal of desktop icons, folders, printed in 9 J.A. at 6015–20 (same). Most and Start menu entries—thwarts the dis- telling, in presentations to OEMs, Micro- tribution of a rival browser by preventing soft itself represented that having only one OEMs from removing visible means of icon in a particular category would be ‘‘less user access to IE. Id. ¶ 203. The OEMs confusing for endusers.’’ See Govern- cannot practically install a second browser ment’s Trial Exhibit (‘‘GX’’) 319 at MS98 in addition to IE, the court found, in part 0109453. Accordingly, we reject Micro- because ‘‘[p]re-installing more than one soft’s argument that we should vacate the product in a given category TTT can signifi- District Court’s Finding of Fact 159 as it cantly increase an OEM’s support costs, relates to consumer confusion. for the redundancy can lead to confusion As noted above, the OEM channel is one among novice users.’’ Id. ¶ 159; see also of the two primary channels for distribu- id. ¶ 217. That is, a certain number of tion of browsers. By preventing OEMs novice computer users, seeing two browser from removing visible means of user ac- icons, will wonder which to use when and cess to IE, the license restriction prevents will call the OEM’s support line. Support many OEMs from pre-installing a rival calls are extremely expensive and, in the browser and, therefore, protects Micro- highly competitive original equipment mar- soft’s monopoly from the competition that ket, firms have a strong incentive to mini- middleware might otherwise present. mize costs. Id. ¶ 210. Therefore, we conclude that the license Microsoft denies the ‘‘consumer confu- restriction at issue is anticompetitive. We sion’’ story; it observes that some OEMs defer for the moment the question whether do install multiple browsers and that exec- that anticompetitive effect is outweighed utives from two OEMs that do so denied by Microsoft’s proffered justifications. any knowledge of consumers being con- The second license provision at issue fused by multiple icons. See 11/5/98 pm prohibits OEMs from modifying the initial Tr. at 41–42 (trial testimony of Avadis boot sequence—the process that occurs Tevanian of Apple), reprinted in 9 J.A. at the first time a consumer turns on the 5493–94; 11/18/99 am Tr. at 69 (trial testi- computer. Prior to the imposition of that mony of John Soyring of IBM), reprinted restriction, ‘‘among the programs that in 10 J.A. at 6222. many OEMs inserted into the boot se- Other testimony, however, supports the quence were Internet sign-up procedures District Court’s finding that fear of such that encouraged users to choose from a list confusion deters many OEMs from pre- of IAPs assembled by the OEM.’’ Find- installing multiple browsers. See, e.g., ings of Fact ¶ 210. Microsoft’s prohibition 01/13/99 pm Tr. at 614–15 (deposition of on any alteration of the boot sequence thus 62 253 FEDERAL REPORTER, 3d SERIES prevents OEMs from using that process to 33% of calls we get related to the lack of promote the services of IAPs, many of quality or confusion generated by your which—at least at the time Microsoft im- productTTTT We must have more ability posed the restriction—used Navigator to decide how our system is presented to rather than IE in their internet access our end users. If we had a choice of software. See id. ¶ 212; GX 295, reprinted another supplier, based on your actions in in 12 J.A. at 14533 (Upon learning of OEM this area, I assure you [that you] would not practices including boot sequence modifica- be our supplier of choice.’’). tion, Microsoft’s Chairman, Bill Gates, The dissatisfaction of the OEM custom- wrote: ‘‘Apparently a lot of OEMs are ers does not, of course, mean the restric- bundling non-Microsoft browsers and com- tions are anticompetitive. The anticom- ing up with offerings together with [IAPs] petitive effect of the license restrictions is, that get displayed on their machines in a as Microsoft itself recognizes, that OEMs FAR more prominent way than MSN or are not able to promote rival browsers, our Internet browser.’’). Microsoft does which keeps developers focused upon the not deny that the prohibition on modifying APIs in Windows. Findings of Fact ¶ 212 the boot sequence has the effect of de- (quoting Microsoft’s Gates as writing, creasing competition against IE by pre- ‘‘[w]inning Internet browser share is a venting OEMs from promoting rivals’ browsers. Because this prohibition has a very very important goal for us,’’ and em- substantial effect in protecting Microsoft’s phasizing the need to prevent OEMs from market power, and does so through a promoting both rival browsers and IAPs means other than competition on the mer- that might use rivals’ browsers); see also its, it is anticompetitive. Again the ques- 01/13/99 Tr. at 305–06 (excerpts from de- tion whether the provision is nonetheless position of James Von Holle of Gateway) justified awaits later treatment. (prior to restriction Gateway had pre-installed non-IE internet registration icon Finally, Microsoft imposes several addi- that was larger than other desktop icons). tional provisions that, like the prohibition This kind of promotion is not a zero-sum on removal of icons, prevent OEMs from game; but for the restrictions in their making various alterations to the desktop: licenses to use Windows, OEMs could pro- Microsoft prohibits OEMs from causing mote multiple IAPs and browsers. By any user interface other than the Windows preventing the OEMs from doing so, this desktop to launch automatically, from add- type of license restriction, like the first two ing icons or folders different in size or shape from those supplied by Microsoft, restrictions, is anticompetitive: Microsoft and from using the ‘‘Active Desktop’’ fea- reduced rival browsers’ usage share not by ture to promote third-party brands. improving its own product but, rather, by These restrictions impose significant costs preventing OEMs from taking actions that upon the OEMs; prior to Microsoft’s pro- could increase rivals’ share of usage. hibiting the practice, many OEMs would change the appearance of the desktop in b. Microsoft’s justifications for the li- ways they found beneficial. See, e.g., cense restrictions Findings of Fact ¶ 214; GX 309, reprinted Microsoft argues that the license rein 22 J.A. at 14551 (March 1997 letter strictions are legally justified because, in from Hewlett–Packard to Microsoft: ‘‘We imposing them, Microsoft is simply ‘‘exer- are responsible for the cost of technical cising its rights as the holder of valid support of our customers, including the copyrights.’’ Appellant’s Opening Br. at U.S. v. MICROSOFT CORP. 63 Cite as 253 F.3d 34 (D.C. Cir. 2001)

102. Microsoft also argues that the licens- Violence v. Reid, 846 F.2d 1485, 1498 es ‘‘do not unduly restrict the opportuni- (D.C.Cir.1988) (noting, again in a context ties of Netscape to distribute Navigator in free of any antitrust concern, that ‘‘an any event.’’ Id. author [ ] may have rights against’’ a licensee that ‘‘excessively mutilated or altered’’ [23] Microsoft’s primary copyright ar- the copyrighted work). gument borders upon the frivolous. The company claims an absolute and unfettered [24] The only license restriction Micro- right to use its intellectual property as it soft seriously defends as necessary to pre- wishes: ‘‘[I]f intellectual property rights vent a ‘‘substantial alteration’’ of its copy- have been lawfully acquired,’’ it says, then righted work is the prohibition on OEMs ‘‘their subsequent exercise cannot give rise automatically launching a substitute user to antitrust liability.’’ Appellant’s Opening interface upon completion of the boot pro- Br. at 105. That is no more correct than cess. See Findings of Fact ¶ 211 (‘‘[A] few the proposition that use of one’s personal large OEMs developed programs that ran property, such as a baseball bat, cannot automatically at the conclusion of a new give rise to tort liability. As the Federal PC system’s first boot sequence. These Circuit succinctly stated: ‘‘Intellectual programs replaced the Windows desktop property rights do not confer a privilege to either with a user interface designed by violate the antitrust laws.’’ In re Indep. the OEM or with Navigator’s user inter- Serv. Orgs. Antitrust Litig., 203 F.3d 1322, face.’’). We agree that a shell that auto- 1325 (Fed.Cir.2000). matically prevents the Windows desktop Although Microsoft never overtly re- from ever being seen by the user is a treats from its bold and incorrect position drastic alteration of Microsoft’s copyright- on the law, it also makes two arguments to ed work, and outweighs the marginal anti- the effect that it is not exercising its copy- competitive effect of prohibiting the OEMs right in an unreasonable manner, despite from substituting a different interface au- the anticompetitive consequences of the tomatically upon completion of the initial license restrictions discussed above. In boot process. We therefore hold that this particular restriction is not an exclusionary the first variation upon its unqualified practice that violates § 2 of the Sherman copyright defense, Microsoft cites two Act. cases indicating that a copyright holder may limit a licensee’s ability to engage in [25] In a second variation upon its significant and deleterious alterations of a copyright defense, Microsoft argues that copyrighted work. See Gilliam v. ABC, the license restrictions merely prevent 538 F.2d 14, 21 (2d Cir.1976); WGN Cont’l OEMs from taking actions that would re- Broad. Co. v. United Video, Inc., 693 F.2d duce substantially the value of Microsoft’s 622, 625 (7th Cir.1982). The relevance of copyrighted work: that is, Microsoft those two cases for the present one is claims each license restriction in question limited, however, both because those cases is necessary to prevent OEMs from so involved substantial alterations of a copy- altering Windows as to undermine ‘‘the righted work, see Gilliam, 538 F.2d at 18, principal value of Windows as a stable and and because in neither case was there any consistent platform that supports a broad claim that the copyright holder was, in range of applications and that is familiar to asserting its rights, violating the antitrust users.’’ Appellant’s Opening Br. at 102. laws, see WGN Cont’l Broad., 693 F.2d at Microsoft, however, never substantiates 626; see also Cmty. for Creative Non– this claim, and, because an OEM’s altering 64 253 FEDERAL REPORTER, 3d SERIES the appearance of the desktop or promot- protect its monopoly, unredeemed by any ing programs in the boot sequence does legitimate justification. The restrictions not affect the code already in the product, therefore violate § 2 of the Sherman Act. the practice does not self-evidently affect either the ‘‘stability’’ or the ‘‘consistency’’ 2. Integration of IE and Windows of the platform. See Conclusions of Law, Although Microsoft’s license restrictions at 41; Findings of Fact ¶ 227. Microsoft have a significant effect in closing rival cites only one item of evidence in support browsers out of one of the two primary of its claim that the OEMs’ alterations channels of distribution, the District Court were decreasing the value of Windows. found that ‘‘Microsoft’s executives believed Defendant’s Trial Exhibit (‘‘DX’’) 2395 at TTT its contractual restrictions placed on MSV0009378A, reprinted in 19 J.A. at OEMs would not be sufficient in them- 12575. That document, prepared by Mi- selves to reverse the direction of Naviga- crosoft itself, states: ‘‘there are quality tor’s usage share. Consequently, in late issues created by OEMs who are too lib- 1995 or early 1996, Microsoft set out to eral with the pre-install process,’’ referring bind [IE] more tightly to Windows 95 as a to the OEMs’ installation of Windows and technical matter.’’ Findings of Fact ¶ 160. additional software on their PCs, which the Technologically binding IE to Windows, document says may result in ‘‘user con- the District Court found, both prevented cerns and confusion.’’ To the extent the OEMs from pre-installing other browsers OEMs’ modifications cause consumer con- and deterred consumers from using them. fusion, of course, the OEMs bear the addi- In particular, having the IE software code tional support costs. See Findings of Fact as an irremovable part of Windows meant ¶ 159. Therefore, we conclude Microsoft that pre-installing a second browser would has not shown that the OEMs’ liberality ‘‘increase an OEM’s product testing costs,’’ reduces the value of Windows except in because an OEM must test and train its the sense that their promotion of rival support staff to answer calls related to browsers undermines Microsoft’s monopo- every software product preinstalled on the ly—and that is not a permissible justifica- machine; moreover, pre-installing a brow- tion for the license restrictions. ser in addition to IE would to many OEMs [26] Apart from copyright, Microsoft be ‘‘a questionable use of the scarce and raises one other defense of the OEM li- valuable space on a PC’s hard drive.’’ Id. cense agreements: It argues that, despite ¶ 159. the restrictions in the OEM license, Net- Although the District Court, in its Con- scape is not completely blocked from dis- clusions of Law, broadly condemned Mi- tributing its product. That claim is insuffi- crosoft’s decision to bind ‘‘Internet Ex- cient to shield Microsoft from liability for plorer to Windows with TTT technological those restrictions because, although Micro- shackles,’’ Conclusions of Law, at 39, its soft did not bar its rivals from all means of findings of fact in support of that conclu- distribution, it did bar them from the cost- sion center upon three specific actions efficient ones. Microsoft took to weld IE to Windows: In sum, we hold that with the exception excluding IE from the ‘‘Add/Remove Pro- of the one restriction prohibiting automati- grams’’ utility; designing Windows so as cally launched alternative interfaces, all in certain circumstances to override the the OEM license restrictions at issue rep- user’s choice of a default browser other resent uses of Microsoft’s market power to than IE; and commingling code related U.S. v. MICROSOFT CORP. 65 Cite as 253 F.3d 34 (D.C. Cir. 2001) to browsing and other code in the same browsers not by making Microsoft’s own files, so that any attempt to delete the browser more attractive to consumers but, files containing IE would, at the same rather, by discouraging OEMs from dis- time, cripple the operating system. As tributing rival products. See id. ¶ 159. with the license restrictions, we consider Because Microsoft’s conduct, through first whether the suspect actions had an something other than competition on the anticompetitive effect, and then whether merits, has the effect of significantly re- Microsoft has provided a procompetitive ducing usage of rivals’ products and hence justification for them. protecting its own operating system monopoly, it is anticompetitive; we defer for a. Anticompetitive effect of integration the moment the question whether it is [27] As a general rule, courts are prop- nonetheless justified. erly very skeptical about claims that com- Second, the District Court found that petition has been harmed by a dominant Microsoft designed Windows 98 ‘‘so that firm’s product design changes. See, e.g., using Navigator on Windows 98 would Foremost Pro Color, Inc. v. Eastman Ko- have unpleasant consequences for users’’ dak Co., 703 F.2d 534, 544–45 (9th Cir. by, in some circumstances, overriding the 1983). In a competitive market, firms rou- user’s choice of a browser other than IE as tinely innovate in the hope of appealing to his or her default browser. Id. ¶ ¶ 171–72. consumers, sometimes in the process mak- Plaintiffs argue that this override harms ing their products incompatible with those the competitive process by deterring con- of rivals; the imposition of liability when a sumers from using a browser other than monopolist does the same thing will inevi- IE even though they might prefer to do so, tably deter a certain amount of innovation. thereby reducing rival browsers’ usage This is all the more true in a market, such share and, hence, the ability of rival brow- as this one, in which the product itself is sers to draw developer attention away rapidly changing. See Findings of Fact from the APIs exposed by Windows. Mi- ¶ 59. Judicial deference to product inno- crosoft does not deny, of course, that over- vation, however, does not mean that a riding the user’s preference prevents some monopolist’s product design decisions are people from using other browsers. Be- per se lawful. See Foremost Pro Color, cause the override reduces rivals’ usage 703 F.2d at 545; see also Cal. Computer share and protects Microsoft’s monopoly, it Prods., 613 F.2d at 739, 744; In re IBM too is anticompetitive. Peripheral EDP Devices Antitrust Litig., [29] Finally, the District Court con- 481 F.Supp. 965, 1007–08 (N.D.Cal.1979). demned Microsoft’s decision to bind IE to [28] The District Court first con- Windows 98 ‘‘by placing code specific to demned as anticompetitive Microsoft’s de- Web browsing in the same files as code cision to exclude IE from the ‘‘Add/Re- that provided operating system functions.’’ move Programs’’ utility in Windows 98. Id. ¶ 161; see also id. ¶ ¶ 174, 192. Put- Findings of Fact ¶ 170. Microsoft had ting code supplying browsing functionality included IE in the Add/Remove Programs into a file with code supplying operating utility in Windows 95, see id. ¶ ¶ 175–76, system functionality ‘‘ensure[s] that the but when it modified Windows 95 to pro- deletion of any file containing browsing- duce Windows 98, it took IE out of the specific routines would also delete vital Add/Remove Programs utility. This operating system routines and thus cripple change reduces the usage share of rival WindowsTTTT’’ Id. ¶ 164. As noted above, 66 253 FEDERAL REPORTER, 3d SERIES

preventing an OEM from removing IE District Court’s finding that Microsoft deters it from installing a second browser commingled browsing and non-browsing because doing so increases the OEM’s code, we cannot conclude that the finding product testing and support costs; by con- was clearly erroneous. See Anderson v. trast, had OEMs been able to remove IE, City of Bessemer City, 470 U.S. 564, 573– they might have chosen to pre-install Navi- 74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) gator alone. See id. ¶ 159. (‘‘If the district court’s account of the evi- Microsoft denies, as a factual matter, dence is plausible in light of the record that it commingled browsing and non- viewed in its entirety, the court of appeals browsing code, and it maintains the Dis- may not reverse it even though convinced trict Court’s findings to the contrary are that had it been sitting as the trier of fact, clearly erroneous. According to Microsoft, it would have weighed the evidence differ- its expert ‘‘testified without contradiction ently.’’). Accordingly, we reject Micro- that ‘[t]he very same code in Windows 98 soft’s argument that we should vacate that provides Web browsing functionality’ Finding of Fact 159 as it relates to the also performs essential operating system commingling of code, and we conclude that functions—not code in the same files, but such commingling has an anticompetitive the very same software code.’’ Appellant’s effect; as noted above, the commingling Opening Br. at 79 (citing 5 J.A. 3291–92). deters OEMs from pre-installing rival Microsoft’s expert did not testify to that browsers, thereby reducing the rivals’ us- effect ‘‘without contradiction,’’ however. A age share and, hence, developers’ interest Government expert, Glenn Weadock, testi- in rivals’ APIs as an alternative to the API fied that Microsoft ‘‘design[ed] [IE] so that set exposed by Microsoft’s operating sys- some of the code that it uses co-resides in tem. the same library files as other code needed for Windows.’’ Direct Testimony ¶ 30. b. Microsoft’s justifications for inte- Another Government expert likewise testi- gration fied that one library file, SHDOCVW.DLL, [30] Microsoft proffers no justification ‘‘is really a bundle of separate functions. for two of the three challenged actions It contains some functions that have to do that it took in integrating IE into Win- specifically with Web browsing, and it con- dows—excluding IE from the Add/Re- tains some general user interface functions move Programs utility and commingling as well.’’ 12/14/98 am Tr. at 60–61 (trial browser and operating system code. Al- testimony of Edward Felten), reprinted in though Microsoft does make some general 11 J.A. at 6953–54. One of Microsoft’s claims regarding the benefits of integrat- own documents suggests as much. See ing the browser and the operating system, Plaintiffs’ Proposed Findings of Fact see, e.g., Direct Testimony of James All- ¶ 131.2.vii (citing GX 1686 (under seal) (Mi- chin ¶ 94, reprinted in 5 J.A. at 3321 crosoft document indicating some functions (‘‘Our vision of deeper levels of technical in SHDOCVW.DLL can be described as integration is highly efficient and provides ‘‘IE only,’’ others can be described as substantial benefits to customers and de- ‘‘shell only’’ and still others can be developers.’’), it neither specifies nor sub- scribed as providing both ‘‘IE’’ and ‘‘shell’’ stantiates those claims. Nor does it ar- functions)). gue that either excluding IE from the In view of the contradictory testimony in Add/Remove Programs utility or com- the record, some of which supports the mingling code achieves any integrative U.S. v. MICROSOFT CORP. 67 Cite as 253 F.3d 34 (D.C. Cir. 2001) benefit. Plaintiffs plainly made out a pri- strating that the anticompetitive effect of ma facie case of harm to competition in the challenged action outweighs it. In the the operating system market by demon- District Court, plaintiffs appear to have strating that Microsoft’s actions increased done neither, let alone both; in any event, its browser usage share and thus protect- upon appeal, plaintiffs offer no rebuttal ed its operating system monopoly from a whatsoever. Accordingly, Microsoft may middleware threat and, for its part, Mi- not be held liable for this aspect of its crosoft failed to meet its burden of show- product design. ing that its conduct serves a purpose oth- 3. Agreements with Internet Access er than protecting its operating system Providers monopoly. Accordingly, we hold that Mi- crosoft’s exclusion of IE from the Add/Re- The District Court also condemned as move Programs utility and its comming- exclusionary Microsoft’s agreements with ling of browser and operating system code various IAPs. The IAPs include both In- constitute exclusionary conduct, in viola- ternet Service Providers, which offer con- tion of § 2. sumers internet access, and Online Ser- vices (‘‘OLSs’’) such as America Online As for the other challenged act that (‘‘AOL’’), which offer proprietary content Microsoft took in integrating IE into Win- in addition to internet access and other dows—causing Windows to override the services. Findings of Fact ¶ 15. The Dis- user’s choice of a default browser in cer- trict Court deemed Microsoft’s agreements tain circumstances—Microsoft argues that with the IAPs unlawful because: it has ‘‘valid technical reasons.’’ Specifi- cally, Microsoft claims that it was neces- Microsoft licensed [IE] and the [IE] Ac- sary to design Windows to override the cess Kit [ (of which, more below) ] to user’s preferences when he or she invokes hundreds of IAPs for no charge. [Find- one of ‘‘a few’’ out ‘‘of the nearly 30 means ings of Fact] ¶ ¶ 250–51. Then, Micro- of accessing the Internet.’’ Appellant’s soft extended valuable promotional Opening Br. at 82. According to Micro- treatment to the ten most important soft: IAPs in exchange for their commitment The Windows 98 Help system and Win- to promote and distribute [IE] and to dows Update feature depend on ActiveX exile Navigator from the desktop. Id. controls not supported by Navigator, ¶ ¶ 255–58, 261, 272, 288–90, 305–06. Fi- and the now-discontinued Channel Bar nally, in exchange for efforts to upgrade utilized Microsoft’s Channel Definition existing subscribers to client software Format, which Navigator also did not that came bundled with [IE] instead of support. Lastly, Windows 98 does not Navigator, Microsoft granted rebates— invoke Navigator if a user accesses the and in some cases made outright pay- Internet through ‘‘My Computer’’ or ments—to those same IAPs. Id. ¶ ¶ 259– ‘‘Windows Explorer’’ because doing so 60, 295. would defeat one of the purposes of Conclusions of Law, at 41. those features—enabling users to move [31] The District Court condemned Mi- seamlessly from local storage devices to crosoft’s actions in (1) offering IE free of the Web in the same browsing window. charge to IAPs and (2) offering IAPs a Id. (internal citations omitted). The plain- bounty for each customer the IAP signs up tiff bears the burden not only of rebutting for service using the IE browser. In ef- a proffered justification but also of demon- fect, the court concluded that Microsoft is 68 253 FEDERAL REPORTER, 3d SERIES acting to preserve its monopoly by offering not assign liability for predatory pricing, IE to IAPs at an attractive price. Similar- however, and plaintiffs do not press this ly, the District Court held Microsoft liable theory on appeal. for (3) developing the IE Access Kit (‘‘IEAK’’), a software package that allows [32] The rare case of price predation an IAP to ‘‘create a distinctive identity for aside, the antitrust laws do not condemn its service in as little as a few hours by even a monopolist for offering its product customizing the [IE] title bar, icon, start at an attractive price, and we therefore and search pages,’’ Findings of Fact ¶ 249, have no warrant to condemn Microsoft for and (4) offering the IEAK to IAPs free of offering either IE or the IEAK free of charge, on the ground that those acts, too, charge or even at a negative price. Like- helped Microsoft preserve its monopoly. wise, as we said above, a monopolist does Conclusions of Law, at 41–42. Finally, the not violate the Sherman Act simply by District Court found that (5) Microsoft developing an attractive product. See agreed to provide easy access to IAPs’ Grinnell, 384 U.S. at 571, 86 S.Ct. 1698 services from the Windows desktop in re- (‘‘[G]rowth or development as a conse- turn for the IAPs’ agreement to promote quence of a superior product [or] business IE exclusively and to keep shipments of acumen’’ is no violation.). Therefore, Mi- internet access software using Navigator crosoft’s development of the IEAK does under a specific percentage, typically 25%. not violate the Sherman Act. See Conclusions of Law, at 42 (citing [33] We turn now to Microsoft’s deals Findings of Fact ¶ ¶ 258, 262, 289). We with IAPs concerning desktop placement. address the first four items—Microsoft’s Microsoft concluded these exclusive agree- inducements—and then its exclusive ments with all ‘‘the leading IAPs,’’ Find- agreements with IAPs. ings of Fact ¶ 244, including the major Although offering a customer an attrac- OLSs. Id. ¶ 245; see also id. ¶ ¶ 305, 306. tive deal is the hallmark of competition, The most significant of the OLS deals is the Supreme Court has indicated that in with AOL, which, when the deal was very rare circumstances a price may be reached, ‘‘accounted for a substantial por- unlawfully low, or ‘‘predatory.’’ See gener- tion of all existing Internet access sub- ally Brooke Group, 509 U.S. at 220–27, 113 scriptions and TTT attracted a very large S.Ct. 2578. Plaintiffs argued before the percentage of new IAP subscribers.’’ Id. District Court that Microsoft’s pricing was ¶ 272. Under that agreement Microsoft indeed predatory; but instead of making puts the AOL icon in the OLS folder on the usual predatory pricing argument— the Windows desktop and AOL does not that the predator would drive out its rivals promote any non-Microsoft browser, nor by pricing below cost on a particular prod- provide software using any non-Microsoft uct and then, sometime in the future, raise browser except at the customer’s request, its prices on that product above the com- and even then AOL will not supply more petitive level in order to recoup its earlier than 15% of its subscribers with a browser losses—plaintiffs argued that by pricing other than IE. Id. ¶ 289. below cost on IE (indeed, even paying people to take it), Microsoft was able si- The Supreme Court most recently con- multaneously to preserve its stream of mo- sidered an antitrust challenge to an exclu- nopoly profits on Windows, thereby more sive contract in Tampa Electric Co. v. than recouping its investment in below- Nashville Coal Co., 365 U.S. 320, 81 S.Ct. cost pricing on IE. The District Court did 623, 5 L.Ed.2d 580 (1961). That case, U.S. v. MICROSOFT CORP. 69 Cite as 253 F.3d 34 (D.C. Cir. 2001)

which involved a challenge to a require- 978 F.2d 98, 110 (3d Cir.1992); 11 HER- ments contract, was brought under § 3 of BERT HOVENKAMP, ANTITRUST LAW ¶ 1800c4 the Clayton Act and §§ 1 and 2 of the (1998) (‘‘[T]he cases are divided, with a Sherman Act. The Court held that an likely majority stating that the Clayton exclusive contract does not violate the Act requires a smaller showing of anticom- Clayton Act unless its probable effect is to petitive effects.’’). ‘‘foreclose competition in a substantial share of the line of commerce affected.’’ [34] Though what is ‘‘significant’’ may Id. at 327, 81 S.Ct. 623. The share of the vary depending upon the antitrust provi- market foreclosed is important because, sion under which an exclusive deal is chal- for the contract to have an adverse effect lenged, it is clear that in all cases the upon competition, ‘‘the opportunities for plaintiff must both define the relevant other traders to enter into or remain in market and prove the degree of foreclo- that market must be significantly limited.’’ Id. at 328, 81 S.Ct. 623. Although ‘‘[n]ei- sure. This is a prudential requirement; ther the Court of Appeals nor the District exclusivity provisions in contracts may Court [had] considered in detail the ques- serve many useful purposes. See, e.g., tion of the relevant market,’’ id. at 330, 81 Omega Envtl., Inc. v. Gilbarco, Inc., 127 S.Ct. 623, the Court in Tampa Electric F.3d 1157, 1162 (9th Cir.1997) (‘‘There are, examined the record and, after defining however, well-recognized economic bene- the relevant market, determined that the fits to exclusive dealing arrangements, in- contract affected less than one percent of cluding the enhancement of interbrand that market. Id. at 333, 81 S.Ct. 623. competition.’’); Barry Wright Corp. v. ITT After concluding, under the Clayton Act, Grinnell Corp., 724 F.2d 227, 236 (1st Cir. that this share was ‘‘conservatively speak- 1983) (Breyer, J.) (‘‘[V]irtually every con- ing, quite insubstantial,’’ id., the Court tract to buy ‘forecloses’ or ‘excludes’ alter- went on summarily to reject the Sherman native sellers from some portion of the Act claims. Id. at 335, 81 S.Ct. 623 (‘‘[I]f market, namely the portion consisting of [the contract] does not fall within the what was bought.’’). Permitting an anti- broader prescription of § 3 of the Clayton trust action to proceed any time a firm Act it follows that it is not forbidden by enters into an exclusive deal would both those of the [Sherman Act].’’). discourage a presumptively legitimate Following Tampa Electric, courts con- business practice and encourage costly an- sidering antitrust challenges to exclusive titrust actions. Because an exclusive deal contracts have taken care to identify the affecting a small fraction of a market share of the market foreclosed. Some clearly cannot have the requisite harmful courts have indicated that § 3 of the Clay- ton Act and § 1 of the Sherman Act re- effect upon competition, the requirement quire an equal degree of foreclosure before of a significant degree of foreclosure prohibiting exclusive contracts. See, e.g., serves a useful screening function. Cf. Roland Mach. Co. v. Dresser Indus., Inc., Frank H. Easterbrook, The Limits of An- 749 F.2d 380, 393 (7th Cir.1984) (Posner, titrust, 63 TEX. L. REV. 1, 21–23 (1984) J.). Other courts, however, have held that (discussing use of presumptions in anti- a higher market share must be foreclosed trust law to screen out cases in which loss in order to establish a violation of the to consumers and economy is likely out- Sherman Act as compared to the Clayton weighed by cost of inquiry and risk of Act. See, e.g., Barr Labs. v. Abbott Labs., deterring procompetitive behavior). 70 253 FEDERAL REPORTER, 3d SERIES

In this case, plaintiffs challenged Micro- Section 1 and Section 2,’’ Appellant’s soft’s exclusive dealing arrangements with Opening Br. at 109, and it argues that the the IAPs under both §§ 1 and 2 of the District Court’s holding of no liability un- Sherman Act. The District Court, in ana- der § 1 necessarily precludes holding it lyzing the § 1 claim, stated, ‘‘unless the liable under § 2. The District Court ap- evidence demonstrates that Microsoft’s pears to have based its holding with re- agreements excluded Netscape altogether spect to § 1 upon a ‘‘total exclusion test’’ from access to roughly forty percent of the rather than the 40% standard drawn from browser market, the Court should decline the caselaw. Even assuming the holding to find such agreements in violation of is correct, however, we nonetheless reject § 1.’’ Conclusions of Law, at 52. The Microsoft’s contention. court recognized that Microsoft had sub- [35] The basic prudential concerns rel- stantially excluded Netscape from ‘‘the evant to §§ 1 and 2 are admittedly the most efficient channels for Navigator to same: exclusive contracts are common- achieve browser usage share,’’ id. at 53; place—particularly in the field of distribu- see also Findings of Fact ¶ 145 (‘‘[N]o tion—in our competitive, market economy, other distribution channel for browsing and imposing upon a firm with market software even approaches the efficiency of power the risk of an antitrust suit every OEM pre-installation and IAP bundling.’’), time it enters into such a contract, no and had relegated it to more costly and matter how small the effect, would create less effective methods (such as mass mail- an unacceptable and unjustified burden ing its browser on a disk or offering it for upon any such firm. At the same time, download over the internet); but because however, we agree with plaintiffs that a Microsoft has not ‘‘completely excluded monopolist’s use of exclusive contracts, in Netscape’’ from reaching any potential certain circumstances, may give rise to a user by some means of distribution, how- § 2 violation even though the contracts ever ineffective, the court concluded the foreclose less than the roughly 40% or 50% agreements do not violate § 1. Conclu- share usually required in order to establish sions of Law, at 53. Plaintiffs did not a § 1 violation. See generally Dennis W. cross-appeal this holding. Carlton, A General Analysis of Exclusion- Turning to § 2, the court stated: ‘‘the ary Conduct and Refusal to Deal—Why fact that Microsoft’s arrangements with Aspen and Kodak Are Misguided, 68 ANTI- various [IAPs and other] firms did not TRUST L.J. 659 (2001) (explaining various foreclose enough of the relevant market to scenarios under which exclusive dealing, constitute a § 1 violation in no way de- particularly by a dominant firm, may raise tracts from the Court’s assignment of lia- legitimate concerns about harm to compe- bility for the same arrangements under tition). § 2TTTT [A]ll of Microsoft’s agreements, In this case, plaintiffs allege that, by including the non-exclusive ones, severely closing to rivals a substantial percentage restricted Netscape’s access to those dis- of the available opportunities for browser tribution channels leading most efficiently distribution, Microsoft managed to pre- to the acquisition of browser usage share.’’ serve its monopoly in the market for oper- Conclusions of Law, at 53. ating systems. The IAPs constitute one of On appeal Microsoft argues that ‘‘courts the two major channels by which browsers have applied the same standard to alleged can be distributed. Findings of Fact exclusive dealing agreements under both ¶ 242. Microsoft has exclusive deals with U.S. v. MICROSOFT CORP. 71 Cite as 253 F.3d 34 (D.C. Cir. 2001)

‘‘fourteen of the top fifteen access provid- at 42–43 (deals with ICPs, ISVs, and Apple ers in North America[, which] account for ‘‘supplemented Microsoft’s efforts in the a large majority of all Internet access sub- OEM and IAP channels’’). The District scriptions in this part of the world.’’ Id. Court condemned Microsoft’s deals with ¶ 308. By ensuring that the ‘‘majority’’ of ICPs and ISVs, stating: ‘‘By granting all IAP subscribers are offered IE either ICPs and ISVs free licenses to bundle [IE] as the default browser or as the only brow- with their offerings, and by exchanging ser, Microsoft’s deals with the IAPs clearly other valuable inducements for their have a significant effect in preserving its agreement to distribute, promote[,] and monopoly; they help keep usage of Navi- rely on [IE] rather than Navigator, Micro- gator below the critical level necessary for soft directly induced developers to focus on Navigator or any other rival to pose a real its own APIs rather than ones exposed by threat to Microsoft’s monopoly. See, e.g., Navigator.’’ Id. (citing Findings of Fact id. ¶ 143 (Microsoft sought to ‘‘divert ¶ ¶ 334–35, 340). enough browser usage from Navigator to [36] With respect to the deals with neutralize it as a platform.’’); see also ICPs, the District Court’s findings do not Carlton, at 670. support liability. After reviewing the ICP Plaintiffs having demonstrated a harm agreements, the District Court specifically to competition, the burden falls upon Mi- stated that ‘‘there is not sufficient evidence crosoft to defend its exclusive dealing to support a finding that Microsoft’s pro- contracts with IAPs by providing a promotional restrictions actually had a sub- competitive justification for them. Signif- stantial, deleterious impact on Navigator’s icantly, Microsoft’s only explanation for usage share.’’ Findings of Fact ¶ 332. Be- its exclusive dealing is that it wants to cause plaintiffs failed to demonstrate that keep developers focused upon its APIs— Microsoft’s deals with the ICPs have a which is to say, it wants to preserve its substantial effect upon competition, they power in the operating system market. have not proved the violation of the Sher- 02/26/01 Ct. Appeals Tr. at 45–47. That man Act. is not an unlawful end, but neither is it a [37] As for Microsoft’s ISV agree- procompetitive justification for the specific ments, however, the District Court did not means here in question, namely exclusive enter a similar finding of no substantial dealing contracts with IAPs. According- effect. The District Court described Mi- ly, we affirm the District Court’s decision crosoft’s deals with ISVs as follows: holding that Microsoft’s exclusive con- In dozens of ‘‘First Wave’’ agreements tracts with IAPs are exclusionary devices, signed between the fall of 1997 and the in violation of § 2 of the Sherman Act. spring of 1998, Microsoft has promised to give preferential support, in the form 4. Dealings with Internet Content of early Windows 98 and Windows NT Providers, Independent Software betas, other technical information, and Vendors, and Apple Computer the right to use certain Microsoft seals The District Court held that Microsoft of approval, to important ISVs that engages in exclusionary conduct in its agree to certain conditions. One of dealings with ICPs, which develop web- these conditions is that the ISVs use sites; ISVs, which develop software; and Internet Explorer as the default brows- Apple, which is both an OEM and a soft- ing software for any software they de- ware developer. See Conclusions of Law, velop with a hypertext-based user inter- 72 253 FEDERAL REPORTER, 3d SERIES

face. Another condition is that the ISVs facie showing that the deals have an anti- use Microsoft’s ‘‘HTML Help,’’ which is competitive effect. accessible only with Internet Explorer, to implement their applications’ help Of course, that Microsoft’s exclusive systems. deals have the anticompetitive effect of preserving Microsoft’s monopoly does not, Id. ¶ 339. The District Court further in itself, make them unlawful. A monopo- found that the effect of these deals is to list, like a competitive firm, may have a ‘‘ensure [ ] that many of the most popular perfectly legitimate reason for wanting an Web-centric applications will rely on exclusive arrangement with its distribu- browsing technologies found only in Win- dows,’’ id. ¶ 340, and that Microsoft’s deals tors. Accordingly, Microsoft had an op- with ISVs therefore ‘‘increase[ ] the likeli- portunity to, but did not, present the Dis- hood that the millions of consumers using trict Court with evidence demonstrating [applications designed by ISVs that en- that the exclusivity provisions have some tered into agreements with Microsoft] will such procompetitive justification. See use Internet Explorer rather than Naviga- Conclusions of Law, at 43 (citing Findings tor.’’ Id. ¶ 340. of Fact ¶ ¶ 339–40) (‘‘With respect to the ISV agreements, Microsoft has put for- The District Court did not specifically ward no procompetitive business ends identify what share of the market for whatsoever to justify their exclusionary browser distribution the exclusive deals with the ISVs foreclose. Although the terms.’’). On appeal Microsoft likewise ISVs are a relatively small channel for does not claim that the exclusivity re- browser distribution, they take on greater quired by the deals serves any legitimate significance because, as discussed above, purpose; instead, it states only that its Microsoft had largely foreclosed the two ISV agreements reflect an attempt ‘‘to primary channels to its rivals. In that persuade ISVs to utilize Internet-related light, one can tell from the record that by system services in Windows rather than affecting the applications used by ‘‘mil- Navigator.’’ Appellant’s Opening Br. at lions’’ of consumers, Microsoft’s exclusive 114. As we explained before, however, deals with the ISVs had a substantial ef- keeping developers focused upon Win- fect in further foreclosing rival browsers dows—that is, preserving the Windows from the market. (Data introduced by monopoly—is a competitively neutral goal. Microsoft, see Direct Testimony of Camer- Microsoft having offered no procompetitive on Myhrvold ¶ 84, reprinted in 6 J.A. at justification for its exclusive dealing ar- 3922–23, and subsequently relied upon by rangements with the ISVs, we hold that the District Court in its findings, see, e.g., those arrangements violate § 2 of the Findings of Fact ¶ 270, indicate that over Sherman Act. the two-year period 1997–98, when Micro- soft entered into the First Wave agree- [38] Finally, the District Court held ments, there were 40 million new users of that Microsoft’s dealings with Apple violat- the internet.) Because, by keeping rival ed the Sherman Act. See Conclusions of browsers from gaining widespread distri- Law, at 42–43. Apple is vertically inte- bution (and potentially attracting the at- grated: it makes both software (including tention of developers away from the APIs an operating system, Mac OS), and hard- in Windows), the deals have a substantial ware (the Macintosh line of computers). effect in preserving Microsoft’s monopoly, Microsoft primarily makes software, in- we hold that plaintiffs have made a prima cluding, in addition to its operating system, U.S. v. MICROSOFT CORP. 73 Cite as 253 F.3d 34 (D.C. Cir. 2001)

a number of popular applications. One, District Court further found that, within a called ‘‘Office,’’ is a suite of business pro- month of Gates’ call, Apple and Microsoft ductivity applications that Microsoft has had reached an agreement pursuant to ported to Mac OS. The District Court which found that ‘‘ninety percent of Mac OS Microsoft’s primary obligation is to con- users running a suite of office productivity tinue releasing up-to-date versions of applications [use] Microsoft’s Mac Office.’’ Mac Office for at least five yearsTTTT Findings of Fact ¶ 344. Further, the Dis- [and] Apple has agreed TTT to ‘‘bundle trict Court found that: the most current version of [IE] TTT In 1997, Apple’s business was in steep with [Mac OS]’’TTT [and to] ‘‘make [IE] decline, and many doubted that the com- the default [browser]’’TTTT Navigator is pany would survive much longerTTTT not installed on the computer hard drive [M]any ISVs questioned the wisdom of during the default installation, which is continuing to spend time and money de- the type of installation most users elect veloping applications for the Mac OS. to employTTTT [The] Agreement fur- Had Microsoft announced in the midst of ther provides that TTT Apple may not this atmosphere that it was ceasing to position icons for nonMicrosoft browsing develop new versions of Mac Office, a software on the desktop of new Macin- great number of ISVs, customers, devel- tosh PC systems or Mac OS upgrades. opers, and investors would have inter- Id. ¶ ¶ 350–52. The agreement also pro- preted the announcement as Apple’s hibits Apple from encouraging users to death notice. substitute another browser for IE, and Id. ¶ 344. Microsoft recognized the impor- states that Apple will ‘‘encourage its em- tance to Apple of its continued support of ployees to use [IE].’’ Id. ¶ 352. Mac Office. See id. ¶ 347 (quoting internal This exclusive deal between Microsoft Microsoft e-mail) (‘‘[We] need a way to and Apple has a substantial effect upon push these guys[, i.e., Apple] and [threat- the distribution of rival browsers. If a ening to cancel Mac Office] is the only one browser developer ports its product to a that seems to make them move.’’); see also second operating system, such as the id. (‘‘[Microsoft Chairman Bill] Gates Mac OS, it can continue to display a com- asked whether Microsoft could conceal mon set of APIs. Thus, usage share, not from Apple in the coming month the fact the underlying operating system, is the that Microsoft was almost finished devel- primary determinant of the platform chal- oping Mac Office 97.’’); id. at ¶ 354 (‘‘I lenge a browser may pose. Pre-installa- think TTT Apple should be using [IE] ev- tion of a browser (which can be accom- erywhere and if they don’t do it, then we plished either by including the browser can use Office as a club.’’). with the operating system or by the In June 1997 Microsoft Chairman Bill OEM installing the browser) is one of the Gates determined that the company’s ne- two most important methods of browser gotiations with Apple ‘‘ ‘have not been go- distribution, and Apple had a not insignif- ing well at allTTTT Apple let us down on icant share of worldwide sales of operat- the browser by making Netscape the stan- ing systems. See id. ¶ 35 (Microsoft has dard install.’ Gates then reported that he 95% of the market not counting Apple had already called Apple’s CEO TTT to ask and ‘‘well above’’ 80% with Apple includ- ‘how we should announce the cancellation ed in the relevant market). Because Mi- of Mac OfficeTTTT’ ’’ Id. at ¶ 349. The crosoft’s exclusive contract with Apple 74 253 FEDERAL REPORTER, 3d SERIES

has a substantial effect in restricting dis- APIs will run on any machine with a ‘‘Java tribution of rival browsers, and because runtime environment,’’ that is, Java class (as we have described several times libraries and a JVM. Id. ¶ ¶ 73, 74. above) reducing usage share of rival In May 1995 Netscape agreed with Sun browsers serves to protect Microsoft’s to distribute a copy of the Java runtime monopoly, its deal with Apple must be environment with every copy of Navigator, regarded as anticompetitive. See Conclu- and ‘‘Navigator quickly became the princi- sions of Law, at 42 (citing Findings of pal vehicle by which Sun placed copies of Fact ¶ 356) (‘‘By extracting from Apple its Java runtime environment on the PC terms that significantly diminished the systems of Windows users.’’ Id. ¶ 76. Mi- usage of Navigator on the Mac OS, Mi- crosoft, too, agreed to promote the Java crosoft helped to ensure that developers technologies—or so it seemed. For at the would not view Navigator as truly cross- same time, Microsoft took steps ‘‘to max- platform middleware.’’). imize the difficulty with which applications Microsoft offers no procompetitive justi- written in Java could be ported from Win- fication for the exclusive dealing arrange- dows to other platforms, and vice versa.’’ ment. It makes only the irrelevant claim Conclusions of Law, at 43. Specifically, that the IE-for-Mac Office deal is part of a the District Court found that Microsoft multifaceted set of agreements between took four steps to exclude Java from devel- itself and Apple, see Appellant’s Opening oping as a viable cross-platform threat: (a) Br. at 61 (‘‘Apple’s ‘browsing software’ ob- designing a JVM incompatible with the ligation was [not] the quid pro quo for one developed by Sun; (b) entering into Microsoft’s Mac Office obligation[;] TTT all contracts, the so-called ‘‘First Wave of the various obligations TTT were part of Agreements,’’ requiring major ISVs to one ‘overall agreement’ between the two promote Microsoft’s JVM exclusively; (c) companies.’’); that does not mean it has deceiving Java developers about the Win- any procompetitive justification. Accord- dows-specific nature of the tools it distrib- ingly, we hold that the exclusive deal with uted to them; and (d) coercing Intel to Apple is exclusionary, in violation of § 2 of stop aiding Sun in improving the Java the Sherman Act. technologies. 5. Java Java, a set of technologies developed by a. The incompatible JVM Sun Microsystems, is another type of mid- [39] The District Court held that Mi- dleware posing a potential threat to Win- crosoft engaged in exclusionary conduct by dows’ position as the ubiquitous platform developing and promoting its own JVM. for software development. Findings of Conclusions of Law, at 43–44. Sun had Fact ¶ 28. The Java technologies include: already developed a JVM for the Windows (1) a programming language; (2) a set of operating system when Microsoft began programs written in that language, called work on its version. The JVM developed the ‘‘Java class libraries,’’ which expose by Microsoft allows Java applications to APIs; (3) a compiler, which translates run faster on Windows than does Sun’s code written by a developer into ‘‘bytec- JVM, Findings of Fact ¶ 389, but a Java ode’’; and (4) a Java Virtual Machine application designed to work with Micro- (‘‘JVM’’), which translates bytecode into soft’s JVM does not work with Sun’s JVM instructions to the operating system. Id. and vice versa. Id. ¶ 390. The District ¶ 73. Programs calling upon the Java Court found that Microsoft ‘‘made a large U.S. v. MICROSOFT CORP. 75 Cite as 253 F.3d 34 (D.C. Cir. 2001) investment of engineering resources to de- To the extent Microsoft’s First Wave velop a high-performance Windows JVM,’’ Agreements with the ISVs conditioned reid. ¶ 396, and, ‘‘[b]y bundling its TTT JVM ceipt of Windows technical information with every copy of [IE] TTT Microsoft en- upon the ISVs’ agreement to promote Mi- dowed its Java runtime environment with crosoft’s JVM exclusively, they raise a dif- the unique attribute of guaranteed, endur- ferent competitive concern. The District ing ubiquity across the enormous Windows Court found that, although not literally installed base,’’ id. ¶ 397. As explained exclusive, the deals were exclusive in prac- above, however, a monopolist does not vio- tice because they required developers to late the antitrust laws simply by develop- make Microsoft’s JVM the default in the ing a product that is incompatible with software they developed. Id. ¶ 401. those of its rivals. See supra Section II. While the District Court did not enter B.1. In order to violate the antitrust laws, precise findings as to the effect of the the incompatible product must have an First Wave Agreements upon the overall anticompetitive effect that outweighs any distribution of rival JVMs, the record indi- procompetitive justification for the design. cates that Microsoft’s deals with the major Microsoft’s JVM is not only incompatible ISVs had a significant effect upon JVM with Sun’s, it allows Java applications to promotion. As discussed above, the prod- run faster on Windows than does Sun’s ucts of First Wave ISVs reached millions of consumers. Id. ¶ 340. The First Wave JVM. Microsoft’s faster JVM lured Java ISVs included such prominent developers developers into using Microsoft’s developer as Rational Software, see GX 970, reprint- tools, and Microsoft offered those tools ed in 15 J.A. at 9994–10000, ‘‘a world deceptively, as we discuss below. The leader’’ in software development tools, see JVM, however, does allow applications to Direct Testimony of Michael Devlin ¶ 2, run more swiftly and does not itself have reprinted in 5 J.A. at 3520, and Symantec, any anticompetitive effect. Therefore, we see GX 2071, reprinted in 22 J.A. at reverse the District Court’s imposition of 14960–66 (sealed), which, according to Mi- liability for Microsoft’s development and crosoft itself, is ‘‘the leading supplier of promotion of its JVM. utilities such as anti-virus software,’’ De- fendant’s Proposed Findings of Fact ¶ 276, b. The First Wave Agreements reprinted in 3 J.A. at 1689. Moreover, Microsoft’s exclusive deals with the leading [40] The District Court also found that ISVs took place against a backdrop of Microsoft entered into First Wave Agree- foreclosure: the District Court found that ments with dozens of ISVs to use Micro- ‘‘[w]hen Netscape announced in May 1995 soft’s JVM. See Findings of Fact ¶ 401 [prior to Microsoft’s execution of the First (‘‘[I]n exchange for costly technical sup- Wave Agreements] that it would include port and other blandishments, Microsoft with every copy of Navigator a copy of a induced dozens of important ISVs to make Windows JVM that complied with Sun’s their Java applications reliant on Win- standards, it appeared that Sun’s Java im- dows-specific technologies and to refrain plementation would achieve the necessary from distributing to Windows users JVMs ubiquity on Windows.’’ Findings of Fact that complied with Sun’s standards.’’). ¶ 394. As discussed above, however, Mi- Again, we reject the District Court’s con- crosoft undertook a number of anticompet- demnation of low but non-predatory pric- itive actions that seriously reduced the dis- ing by Microsoft. tribution of Navigator, and the District 76 253 FEDERAL REPORTER, 3d SERIES

Court found that those actions thereby That is, developers who relied upon Micro- seriously impeded distribution of Sun’s soft’s public commitment to cooperate with JVM. Conclusions of Law, at 43–44. Be- Sun and who used Microsoft’s tools to cause Microsoft’s agreements foreclosed a develop what Microsoft led them to believe substantial portion of the field for JVM were cross-platform applications ended up distribution and because, in so doing, they producing applications that would run only protected Microsoft’s monopoly from a on the Windows operating system. middleware threat, they are anticompeti- When specifically accused by a PC Week tive. reporter of fragmenting Java standards so Microsoft offered no procompetitive jus- as to prevent cross-platform uses, Micro- tification for the default clause that made soft denied the accusation and indicated it the First Wave Agreements exclusive as a was only ‘‘adding rich platform support’’ to practical matter. See Findings of Fact what remained a crossplatform implemen- ¶ 401. Because the cumulative effect of tation. An e-mail message internal to Mi- the deals is anticompetitive and because crosoft, written shortly after the conversa- Microsoft has no procompetitive justification with the reporter, shows otherwise: tion for them, we hold that the provisions [O]k, i just did a followup callTTTT [The in the First Wave Agreements requiring reporter] liked that i kept pointing cus- use of Microsoft’s JVM as the default are tomers to w3c standards [ (commonly exclusionary, in violation of the Sherman observed internet protocols) ]TTTT [but] Act. he accused us of being schizo with this vs. our java approach, i said he misun- c. Deception of Java developers derstood [—] that [with Java] we are [41] Microsoft’s ‘‘Java implementation’’ merely trying to add rich platform sup- included, in addition to a JVM, a set of port to an interop layerTTTT this plays software development tools it created to wellTTTT at this point its [sic] not good assist ISVs in designing Java applications. to create MORE noise around our win32 The District Court found that, not only java classes. instead we should just were these tools incompatible with Sun’s quietly grow jvv [ (Microsoft’s devel- cross-platform aspirations for Java—no vi- opment tools) ] share and assume that olation, to be sure—but Microsoft deceived people will take more advantage of our Java developers regarding the Windows- classes without ever realizing they are specific nature of the tools. Microsoft’s building win32–only java apps. tools included ‘‘certain ‘keywords’ and GX 1332, reprinted in 22 J.A. at 14922–23. ‘compiler directives’ that could only be exe- Finally, other Microsoft documents con- cuted properly by Microsoft’s version of firm that Microsoft intended to deceive the Java runtime environment for Win- Java developers, and predicted that the dows.’’ Id. ¶ 394; see also Direct Testimo- effect of its actions would be to generate ny of James Gosling ¶ 58, reprinted in 21 Windows-dependent Java applications that J.A. at 13959 (Microsoft added ‘‘program- their developers believed would be cross- ming instructions TTT that alter the behav- platform; these documents also indicate ior of the code.’’). As a result, even Java that Microsoft’s ultimate objective was to ‘‘developers who were opting for portabili- thwart Java’s threat to Microsoft’s monop- ty over performance TTT unwittingly oly in the market for operating systems. [wrote] Java applications that [ran] only on One Microsoft document, for example, Windows.’’ Conclusions of Law, at 43. states as a strategic goal: ‘‘Kill cross-plat- U.S. v. MICROSOFT CORP. 77 Cite as 253 F.3d 34 (D.C. Cir. 2001)

form Java by grow[ing] the polluted Java Intel nonetheless continued to undertake market.’’ GX 259, reprinted in 22 J.A. at initiatives related to Java. By 1996 ‘‘Intel 14514; see also id. (‘‘Cross-platform capa- had developed a JVM designed to run well bility is by far the number one reason for TTT while complying with Sun’s cross-plat- choosing/using Java.’’) (emphasis in origi- form standards.’’ Id. ¶ 396. In April of nal). that year, Microsoft again urged Intel not to help Sun by distributing Intel’s fast, Microsoft’s conduct related to its Java Suncompliant JVM. Id. And Microsoft developer tools served to protect its mo- threatened Intel that if it did not stop nopoly of the operating system in a man- aiding Sun on the multimedia front, then ner not attributable either to the superi- Microsoft would refuse to distribute Intel ority of the operating system or to the technologies bundled with Windows. Id. acumen of its makers, and therefore was ¶ 404. anticompetitive. Unsurprisingly, Micro- Intel finally capitulated in 1997, after soft offers no procompetitive explanation Microsoft delivered the coup de grace. for its campaign to deceive developers. [O]ne of Intel’s competitors, called Accordingly, we conclude this conduct is AMD, solicited support from Microsoft exclusionary, in violation of § 2 of the for its ‘‘3DX’’ technologyTTTT Micro- Sherman Act. soft’s Allchin asked Gates whether Mi- crosoft should support 3DX, despite the d. The threat to Intel fact that Intel would oppose it. Gates responded: ‘‘If Intel has a real problem [42] The District Court held that Mi- with us supporting this then they will crosoft also acted unlawfully with respect have to stop supporting Java Multimedia to Java by using its ‘‘monopoly power to the way they are. I would gladly give prevent firms such as Intel from aiding in up supporting this if they would back off the creation of cross-platform interfaces.’’ from their work on JAVA.’’ Conclusions of Law, at 43. In 1995 Intel was in the process of developing a highper- Id. ¶ 406. formance, Windows-compatible JVM. Mi- Microsoft’s internal documents and de- crosoft wanted Intel to abandon that effort position testimony confirm both the anti- because a fast, cross-platform JVM would competitive effect and intent of its actions. threaten Microsoft’s monopoly in the oper- See, e.g., GX 235, reprinted in 22 J.A. at ating system market. At an August 1995 14502 (Microsoft executive, Eric Eng- meeting, Microsoft’s Gates told Intel that strom, included among Microsoft’s goals its ‘‘cooperation with Sun and Netscape to for Intel: ‘‘Intel to stop helping Sun create develop a Java runtime environment TTT Java Multimedia APIs, especially ones that was one of the issues threatening to under- run well TTT on Windows.’’); Deposition of mine cooperation between Intel and Micro- Eric Engstrom at 179 (‘‘We were success- soft.’’ Findings of Fact ¶ 396. Three ful [in convincing Intel to stop aiding Sun] months later, ‘‘Microsoft’s Paul Maritz told for some period of time.’’). a senior Intel executive that Intel’s [adap- Microsoft does not deny the facts found tation of its multimedia software to comply by the District Court, nor does it offer any with] Sun’s Java standards was as inimical procompetitive justification for pressuring to Microsoft as Microsoft’s support for Intel not to support cross-platform Java. non-Intel microprocessors would be to In- Microsoft lamely characterizes its threat to tel.’’ Id. ¶ 405. Intel as ‘‘advice.’’ The District Court, 78 253 FEDERAL REPORTER, 3d SERIES however, found that Microsoft’s ‘‘advice’’ to of the District Court’s opinion contains, Intel to stop aiding cross-platform Java with one exception, only broad, summariz- was backed by the threat of retaliation, ing conclusions. See, e.g., Conclusions of and this conclusion is supported by the Law, at 44 (‘‘Microsoft placed an oppres- evidence cited above. Therefore we affirm sive thumb on the scale of competitive the conclusion that Microsoft’s threats to fortuneTTTT’’). The only specific acts to Intel were exclusionary, in violation of § 2 which the court refers are Microsoft’s ex- of the Sherman Act. penditures in promoting its browser, see 6. Course of Conduct id. (‘‘Microsoft has expended wealth and foresworn opportunities to realize [43] The District Court held that, moreTTTT’’), which we have explained are apart from Microsoft’s specific acts, Micro- not in themselves unlawful. Because the soft was liable under § 2 based upon its District Court identifies no other specific general ‘‘course of conduct.’’ In reaching acts as a basis for ‘‘course of conduct’’ this conclusion the court relied upon Conti- liability, we reverse its conclusion that Mi- nental Ore Co. v. Union Carbide & Carbon crosoft’s course of conduct separately vio- Corp., 370 U.S. 690, 699, 82 S.Ct. 1404, 8 lates § 2 of the Sherman Act. L.Ed.2d 777 (1962), where the Supreme Court stated, ‘‘[i]n [Sherman Act cases], plaintiffs should be given the full benefit of C. Causation their proof without tightly compartmental- [44] As a final parry, Microsoft urges izing the various factual components and this court to reverse on the monopoly wiping the slate clean after scrutiny of maintenance claim, because plaintiffs nev- each.’’ er established a causal link between Mi- Microsoft points out that Continental crosoft’s anticompetitive conduct, in partic- Ore and the other cases cited by plaintiffs ular its foreclosure of Netscape’s and in support of ‘‘course of conduct’’ liability Java’s distribution channels, and the main- all involve conspiracies among multiple tenance of Microsoft’s operating system firms, not the conduct of a single firm; in monopoly. See Findings of Fact ¶ 411 that setting the ‘‘course of conduct’’ is the (‘‘There is insufficient evidence to find conspiracy itself, for which all the partici- that, absent Microsoft’s actions, Navigator pants may be held liable. See Appellant’s and Java already would have ignited genu- Opening Br. at 112–13. Plaintiffs respond ine competition in the market for Intel- that, as a policy matter, a monopolist’s compatible PC operating systems.’’). This unilateral ‘‘campaign of [acts intended to is the flip side of Microsoft’s earlier argu- exclude a rival] that in the aggregate has ment that the District Court should have the requisite impact’’ warrants liability included middleware in the relevant mar- even if the acts viewed individually would ket. According to Microsoft, the District be lawful for want of a significant effect Court cannot simultaneously find that mid- upon competition. Appellees’ Br. at 82–83. dleware is not a reasonable substitute and We need not pass upon plaintiffs’ argu- that Microsoft’s exclusionary conduct con- ment, however, because the District Court tributed to the maintenance of monopoly did not point to any series of acts, each of power in the operating system market. which harms competition only slightly but Microsoft claims that the first finding de- the cumulative effect of which is significant pended on the court’s view that middle- enough to form an independent basis for ware does not pose a serious threat to liability. The ‘‘course of conduct’’ section Windows, see supra Section II.A, while the U.S. v. MICROSOFT CORP. 79 Cite as 253 F.3d 34 (D.C. Cir. 2001)

second finding required the court to find inasmuch as nascent threats are merely that Navigator and Java would have devel- potential substitutes. But the underlying oped into serious enough cross-platform proof problem is the same—neither plain- threats to erode the applications barrier to tiffs nor the court can confidently recon- entry. We disagree. struct a product’s hypothetical technologi- Microsoft points to no case, and we can cal development in a world absent the find none, standing for the proposition defendant’s exclusionary conduct. To that, as to § 2 liability in an equitable some degree, ‘‘the defendant is made to enforcement action, plaintiffs must present suffer the uncertain consequences of its direct proof that a defendant’s continued own undesirable conduct.’’ 3 AREEDA & monopoly power is precisely attributable HOVENKAMP, ANTITRUST LAW ¶ 651c, at 78. to its anticompetitive conduct. As its lone Given this rather edentulous test for authority, Microsoft cites the following causation, the question in this case is not passage from Professor Areeda’s antitrust whether Java or Navigator would actually treatise: ‘‘The plaintiff has the burden of have developed into viable platform substi- pleading, introducing evidence, and pre- tutes, but (1) whether as a general matter sumably proving by a preponderance of the exclusion of nascent threats is the type the evidence that reprehensible behavior of conduct that is reasonably capable of has contributed significantly to the TTT contributing significantly to a defendant’s maintenance of the monopoly.’’ 3 PHILLIP continued monopoly power and (2) whether E. AREEDA & HERBERT HOVENKAMP, ANTI- Java and Navigator reasonably constituted TRUST LAW ¶ 650c, at 69 (1996) (emphasis nascent threats at the time Microsoft en- added). gaged in the anticompetitive conduct at But, with respect to actions seeking in- issue. As to the first, suffice it to say that junctive relief, the authors of that treatise it would be inimical to the purpose of the also recognize the need for courts to infer Sherman Act to allow monopolists free ‘‘causation’’ from the fact that a defendant reign to squash nascent, albeit unproven, has engaged in anticompetitive conduct competitors at will—particularly in indus- that ‘‘reasonably appear[s] capable of tries marked by rapid technological ad- making a significant contribution to TTT vance and frequent paradigm shifts. maintaining monopoly power.’’ Id. ¶ 651c, Findings of Fact ¶ ¶ 59–60. As to the at 78; see also Morgan v. Ponder, 892 second, the District Court made ample F.2d 1355, 1363 (8th Cir.1989); Barry findings that both Navigator and Java Wright, 724 F.2d at 230. To require that showed potential as middleware platform § 2 liability turn on a plaintiff’s ability or threats. Findings of Fact ¶ ¶ 68–77. inability to reconstruct the hypothetical Counsel for Microsoft admitted as much at marketplace absent a defendant’s anticom- oral argument. 02/26/01 Ct. Appeals Tr. petitive conduct would only encourage mo- at 27 (‘‘There are no constraints on output. nopolists to take more and earlier anti- Marginal costs are essentially zero. And competitive action. there are to some extent network effects. We may infer causation when exclu- So a company like Netscape founded in sionary conduct is aimed at producers of 1994 can be by the middle of 1995 clearly a nascent competitive technologies as well potentially lethal competitor to Windows as when it is aimed at producers of es- because it can supplant its position in the tablished substitutes. Admittedly, in the market because of the characteristics of former case there is added uncertainty, these markets.’’). 80 253 FEDERAL REPORTER, 3d SERIES

Microsoft’s concerns over causation States, 342 U.S. 143, 153–55, 72 S.Ct. 181, have more purchase in connection with the 96 L.Ed. 162 (1951). Because a deficiency appropriate remedy issue, i.e., whether on any one of the three will defeat plain- the court should impose a structural reme- tiffs’ claim, we look no further than plain- dy or merely enjoin the offensive conduct tiffs’ failure to prove a dangerous probabil- at issue. As we point out later in this ity of achieving monopoly power in the opinion, divestiture is a remedy that is im- putative browser market. posed only with great caution, in part because its long-term efficacy is rarely cer- [46] The determination whether a dan- tain. See infra Section V.E. Absent gerous probability of success exists is a some measure of confidence that there has particularly fact-intensive inquiry. Be- been an actual loss to competition that cause the Sherman Act does not identify needs to be restored, wisdom counsels the activities that constitute the offense of against adopting radical structural relief. attempted monopolization, the court ‘‘must See 3 AREEDA & HOVENKAMP, ANTITRUST examine the facts of each case, mindful LAW ¶ 653b, at 91–92 (‘‘[M]ore extensive that the determination of what constitutes equitable relief, particularly remedies such an attempt, as Justice Holmes explained, as divestiture designed to eliminate the ‘is a question of proximity and degree.’ ’’ monopoly altogether, raise more serious United States v. Am. Airlines, Inc., 743 questions and require a clearer indication F.2d 1114, 1118 (5th Cir.1984) (quoting of a significant causal connection between Swift & Co. v. United States, 196 U.S. the conduct and creation or maintenance 375, 402, 25 S.Ct. 276, 49 L.Ed. 518 of the market power.’’). But these queries (1905)). The District Court determined go to questions of remedy, not liability. that ‘‘[t]he evidence supports the conclu- In short, causation affords Microsoft no sion that Microsoft’s actions did pose such defense to liability for its unlawful actions a danger.’’ Conclusions of Law, at 45. undertaken to maintain its monopoly in Specifically, the District Court concluded the operating system market. that ‘‘Netscape’s assent to Microsoft’s market division proposal would have, in- III. ATTEMPTED MONOPOLIZATION stanter, resulted in Microsoft’s attainment [45] Microsoft further challenges the of monopoly power in a second market,’’ District Court’s determination of liability and that ‘‘the proposal itself created a TTT for ‘‘attempt[ing] to monopolize any dangerous probability of that result.’’ part of the trade or commerce among the Conclusions of Law, at 46 (citation omit- several States.’’ 15 U.S.C. § 2 (1997). To ted). The District Court further conclud- establish a § 2 violation for attempted mo- ed that ‘‘the predatory course of conduct nopolization, ‘‘a plaintiff must prove (1) Microsoft has pursued since June of 1995 that the defendant has engaged in predato- has revived the dangerous probability that ry or anticompetitive conduct with (2) a Microsoft will attain monopoly power in a specific intent to monopolize and (3) a dan- second market.’’ Id. gerous probability of achieving monopoly power.’’ Spectrum Sports, Inc. v. McQuil- At the outset we note a pervasive flaw lan, 506 U.S. 447, 456, 113 S.Ct. 884, 122 in the District Court’s and plaintiffs’ dis- L.Ed.2d 247 (1993); see also Times–Picay- cussion of attempted monopolization. une Pub. Co. v. United States, 345 U.S. Simply put, plaintiffs have made the same 594, 626, 73 S.Ct. 872, 97 L.Ed. 1277 argument under two different headings— (1953); Lorain Journal Co. v. United monopoly maintenance and attempted mo- U.S. v. MICROSOFT CORP. 81 Cite as 253 F.3d 34 (D.C. Cir. 2001) nopolization. They have relied upon Mi- not—and an examination of the substitutes crosoft’s § 2 liability for monopolization of that are part of the market and those that the operating system market as a pre- are not. See also supra Section II.A. The sumptive indicator of attempted monopoli- District Court never engaged in such an zation of an entirely different market. analysis nor entered detailed findings de- The District Court implicitly accepted this fining what a browser is or what products approach: It agreed with plaintiffs that might constitute substitutes. In the Find- the events that formed the basis for the ings of Fact, the District Court (in a sec- § 2 monopolization claim ‘‘warrant[ed] ad- tion on whether IE and Windows are sepa- ditional liability as an illegal attempt to rate products) stated only that ‘‘a Web amass monopoly power in ‘the browser browser provides the ability for the end market.’ ’’ Id. at 45 (emphasis added). user to select, retrieve, and perceive re- Thus, plaintiffs and the District Court sources on the Web.’’ Findings of Fact failed to recognize the need for an analysis ¶ 150. Furthermore, in discussing at- wholly independent of the conclusions and tempted monopolization in its Conclusions findings on monopoly maintenance. of Law, the District Court failed to demon- To establish a dangerous probability of strate analytical rigor when it employed success, plaintiffs must as a threshold mat- varying and imprecise references to the ter show that the browser market can be ‘‘market for browsing technology for Win- monopolized, i.e., that a hypothetical mo- dows,’’ ‘‘the browser market,’’ and ‘‘plat- nopolist in that market could enjoy market form-level browsing software.’’ Conclu- power. This, in turn, requires plaintiffs sions of Law, at 45. (1) to define the relevant market and (2) to [49] Because the determination of a demonstrate that substantial barriers to relevant market is a factual question to be entry protect that market. Because plain- resolved by the District Court, see, e.g., All tiffs have not carried their burden on ei- Care Nursing Serv., Inc. v. High Tech ther prong, we reverse without remand. Staffing Servs., Inc., 135 F.3d 740, 749 (11th Cir.1998); Tunis Bros. Co., Inc. v. A. Relevant Market Ford Motor Co., 952 F.2d 715, 722–23 (3d [47, 48] A court’s evaluation of an at- Cir.1991); Westman Comm’n Co. v. Ho- tempted monopolization claim must include bart Int’l, Inc., 796 F.2d 1216, 1220 (10th a definition of the relevant market. See Cir.1986), we would normally remand the Spectrum Sports, 506 U.S. at 455–56, 113 case so that the District Court could for- S.Ct. 884. Such a definition establishes a mulate an appropriate definition. See context for evaluating the defendant’s ac- Pullman–Standard v. Swint, 456 U.S. 273, tions as well as for measuring whether the 291–92 & n. 22, 102 S.Ct. 1781, 72 L.Ed.2d challenged conduct presented a dangerous 66 (1982); Janini v. Kuwait Univ., 43 probability of monopolization. See id. F.3d 1534, 1537 (D.C.Cir.1995); Palmer v. The District Court omitted this element of Shultz, 815 F.2d 84, 103 (D.C.Cir.1987). A the Spectrum Sports inquiry. remand on market definition is unneces- Defining a market for an attempted mo- sary, however, because the District Court’s nopolization claim involves the same steps imprecision is directly traceable to plain- as defining a market for a monopoly main- tiffs’ failure to articulate and identify evi- tenance claim, namely a detailed descrip- dence before the District Court as to (1) tion of the purpose of a browser—what what constitutes a browser (i.e., what are functions may be included and what are the technological components of or func- 82 253 FEDERAL REPORTER, 3d SERIES

tionalities provided by a browser) and (2) market is also protected by significant why certain other products are not reason- barriers to entry, see supra Section II.A, able substitutes (e.g., browser shells or it follows that a firm cannot threaten to viewers for individual internet extensions, achieve monopoly power in a market un- such as Real Audio Player or Adobe Acro- less that market is, or will be, similarly bat Reader). See Plaintiffs’ Joint Pro- protected. See Spectrum Sports, 506 U.S. posed Findings of Fact, at 817–19, reprint- at 456, 113 S.Ct. 884 (‘‘In order to deter- ed in 2 J.A. at 1480–82; Plaintiffs’ Joint mine whether there is a dangerous proba- Proposed Conclusions of Law § IV (No. bility of monopolization, courts have found 98–1232); see also Lee v. Interstate Fire & it necessary to consider TTT the defen- Cas. Co., 86 F.3d 101, 105 (7th Cir.1996) dant’s ability to lessen or destroy competi- (stating that remand for development of a tion in that market.’’) (citing cases). factual record is inappropriate where Plaintiffs have the burden of establishing plaintiff failed to meet burden of persua- barriers to entry into a properly defined sion and never suggested that additional relevant market. See 2A PHILLIP E. AREE- evidence was necessary). Indeed, when DA ET AL., ANTITRUST LAW ¶ 420b, at 57–59 plaintiffs in their Proposed Findings of (1995); 3A PHILLIP E. AREEDA & HERBERT Fact attempted to define a relevant mar- HOVENKAMP, ANTITRUST LAW ¶ 807g, at 361– ket for the attempt claim, they pointed 62 (1996); see also Neumann v. Rein- only to their separate products analysis for forced Earth Co., 786 F.2d 424, 429 the tying claim. See, e.g., Plaintiffs’ Joint (D.C.Cir.1986). Plaintiffs must not only Proposed Findings of Fact, at 818, reprint- show that barriers to entry protect the properly defined browser market, but that ed in 2 J.A. at 1481. However, the sepa- those barriers are ‘‘significant.’’ See Unit- rate products analysis for tying purposes ed States v. Baker Hughes Inc., 908 F.2d is not a substitute for the type of market 981, 987 (D.C.Cir.1990). Whether there definition that Spectrum Sports requires. are significant barriers to entry cannot, of See infra Section IV.A. course, be answered absent an appropriate Plaintiffs’ proposed findings and the Dis- market definition; thus, plaintiffs’ failure trict Court’s actual findings on attempted on that score alone is dispositive. But monopolization pale in comparison to their even were we to assume a properly de- counterparts on the monopoly maintenance fined market, for example browsers con- claim. Compare Findings of Fact ¶ 150, sisting of a graphical interface plus inter- and Plaintiffs’ Joint Proposed Findings of net protocols, plaintiffs nonetheless failed Fact, at 817–819, reprinted in 2 J.A. at to carry their burden on barriers to entry. 1480–82, with Findings of Fact ¶ ¶ 18–66, Contrary to plaintiffs’ contention on ap- and Plaintiffs’ Joint Proposed Findings of peal, see Appellees’ Br. at 91–93, none of Fact, at 20–31, reprinted in 1 J.A. at 658– the District Court’s statements constitutes 69. Furthermore, in their brief and at a finding of barriers to entry into the web oral argument before this court, plaintiffs browser market. Finding of Fact 89 did nothing to clarify or ameliorate this states: deficiency. See, e.g., Appellees’ Br. at 93– At the time Microsoft presented its pro- 94. posal, Navigator was the only browser product with a significant share of the B. Barriers to Entry market and thus the only one with the [50, 51] Because a firm cannot possess potential to weaken the applications bar- monopoly power in a market unless that rier to entry. Thus, had it convinced U.S. v. MICROSOFT CORP. 83 Cite as 253 F.3d 34 (D.C. Cir. 2001)

Netscape to accept its offer of a ‘‘special kind of entry barrier in its Conclusions of relationship,’’ Microsoft quickly would Law: have gained such control over the exten- In the time it would have taken an aspir- sions and standards that networkcentric ing entrant to launch a serious effort to applications (including Web sites) em- compete against Internet Explorer, Mi- ploy as to make it all but impossible for crosoft could have erected the same any future browser rival to lure appreci- type of barrier that protects its existing able developer interest away from Mi- monopoly power by adding proprietary crosoft’s platform. extensions to the browsing software under its control and by extracting com- This finding is far too speculative to mitments from OEMs, IAPs and others establish that competing browsers would similar to the ones discussed in [the be unable to enter the market, or that monopoly maintenance section]. Microsoft would have the power to raise Conclusions of Law, at 46 (emphasis add- the price of its browser above, or reduce ed). the quality of its browser below, the competitive level. Moreover, it is ambiguous Giving plaintiffs and the District Court insofar as it appears to focus on Micro- the benefit of the doubt, we might remand soft’s response to the perceived platform if the possible existence of entry barriers threat rather than the browser market. resulting from the possible creation and Finding of Fact 144, on which plaintiffs exploitation of network effects in the also rely, is part of the District Court’s browser market were the only concern. discussion of Microsoft’s alleged anticom- That is not enough to carry the day, how- petitive actions to eliminate the platform ever, because the District Court did not threat posed by Netscape Navigator. This make two key findings: (1) that network finding simply describes Microsoft’s reli- effects were a necessary or even probable, ance on studies indicating consumers’ re- rather than merely possible, consequence luctance to switch browsers, a reluctance of high market share in the browser mar- not shown to be any more than that which ket and (2) that a barrier to entry result- stops consumers from switching brands of ing from network effects would be ‘‘signifi- cereal. Absent more extensive and defini- cant’’ enough to confer monopoly power. tive factual findings, the District Court’s Again, these deficiencies are in large part legal conclusions about entry barriers traceable to plaintiffs’ own failings. As to amount to nothing more than speculation. the first point, the District Court’s use of the phrase ‘‘could have’’ reflects the same In contrast to their minimal effort on uncertainty articulated in testimony cited market definition, plaintiffs did at least in plaintiffs’ proposed findings. See Plain- offer proposed findings of fact suggesting tiffs’ Joint Proposed Findings of Fact, at that the possibility of network effects could 822 (citing testimony of Frederick War- potentially create barriers to entry into the ren–Boulton), at 826 (citing testimony of browser market. See Plaintiffs’ Joint Pro- Franklin Fisher), reprinted in 2 J.A. at posed Findings of Fact, at 822–23, 825–27, 1485, 1489. As to the second point, the reprinted in 2 J.A. at 1485–86, 1488–90. cited testimony in plaintiffs’ proposed find- The District Court did not adopt those ings offers little more than conclusory proposed findings. See Findings of Fact statements. See id. at 822–27, reprinted ¶ 89. However, the District Court did ac- in 2 J.A. at 1485–90. The proffered testi- knowledge the possibility of a different mony contains no evidence regarding the 84 253 FEDERAL REPORTER, 3d SERIES cost of ‘‘porting’’ websites to different clusions of Law, at 47–51. We hold that browsers or the potentially different eco- the rule of reason, rather than per se nomic incentives facing ICPs, as opposed analysis, should govern the legality of ty- to ISVs, in their decision to incur costs to ing arrangements involving platform soft- do so. Simply invoking the phrase ‘‘netware products. The Supreme Court has work effects’’ without pointing to more evi- warned that ‘‘ ‘[i]t is only after considera- dence does not suffice to carry plaintiffs’ ble experience with certain business rela- burden in this respect. tionships that courts classify them as per Any doubt that we may have had re- se violationsTTTT’ ’’ Broad. Music, Inc. v. garding remand instead of outright rever- CBS, 441 U.S. 1, 9, 99 S.Ct. 1551, 60 sal on the barriers to entry question was L.Ed.2d 1 (1979) (quoting United States v. dispelled by plaintiffs’ arguments on at- Topco Assocs., 405 U.S. 596, 607–08, 92 tempted monopolization before this court. S.Ct. 1126, 31 L.Ed.2d 515 (1972)). While Not only did plaintiffs fail to articulate a every ‘‘business relationship’’ will in some website barrier to entry theory in either sense have unique features, some repre- their brief or at oral argument, they failed sent entire, novel categories of dealings. to point the court to evidence in the record As we shall explain, the arrangement be- that would support a finding that Micro- fore us is an example of the latter, offering soft would likely erect significant barriers the first up-close look at the technological to entry upon acquisition of a dominant integration of added functionality into soft- market share. ware that serves as a platform for third- party applications. There being no close Plaintiffs did not devote the same re- parallel in prior antitrust cases, simplistic sources to the attempted monopolization application of per se tying rules carries a claim as they did to the monopoly mainte- serious risk of harm. Accordingly, we va- nance claim. But both claims require evi- cate the District Court’s finding of a per se dentiary and theoretical rigor. Because tying violation and remand the case. plaintiffs failed to make their case on at- Plaintiffs may on remand pursue their ty- tempted monopolization both in the Dis- ing claim under the rule of reason. trict Court and before this court, there is no reason to give them a second chance to The facts underlying the tying allegation flesh out a claim that should have been substantially overlap with those set forth fleshed out the first time around. Accord- in Section II.B in connection with the § 2 ingly, we reverse the District Court’s de- monopoly maintenance claim. The key termination of § 2 liability for attempted District Court findings are that (1) Micro- monopolization. soft required licensees of Windows 95 and 98 also to license IE as a bundle at a single IV. TYING price, Findings of Fact ¶ ¶ 137, 155, 158; [52, 53] Microsoft also contests the (2) Microsoft refused to allow OEMs to District Court’s determination of liability uninstall or remove IE from the Windows under § 1 of the Sherman Act. The Dis- desktop, id. ¶ ¶ 158, 203, 213; (3) Microsoft trict Court concluded that Microsoft’s con- designed Windows 98 in a way that with- tractual and technological bundling of the held from consumers the ability to remove IE web browser (the ‘‘tied’’ product) with IE by use of the Add/Remove Programs its Windows operating system (‘‘OS’’) (the utility, id. ¶ 170; cf. id. ¶ 165 (stating that ‘‘tying’’ product) resulted in a tying ar- IE was subject to Add/Remove Programs rangement that was per se unlawful. Con- utility in Windows 95); and (4) Microsoft U.S. v. MICROSOFT CORP. 85 Cite as 253 F.3d 34 (D.C. Cir. 2001) designed Windows 98 to override the cases. Our purpose is to highlight the user’s choice of default web browser in poor fit between the separate-products test certain circumstances, id. ¶ ¶ 171, 172. and the facts of this case. We then offer The court found that these acts constituted further reasons for carving an exception to a per se tying violation. Conclusions of the per se rule when the tying product is Law, at 47–51. Although the District platform software. In the final section we Court also found that Microsoft commin- discuss the District Court’s inquiry if gled operating system-only and browser- plaintiffs pursue a rule of reason claim on only routines in the same library files, remand. Findings of Fact ¶ ¶ 161, 164, it did not include this as a basis for tying liability A. Separate-Products Inquiry Under the despite plaintiffs’ request that it do so, Per Se Test Plaintiffs’ Proposed Findings of Fact, The requirement that a practice involve ¶ ¶ 131–32, reprinted in 2 J.A. at 941–47. two separate products before being condemned as an illegal tie started as a purely [54] There are four elements to a per linguistic requirement: unless products se tying violation: (1) the tying and tied are separate, one cannot be ‘‘tied’’ to the goods are two separate products; (2) the other. Indeed, the nature of the products defendant has market power in the tying involved in early tying cases—intuitively product market; (3) the defendant affords distinct items such as a movie projector consumers no choice but to purchase the and a film, Motion Picture Patents Co. v. tied product from it; and (4) the tying Universal Film Mfg. Co., 243 U.S. 502, 37 arrangement forecloses a substantial vol- S.Ct. 416, 61 L.Ed. 871 (1917)—led courts ume of commerce. See Eastman Kodak either to disregard the separate-products Co. v. Image Tech. Servs., Inc., 504 U.S. question, see, e.g., United Shoe Mach. 451, 461–62, 112 S.Ct. 2072, 119 L.Ed.2d Corp. v. United States, 258 U.S. 451, 42 265 (1992); Jefferson Parish Hosp. Dist. S.Ct. 363, 66 L.Ed. 708 (1922), or to dis- No. 2 v. Hyde, 466 U.S. 2, 12–18, 104 S.Ct. cuss it only in passing, see, e.g., Motion 1551, 80 L.Ed.2d 2 (1984). Picture Patents, 243 U.S. at 508, 512, 518, Microsoft does not dispute that it bound 37 S.Ct. 416. It was not until Times- Windows and IE in the four ways the Picayune Publishing Co. v. United States, District Court cited. Instead it argues 345 U.S. 594, 73 S.Ct. 872, 97 L.Ed. 1277 that Windows (the tying good) and IE (1953), that the separate-products issue be- browsers (the tied good) are not ‘‘separate came a distinct element of the test for an products,’’ Appellant’s Opening Br. at 69– illegal tie. Id. at 614, 73 S.Ct. 872. Even 79, and that it did not substantially fore- that case engaged in a rather cursory in- close competing browsers from the tied quiry into whether ads sold in the morning product market, id. at 79–83. (Microsoft edition of a paper were a separate product also contends that it does not have monop- from ads sold in the evening edition. oly power in the tying product market, id. The first case to give content to the at 84–96, but, for reasons given in Section separate-products test was Jefferson Par- II.A, we uphold the District Court’s find- ish, 466 U.S. 2, 104 S.Ct. 1551, 80 L.Ed.2d ing to the contrary.) 2. That case addressed a tying arrange- We first address the separate-products ment in which a hospital conditioned surgi- inquiry, a source of much argument be- cal care at its facility on the purchase of tween the parties and of confusion in the anesthesiological services from an affiliat- 86 253 FEDERAL REPORTER, 3d SERIES ed medical group. The facts were a chal- exist unless there is a sufficient demand lenge for casual separate-products analysis for the purchase of anesthesiological ser- because the tied service—anesthesia—was vices separate from hospital services to neither intuitively distinct from nor intui- identify a distinct product market in which tively contained within the tying service— it is efficient to offer anesthesiological ser- surgical care. A further complication was vices separately from hospital service,’’ id. that, soon after the Court enunciated the at 21–22, 104 S.Ct. 1551 (emphasis added); per se rule for tying liability in Interna- accord Eastman Kodak, 504 U.S. at 462, tional Salt Co. v. United States, 332 U.S. 112 S.Ct. 2072. 392, 396, 68 S.Ct. 12, 92 L.Ed. 20 (1947), and Northern Pacific Railway Co. v. Unit- The Court proceeded to examine direct ed States, 356 U.S. 1, 5–7, 78 S.Ct. 514, 2 and indirect evidence of consumer demand L.Ed.2d 545 (1958), new economic research for the tied product separate from the began to cast doubt on the assumption, tying product. Direct evidence addresses voiced by the Court when it established the question whether, when given a choice, the rule, that ‘‘ ‘tying agreements serve consumers purchase the tied good from hardly any purpose beyond the suppres- the tying good maker, or from other firms. sion of competition,’ ’’ id. at 6, 78 S.Ct. 514 The Court took note, for example, of testi- (quoting Standard Oil of Cal. v. United mony that patients and surgeons often re- States, 337 U.S. 293, 305–06, 69 S.Ct. 1051, quested specific anesthesiologists not asso- 93 L.Ed. 1371 (1949)); see also Jefferson ciated with a hospital. Jefferson Parish, Parish, 466 U.S. at 15 n. 23, 104 S.Ct. 1551 466 U.S. at 22, 104 S.Ct. 1551. Indirect (citing materials); Fortner Enters. v. U.S. evidence includes the behavior of firms Steel Corp., 394 U.S. 495, 524–25, 89 S.Ct. without market power in the tying good 1252, 22 L.Ed.2d 495 (1969) (Fortas, J., market, presumably on the notion that dissenting) (‘‘Fortner I’’). (competitive) supply follows demand. If The Jefferson Parish Court resolved the competitive firms always bundle the tying matter in two steps. First, it clarified that and tied goods, then they are a single ‘‘the answer to the question whether one product. See id. at 22 n. 36, 104 S.Ct. or two products are involved’’ does not 1551; see also Eastman Kodak, 504 U.S. turn ‘‘on the functional relation between at 462, 112 S.Ct. 2072; Fortner I, 394 U.S. themTTTT’’ Jefferson Parish, 466 U.S. at at 525, 89 S.Ct. 1252 (Fortas, J., dissent- 19, 104 S.Ct. 1551; see also id. at 19 n. 30, ing), cited in Jefferson Parish, 466 U.S. at 104 S.Ct. 1551. In other words, the mere 12, 22 n. 35, 104 S.Ct. 1551; United States fact that two items are complements, that v. Jerrold Elecs. Corp., 187 F.Supp. 545, ‘‘one TTT is useless without the other,’’ id., 559 (E.D.Pa.1960), aff’d per curiam, 365 does not make them a single ‘‘product’’ for U.S. 567, 81 S.Ct. 755, 5 L.Ed.2d 806 purposes of tying law. Accord Eastman (1961); 10 PHILLIP E. AREEDA ET AL., ANTI- Kodak, 504 U.S. at 463, 112 S.Ct. 2072. TRUST LAW ¶ 1744, at 197–201 (1996). Here Second, reasoning that the ‘‘definitional the Court noted that only 27% of anesthe- question [whether two distinguishable siologists in markets other than the defen- products are involved] depends on whether dant’s had financial relationships with hos- the arrangement may have the type of pitals, and that, unlike radiologists and competitive consequences addressed by pathologists, anesthesiologists were not the rule [against tying],’’ Jefferson Parish, usually employed by hospitals, i.e., bundled 466 U.S. at 21, 104 S.Ct. 1551, the Court with hospital services. Jefferson Parish, decreed that ‘‘no tying arrangement can 466 U.S. at 22 n. 36, 104 S.Ct. 1551. With U.S. v. MICROSOFT CORP. 87 Cite as 253 F.3d 34 (D.C. Cir. 2001)

both direct and indirect evidence concur- Cir.1979) (memory). Bundling can also ring, the Court determined that hospital capitalize on certain economies of scope. surgery and anesthesiological services A possible example is the ‘‘shared’’ library were distinct goods. files that perform OS and browser func- To understand the logic behind the tions with the very same lines of code and Court’s consumer demand test, consider thus may save drive space from the clutter first the postulated harms from tying. of redundant routines and memory when consumers use both the OS and browser The core concern is that tying prevents simultaneously. 11/16/98 pm Tr. at 44 (tri- goods from competing directly for consum- al testimony of Glenn Weadock), reprinted er choice on their merits, i.e., being select- in 9 J.A. at 5892; Direct Testimony of ed as a result of ‘‘buyers’ independent Microsoft’s James Allchin ¶ ¶ 10, 97, 100, judgment,’’ id. at 13, 104 S.Ct. 1551 (inter- 106–116, app. A (excluding ¶ ¶ f, g.vi), re- nal quotes omitted). With a tie, a buyer’s printed in 5 J.A. at 3292, 3322–30, 3412– ‘‘freedom to select the best bargain in the 17. Indeed, if there were no efficiencies second market [could be] impaired by his from a tie (including economizing on con- need to purchase the tying product, and sumer transaction costs such as the time perhaps by an inability to evaluate the true and effort involved in choice), we would cost of either productTTTT’’ Id. at 15, 104 expect distinct consumer demand for each S.Ct. 1551. Direct competition on the individual component of every good. In a merits of the tied product is foreclosed competitive market with zero transaction when the tying product either is sold only costs, the computers on which this opinion in a bundle with the tied product or, was written would only be sold piece- though offered separately, is sold at a bun- meal—keyboard, monitor, mouse, central dled price, so that the buyer pays the same processing unit, disk drive, and memory all price whether he takes the tied product or sold in separate transactions and likely by not. In both cases, a consumer buying the different manufacturers. tying product becomes entitled to the tied Recognizing the potential benefits from product; he will therefore likely be unwill- tying, see Jefferson Parish, 466 U.S. at 21 ing to buy a competitor’s version of the n. 33, 104 S.Ct. 1551, the Court in Jeffer- tied product even if, making his own son Parish forged a separate-products test price/quality assessment, that is what he that, like those of market power and sub- would prefer. stantial foreclosure, attempts to screen out But not all ties are bad. Bundling obvi- false positives under per se analysis. The ously saves distribution and consumer consumer demand test is a rough proxy for transaction costs. 9 PHILLIP E. AREEDA, whether a tying arrangement may, on bal- ANTITRUST LAW ¶ 1703g2, at 51–52 (1991). ance, be welfare-enhancing, and unsuited This is likely to be true, to take some to per se condemnation. In the abstract, examples from the computer industry, with of course, there is always direct separate the integration of math co-processors and demand for products: assuming choice is memory into microprocessor chips and the available at zero cost, consumers will pre- inclusion of spell checkers in word pro- fer it to no choice. Only when the efficien- cessors. 11/10/98 pm Tr. at 18–19 (trial cies from bundling are dominated by the testimony of Steven McGeady of Intel), benefits to choice for enough consumers, reprinted in 9 J.A. at 5581–82 (math co- however, will we actually observe consum- processor); Cal. Computer Prods., Inc. v. ers making independent purchases. In IBM Corp., 613 F.2d 727, 744 & n. 29 (9th other words, perceptible separate demand 88 253 FEDERAL REPORTER, 3d SERIES is inversely proportional to net efficiencies. With this background, we now turn to On the supply side, firms without market the separateproducts inquiry before us. power will bundle two goods only when the The District Court found that many con- cost savings from joint sale outweigh the sumers, if given the option, would choose value consumers place on separate choice. their browser separately from the OS. So bundling by all competitive firms im- Findings of Fact ¶ 151 (noting that ‘‘corpo- plies strong net efficiencies. If a court rate consumers TTT prefer to standardize finds either that there is no noticeable on the same browser across different separate demand for the tied product or, [OSs]’’ at the workplace). Turning to in- there being no convincing direct evidence dustry custom, the court found that, al- of separate demand, that the entire ‘‘com- though all major OS vendors bundled petitive fringe’’ engages in the same be- browsers with their OSs, these companies havior as the defendant, 10 AREEDA ET AL., either sold versions without a browser, or ANTITRUST LAW ¶ 1744c4, at 200, then the allowed OEMs or end-users either not to tying and tied products should be declared install the bundled browser or in any event one product and per se liability should be to ‘‘uninstall’’ it. Id. ¶ 153. The court did rejected. not discuss the record evidence as to Before concluding our exegesis of Jeffer- whether OS vendors other than Microsoft son Parish’s separate-products test, we sold at a bundled price, with no discount should clarify two things. First, Jefferson for a browserless OS, perhaps because the Parish does not endorse a direct inquiry record evidence on the issue was in con- into the efficiencies of a bundle. Rather, it flict. Compare, e.g., Direct Testimony of proposes easy-to-administer proxies for Richard Schmalensee ¶ 241, reprinted in 7 net efficiency. In describing the separate- J.A. at 4315 (‘‘[A]ll major operating system products test we discuss efficiencies only vendors do in fact include Web-browsing to explain the rationale behind the con- software with the operating system at no sumer demand inquiry. To allow the sepa- extra charge.’’) (emphasis added), with, rate-products test to become a detailed e.g., 1/6/99 pm Tr. at 42 (trial testimony of inquiry into possible welfare consequences Franklin Fisher of MIT) (suggesting all would turn a screening test into the very OSs but Microsoft offer discounts). process it is expected to render unneces- Microsoft does not dispute that many sary. 10 AREEDA ET AL., ANTITRUST LAW consumers demand alternative browsers. ¶ ¶ 1741b & c, at 180–85; see also Jeffer- But on industry custom Microsoft contends son Parish, 466 U.S. at 34–35, 104 S.Ct. that no other firm requires non-removal 1551 (O’Connor, J., concurring). because no other firm has invested the Second, the separate-products test is not resources to integrate web browsing as a one-sided inquiry into the cost savings deeply into its OS as Microsoft has. Ap- from a bundle. Although Jefferson Parish pellant’s Opening Br. at 25; cf. Direct acknowledged that prior lower court cases Testimony of James Allchin ¶ ¶ 262–72, re- looked at cost-savings to decide separate printed in 5 J.A. at 3385–89 (Apple, IBM); products, see id. at 22 n. 35, 104 S.Ct. 1551, 11/5/98 pm Tr. at 55–58 (trial testimony of the Court conspicuously did not adopt that Apple’s Avadis Tevanian, Jr.), reprinted in approach in its disposition of tying ar- 9 J.A. at 5507–10 (Apple). (We here use rangement before it. Instead it chose the term ‘‘integrate’’ in the rather simple proxies that balance costs savings against sense of converting individual goods into reduction in consumer choice. components of a single physical object U.S. v. MICROSOFT CORP. 89 Cite as 253 F.3d 34 (D.C. Cir. 2001)

(e.g., a computer as it leaves the OEM, or indirect industry custom test looks at firms a disk or sets of disks), without any norma- that, unlike the defendant, may not have tive implication that such integration is integrated the tying and tied goods. Both desirable or achieves special advantages. tests compare incomparables—the defen- Cf. United States v. Microsoft Corp., 147 dant’s decision to bundle in the presence of F.3d 935, 950 (D.C.Cir.1998) (‘‘Microsoft integration, on the one hand, and consum- II’’).) Microsoft contends not only that its er and competitor calculations in its ab- integration of IE into Windows is innova- sence, on the other. If integration has tive and beneficial but also that it requires efficiency benefits, these may be ignored non-removal of IE. In our discussion of by the Jefferson Parish proxies. Because monopoly maintenance we find that these one cannot be sure beneficial integration claims fail the efficiency balancing applica- will be protected by the other elements of ble in that context. But the separate- the per se rule, simple application of that products analysis is supposed to perform rule’s separate-products test may make its function as a proxy without embarking consumers worse off. on any direct analysis of efficiency. Ac- cordingly, Microsoft’s implicit argument— In light of the monopoly maintenance that in this case looking to a competitive section, obviously, we do not find that Mi- fringe is inadequate to evaluate fully its crosoft’s integration is welfare-enhancing potentially innovative technological inte- or that it should be absolved of tying liabil- gration, that such a comparison is between ity. Rather, we heed Microsoft’s warning apples and oranges—poses a legitimate ob- that the separate-products element of the jection to the operation of Jefferson Par- per se rule may not give newly integrated ish’s separate-products test for the per se products a fair shake. rule. In fact there is merit to Microsoft’s B. Per Se Analysis Inappropriate for broader argument that Jefferson Parish’s this Case. consumer demand test would ‘‘chill innovation to the detriment of consumers by We now address directly the larger preventing firms from integrating into question as we see it: whether standard their products new functionality previously per se analysis should be applied ‘‘off the provided by standalone products—and shelf’’ to evaluate the defendant’s tying hence, by definition, subject to separate arrangement, one which involves software consumer demand.’’ Appellant’s Opening that serves as a platform for third-party Br. at 69. The per se rule’s direct con- applications. There is no doubt that ‘‘[i]t sumer demand and indirect industry cus- is far too late in the history of our anti- tom inquiries are, as a general matter, trust jurisprudence to question the propo- backward-looking and therefore systemat- sition that certain tying arrangements ically poor proxies for overall efficiency in pose an unacceptable risk of stifling com- the presence of new and innovative inte- petition and therefore are unreasonable gration. See 10 AREEDA ET AL., ANTITRUST ‘per se.’ ’’ Jefferson Parish, 466 U.S. at 9, LAW ¶ 1746, at 224–29; Amicus Brief of 104 S.Ct. 1551 (emphasis added). But Lawrence Lessig at 24–25, and sources there are strong reasons to doubt that the cited therein (brief submitted regarding integration of additional software function- Conclusions of Law). The direct consumer ality into an OS falls among these arrange- demand test focuses on historic consumer ments. Applying per se analysis to such behavior, likely before integration, and the an amalgamation creates undue risks of 90 253 FEDERAL REPORTER, 3d SERIES

error and of deterring welfare-enhancing sale of desired films on the purchase of innovation. undesired films); U.S. Steel Corp. v. Fort- The Supreme Court has warned that ner Enters., Inc., 429 U.S. 610, 97 S.Ct. ‘‘ ‘[i]t is only after considerable experience 861, 51 L.Ed.2d 80 (1977) (‘‘Fortner II’’) with certain business relationships that (defendant steel company conditioned ac- courts classify them as per se viola- cess to low interest loans on the purchase tionsTTTT’ ’’ Broad. Music, 441 U.S. at 9, of the defendant’s prefabricated homes); 99 S.Ct. 1551 (quoting Topco Assocs., 405 Jefferson Parish, 466 U.S. 2, 104 S.Ct. U.S. at 607–08, 92 S.Ct. 1126); accord 1551, 80 L.Ed.2d 2 (1984) (defendant hos- Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 pital conditioned use of its operating rooms U.S. 36, 47–59, 97 S.Ct. 2549, 53 L.Ed.2d on the purchase of anesthesiological ser- 568 (1977); White Motor Co. v. United vices from a medical group associated with States, 372 U.S. 253, 263, 83 S.Ct. 696, 9 the hospital); Eastman Kodak, 504 U.S. L.Ed.2d 738 (1963); Jerrold Elecs., 187 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992) F.Supp. at 555–58, 560–61; see also Frank (defendant photocopying machine manu- H. Easterbrook, Allocating Antitrust De- facturer conditioned the sale of replace- cisionmaking Tasks, 76 GEO. L.J. 305, 308 ment parts for its machines on the use of (1987). Yet the sort of tying arrangement the defendant’s repair services). attacked here is unlike any the Supreme Court has considered. The early Supreme In none of these cases was the tied good Court cases on tying dealt with arrange- physically and technologically integrated ments whereby the sale or lease of a pat- with the tying good. Nor did the defen- ented product was conditioned on the pur- dants ever argue that their tie improved chase of certain unpatented products from the value of the tying product to users and the patentee. See Motion Picture Pat- to makers of complementary goods. In ents, 243 U.S. 502, 37 S.Ct. 416, 61 L.Ed. those cases where the defendant claimed 871 (1917); United Shoe Mach., 258 U.S. that use of the tied good made the tying 451, 42 S.Ct. 363, 66 L.Ed. 708 (1922); good more valuable to users, the Court IBM Corp. v. United States, 298 U.S. 131, ruled that the same result could be 56 S.Ct. 701, 80 L.Ed. 1085 (1936); Int’l achieved via quality standards for substi- Salt, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 tutes of the tied good. See, e.g., Int’l Salt, (1947). Later Supreme Court tying cases 332 U.S. at 397–98, 68 S.Ct. 12; IBM, 298 did not involve market power derived from U.S. at 138–40, 56 S.Ct. 701. Here Micro- patents, but continued to involve contrac- soft argues that IE and Windows are an tual ties. See Times–Picayune, 345 U.S. integrated physical product and that the 594, 73 S.Ct. 872, 97 L.Ed. 1277 (1953) bundling of IE APIs with Windows makes (defendant newspaper conditioned the pur- the latter a better applications platform for chase of ads in its evening edition on the third-party software. It is unclear how purchase of ads in its morning edition); N. the benefits from IE APIs could be Pac. Ry., 356 U.S. 1, 78 S.Ct. 514, 2 achieved by quality standards for different L.Ed.2d 545 (1958) (defendant railroad browser manufacturers. We do not pass leased land only on the condition that judgment on Microsoft’s claims regarding products manufactured on the land be the benefits from integration of its APIs. shipped on its railways); United States v. We merely note that these and other nov- Loew’s Inc., 371 U.S. 38, 83 S.Ct. 97, 9 el, purported efficiencies suggest that judi- L.Ed.2d 11 (1962) (defendant distributor of cial ‘‘experience’’ provides little basis for copyrighted feature films conditioned the believing that, ‘‘because of their pernicious U.S. v. MICROSOFT CORP. 91 Cite as 253 F.3d 34 (D.C. Cir. 2001)

effect on competition and lack of any re- that most resembles the present one is deeming virtue,’’ a software firm’s deci- Telex Corp. v. IBM Corp., 367 F.Supp. 258 sions to sell multiple functionalities as a (N.D.Okla.1973), rev’d on other grounds, package should be ‘‘conclusively presumed 510 F.2d 894 (10th Cir.1975). Just as Mi- to be unreasonable and therefore illegal crosoft integrated web browsing into its without elaborate inquiry as to the precise OS, IBM in the 1970s integrated memory harm they have caused or the business into its CPUs, a hardware platform. A excuse for their use.’’ N. Pac. Ry., 356 peripheral manufacturer alleged a tying U.S. at 5, 78 S.Ct. 514 (emphasis added). violation, but the District Court dismissed Nor have we found much insight into the claim because it thought it inappropri- software integration among the decisions ate to enmesh the courts in product design of lower federal courts. Most tying cases decisions. Id. at 347. The court’s discus- in the computer industry involve bundling sion of the tying claim was brief and did with hardware. See, e.g., Digital Equip. not dwell on the effects of the integration Corp. v. Uniq Digital Techs., Inc., 73 F.3d on competition or efficiencies. Nor did the 756, 761 (7th Cir.1996) (Easterbrook, J.) court consider whether per se analysis of (rejecting with little discussion the notion the alleged tie was wise. that bundling of OS with a computer is a tie of two separate products); Datagate, We have found four antitrust cases in- Inc. v. Hewlett–Packard Co., 941 F.2d 864, volving arrangements in which a software 870 (9th Cir.1991) (holding that plaintiff’s program is tied to the purchase of a soft- allegation that defendant conditioned its ware platform—two district court cases software on purchase of its hardware was and two appellate court cases, including sufficient to survive summary judgment); one from this court. The first case, Inno- Digidyne Corp. v. Data Gen. Corp., 734 vation Data Processing, Inc. v. IBM F.2d 1336, 1341–47 (9th Cir.1984) (holding Corp., 585 F.Supp. 1470 (D.N.J.1984), in- that defendant’s conditioning the sale of its volved an allegation that IBM bundled OS on the purchase of its CPU constitutes with its OS a utility used to transfer data a per se tying violation); Cal. Computer from a tape drive to a computer’s disk Prods., 613 F.2d at 743–44 (holding that drive. Although the court mentioned the defendant’s integration into its CPU of a efficiencies achieved by bundling, it ulti- disk controller designed for its own disk drives was a useful innovation and not an mately dismissed the per se tying claim impermissible attempt to monopolize); because IBM sold a discounted version of ILC Peripherals Leasing Corp. v. IBM the OS without the utility. Id. at 1475–76. Corp., 448 F.Supp. 228, 233 (N.D.Cal.1978) The second case, A.I. Root Co. v. Comput- (finding that defendant’s integration of er/Dynamics, Inc., 806 F.2d 673 (6th Cir. magnetic disks and a head/disk assembly 1986), was brought by a business customer was not an unlawful tie), aff’d per curiam who claimed that an OS manufacturer ille- sub. nom. Memorex Corp. v. IBM Corp., gally conditioned the sale of its OS on the 636 F.2d 1188 (9th Cir.1980); see also purchase of other software applications. Transamerica Computer Co. v. IBM The court quickly disposed of the case on Corp., 698 F.2d 1377, 1382–83 (9th Cir. the ground that defendant Computer/Dy- 1983) (finding lawful defendant’s design namics had no market power. Id. at 675– changes that rendered plaintiff peripheral 77. There was no mention of the efficien- maker’s tape drives incompatible with the cies from the tie. The third case, Caldera, defendant’s CPU). The hardware case Inc. v. Microsoft Corp., 72 F.Supp.2d 1295 92 253 FEDERAL REPORTER, 3d SERIES

(D.Utah 1999), involved a complaint that plication of per se analysis. See Broad. the technological integration of MS–DOS Music, 441 U.S. at 10–16, 99 S.Ct. 1551 and Windows 3.1 into Windows 95 consti- (refusing to apply per se analysis to defen- tuted a per se tying violation. The court dant’s blanket licenses even though those formulated the ‘‘single product’’ issue in licenses had been thoroughly investigated terms of whether the tie constituted a by the Department of Justice and were the technological improvement, ultimately con- subject of a consent decree that had been cluding that Microsoft was not entitled to reviewed by numerous courts). summary judgment on that issue. Id. at 1322–28. While the paucity of cases examining software bundling suggests a high risk The software case that bears the great- that per se analysis may produce inaccu- est resemblance to that at bar is, not sur- rate results, the nature of the platform prisingly, Microsoft II, 147 F.3d 935, software market affirmatively suggests where we examined the bundling of IE that per se rules might stunt valuable in- with Windows 95. But the issue there was novation. We have in mind two reasons. whether the bundle constituted an ‘‘integrated product’’ as the term was used in a First, as we explained in the previous 1994 consent decree between the Depart- section, the separate-products test is a ment of Justice and Microsoft. Id. at 939. poor proxy for net efficiency from newly We did not consider whether Microsoft’s integrated products. Under per se analy- bundling should be condemned as per se sis the first firm to merge previously dis- illegal. We certainly did not make any tinct functionalities (e.g., the inclusion of finding that bundling IE with Windows starter motors in automobiles) or to elimi- had ‘‘no purpose except stifling of competi- nate entirely the need for a second function,’’ White Motor, 372 U.S. at 263, 83 tion (e.g., the invention of the stain-resis- S.Ct. 696, an important consideration in tant carpet) risks being condemned as defining the scope of any of antitrust law’s having tied two separate products because per se rules, see Cont’l T.V., 433 U.S. at at the moment of integration there will ap- 57–59, 97 S.Ct. 2549. While we believed pear to be a robust ‘‘distinct’’ market for our interpretation of the term ‘‘integrated the tied product. See 10 AREEDA ET AL., product’’ was consistent with the test for ANTITRUST LAW ¶ 1746, at 224. Rule of separate products under tying law, we reason analysis, however, affords the first made clear that the ‘‘antitrust question is mover an opportunity to demonstrate that of course distinct.’’ Microsoft II, 147 F.3d an efficiency gain from its ‘‘tie’’ adequately at 950 n. 14. We even cautioned that our offsets any distortion of consumer choice. conclusion that IE and Windows 95 were See Grappone, Inc. v. Subaru of New Eng- integrated was ‘‘subject to reexamination land, Inc., 858 F.2d 792, 799 (1st Cir.1988) on a more complete record.’’ Id. at 952. (Breyer, J.); see also Town Sound & Cus- To the extent that the decision completely tom Tops, Inc. v. Chrysler Motor Corp., disclaimed judicial capacity to evaluate 959 F.2d 468, 482 (3d Cir.1992); Kaiser ‘‘high-tech product design,’’ id., it cannot Aluminum & Chem. Sales, Inc. v. Avon- be said to conform to prevailing antitrust dale Shipyards, Inc., 677 F.2d 1045, 1048– doctrine (as opposed to resolution of the 49 n. 5 (5th Cir.1982). decree-interpretation issue then before us). In any case, mere review of asserted The failure of the separate-products test breaches of a consent decree hardly consti- to screen out certain cases of productive tutes enough ‘‘experience’’ to warrant ap- integration is particularly troubling in plat- U.S. v. MICROSOFT CORP. 93 Cite as 253 F.3d 34 (D.C. Cir. 2001)

form software markets such as that in same API if it is bundled with two differ- which the defendant competes. Not only ent software programs. It is also true is integration common in such markets, that OEMs can include APIs with the com- but it is common among firms without puters they sell, id., but diffusion of uni- market power. We have already reviewed form APIs by that route may be inferior. evidence that nearly all competitive OS First, many OEMs serve special subsets of vendors also bundle browsers. Moreover, Windows consumers, such as home or cor- plaintiffs do not dispute that OS vendors porate or academic users. If just one of can and do incorporate basic internet these OEMs decides not to bundle an API plumbing and other useful functionality because it does not benefit enough of its into their OSs. See Direct Testimony of clients, ISVs that use that API might have Richard Schmalensee ¶ 508, reprinted in 7 to bundle it with every copy of their pro- J.A. at 4462–64 (disk defragmentation, gram. Second, there may be a substantial memory management, peer-to-peer net- lag before all OEMs bundle the same set working or file sharing); 11/19/98 am Tr. of APIs—a lag inevitably aggravated by at 82–83 (trial testimony of Frederick the first phenomenon. In a field where Warren–Boulton), reprinted in 10 J.A. at programs change very rapidly, delays in 6427–28 (TCP/IP stacks). Firms without the spread of a necessary element (here, market power have no incentive to pack- the APIs) may be very costly. Of course, age different pieces of software together unless there are efficiency gains from do- these arguments may not justify Micro- ing so. The ubiquity of bundling in com- soft’s decision to bundle APIs in this case, petitive platform software markets should particularly because Microsoft did not give courts reason to pause before con- merely bundle with Windows the APIs demning such behavior in less competitive from IE, but an entire browser application markets. (sometimes even without APIs, see id.). A justification for bundling a component of Second, because of the pervasively inno- software may not be one for bundling the vative character of platform software markets, tying in such markets may produce entire software package, especially given efficiencies that courts have not previously the malleability of software code. See id. encountered and thus the Supreme Court ¶ ¶ 162–63; 12/9/98 am Tr. at 17 (trial tes- had not factored into the per se rule as timony of David Farber); 1/6/99 am Tr. at originally conceived. For example, the 6–7 (trial testimony of Franklin Fisher), bundling of a browser with OSs enables an reprinted in 11 J.A. at 7192–93; Direct independent software developer to count Testimony of Joachim Kempin ¶ 286, re- on the presence of the browser’s APIs, if printed in 6 J.A. at 3749. Furthermore, any, on consumers’ machines and thus to the interest in efficient API diffusion obvi- omit them from its own package. See ously supplies a far stronger justification Direct Testimony of Richard Schmalensee for simple price-bundling than for Micro- ¶ ¶ 230–31, 234, reprinted in 7 J.A. at soft’s contractual or technological bars to 4309–11, 4312; Direct Testimony of Mi- subsequent removal of functionality. But chael Devlin ¶ ¶ 12–21, reprinted in 5 J.A. our qualms about redefining the bound- at 3525–29; see also Findings of Fact ¶ 2. aries of a defendant’s product and the It is true that software developers can possibility of consumer gains from simpli- bundle the browser APIs they need with fying the work of applications developers their own products, see id. ¶ 193, but that makes us question any hard and fast ap- may force consumers to pay twice for the proach to tying in OS software markets. 94 253 FEDERAL REPORTER, 3d SERIES

There may also be a number of efficien- These arguments all point to one conclu- cies that, although very real, have been sion: we cannot comfortably say that bun- ignored in the calculations underlying the dling in platform software markets has so adoption of a per se rule for tying. We little ‘‘redeeming virtue,’’ N. Pac. Ry., 356 fear that these efficiencies are common in U.S. at 5, 78 S.Ct. 514, and that there technologically dynamic markets where would be so ‘‘very little loss to society’’ product development is especially unlikely from its ban, that ‘‘an inquiry into its costs to follow an easily foreseen linear pattern. in the individual case [can be] considered Take the following example from ILC Pe- [ ] unnecessary.’’ Jefferson Parish, 466 ripherals, 448 F.Supp. 228, a case concern- U.S. at 33–34, 104 S.Ct. 1551 (O’Connor, J., ing the evolution of disk drives for comput- concurring). We do not have enough em- ers. When IBM first introduced such pirical evidence regarding the effect of Mi- drives in 1956, it sold an integrated prod- crosoft’s practice on the amount of consumer surplus created or consumer choice uct that contained magnetic disks and disk foreclosed by the integration of added heads that read and wrote data onto disks. functionality into platform software to ex- Id. at 231. Consumers of the drives de- ercise sensible judgment regarding that manded two functions—to store data and entire class of behavior. (For some issues to access it all at once. In the first few we have no data.) ‘‘We need to know years consumers’ demand for storage in- more than we do about the actual impact creased rapidly, outpacing the evolution of of these arrangements on competition to magnetic disk technology. To satisfy that decide whether they TTT should be classi- demand IBM made it possible for consum- fied as per se violations of the Sherman ers to remove the magnetic disks from Act.’’ White Motor, 372 U.S. at 263, 83 drives, even though that meant consumers S.Ct. 696. Until then, we will heed the would not have access to data on disks wisdom that ‘‘easy labels do not always removed from the drive. This componen- supply ready answers,’’ Broad. Music, 441 tization enabled makers of computer pe- U.S. at 8, 99 S.Ct. 1551, and vacate the ripherals to sell consumers removable District Court’s finding of per se tying disks. Id. at 231–32. Over time, however, liability under Sherman Act § 1. We re- the technology of magnetic disks caught up mand the case for evaluation of Microsoft’s with demand for capacity, so that consum- tying arrangements under the rule of rea- ers needed few removable disks to store son. See Pullman–Standard v. Swint, 456 all their data. At this point IBM reinte- U.S. 273, 292, 102 S.Ct. 1781, 72 L.Ed.2d grated disks into their drives, enabling 66 (1982) (‘‘[W]here findings are infirm consumers to once again have immediate because of an erroneous view of the law, a access to all their data without a sacrifice remand is the proper course unless the in capacity. Id. A manufacturer of re- record permits only one resolution of the movable disks sued. But the District factual issue.’’). That rule more freely Court found the tie justified because it permits consideration of the benefits of satisfied consumer demand for immediate bundling in software markets, particularly access to all data, and ruled that disks and those for OSs, and a balancing of these disk heads were one product. Id. at 233. benefits against the costs to consumers A court hewing more closely to the trun- whose ability to make direct price/quality cated analysis contemplated by Northern tradeoffs in the tied market may have Pacific Railway would perhaps have over- been impaired. See Jefferson Parish, 466 looked these consumer benefits. U.S. at 25 nn.41–42, 104 S.Ct. 1551 (noting U.S. v. MICROSOFT CORP. 95 Cite as 253 F.3d 34 (D.C. Cir. 2001) that per se rule does not broadly permit [55] First, on remand, plaintiffs must consideration of procompetitive justifica- show that Microsoft’s conduct unreason- tions); id. at 34–35, 104 S.Ct. 1551 (O’Con- ably restrained competition. Meeting that nor, J., concurring); N. Pac. Ry., 356 U.S. burden ‘‘involves an inquiry into the actual at 5, 78 S.Ct. 514. effect’’ of Microsoft’s conduct on competition in the tied good market, Jefferson Our judgment regarding the compara- Parish, 466 U.S. at 29, 104 S.Ct. 1551, the tive merits of the per se rule and the rule putative market for browsers. To the ex- of reason is confined to the tying arrange- tent that certain aspects of tying injury ment before us, where the tying product is may depend on a careful definition of the software whose major purpose is to serve tied good market and a showing of barri- as a platform for third-party applications ers to entry other than the tying arrange- and the tied product is complementary ment itself, plaintiffs would have to estab- software functionality. While our reason- lish these points. See Jefferson Parish, ing may at times appear to have broader 466 U.S. at 29, 104 S.Ct. 1551 (‘‘This com- force, we do not have the confidence to petition [among anesthesiologists] takes speak to facts outside the record, which place in a market that has not been de- contains scant discussion of software inte- fined.’’); id. at 29 n. 48, 104 S.Ct. 1551 gration generally. Microsoft’s primary (‘‘[N]either the District Court nor the justification for bundling IE APIs is that Court of Appeals made any findings con- their inclusion with Windows increases the cerning the contract’s effect on entry bar- value of third-party software (and Win- riers.’’). But plaintiffs were required—and dows) to consumers. See Appellant’s had every incentive—to provide both a Opening Br. at 41–43. Because this claim definition of the browser market and barri- applies with distinct force when the tying ers to entry to that market as part of their product is platform software, we have no § 2 attempted monopolization claim; yet present basis for finding the per se rule they failed to do so. See supra Section inapplicable to software markets generally. III. Accordingly, on remand of the § 1 Nor should we be interpreted as setting a tying claim, plaintiffs will be precluded precedent for switching to the rule of rea- from arguing any theory of harm that son every time a court identifies an effi- depends on a precise definition of browsers ciency justification for a tying arrange- or barriers to entry (for example, network ment. Our reading of the record suggests effects from Internet protocols and exten- merely that integration of new functionali- sions embedded in a browser) other than ty into platform software is a common what may be implicit in Microsoft’s tying practice and that wooden application of per arrangement. se rules in this litigation may cast a cloud Of the harms left, plaintiffs must show over platform innovation in the market for that Microsoft’s conduct was, on balance, PCs, network computers and information anticompetitive. Microsoft may of course appliances. offer procompetitive justifications, and it is plaintiffs’ burden to show that the anticom- C. On Remand petitive effect of the conduct outweighs its benefit. Should plaintiffs choose to pursue a tying claim under the rule of reason, we note [56] Second, the fact that we have al- the following for the benefit of the trial ready considered some of the behavior court: plaintiffs allege to constitute tying viola- 96 253 FEDERAL REPORTER, 3d SERIES

tions in the monopoly maintenance section deed price bundled—that is, was Micro- does not resolve the § 1 inquiry. The two soft’s charge for Windows and IE higher practices that plaintiffs have most ardent- than its charge would have been for Win- ly claimed as tying violations are, indeed, dows alone? This will require plaintiffs to a basis for liability under plaintiffs’ § 2 resolve the tension between Findings of monopoly maintenance claim. These are Fact ¶ ¶ 136–37, which Microsoft interprets Microsoft’s refusal to allow OEMs to unin- as saying that no part of the bundled price stall IE or remove it from the Windows of Windows can be attributed to IE, and desktop, Findings of Fact ¶ ¶ 158, 203, Conclusions of Law, at 50, which says the 213, and its removal of the IE entry from opposite. Compare Direct Testimony of the Add/Remove Programs utility in Win- Paul Maritz ¶ ¶ 37, 296, reprinted in 6 J.A. dows 98, id. ¶ 170. See supra Section at 3656, 3753–54 (Microsoft did not II.B. In order for the District Court to ‘‘charge separately’’ for IE, but like all conclude these practices also constitute other major OS vendors included browsing § 1 tying violations, plaintiffs must dem- software at ‘‘no extra charge’’), with GX onstrate that their benefits—if any, see 202 at MS7 004343, esp. 004347, reprinted supra Sections II.B.1.b and II.B.2.b; in 22 J.A. at 14459, esp. 14463 (memo from Findings of Fact ¶ ¶ 176, 186, 193—are Christian Wildfeuer describing focus group outweighed by the harms in the tied prod- test used to price Windows 98 with IE 4), uct market. See Jefferson Parish, 466 and GX 1371 at MS7 003729–30, 003746, U.S. at 29, 104 S.Ct. 1551. If the District 003748, esp. 003750, reprinted in 15 J.A. at Court is convinced of net harm, it must 10306–07, 10323, 10325, esp. 10327 (Win- then consider whether any additional rem- dows 98 pricing and marketing memo), edy is necessary. and Findings of Fact ¶ 63 (identifying GX In Section II.B we also considered an- 202 as the basis for Windows 98 pricing). other alleged tying violation—the Windows If there is a positive price increment in 98 override of a consumer’s choice of de- Windows associated with IE (we know fault web browser. We concluded that there is no claim of price predation), this behavior does not provide a distinct plaintiffs must demonstrate that the anti- basis for § 2 liability because plaintiffs competitive effects of Microsoft’s price failed to rebut Microsoft’s proffered justifi- bundling outweigh any procompetitive jus- cation by demonstrating that harms in the tifications the company provides for it. In operating system market outweigh Micro- striking this balance, the District Court soft’s claimed benefits. See supra Section should consider, among other things, indi- II.B. On remand, however, although Mi- rect evidence of efficiency provided by crosoft may offer the same procompetitive ‘‘the competitive fringe.’’ See supra Sec- justification for the override, plaintiffs tion IV.A. Although this inquiry may ov- must have a new opportunity to rebut this erlap with the separate-products screen claim, by demonstrating that the anticom- under the per se rule, that is not its role petitive effect in the browser market is here. Because courts applying the rule of greater than these benefits. reason are free to look at both direct and [57] Finally, the District Court must indirect evidence of efficiencies from a tie, also consider an alleged tying violation there is no need for a screening device as that we did not consider under § 2 monop- such; thus the separate-products inquiry oly maintenance: price bundling. First, serves merely to classify arrangements as the court must determine if Microsoft in- subject to tying law, as opposed to, say, U.S. v. MICROSOFT CORP. 97 Cite as 253 F.3d 34 (D.C. Cir. 2001)

liability for exclusive dealing. See Times– Of course price bundling by competitive Picayune, 345 U.S. at 614, 73 S.Ct. 872 OS makers would tend to exonerate Micro- (finding a single product and then turning soft only if the sellers in question sold to a general rule of reason analysis under their browser/OS combinations exclusively § 1, though not using the term ‘‘tying’’); at a bundled price. If a competitive seller Foster v. Md. State Sav. & Loan Ass’n, offers a discount for a browserless version, 590 F.2d 928, 931, 933 (D.C.Cir.1978), cit- then—at least as to its OS and browser— ed in Jefferson Parish, 466 U.S. at 40, 104 the gains from bundling are outweighed by S.Ct. 1551 (O’Connor, J., concurring) those from separate choice. The evidence (same); see also Chawla v. Shell Oil Co., on discounts appears to be in conflict. Compare Direct Testimony of Richard 75 F.Supp.2d 626, 635, 643–44 (S.D.Tex. Schmalensee ¶ 241, reprinted in 7 J.A. at 1999) (considering a rule of reason tying 4315, with 1/6/99 pm Tr. at 42 (trial testi- claim after finding a single product under mony of Franklin Fisher). If Schmalensee the per se rule); Montgomery County is correct that nearly all OS makers do not Ass’n of Realtors v. Realty Photo Master offer a discount, then the harm from ty- Corp., 783 F.Supp. 952, 961 & n. 26 ing—obstruction of direct consumer (D.Md.1992), aff’d mem. 993 F.2d 1538 choice—would be theoretically created by (4th Cir.1993) (same). virtually all sellers: a customer who would If OS vendors without market power prefer an alternate browser is forced to also sell their software bundled with a pay the full price of that browser even browser, the natural inference is that sale though its value to him is only the incre- of the items as a bundle serves consumer ment in value over the bundled browser. (The result is similar to that from non- demand and that unbundled sale would removal, which forces consumers who want not, for otherwise a competitor could prof- the alternate browser to surrender disk itably offer the two products separately space taken up by the unused, bundled and capture sales of the tying good from browser.) If the failure to offer a price vendors that bundle. See 10 AREEDA ET AL., discount were universal, any impediment ANTITRUST LAW ¶ 1744b, at 197–98. It does to direct consumer choice created by Mi- appear that most if not all firms have sold crosoft’s price-bundled sale of IE with a browser with their OSs at a bundled Windows would be matched throughout price, beginning with IBM and its OS/2 the market; yet these OS suppliers on the Warp OS in September 1994, Findings of competitive fringe would have evidently Fact ¶ 140; see also Direct Testimony of found this price bundling on balance effi- Richard Schmalensee ¶ 212, reprinted in 7 cient. If Schmalensee’s assertions are ill- J.A. at 4300–01, and running to current founded, of course, no such inference could versions of Apple’s Mac OS, Caldera and be drawn. Red Hat’s Linux OS, Sun’s Solaris OS, Be’s BeOS, Santa Cruz Operation’s Unix- V. TRIAL PROCEEDINGS AND REMEDY Ware, Novell’s NetWare OS, and others, Microsoft additionally challenges the see Findings of Fact ¶ 153; Direct Testi- District Court’s procedural rulings on two mony of Richard Schmalensee ¶ ¶ 215–23, fronts. First, with respect to the trial 230, esp. table 5, reprinted in 7 J.A. at phase, Microsoft proposes that the court 4302–05, 4310; Direct Testimony of James mismanaged its docket by adopting an ex- Allchin ¶ ¶ 261–77, reprinted in 5 J.A. at pedited trial schedule and receiving evi- 3384–92. dence through summary witnesses. Sec- 98 253 FEDERAL REPORTER, 3d SERIES

ond, with respect to the remedies decree, On April 28, 2000, plaintiffs submitted Microsoft argues that the court improperly their proposed final judgment, accompa- ordered that it be divided into two sepa- nied by six new supporting affidavits and rate companies. Only the latter claim will several exhibits. In addition to a series of long detain us. The District Court’s trial- temporary conduct restrictions, plaintiffs phase procedures were comfortably within proposed that Microsoft be split into two the bounds of its broad discretion to con- independent corporations, with one conduct trials as it sees fit. We conclude, tinuing Microsoft’s operating systems busi- however, that the District Court’s reme- ness and the other undertaking the bal- dies decree must be vacated for three in- ance of Microsoft’s operations. Plaintiffs’ dependent reasons: (1) the court failed to Proposed Final Judgment at 2–3, reprint- hold a remedies-specific evidentiary hear- ed in 4 J.A. at 2473–74. Microsoft filed a ing when there were disputed facts; (2) ‘‘summary response’’ on May 10, contend- the court failed to provide adequate rea- ing both that the proposed decree was too sons for its decreed remedies; and (3) this severe and that it would be impossible to Court has revised the scope of Microsoft’s resolve certain remedies-specific factual liability and it is impossible to determine disputes ‘‘on a highly expedited basis.’’ to what extent that should affect the reme- Defendant’s Summary Response at 6–7, dies provisions. reprinted in 4 J.A. at 2587–88. Another A. Factual Background May 10 submission argued that if the Dis- trict Court considered imposing plaintiffs’ On April 3, 2000, the District Court con- proposed remedy, ‘‘then substantial discov- cluded the liability phase of the proceed- ery, adequate time for preparation and a ings by the filing of its Conclusions of Law holding that Microsoft had violated §§ 1 full trial on relief will be required.’’ De- and 2 of the Sherman Act. The court and fendant’s Position as to Future Proceed- the parties then began discussions of the ings at 2, reprinted in 4 J.A. at 2646. procedures to be followed in the imposition After the District Court revealed during of remedies. Initially, the District Court a May 24 hearing that it was prepared to signaled that it would enter relief only enter a decree without conducting ‘‘any after conducting a new round of proceed- further process,’’ 5/24/00 pm Tr. at 33, ings. In its Conclusions of Law, the court reprinted in 14 J.A. at 9866, Microsoft stated that it would issue a remedies order renewed its argument that the underlying ‘‘following proceedings to be established by factual disputes between the parties neces- further Order of the Court.’’ Conclusions sitated a remedies-specific evidentiary of Law, at 57. And, when during a post- hearing. In two separate offers of proof, trial conference, Microsoft’s counsel asked Microsoft offered to produce a number of whether the court ‘‘contemplate[d] further pieces of evidence, including the following: proceedings,’’ the judge replied, ‘‘Yes. Yes. I assume that there would be further 1 Testimony from Dr. Robert Cran- proceedings.’’ 4/4/00 Tr. at 8–9, 11, re- dall, a Senior Fellow at the Brook- printed in 4 J.A. at 2445–46, 2448. The ings Institution, that divestiture and District Court further speculated that dissolution orders historically have those proceedings might ‘‘replicate the ‘‘failed to improve economic welfare procedure at trial with testimony in writ- by reducing prices or increasing out- ten form subject to crossexamination.’’ Id. put.’’ Defendant’s Offer of Proof at at 11, reprinted in 4 J.A. at 2448. 2, reprinted in 4 J.A. at 2743. U.S. v. MICROSOFT CORP. 99 Cite as 253 F.3d 34 (D.C. Cir. 2001)

1 Testimony from Professor Kenneth crosoft in two ‘‘will make it more Elzinga, Professor of Economics at difficult for OEMs to provide cus- the University of Virginia, that plain- tomers with the tightly integrated tiffs’ proposed remedies would not product offerings they demand’’ in induce entry into the operating sys- part because ‘‘complementary prod- tems market. Id. at 4, reprinted in ucts created by unrelated companies 4 J.A. at 2745. do not work as well together as prod- 1 Testimony from Dean Richard ucts created by a single company.’’ Schmalensee, Dean of MIT’s Sloan Defendant’s Supplemental Offer of School of Management, that dividing Proof at 2, reprinted in 4 J.A. at Microsoft likely would ‘‘harm con- 2823. sumers through higher prices, lower Over Microsoft’s objections, the District output, reduced efficiency, and less Court proceeded to consider the merits of innovation’’ and would ‘‘produce im- the remedy and on June 7, 2000 entered mediate, substantial increases in the its final judgment. The court explained prices of both Windows and Office.’’ that it would not conduct ‘‘extended pro- Id. at 8, reprinted in 4 J.A. at 2749. ceedings on the form a remedy should Indeed, it would cause the price of take,’’ because it doubted that an eviden- Windows to triple. Id. tiary hearing would ‘‘give any significantly 1 Testimony from Goldman, Sachs & greater assurance that it will be able to Co. and from Morgan Stanley Dean identify what might be generally regarded Witter that dissolution would ad- as an optimum remedy.’’ Final Judg- versely affect shareholder value. Id. ment, at 62. The bulk of Microsoft’s prof- at 17, 19, reprinted in 4 J.A. at 2758, fered facts were simply conjectures about 2760. future events, and ‘‘[i]n its experience the 1 Testimony from Microsoft Chairman Court has found testimonial predictions of Bill Gates that dividing Microsoft future events generally less reliable even ‘‘along the arbitrary lines proposed than testimony as to historical fact, and by the Government’’ would devastate crossexamination to be of little use in en- the company’s proposed Next Gener- hancing or detracting from their accura- ation Windows Services platform, cy.’’ Id. Nor was the court swayed by which would allow software develop- Microsoft’s ‘‘profession of surprise’’ at the ers to write web-based applications possibility of structural relief. Id. at 61. that users could access from a wide ‘‘From the inception of this case Microsoft range of devices. Id. at 21–22, re- knew, from well-established Supreme printed in 4 J.A. at 2762–63. Court precedents dating from the begin- 1 Testimony from Steve Ballmer, Mi- ning of the last century, that a mandated crosoft’s President and CEO, that divestiture was a possibility, if not a proba- Microsoft is organized as a unified bility, in the event of an adverse result at company and that ‘‘there are no nat- trial.’’ Id. ural lines along which Microsoft The substance of the District Court’s could be broken up without causing remedies order is nearly identical to plain- serious problems.’’ Id. at 23, re- tiffs’ proposal. The decree’s centerpiece is printed in 4 J.A. at 2764. the requirement that Microsoft submit a 1 Testimony from Michael Capellas, proposed plan of divestiture, with the com- CEO of Compaq, that splitting Mi- pany to be split into an ‘‘Operating Sys- 100 253 FEDERAL REPORTER, 3d SERIES

tems Business,’’ or ‘‘OpsCo,’’ and an ‘‘Ap- ute any other Microsoft software product.’’ plications Business,’’ or ‘‘AppsCo.’’ Final Id. And § 3.g imposes a ‘‘Restriction on Judgment, Decree §§ 1.a, l.c.i, at 64. Op- Binding Middleware Products to Operat- sCo would receive all of Microsoft’s operating System Products’’ unless Microsoft ing systems, such as Windows 98 and Win- also offers consumers ‘‘an otherwise identi- dows 2000, while AppsCo would receive cal version’’ of the operating system with- the remainder of Microsoft’s businesses, out the middleware. Id. including IE and Office. The District Court identified four reasons for its ‘‘reluc- B. Trial Proceedings tant[ ]’’ conclusion that ‘‘a structural remedy has become imperative.’’ Id. at 62. [58–60] Microsoft’s first contention— First, Microsoft ‘‘does not yet concede that that the District Court erred by adopting any of its business practices violated the an expedited trial schedule and receiving Sherman Act.’’ Id. Second, the company evidence through summary witnesses—is consequently ‘‘continues to do business as easily disposed of. Trial courts have ex- it has in the past.’’ Id. Third, Microsoft traordinarily broad discretion to determine ‘‘has proved untrustworthy in the past.’’ the manner in which they will conduct Id. And fourth, the Government, whose trials. ‘‘This is particularly true in a case officials ‘‘are by reason of office obliged such as the one at bar where the proceed- and expected to consider—and to act in— ings are being tried to the court without a the public interest,’’ won the case, ‘‘and for jury.’’ Eli Lilly & Co., Inc. v. Generix that reason alone have some entitlement to Drug Sales, Inc., 460 F.2d 1096, 1105 (5th a remedy of their choice.’’ Id. at 62–63. Cir.1972). In such cases, ‘‘[a]n appellate The decree also contains a number of court will not interfere with the trial interim restrictions on Microsoft’s conduct. court’s exercise of its discretion to control For instance, Decree § 3.b requires Micro- its docket and dispatch its business TTT soft to disclose to third-party developers except upon the clearest showing that the the APIs and other technical information procedures have resulted in actual and necessary to ensure that software effec- substantial prejudice to the complaining tively interoperates with Windows. Id. at litigant.’’ Id. Microsoft fails to clear this 67. ‘‘To facilitate compliance,’’ § 3.b fur- high hurdle. Although the company ther requires that Microsoft establish ‘‘a claims that setting an early trial date in- secure facility’’ at which third-party repre- hibited its ability to conduct discovery, it sentatives may ‘‘study, interrogate and in- never identified a specific deposition or teract with relevant and necessary por- document it was unable to obtain. And tions of [Microsoft platform software] while Microsoft now argues that the use of source code.’’ Id. Section 3.e, entitled summary witnesses made inevitable the ‘‘Ban on Exclusive Dealing,’’ forbids Micro- improper introduction of hearsay evidence, soft from entering contracts which oblige the company actually agreed to the Dis- third parties to restrict their ‘‘develop- trict Court’s proposal to limit each side to ment, production, distribution, promotion 12 summary witnesses. 12/2/98 am Tr. at or use of, or payment for’’ non-Microsoft 11, reprinted in 21 J.A. at 14083 (court platformlevel software. Id. at 68. Under admonishing Microsoft’s counsel to ‘‘[k]eep Decree § 3.f—‘‘Ban on Contractual Ty- in mind that both sides agreed to the ing’’—the company may not condition its number of witnesses’’). Even absent Mi- grant of a Windows license on a party’s crosoft’s agreement, the company’s chal- agreement ‘‘to license, promote, or distrib- lenge fails to show that this use of sum- U.S. v. MICROSOFT CORP. 101 Cite as 253 F.3d 34 (D.C. Cir. 2001) mary witnesses falls outside the trial verse party has waived its right to a hear- court’s wide latitude to receive evidence as ing, can that significant procedural step be it sees fit. General Elec. Co. v. Joiner, 522 eliminated.’’ (citation and internal quota- U.S. 136, 141–42, 118 S.Ct. 512, 139 tion marks omitted)). Other than a tem- L.Ed.2d 508 (1997). This is particularly porary restraining order, no injunctive re- true given the presumption that a judge lief may be entered without a hearing. who conducts a bench trial has ignored any See generally FED. R. CIV. P. 65. A hear- inadmissible evidence, Harris v. Rivera, ing on the merits—i.e., a trial on liability— 454 U.S. 339, 346, 102 S.Ct. 460, 70 does not substitute for a relief-specific evi- L.Ed.2d 530 (1981)—a presumption that dentiary hearing unless the matter of re- Microsoft makes no serious attempt to lief was part of the trial on liability, or overcome. Indeed, under appropriate cir- unless there are no disputed factual issues cumstances with appropriate instructions, regarding the matter of relief. we have in the past approved the use of [65] This rule is no less applicable in summary witnesses even in jury trials. antitrust cases. The Supreme Court ‘‘has See, e.g., United States v. Lemire, 720 F.2d recognized that a ‘full exploration of facts 1327 (D.C.Cir.1983). Therefore, neither is usually necessary in order (for the Dis- the use of the summary witnesses nor any trict Court) properly to draw (an antitrust) other aspect of the District Court’s con- decree’ so as ‘to prevent future violations duct of the trial phase amounted to an and eradicate existing evils.’ ’’ United abuse of discretion. States v. Ward Baking Co., 376 U.S. 327, 330–31, 84 S.Ct. 763, 11 L.Ed.2d 743 (1964) C. Failure to Hold an Evidentiary Hear- (quoting Associated Press v. United ing States, 326 U.S. 1, 22, 65 S.Ct. 1416, 89 [61, 62] The District Court’s remedies- L.Ed. 2013 (1945)). Hence a remedies de- phase proceedings are a different matter. cree must be vacated whenever there is ‘‘a It is a cardinal principle of our system of bona fide disagreement concerning sub- justice that factual disputes must be heard stantive items of relief which could be in open court and resolved through trial- resolved only by trial.’’ Id. at 334, 84 S.Ct. like evidentiary proceedings. Any other 763; cf. Sims, 161 F.2d at 89 (‘‘It has course would be contrary ‘‘to the spirit never been supposed that a temporary in- which imbues our judicial tribunals prohib- junction could issue under the Clayton Act iting decision without hearing.’’ Sims v. without giving the party against whom the Greene, 161 F.2d 87, 88 (3d Cir.1947). injunction was sought an opportunity to [63, 64] A party has the right to judi- present evidence on his behalf.’’). cial resolution of disputed facts not just as Despite plaintiffs’ protestations, there to the liability phase, but also as to appro- can be no serious doubt that the parties priate relief. ‘‘Normally, an evidentiary disputed a number of facts during the hearing is required before an injunction remedies phase. In two separate offers of may be granted.’’ United States v. proof, Microsoft identified 23 witnesses McGee, 714 F.2d 607, 613 (6th Cir.1983); who, had they been permitted to testify, see also Charlton v. Estate of Charlton, would have challenged a wide range of 841 F.2d 988, 989 (9th Cir.1988) (‘‘General- plaintiffs’ factual representations, including ly the entry or continuation of an injunc- the feasibility of dividing Microsoft, the tion requires a hearing. Only when the likely impact on consumers, and the effect facts are not in dispute, or when the ad- of divestiture on shareholders. To take 102 253 FEDERAL REPORTER, 3d SERIES but two examples, where plaintiffs’ econo- The presence of factual disputes thus mists testified that splitting Microsoft in distinguishes this case from the decisions two would be socially beneficial, the com- plaintiffs cite for the proposition that Mi- pany offered to prove that the proposed crosoft was not entitled to an evidentiary remedy would ‘‘cause substantial social hearing. Indeed, far from assisting plain- harm by raising software prices, lowering tiffs, these cases actually confirm the prop- rates of innovation and disrupting the evo- osition that courts must hold evidentiary lution of Windows as a software develop- hearings when they are confronted with ment platform.’’ Defendant’s Offer of disputed facts. In Ford Motor Co., the Proof at 6, reprinted in 4 J.A. at 2747. Supreme Court affirmed a divestiture or- And where plaintiffs’ investment banking der after emphasizing that the District experts proposed that divestiture might Court had ‘‘held nine days of hearings on actually increase shareholder value, Micro- the remedy.’’ 405 U.S. at 571, 92 S.Ct. soft proffered evidence that structural re- 1142. In Davoll v. Webb, 194 F.3d 1116 lief ‘‘would inevitably result in a significant (10th Cir.1999), the defendant both failed loss of shareholder value,’’ a loss that could to submit any offers of proof, and waived reach ‘‘tens—possibly hundreds—of bil- its right to an evidentiary hearing by ex- lions of dollars.’’ Id. at 19, reprinted in 4 pressly agreeing that relief should be de- J.A. at 2760. termined based solely on written submis- Indeed, the District Court itself appears sions. Id. at 1142–43. The defendants in to have conceded the existence of acute American Can Co. v. Mansukhani, 814 factual disagreements between Microsoft F.2d 421 (7th Cir.1987), were not entitled and plaintiffs. The court acknowledged to a hearing on remedies because they that the parties were ‘‘sharply divided’’ failed ‘‘to explain to the district court what and held ‘‘divergent opinions’’ on the likely new proof they would present to show’’ results of its remedies decree. Final that the proposed remedy was unwarrant- Judgment, at 62. The reason the court ed. Id. at 425. And in Socialist Workers declined to conduct an evidentiary hearing Party v. Illinois State Board of Elections, was not because of the absence of disputed 566 F.2d 586 (7th Cir.1977), aff’d, 440 U.S. facts, but because it believed that those 173, 99 S.Ct. 983, 59 L.Ed.2d 230 (1979), disputes could be resolved only through the Seventh Circuit held that a remedies- ‘‘actual experience,’’ not further proceed- specific hearing was unnecessary because ings. Id. But a prediction about future that case involved a pure question of legal events is not, as a prediction, any less a interpretation and hence ‘‘[t]here was no factual issue. Indeed, the Supreme Court factual dispute as to the ground on which has acknowledged that drafting an anti- the injunction was ordered.’’ Id. at 587. trust decree by necessity ‘‘involves predictions and assumptions concerning future Unlike the parties in Davoll, American economic and business events.’’ Ford Mo- Can, and Socialist Workers Party, Micro- tor Co. v. United States, 405 U.S. 562, 578, soft both repeatedly asserted its right to 92 S.Ct. 1142, 31 L.Ed.2d 492 (1972). Tri- an evidentiary hearing and submitted two al courts are not excused from their obli- offers of proof. The company’s ‘‘summary gation to resolve such matters through response’’ to the proposed remedy argued evidentiary hearings simply because they that it would be ‘‘impossible’’ to address consider the bedrock procedures of our underlying factual issues ‘‘on a highly ex- justice system to be ‘‘of little use.’’ Final pedited basis,’’ Defendant’s Summary Re- Judgment, at 62. sponse at 6–7, reprinted in 4 J.A. at 2587– U.S. v. MICROSOFT CORP. 103 Cite as 253 F.3d 34 (D.C. Cir. 2001)

88, and Microsoft further maintained that adequate explanation for the relief it or- the court could not issue a decree unless it dered. The Supreme Court has explained first permitted ‘‘substantial discovery, ade- that a remedies decree in an antitrust case quate time for preparation and a full trial must seek to ‘‘unfetter a market from anti- on relief.’’ Defendant’s Position as to Fu- competitive conduct,’’ Ford Motor Co., 405 ture Proceedings at 2, reprinted in 4 J.A. U.S. at 577, 92 S.Ct. 1142, to ‘‘terminate at 2646. And in 53 pages of submissions, the illegal monopoly, deny to the defendant Microsoft identified the specific evidence it the fruits of its statutory violation, and would introduce to challenge plaintiffs’ ensure that there remain no practices like- representations. ly to result in monopolization in the fu- [66] Plaintiffs further argue—and the ture,’’ United States v. United Shoe Mach. District Court held—that no evidentiary Corp., 391 U.S. 244, 250, 88 S.Ct. 1496, 20 hearing was necessary given that Micro- L.Ed.2d 562 (1968); see also United States soft long had been on notice that structur- v. Grinnell Corp., 384 U.S. 563, 577, 86 al relief was a distinct possibility. It is S.Ct. 1698, 16 L.Ed.2d 778 (1966). difficult to see why this matters. Whether The District Court has not explained Microsoft had advance notice that dissolu- how its remedies decree would accomplish tion was in the works is immaterial to those objectives. Indeed, the court devot- whether the District Court violated the ed a mere four paragraphs of its order to company’s procedural rights by ordering it explaining its reasons for the remedy. without an evidentiary hearing. To be They are: (1) Microsoft ‘‘does not yet con- sure, ‘‘claimed surprise at the district cede that any of its business practices court’s decision to consider permanent in- violated the Sherman Act’’; (2) Microsoft junctive relief does not, alone, merit rever- ‘‘continues to do business as it has in the sal.’’ Socialist Workers, 566 F.2d at 587. past’’; (3) Microsoft ‘‘has proved untrust- But in this case, Microsoft’s professed sur- worthy in the past’’; and (4) the Govern- prise does not stand ‘‘alone.’’ There is ment, whose officials ‘‘are by reason of something more: the company’s basic pro- office obliged and expected to consider— cedural right to have disputed facts re- and to act in—the public interest,’’ won the solved through an evidentiary hearing. case, ‘‘and for that reason alone have some In sum, the District Court erred when it entitlement to a remedy of their choice.’’ resolved the parties’ remedies-phase factu- Final Judgment, at 62–63. Nowhere did al disputes by consulting only the evidence the District Court discuss the objectives introduced during trial and plaintiffs’ rem- the Supreme Court deems relevant. edies phase submissions, without considering the evidence Microsoft sought to intro- E. Modification of Liability duce. We therefore vacate the District [68] Quite apart from its procedural Court’s final judgment, and remand with difficulties, we vacate the District Court’s instructions to conduct a remedies-specific final judgment in its entirety for the addi- evidentiary hearing. tional, independent reason that we have modified the underlying bases of liability. D. Failure to Provide an Adequate Ex- Of the three antitrust violations originally planation identified by the District Court, one is no [67] We vacate the District Court’s longer viable: attempted monopolization of remedies decree for the additional reason the browser market in violation of Sher- that the court has failed to provide an man Act § 2. One will be remanded for 104 253 FEDERAL REPORTER, 3d SERIES liability proceedings under a different legal gerous probability of success from the de- standard: unlawful tying in violation of fendants’ predatory conduct, without any § 1. Only liability for the § 2 monopoly- proof of the relevant market or of a realis- maintenance violation has been affirmed— tic probability that the defendants could and even that we have revised. Ordinari- achieve monopoly power in that market.’’ ly, of course, we review the grant or denial Id. at 459, 113 S.Ct. 884. Therefore, the of equitable relief under the abuse of dis- High Court reversed the Ninth Circuit’s cretion standard. See, e.g., Doran v. Sa- judgment affirming the District Court and lem Inn, Inc., 422 U.S. 922, 931–32, 95 remanded for further proceedings, ex- S.Ct. 2561, 45 L.Ed.2d 648 (1975) (‘‘[T]he pressly because ‘‘the jury’s verdict did not standard of appellate review is simply negate the possibility that the § 2 verdict whether the issuance of the injunction, in rested on the attempt to monopolize the light of the applicable standard, consti- grounds aloneTTTT’’ Id. Similarly, here, tuted an abuse of discretion.’’). For obvi- we cannot presume that a District Court ous reasons, the application of that stan- would exercise its discretion to fashion the dard is not sufficient to sustain the remedy same remedy where the erroneous in the case before us. We cannot determine grounds of liability were stripped from its whether the District Court has abused its consideration. discretion in remedying a wrong where the court did not exercise that discretion in The Eighth Circuit confronted a similar order to remedy the properly determined problem in Concord Boat Corp. v. Bruns- wrong. That is, the District Court deter- wick Corp., 207 F.3d 1039 (8th Cir.), cert. mined that the conduct restrictions and denied, 531 U.S. 979, 121 S.Ct. 428, 148 the pervasive structural remedy were to- L.Ed.2d 436 (2000). In that case, a group gether appropriate to remedy the three of boat builders brought an action against antitrust violations set forth above. The an engine manufacturer alleging violations court did not exercise its discretion to of Sherman Act §§ 1 and 2, and Clayton determine whether all, or for that matter, Act § 7. After a 10–week trial, the jury any, of those equitable remedies were re- found Brunswick liable on all three counts quired to rectify a § 2 monopoly mainte- and returned a verdict for over $44 million. nance violation taken alone. We therefore On appeal, the Eighth Circuit reversed the cannot sustain an exercise of discretion not Clayton Act claim. Id. at 1053. That yet made. court held that, as a consequence, it was By way of comparison, in Spectrum required to vacate the jury’s remedy in its Sports, Inc. v. McQuillan, 506 U.S. 447, entirety. Because the ‘‘verdict form did 113 S.Ct. 884, 122 L.Ed.2d 247 (1993), the not require the jury to consider what dam- Supreme Court reviewed a damages award ages resulted from each type of violation,’’ in a Sherman Act case. In that case, the the court could not ‘‘know what damages it trial court entered judgment upon a jury found to have been caused by the acquisi- verdict which did not differentiate among tions upon which the Section 7 claims were multiple possible theories of liability under based.’’ Id. at 1054. The court rejected § 2. The Supreme Court ultimately deter- the proposition that ‘‘the entire damage mined that the trial record could not legal- award may be upheld based on Bruns- ly support a finding that the defendant had wick’s Sherman Act liability alone,’’ id. at committed an illegal attempt to monopo- 1053, holding that, because ‘‘there is no lize, and that ‘‘the trial instructions allowed way to know what damages the jury as- the jury to infer specific intent and dan- signed to the Section 7 claims,’’ the defen- U.S. v. MICROSOFT CORP. 105 Cite as 253 F.3d 34 (D.C. Cir. 2001)

dant ‘‘would be entitled at the very least to F. On Remand a new damages trial on the boat builders’ [70] As a general matter, a district Sherman Act claims,’’ id. at 1054. court is afforded broad discretion to enter that relief it calculates will best remedy [69] Spectrum Sports and Concord the conduct it has found to be unlawful. Boat are distinguishable from the case be- See, e.g., Woerner v. United States Small fore us in that both involved the award of Bus. Admin., 934 F.2d 1277, 1279 money damages rather than equitable re- (D.C.Cir.1991) (recognizing that an appel- lief. Nonetheless, their reasoning is in- late court reviews a trial court’s decision structive. A court in both contexts must whether or not to grant equitable relief base its relief on some clear ‘‘indication of only for an abuse of discretion). This is no a significant causal connection between the less true in antitrust cases. See, e.g., Ford conduct enjoined or mandated and the vio- Motor Co., 405 U.S. at 573, 92 S.Ct. 1142 lation found directed toward the remedial (‘‘The District Court is clothed with ‘large goal intended.’’ 3 PHILLIP E. AREEDA & discretion’ to fit the decree to the special HERBERT HOVENKAMP, ANTITRUST LAW needs of the individual case.’’); Md. & Va. ¶ 653(b), at 91–92 (1996). In a case such Milk Producers Ass’n, Inc. v. United as the one before us where sweeping equi- States, 362 U.S. 458, 473, 80 S.Ct. 847, 4 table relief is employed to remedy multiple L.Ed.2d 880 (1960) (‘‘The formulation of violations, and some—indeed most—of the decrees is largely left to the discretion of findings of remediable violations do not the trial courtTTTT’’). And divestiture is a withstand appellate scrutiny, it is neces- common form of relief in successful anti- sary to vacate the remedy decree since the trust prosecutions: it is indeed ‘‘the most implicit findings of causal connection no important of antitrust remedies.’’ See, longer exist to warrant our deferential af- e.g., United States v. E.I. du Pont de firmance. Nemours & Co., 366 U.S. 316, 331, 81 S.Ct. In short, we must vacate the remedies 1243, 6 L.Ed.2d 318 (1961). decree in its entirety and remand the case On remand, the District Court must re- for a new determination. This court has consider whether the use of the structural drastically altered the District Court’s con- remedy of divestiture is appropriate with clusions on liability. On remand, the Dis- respect to Microsoft, which argues that it trict Court, after affording the parties a is a unitary company. By and large, cases proper opportunity to be heard, can fash- upon which plaintiffs rely in arguing for ion an appropriate remedy for Microsoft’s the split of Microsoft have involved the antitrust violations. In particular, the dissolution of entities formed by mergers court should consider which of the decree’s and acquisitions. On the contrary, the conduct restrictions remain viable in light Supreme Court has clarified that divesti- of our modification of the original liability ture ‘‘has traditionally been the remedy decision. While the task of drafting the for Sherman Act violations whose heart is remedies decree is for the District Court intercorporate combination and control,’’ in the first instance, because of the unusu- du Pont, 366 U.S. at 329, 81 S.Ct. 1243 ally convoluted nature of the proceedings (emphasis added), and that ‘‘[c]omplete di- thus far, and a desire to advance the ulti- vestiture is particularly appropriate where mate resolution of this important contro- asset or stock acquisitions violate the anti- versy, we offer some further guidance for trust laws,’’ Ford Motor Co., 405 U.S. at the exercise of that discretion. 573, 92 S.Ct. 1142 (emphasis added). 106 253 FEDERAL REPORTER, 3d SERIES

One apparent reason why courts have organized along product lines,’’ but rather not ordered the dissolution of unitary com- is housed in a single corporate headquar- panies is logistical difficulty. As the court ters and that it has explained in United States v. ALCOA, 91 only one sales and marketing organiza- F.Supp. 333, 416 (S.D.N.Y.1950), a ‘‘corpo- tion which is responsible for selling all of ration, designed to operate effectively as a the company’s products, one basic re- single entity, cannot readily be dismem- search organization, one product support bered of parts of its various operations organization, one operations department, without a marked loss of efficiency.’’ A one information technology department, corporation that has expanded by acquir- one facilities department, one purchas- ing its competitors often has preexisting ing department, one human resources internal lines of division along which it department, one finance department, may more easily be split than a corpora- one legal department and one public re- tion that has expanded from natural lations department. growth. Although time and corporate Defendant’s Offer of Proof at 23–26, re- modifications and developments may even- printed in 4 J.A. at 2764–67. If indeed tually fade those lines, at least the identifi- Microsoft is a unitary company, division able entities preexisted to create a temp- might very well require Microsoft to re- late for such division as the court might produce each of these departments in each later decree. With reference to those cor- new entity rather than simply allocate the porations that are not acquired by merger differing departments among them. and acquisition, Judge Wyzanski accurate- In devising an appropriate remedy, the ly opined in United Shoe: District Court also should consider wheth- United conducts all machine manufac- er plaintiffs have established a sufficient ture at one plant in Beverly, with one causal connection between Microsoft’s anti- set of jigs and tools, one foundry, one competitive conduct and its dominant posi- laboratory for machinery problems, one tion in the OS market. ‘‘Mere existence of managerial staff, and one labor force. It an exclusionary act does not itself justify takes no Solomon to see that this organ- full feasible relief against the monopolist to ism cannot be cut into three equal and create maximum competition.’’ 3 AREEDA viable parts. & HOVENKAMP, ANTITRUST LAW ¶ 650a, at 67. United States v. United Shoe Machine Rather, structural relief, which is ‘‘de- Corp., 110 F.Supp. 295, 348 (D.Mass.1953). signed to eliminate the monopoly altogeth- Depending upon the evidence, the Dis- er TTT require[s] a clearer indication of a trict Court may find in a remedies pro- significant causal connection between the ceeding that it would be no easier to split conduct and creation or maintenance of the Microsoft in two than United Shoe in market power.’’ Id. ¶ 653b, at 91–92 (em- three. Microsoft’s Offer of Proof in re- phasis added). Absent such causation, the sponse to the court’s denial of an eviden- antitrust defendant’s unlawful behavior tiary hearing included proffered testimony should be remedied by ‘‘an injunction from its President and CEO Steve Ballmer against continuation of that conduct.’’ Id. that the company ‘‘is, and always has been, ¶ 650a, at 67. a unified company without free-standing As noted above, see supra Section II.C, business units. Microsoft is not the result we have found a causal connection between of mergers or acquisitions.’’ Microsoft Microsoft’s exclusionary conduct and its further offered evidence that it is ‘‘not continuing position in the operating sys- U.S. v. MICROSOFT CORP. 107 Cite as 253 F.3d 34 (D.C. Cir. 2001) tems market only through inference. See VI. JUDICIAL MISCONDUCT 3 AREEDA & HOVENKAMP, ANTITRUST LAW Canon 3A(6) of the Code of Conduct for ¶ 653(b), at 91–92 (suggesting that ‘‘more United States Judges requires federal extensive equitable relief, particularly rem- judges to ‘‘avoid public comment on the edies such as divestiture designed to elimi- merits of [ ] pending or impending’’ cases. nate the monopoly altogether, TTT require Canon 2 tells judges to ‘‘avoid impropriety a clearer indication of significant causal and the appearance of impropriety in all connection between the conduct and cre- activities,’’ on the bench and off. Canon ation or maintenance of the market pow- 3A(4) forbids judges to initiate or consider er’’). Indeed, the District Court expressly ex parte communications on the merits of did not adopt the position that Microsoft pending or impending proceedings. Sec- would have lost its position in the OS tion 455(a) of the Judicial Code requires market but for its anticompetitive behav- judges to recuse themselves when their ior. Findings of Fact ¶ 411 (‘‘There is ‘‘impartiality might reasonably be ques- insufficient evidence to find that, absent tioned.’’ 28 U.S.C. § 455(a). Microsoft’s actions, Navigator and Java al- All indications are that the District ready would have ignited genuine competi- Judge violated each of these ethical pre- tion in the market for Intel-compatible PC cepts by talking about the case with re- operating systems.’’). If the court on reporters. The violations were deliberate, mand is unconvinced of the causal connec- repeated, egregious, and flagrant. The tion between Microsoft’s exclusionary con- only serious question is what consequences duct and the company’s position in the OS should follow. Microsoft urges us to dis- market, it may well conclude that divesti- qualify the District Judge, vacate the judg- ture is not an appropriate remedy. ment in its entirety and toss out the findings of fact, and remand for a new trial While we do not undertake to dictate to before a different District Judge. At the the District Court the precise form that other extreme, plaintiffs ask us to do noth- relief should take on remand, we note ing. We agree with neither position. again that it should be tailored to fit the wrong creating the occasion for the reme- A. The District Judge’s Communications dy. with the Press Immediately after the District Judge G. Conclusion entered final judgment on June 7, 2000, accounts of interviews with him began ap- In sum, we vacate the District Court’s pearing in the press. Some of the inter- remedies decree for three reasons. First, views were held after he entered final the District Court failed to hold an eviden- judgment. See Peter Spiegel, Microsoft tiary hearing despite the presence of rem- Judge Defends Post-trial Comments, FIN. edies-specific factual disputes. Second, TIMES (London), Oct. 7, 2000, at 4; John R. the court did not provide adequate reasons Wilke, For Antitrust Judge, Trust, or for its decreed remedies. Finally, we have Lack of It, Really Was the Issue—In an drastically altered the scope of Microsoft’s Interview, Jackson Says Microsoft Did liability, and it is for the District Court in the Damage to Its Credibility in Court, the first instance to determine the propri- WALL ST. J., June 8, 2000, at A1. The ety of a specific remedy for the limited District Judge also aired his views about ground of liability which we have upheld. the case to larger audiences, giving 108 253 FEDERAL REPORTER, 3d SERIES

speeches at a college and at an antitrust admissible evidence of the truthfulness of seminar. See James V. Grimaldi, Micro- its contents.’’). soft Judge Says Ruling at Risk; Every We are of course concerned about grant- Trial Decision Called ‘Vulnerable’, WASH. ing a request to disqualify a federal judge POST, Sept. 29, 2000, at E1; Alison when the material supporting it has not Schmauch, Microsoft Judge Shares Expe- been admitted in evidence. Disqualifica- riences, THE DARTMOUTH ONLINE, Oct. 3, tion is never taken lightly. In the wrong 2000. hands, a disqualification motion is a procedural weapon to harass opponents and de- From the published accounts, it is ap- lay proceedings. If supported only by ru- parent that the Judge also had been giving mor, speculation, or innuendo, it is also a secret interviews to select reporters before means to tarnish the reputation of a feder- entering final judgment—in some instanc- al judge. es long before. The earliest interviews we know of began in September 1999, shortly But the circumstances of this case are after the parties finished presenting evi- most unusual. By placing an embargo on dence but two months before the court the interviews, the District Judge ensured issued its Findings of Fact. See Joel that the full extent of his actions would not Brinkley & Steve Lohr, U.S. vs. Microsoft: be revealed until this case was on appeal. Pursuing a Giant; Retracing the Missteps Plaintiffs, in defending the judgment, do in the Microsoft Defense, N.Y. TIMES, June not dispute the statements attributed to 9, 2000, at A1. Interviews with reporters him in the press; they do not request an from the New York Times and Ken Aulet- evidentiary hearing; and they do not ar- ta, another reporter who later wrote a gue that Microsoft should have filed a book on the Microsoft case, continued motion in the District Court before raising throughout late 1999 and the first half of the matter on appeal. At oral argument, 2000, during which time the Judge issued plaintiffs all but conceded that the Judge his Findings of Fact, Conclusions of Law, violated ethical restrictions by discussing and Final Judgment. See id.; Ken Aulet- the case in public: ‘‘On behalf of the gov- ernments, I have no brief to defend the ta, Final Offer, THE NEW YORKER, Jan. 15, 2001, at 40. The Judge ‘‘embargoed’’ District Judge’s decision to discuss this these interviews; that is, he insisted that case publicly while it was pending on ap- the fact and content of the interviews re- peal, and I have no brief to defend the main secret until he issued the Final Judg- judge’s decision to discuss the case with reporters while the trial was proceeding, ment. even given the embargo on any reporting [71] Before we recount the statements concerning those conversations until after attributed to the District Judge, we need the trial.’’ 02/27/01 Ct. Appeals Tr. at 326. to say a few words about the state of the [72] We must consider too that the record. All we have are the published federal disqualification provisions reflect a accounts and what the reporters say the strong federal policy to preserve the actu- Judge said. Those accounts were not ad- al and apparent impartiality of the federal mitted in evidence. They may be hearsay. judiciary. Judicial misconduct may impli- See FED.R.EVID. 801(c); Metro. Council of cate that policy regardless of the means NAACP Branches v. FCC, 46 F.3d 1154, by which it is disclosed to the public. Cf. 1165 (D.C.Cir.1995) (‘‘We seriously ques- The Washington Post v. Robinson, 935 tion whether a New York Times article is F.2d 282, 291 (D.C.Cir.1991) (taking judi- U.S. v. MICROSOFT CORP. 109 Cite as 253 F.3d 34 (D.C. Cir. 2001) cial notice of newspaper articles to ascer- should also be offered separately: ‘‘You tain whether a fact was within public like the convenience of having a light me- knowledge). Also, in our analysis of the ter built in, integrated, so all you have to arguments presented by the parties, the do is press a button to get a reading. But specifics of particular conversations are do you think camera makers should also less important than their cumulative ef- serve photographers who want to use a fect. separate light meter, so they can hold it [73] For these reasons we have decid- up, move it around?’’ JOEL BRINKLEY & ed to adjudicate Microsoft’s disqualifica- STEVE LOHR, U.S. V. MICROSOFT 263 (2001). tion request notwithstanding the state of In other remarks, the Judge commented the record. The same reasons also war- on the integration at the heart of the case: rant a departure from our usual practice of ‘‘[I]t was quite clear to me that the motive declining to address issues raised for the of Microsoft in bundling the Internet first time on appeal: the ‘‘matter of what browser was not one of consumer conve- questions may be taken up and resolved nience. The evidence that this was done for the first time on appeal is one left for the consumer was not credibleTTTT primarily to the discretion of the courts of The evidence was so compelling that there appeals, to be exercised on the facts of was an ulterior motive.’’ Wilke, WALL ST. individual cases.’’ Singleton v. Wulff, 428 J. As for tying law in general, he criti- U.S. 106, 121, 96 S.Ct. 2868, 49 L.Ed.2d cized this court’s ruling in the consent 826 (1976); accord Hormel v. Helvering, decree case, saying it ‘‘was wrongheaded 312 U.S. 552, 556–57, 61 S.Ct. 719, 85 on several counts’’ and would exempt the L.Ed. 1037 (1941); Nat’l Ass’n of Mfrs. v. software industry from the antitrust laws. Dep’t of Labor, 159 F.3d 597, 605–06 BRINKLEY & LOHR, U.S. V. MICROSOFT 78, (D.C.Cir.1998). We will assume the truth 295; Brinkley & Lohr, N.Y. TIMES. of the press accounts and not send the Reports of the interviews have the Dis- case back for an evidentiary hearing on trict Judge describing Microsoft’s conduct, this subject. We reach no judgment on with particular emphasis on what he re- whether the details of the interviews were garded as the company’s prevarication, hu- accurately recounted. bris, and impenitence. In some of his The published accounts indicate that the secret meetings with reporters, the Judge District Judge discussed numerous topics offered his contemporaneous impressions relating to the case. Among them was his of testimony. He permitted at least one distaste for the defense of technological reporter to see an entry concerning Bill integration—one of the central issues in Gates in his ‘‘oversized green notebook.’’ the lawsuit. In September 1999, two KEN AULETTA, WORLD WAR 3.0, at 112 months before his Findings of Fact and six (2001). He also provided numerous after- months before his Conclusions of Law, and the-fact credibility assessments. He told in remarks that were kept secret until reporters that Bill Gates’ ‘‘testimony is after the Final Judgment, the Judge told inherently without credibility’’ and ‘‘[i]f you reporters from the New York Times that can’t believe this guy, who else can you he questioned Microsoft’s integration of a believe?’’ BRINKLEY & LOHR, U.S. V. MICRO- web browser into Windows. Stating that SOFT 278; Brinkley & Lohr, N.Y. TIMES; he was ‘‘not a fan of integration,’’ he drew see also Auletta, THE NEW YORKER, at 40. an analogy to a 35–millimeter camera with As for the company’s other witnesses, the an integrated light meter that in his view Judge is reported as saying that there 110 253 FEDERAL REPORTER, 3d SERIES

‘‘were times when I became impatient with has extraordinary ability and needs a little Microsoft witnesses who were giving discipline. I’ve often said to colleagues speeches.’’ ‘‘[T]hey were telling me things that Gates would be better off if he had I just flatly could not credit.’’ Brinkley & finished Harvard.’’ AULETTA, WORLD WAR Lohr, N.Y. TIMES. In an interview given 3.0, at 168–69; see also Auletta, THE NEW the day he entered the break-up order, he YORKER, at 46 (reporting the District summed things up: ‘‘Falsus in uno, falsus Judge’s statement that ‘‘they [Microsoft in omnibus’’: ‘‘Untrue in one thing, untrue and its executives] don’t act like grown- in everything.’’ ‘‘I don’t subscribe to that ups!’’ ‘‘[T]o this day they continue to deny as absolutely true. But it does lead one to they did anything wrong.’’). suspicion. It’s a universal human experience. If someone lies to you once, how The District Judge likened Microsoft’s much else can you credit as the truth?’’ writing of incriminating documents to drug Wilke, WALL ST. J. traffickers who ‘‘never figure out that they According to reporter Auletta, the Dis- shouldn’t be saying certain things on the trict Judge told him in private that, ‘‘I phone.’’ BRINKLEY & LOHR, U.S. V. MICRO- thought they [Microsoft and its executives] SOFT 6; Brinkley & Lohr, N.Y. TIMES. He didn’t think they were regarded as adult invoked the drug trafficker analogy again members of the community. I thought to denounce Microsoft’s protestations of they would learn.’’ AULETTA, WORLD WAR innocence, this time with a reference to the 3.0, at 14. The Judge told a college audi- notorious Newton Street Crew that terror- ence that ‘‘Bill Gates is an ingenious engi- ized parts of Washington, D.C. Reporter neer, but I don’t think he is that adept at Auletta wrote in The New Yorker that the business ethics. He has not yet come to Judge realise things he did (when Microsoft was went as far as to compare the company’s smaller) he should not have done when he declaration of innocence to the protesta- became a monopoly.’’ Spiegel, FIN. TIMES. tions of gangland killers. He was refer- Characterizing Gates’ and his company’s ring to five gang members in a racke- ‘‘crime’’ as hubris, the Judge stated that teering, drug-dealing, and murder trial ‘‘[i]f I were able to propose a remedy of that he had presided over four years my devising, I’d require Mr. Gates to write earlier. In that case, the three victims a book report’’ on Napoleon Bonaparte, had had their heads bound with duct ‘‘[b]ecause I think [Gates] has a Napoleon- tape before they were riddled with bul- ic concept of himself and his company, an lets from semi-automatic weapons. ‘‘On arrogance that derives from power and the day of the sentencing, the gang unalloyed success, with no leavening hard members maintained that they had done experience, no reverses.’’ Auletta, THE nothing wrong, saying that the whole NEW YORKER, at 41; see also AULETTA, case was a conspiracy by the white pow- WORLD WAR 3.0, at 397. The Judge appar- er structure to destroy them,’’ Jackson ently became, in Auletta’s words, ‘‘increas- recalled. ‘‘I am now under no illusions ingly troubled by what he learned about that miscreants will realize that other Bill Gates and couldn’t get out of his mind parts of society will view them that the group picture he had seen of Bill Gates way.’’ and Paul Allen and their shaggy-haired first employees at Microsoft.’’ The report- Auletta, THE NEW YORKER, at 40–41; AU- er wrote that the Judge said he saw in the LETTA, WORLD WAR 3.0, at 369–70 (same); picture ‘‘a smart-mouthed young kid who see also Auletta, THE NEW YORKER, at 46. U.S. v. MICROSOFT CORP. 111 Cite as 253 F.3d 34 (D.C. Cir. 2001)

The District Judge also secretly di- U.S. V. MICROSOFT 315. The Judge recited vulged to reporters his views on the reme- a ‘‘North Carolina mule trainer’’ story to dy for Microsoft’s antitrust violations. On explain his change in thinking from ‘‘[i]f it the question whether Microsoft was enti- ain’t broken, don’t try to fix it’’ and ‘‘I just tled to any process at the remedy stage, don’t think that [restructuring the compa- the Judge told reporters in May 2000 that ny] is something I want to try to do on my he was ‘‘not aware of any case authority own’’ to ordering Microsoft broken in two: that says I have to give them any due He had a trained mule who could do all process at all. The case is over. They kinds of wonderful tricks. One day lost.’’ Brinkley & Lohr, N.Y. TIMES. An- somebody asked him: ‘‘How do you do other reporter has the Judge asking it? How do you train the mule to do all ‘‘[w]ere the Japanese allowed to propose these amazing things?’’ ‘‘Well,’’ he an- terms of their surrender?’’ Spiegel, FIN. swered, ‘‘I’ll show you.’’ He took a 2– TIMES. The District Judge also told re- by–4 and whopped him upside the head. porters the month before he issued his The mule was reeling and fell to his break-up order that ‘‘[a]ssuming, as I knees, and the trainer said: ‘‘You just think they are, [ ] the Justice Department have to get his attention.’’ and the states are genuinely concerned about the public interest,’’ ‘‘I know they BRINKLEY & LOHR, U.S. V. MICROSOFT 278. have carefully studied all the possible op- The Judge added: ‘‘I hope I’ve got Micro- tions. This isn’t a bunch of amateurs. soft’s attention.’’ Id.; see also Grimaldi, They have consulted with some of the best WASH. POST (comments by the Judge blam- minds in America over a long period of ing the break-up on Microsoft’s intransi- time.’’ ‘‘I am not in a position to duplicate gence and on what he perceived to be that and re-engineer their work. There’s Microsoft’s responsibility for the failure of no way I can equip myself to do a better settlement talks); Spiegel, FIN. TIMES (the job than they have done.’’ Brinkley & Judge blaming break-up on Microsoft’s in- Lohr, N.Y. TIMES; cf. Final Judgment, at transigence). 62–63. B. Violations of the Code of Conduct for In February 2000, four months before United States Judges his final order splitting the company in two, the District Judge reportedly told [74] The Code of Conduct for United New York Times reporters that he was States Judges was adopted by the Judicial ‘‘not at all comfortable with restructuring Conference of the United States in 1973. the company,’’ because he was unsure It prescribes ethical norms for federal whether he was ‘‘competent to do that.’’ judges as a means to preserve the actual Brinkley & Lohr, N.Y. TIMES; see also and apparent integrity of the federal judi- BRINKLEY & LOHR, U.S. V. MICROSOFT 277– ciary. Every federal judge receives a copy 78 (same); cf. AULETTA, WORLD WAR 3.0, at of the Code, the Commentary to the Code, 370 (comment by the Judge in April 2000 the Advisory Opinions of the Judicial Con- that he was inclining toward behavioral ference’s Committee on Codes of Conduct, rather than structural remedies). A few and digests of the Committee’s informal, months later, he had a change of heart. unpublished opinions. See II GUIDE TO He told the same reporters that ‘‘with JUDICIARY POLICIES AND PROCEDURES (1973). what looks like Microsoft intransigence, a The material is periodically updated. breakup is inevitable.’’ Brinkley & Lohr, Judges who have questions about whether N.Y. TIMES; see also BRINKLEY & LOHR, their conduct would be consistent with the 112 253 FEDERAL REPORTER, 3d SERIES

Code may write to the Codes of Conduct Judge knew his comments would eventual- Committee for a written, confidential opin- ly receive widespread dissemination. ion. See Introduction, CODE OF CONDUCT. It is clear that the District Judge was The Committee traditionally responds not discussing purely procedural matters, promptly. A judge may also seek informal which are a permissible subject of public advice from the Committee’s circuit repre- comment under one of the Canon’s three sentative. narrowly drawn exceptions. He disclosed his views on the factual and legal matters While some of the Code’s Canons fre- at the heart of the case. His opinions quently generate questions about their ap- about the credibility of witnesses, the va- plication, others are straightforward and lidity of legal theories, the culpability of easily understood. Canon 3A(6) is an ex- the defendant, the choice of remedy, and ample of the latter. In forbidding federal so forth all dealt with the merits of the judges to comment publicly ‘‘on the merits action. It is no excuse that the Judge may of a pending or impending action,’’ Canon have intended to ‘‘educate’’ the public 3A(6) applies to cases pending before any about the case or to rebut ‘‘public misper- court, state or federal, trial or appellate. ceptions’’ purportedly caused by the par- See JEFFREY M. SHAMAN ET AL., JUDICIAL ties. See Grimaldi, WASH. POST; Microsoft CONDUCT AND ETHICS § 10.34, at 353 (3d Judge Says He May Step down from Case ed.2000). As ‘‘impending’’ indicates, the on Appeal, WALL ST. J., Oct. 30, 2000. If prohibition begins even before a case en- those were his intentions, he could have ters the court system, when there is rea- addressed the factual and legal issues as son to believe a case may be filed. Cf. E. he saw them—and thought the public WAYNE THODE, REPORTER’S NOTES TO CODE OF should see them—in his Findings of Fact, JUDICIAL CONDUCT 54 (1973). An action Conclusions of Law, Final Judgment, or in remains ‘‘pending’’ until ‘‘completion of the a written opinion. Or he could have held appellate process.’’ CODE OF CONDUCT Can- his tongue until all appeals were conclud- on 3A(6) cmt.; Comm. on Codes of Con- ed. duct, Adv. Op. No. 55 (1998). Far from mitigating his conduct, the The Microsoft case was ‘‘pending’’ dur- District Judge’s insistence on secrecy—his ing every one of the District Judge’s meet- embargo—made matters worse. Conceal- ings with reporters; the case is ‘‘pending’’ ment of the interviews suggests knowledge now; and even after our decision issues, it of their impropriety. Concealment also will remain pending for some time. The prevented the parties from nipping his im- District Judge breached his ethical duty proprieties in the bud. Without any under Canon 3A(6) each time he spoke to a knowledge of the interviews, neither the reporter about the merits of the case. Al- plaintiffs nor the defendant had a chance though the reporters interviewed him in to object or to seek the Judge’s removal private, his comments were public. Court before he issued his Final Judgment. was not in session and his discussion of the Other federal judges have been disquali- case took place outside the presence of the fied for making limited public comments parties. He provided his views not to about cases pending before them. See In court personnel assisting him in the case, re Boston’s Children First, 244 F.3d 164 but to members of the public. And these (1st Cir.2001); In re IBM Corp., 45 F.3d were not just any members of the public. 641 (2d Cir.1995); United States v. Cooley, Because he was talking to reporters, the 1 F.3d 985 (10th Cir.1993). Given the U.S. v. MICROSOFT CORP. 113 Cite as 253 F.3d 34 (D.C. Cir. 2001)

extent of the Judge’s transgressions in this Washington Post editorial, ‘‘[a]nyone who case, we have little doubt that if the par- sat in [the District Judge’s] courtroom ties had discovered his secret liaisons with during the trial had seen ample evidence the press, he would have been disqualified, of Microsoft’s sometimes thuggish tactics.’’ voluntarily or by court order. Cf. In re Ken Auletta, Maligning the Microsoft Barry, 946 F.2d 913 (D.C.Cir.1991) (per Judge, WASH. POST, Mar. 7, 2001, at A23. curiam); id. at 915 (Edwards, J., dissent- The District Judge’s repeated violations ing). of Canons 3A(6) and 3A(4) also violated In addition to violating the rule prohibit- Canon 2, which provides that ‘‘a judge ing public comment, the District Judge’s should avoid impropriety and the appear- reported conduct raises serious questions ance of impropriety in all activities.’’ CODE under Canon 3A(4). That Canon states OF CONDUCT Canon 2; see also In re Charge that a ‘‘judge should accord to every per- of Judicial Misconduct, 47 F.3d 399, 400 son who is legally interested in a proceed- (10th Cir. Jud. Council 1995) (‘‘The allega- ing, or the person’s lawyer, full right to be tions of extra-judicial comments cause the heard according to law, and, except as Council substantial concern under both authorized by law, neither initiate nor con- Canon 3A(6) and Canon 2 of the Judicial sider ex parte communications on the mer- Code of Conduct.’’). Canon 2A requires its, or procedures affecting the merits, of a federal judges to ‘‘respect and comply with pending or impending proceeding.’’ CODE the law’’ and to ‘‘act at all times in a OF CONDUCT Canon 3A(4). manner that promotes public confidence in What did the reporters convey to the the integrity and impartiality of the judi- District Judge during their secret ses- ciary.’’ CODE OF CONDUCT Canon 2A. The sions? By one account, the Judge spent a Code of Conduct is the law with respect to total of ten hours giving taped interviews the ethical obligations of federal judges, to one reporter. AULETTA, WORLD WAR 3.0, and it is clear the District Judge violated it at 14 n.*. We do not know whether he on multiple occasions in this case. The spent even more time in untaped conversa- rampant disregard for the judiciary’s ethi- tions with the same reporter, nor do we cal obligations that the public witnessed in know how much time he spent with others. this case undoubtedly jeopardizes ‘‘public But we think it safe to assume that these confidence in the integrity’’ of the District interviews were not monologues. Inter- Court proceedings. views often become conversations. When Another point needs to be stressed. reporters pose questions or make asser- Rulings in this case have potentially huge tions, they may be furnishing information, financial consequences for one of the na- information that may reflect their personal tion’s largest publicly-traded companies views of the case. The published accounts and its investors. The District Judge’s indicate this happened on at least one oc- secret interviews during the trial provided casion. Ken Auletta reported, for exam- a select few with inside information about ple, that he told the Judge ‘‘that Microsoft the case, information that enabled them employees professed shock that he thought and anyone they shared it with to antici- they had violated the law and behaved pate rulings before the Judge announced unethically,’’ at which time the Judge be- them to the world. Although he ‘‘embar- came ‘‘agitated’’ by ‘‘Microsoft’s ‘obstina- goed’’ his comments, the Judge had no way cy’.’’ Id. at 369. It is clear that Auletta of policing the reporters. For all he knew had views of the case. As he wrote in a there may have been trading on the basis 114 253 FEDERAL REPORTER, 3d SERIES

of the information he secretly conveyed. the judicial process. It has been argued The public cannot be expected to maintain that any ‘‘public comment by a judge con- confidence in the integrity and impartiality cerning the facts, applicable law, or merits of the federal judiciary in the face of such of a case that is sub judice in his court or conduct. any comment concerning the parties or their attorneys would raise grave doubts C. Appearance of Partiality about the judge’s objectivity and his will- [75] The Code of Conduct contains no ingness to reserve judgment until the close of the proceeding.’’ William G. Ross, Ex- enforcement mechanism. See THODE, RE- trajudicial Speech: Charting the Bound- PORTER’S NOTES TO CODE OF JUDICIAL CON- aries of Propriety, 2 GEO. J. LEGAL ETHICS DUCT 43. The Canons, including the one 589, 598 (1989). Some courts of appeals that requires a judge to disqualify himself have taken a hard line on public com- in certain circumstances, see CODE OF CON- ments, finding violations of § 455(a) for DUCT Canon 3C, are self-enforcing. There judicial commentary on pending cases that are, however, remedies extrinsic to the seems mild in comparison to what we are Code. One is an internal disciplinary pro- confronting in this case. See Boston’s ceeding, begun with the filing of a com- Children First, 244 F.3d 164 (granting plaint with the clerk of the court of appeals writ of mandamus ordering district judge pursuant to 28 U.S.C. § 372(c). Another to recuse herself under § 455(a) because of is disqualification of the offending judge public comments on class certification and under either 28 U.S.C. § 144, which re- standing in a pending case); In re IBM quires the filing of an affidavit while the Corp., 45 F.3d 641 (granting writ of man- case is in the District Court, or 28 U.S.C. damus ordering district judge to recuse § 455, which does not. Microsoft urges himself based in part on the appearance of the District Judge’s disqualification under partiality caused by his giving newspaper § 455(a): a judge ‘‘shall disqualify himself interviews); Cooley, 1 F.3d 985 (vacating in any proceeding in which his impartiality convictions and disqualifying district judge might reasonably be questioned.’’ 28 for appearance of partiality because he U.S.C. § 455(a). The standard for dis- appeared on television program Nightline qualification under § 455(a) is an objective and stated that abortion protestors in a one. The question is whether a reasonable case before him were breaking the law and and informed observer would question the that his injunction would be obeyed). judge’s impartiality. See In re Barry, 946 While § 455(a) is concerned with actual F.2d at 914; see also In re Aguinda, 241 and apparent impropriety, the statute re- F.3d 194, 201 (2d Cir.2001); RICHARD E. quires disqualification only when a judge’s FLAMM, JUDICIAL DISQUALIFICATION § 24.2.1 ‘‘impartiality might reasonably be ques- (1996). tioned.’’ 28 U.S.C. § 455(a). Although ‘‘The very purpose of § 455(a) is to pro- this court has condemned public judicial mote confidence in the judiciary by avoid- comments on pending cases, we have not ing even the appearance of impropriety gone so far as to hold that every violation whenever possible.’’ Liljeberg v. Health of Canon 3A(6) or every impropriety under Servs. Acquisition Corp., 486 U.S. 847, the Code of Conduct inevitably destroys 865, 108 S.Ct. 2194, 100 L.Ed.2d 855 the appearance of impartiality and thus (1988). As such, violations of the Code of violates § 455(a). See In re Barry, 946 Conduct may give rise to a violation of F.2d at 914; see also Boston’s Children § 455(a) if doubt is cast on the integrity of First, 244 F.3d at 168; United States v. U.S. v. MICROSOFT CORP. 115 Cite as 253 F.3d 34 (D.C. Cir. 2001)

Fortier, 242 F.3d 1224, 1229 (10th Cir. arguably reflected what he learned, or 2001). what he thought he learned, during the In this case, however, we believe the line proceedings. See Liteky v. United States, has been crossed. The public comments 510 U.S. 540, 554–55, 114 S.Ct. 1147, 127 were not only improper, but also would L.Ed.2d 474 (1994); United States v. Bar- lead a reasonable, informed observer to ry, 961 F.2d 260, 263 (D.C.Cir.1992). But question the District Judge’s impartiality. this ‘‘extrajudicial source’’ rule has no Public confidence in the integrity and im- bearing on the case before us. The prob- partiality of the judiciary is seriously jeop- lem here is not just what the District ardized when judges secretly share their Judge said, but to whom he said it and thoughts about the merits of pending cases when. His crude characterizations of Mi- with the press. Judges who covet publici- crosoft, his frequent denigrations of Bill ty, or convey the appearance that they do, Gates, his mule trainer analogy as a reason lead any objective observer to wonder for his remedy—all of these remarks and whether their judgments are being influ- others might not have given rise to a viola- enced by the prospect of favorable cover- tion of the Canons or of § 455(a) had he age in the media. Discreet and limited uttered them from the bench. See Liteky, public comments may not compromise a 510 U.S. at 555–56, 114 S.Ct. 1147; CODE judge’s apparent impartiality, but we have OF CONDUCT Canon 3A(6) (exception to pro- little doubt that the District Judge’s con- hibition on public comments for ‘‘state- duct had that effect. Appearance may be ments made in the course of the judge’s all there is, but that is enough to invoke official duties’’). But then Microsoft would the Canons and § 455(a). have had an opportunity to object, perhaps Judge Learned Hand spoke of ‘‘this even to persuade, and the Judge would America of ours where the passion for have made a record for review on appeal. publicity is a disease, and where swarms of It is an altogether different matter when foolish, tawdry moths dash with rapture the statements are made outside the court- into its consuming fireTTTT’’ LEARNED room, in private meetings unknown to the HAND, THE SPIRIT OF LIBERTY 132–33 (2d parties, in anticipation that ultimately the ed.1953). Judges are obligated to resist Judge’s remarks would be reported. this passion. Indulging it compromises Rather than manifesting neutrality and im- what Edmund Burke justly regarded as partiality, the reports of the interviews the ‘‘cold neutrality of an impartial judge.’’ with the District Judge convey the impres- Cold or not, federal judges must maintain sion of a judge posturing for posterity, the appearance of impartiality. What was trying to please the reporters with colorful true two centuries ago is true today: ‘‘Def- analogies and observations bound to wind erence to the judgments and rulings of up in the stories they write. Members of courts depends upon public confidence in the public may reasonably question wheth- the integrity and independence of judges.’’ er the District Judge’s desire for press CODE OF CONDUCT Canon 1 cmt. Public coverage influenced his judgments, indeed confidence in judicial impartiality cannot whether a publicity-seeking judge might survive if judges, in disregard of their consciously or subconsciously seek the ethical obligations, pander to the press. publicity-maximizing outcome. We be- We recognize that it would be extraordi- lieve, therefore, that the District Judge’s nary to disqualify a judge for bias or ap- interviews with reporters created an appearance of partiality when his remarks pearance that he was not acting impartial- 116 253 FEDERAL REPORTER, 3d SERIES ly, as the Code of Conduct and § 455(a) to the parties in the particular case, the require. risk that the denial of relief will produce injustice in other cases, and the risk of D. Remedies for Judicial Misconduct undermining the public’s confidence in the and Appearance of Partiality judicial process.’’ Id. at 864, 108 S.Ct. 1. Disqualification 2194. Although the Court was discussing § 455(a) in a slightly different context (the [76] Disqualification is mandatory for judgment there had become final after ap- conduct that calls a judge’s impartiality peal and the movant sought to have it into question. See 28 U.S.C. § 455(a); In vacated under Rule 60(b)), we believe the re School Asbestos Litig., 977 F.2d 764, 783 test it propounded applies as well to cases (3d Cir.1992). Section 455 does not pre- such as this in which the full extent of the scribe the scope of disqualification. Rath- disqualifying circumstances came to light er, Congress ‘‘delegated to the judiciary only while the appeal was pending. See In the task of fashioning the remedies that re School Asbestos Litig., 977 F.2d at 785. will best serve the purpose’’ of the disqual- Our application of Liljeberg leads us to ification statute. Liljeberg, 486 U.S. at conclude that the appropriate remedy for 862, 108 S.Ct. 2194. the violations of § 455(a) is disqualification [77] At a minimum, § 455(a) requires of the District Judge retroactive only to prospective disqualification of the offend- the date he entered the order breaking up ing judge, that is, disqualification from the Microsoft. We therefore will vacate that judge’s hearing any further proceedings in order in its entirety and remand this case the case. See United States v. Microsoft to a different District Judge, but will not Corp., 56 F.3d 1448, 1463–65 (D.C.Cir. set aside the existing Findings of Fact or 1995) (per curiam) (‘‘Microsoft I’’). Micro- Conclusions of Law (except insofar as spe- soft urges retroactive disqualification of cific findings are clearly erroneous or legal the District Judge, which would entail dis- conclusions are incorrect). qualification antedated to an earlier part of This partially retroactive disqualification the proceedings and vacatur of all subse- minimizes the risk of injustice to the par- quent acts. Cf. In re School Asbestos Li- ties and the damage to public confidence in tig., 977 F.2d at 786 (discussing remedy the judicial process. Although the viola- options). tions of the Code of Conduct and § 455(a) [78] ‘‘There need not be a draconian were serious, full retroactive disqualifica- remedy for every violation of § 455(a).’’ tion is unnecessary. It would unduly pe- Liljeberg, 486 U.S. at 862, 108 S.Ct. 2194. nalize plaintiffs, who were innocent and Liljeberg held that a district judge could unaware of the misconduct, and would be disqualified under § 455(a) after enter- have only slight marginal deterrent effect. ing final judgment in a case, even though Most important, full retroactive disquali- the judge was not (but should have been) fication is unnecessary to protect Micro- aware of the grounds for disqualification soft’s right to an impartial adjudication. before final judgment. The Court identified The District Judge’s conduct destroyed the three factors relevant to the question appearance of impartiality. Microsoft nei- whether vacatur is appropriate: ‘‘in deter- ther alleged nor demonstrated that it rose mining whether a judgment should be va- to the level of actual bias or prejudice. cated for a violation of § 455(a), it is ap- There is no reason to presume that every- propriate to consider the risk of injustice thing the District Judge did is suspect. U.S. v. MICROSOFT CORP. 117 Cite as 253 F.3d 34 (D.C. Cir. 2001)

See In re Allied–Signal Inc., 891 F.2d 974, unless they are clearly erroneous. See FED. 975–76 (1st Cir.1989); cf. Liberty Lobby, R.CIV.P. 52(a). Ordinarily, there is no ba- Inc. v. Dow Jones & Co., 838 F.2d 1287, sis for doubting that the District Court’s 1301–02 (D.C.Cir.1988). Although Micro- factual findings are entitled to the substan- soft challenged very few of the findings as tial deference the clearly erroneous stan- clearly erroneous, we have carefully re- dard entails. But of course this is no viewed the entire record and discern no ordinary case. Deference to a district basis to suppose that actual bias infected court’s factfindings presumes impartiality his factual findings. on the lower court’s part. When impar- The most serious judicial misconduct oc- tiality is called into question, how much curred near or during the remedial stage. deference is due? It is therefore commensurate that our remedy focus on that stage of the case. [80] The question implies that there is The District Judge’s impatience with what some middle ground, but we believe there he viewed as intransigence on the part of is none. As the rules are written, district the company; his refusal to allow an evi- court factfindings receive either full defer- dentiary hearing; his analogizing Micro- ence under the clearly erroneous standard soft to Japan at the end of World War II; or they must be vacated. There is no de his story about the mule—all of these out- novo appellate review of factfindings and of-court remarks and others, plus the no intermediate level between de novo and Judge’s evident efforts to please the press, clear error, not even for findings the court would give a reasonable, informed observ- of appeals may consider sub-par. See er cause to question his impartiality in Amadeo v. Zant, 486 U.S. 214, 228, 108 ordering the company split in two. S.Ct. 1771, 100 L.Ed.2d 249 (1988) (‘‘The To repeat, we disqualify the District District Court’s lack of precision, however, Judge retroactive only to the imposition of is no excuse for the Court of Appeals to the remedy, and thus vacate the remedy ignore the dictates of Rule 52(a) and en- order for the reasons given in Section V gage in impermissible appellate factfind- and because of the appearance of partiality ing.’’); Anderson v. City of Bessemer City, created by the District Judge’s miscon- 470 U.S. 564, 571–75, 105 S.Ct. 1504, 84 duct. L.Ed.2d 518 (1985) (criticizing district court practice of adopting a party’s pro- 2. Review of Findings of Fact and posed factfindings but overturning court of Conclusions of Law appeals’ application of ‘‘close scrutiny’’ to [79] Given the limited scope of our dis- such findings). qualification of the District Judge, we have Rule 52(a) mandates clearly erroneous let stand for review his Findings of Fact review of all district court factfindings: and Conclusions of Law. The severity of ‘‘Findings of fact, whether based on oral or the District Judge’s misconduct and the documentary evidence, shall not be set appearance of partiality it created have led aside unless clearly erroneous, and due us to consider whether we can and should regard shall be given to the opportunity of subject his factfindings to greater scrutiny. the trial court to judge of the credibility of For a number of reasons we have rejected the witnesses.’’ FED.R.CIV.P. 52(a). The any such approach. rule ‘‘does not make exceptions or purport The Federal Rules require that district to exclude certain categories of factual court findings of fact not be set aside findings from the obligation of a court of 118 253 FEDERAL REPORTER, 3d SERIES

appeals to accept a district court’s findings Constr. Co., 915 F.2d 770, 773 (1st Cir. unless clearly erroneous.’’ Pullman-Stan- 1990); cf. Bose Corp. v. Consumers Union dard v. Swint, 456 U.S. 273, 287, 102 S.Ct. of United States, Inc., 466 U.S. 485, 499, 1781, 72 L.Ed.2d 66 (1982); see also 104 S.Ct. 1949, 80 L.Ed.2d 502 (1984). Anderson, 470 U.S. at 574–75, 105 S.Ct. Thus, although Microsoft alleged only ap- 1504; Inwood Labs., Inc. v. Ives Labs., pearance of bias, not actual bias, we have Inc., 456 U.S. 844, 855–58, 102 S.Ct. 2182, reviewed the record with painstaking care 72 L.Ed.2d 606 (1982). The Supreme and have discerned no evidence of actual Court has emphasized on multiple occa- bias. See S. Pac. Communications Co. v. sions that ‘‘[i]n applying the clearly errone- AT & T, 740 F.2d 980, 984 (D.C.Cir.1984); ous standard to the findings of a district Cooley, 1 F.3d at 996 (disqualifying district court sitting without a jury, appellate judge for appearance of partiality but not- courts must constantly have in mind that ing that ‘‘the record of the proceedings their function is not to decide factual is- below TTT discloses no bias’’). sues de novo.’’ Zenith Radio Corp. v. In light of this conclusion, the District Hazeltine Research, Inc., 395 U.S. 100, Judge’s factual findings both warrant def- 123, 89 S.Ct. 1562, 23 L.Ed.2d 129 (1969); erence under the clear error standard of Anderson, 470 U.S. at 573, 105 S.Ct. 1504 review and, though exceedingly sparing in (quoting Zenith). citations to the record, permit meaningful [81] The mandatory nature of Rule appellate review. In reaching these con- 52(a) does not compel us to accept factfind- clusions, we have not ignored the District ings that result from the District Court’s Judge’s reported intention to craft his fact- misapplication of governing law or that findings and Conclusions of Law to mini- otherwise do not permit meaningful appel- mize the breadth of our review. The late review. See Pullman–Standard, 456 Judge reportedly told Ken Auletta that U.S. at 292, 102 S.Ct. 1781; Inwood Labs., ‘‘[w]hat I want to do is confront the Court 456 U.S. at 855 n. 15, 102 S.Ct. 2182. Nor of Appeals with an established factual rec- must we accept findings that are utterly ord which is a fait accompli.’’ AULETTA, WORLD WAR 3.0, at 230. He explained: deficient in other ways. In such a case, we ‘‘part of the inspiration for doing that is vacate and remand for further factfinding. that I take mild offense at their reversal of See 9 MOORE’S FEDERAL PRACTICE § 52.12[1] my preliminary injunction in the consent- (Matthew Bender 3d ed.2000); 9A decree case, where they went ahead and CHARLES A. WRIGHT & ARTHUR R. MILLER, made up about ninety percent of the facts FEDERAL PRACTICE AND PROCEDURE § 2577, on their own.’’ Id. Whether the District at 514–22 (2d ed.1995); cf. Icicle Seafoods, Judge takes offense, mild or severe, is Inc. v. Worthington, 475 U.S. 709, 714, 106 beside the point. Appellate decisions com- S.Ct. 1527, 89 L.Ed.2d 739 (1986); Pull- mand compliance, not agreement. We do man-Standard, 456 U.S. at 291–92, 102 not view the District Judge’s remarks as S.Ct. 1781. anything other than his expression of dis- [82] When there is fair room for argu- agreement with this court’s decision, and ment that the District Court’s factfindings his desire to provide extensive factual find- should be vacated in toto, the court of ings in this case, which he did. appeals should be especially careful in de- termining that the findings are worthy of VII. CONCLUSION the deference Rule 52(a) prescribes. See, The judgment of the District Court is e.g., Thermo Electron Corp. v. Schiavone affirmed in part, reversed in part, and HONEYWELL INTERN., INC. v. N.L.R.B. 119 Cite as 253 F.3d 119 (D.C. Cir. 2001)

remanded in part. We vacate in full the 1. Labor Relations O510 Final Judgment embodying the remedial Where employer and union entered order, and remand the case to the District into a ‘‘Competitiveness Agreement’’ which Court for reassignment to a different trial was one of three agreements among them judge for further proceedings consistent and which provided that employer could with this opinion. terminate it if specified financial arrangements for the plant in question were not made in the federal budget, the National , Labor Relations Board (NLRB) exceeded its authority by injecting itself into a contract dispute when it considered whether employer had made sufficient efforts to obtain funding and whether further efforts were futile, on theory the employer had HONEYWELL INTERNATIONAL, repudiated the agreement in its entirety, INC.,Petitioner, and when the employer had a sound argua- v. ble basis for its interpretation. National Labor Relations Act, § 8(a)(5), as amend- NATIONAL LABOR RELATIONS ed, 29 U.S.C.A. § 158(a)(5); Labor Man- BOARD, Respondent. agement Relations Act, 1947, § 301, 29 U.S.C.A. § 185. International Union, United Automo- bile, Aerospace & Agricultural Imple- 2. Labor Relations O510 ment Workers of America, UAW, Lo- The National Labor Relations Board cal 376, Intervenor. (NLRB) is empowered to interpret collec- tive bargaining agreements when doing so Nos. 00–1170 & 00–1274. is necessary to determine whether an un- United States Court of Appeals, fair labor practice has occurred, but the District of Columbia Circuit. federal courts, not the Board, are legisla- tively empowered to be the primary inter- Argued May 8, 2001. preters of contracts. Labor Management Decided June 29, 2001. Relations Act, 1947, § 301, 29 U.S.C.A. § 185.

3. Labor Relations O389 A petition was filed for review and a An employer could not be deemed to cross-application was filed for enforcement have refused to bargain collectively over a of an order of the National Labor Rela- particular subject when it had bargained tions Board (NLRB) finding that an em- over that subject matter and memorial- ployer committed an unfair labor practice. ized the results in a contract, though it The Court of Appeals, Randolph, Circuit later terminated the contract pursuant to Judge, held that the NLRB exceeded its its interpretation of its terms; once the authority by injecting itself into a contract National Labor Relations Board (NLRB) dispute when the employer had a sound determined that the contract covered a arguable basis for its interpretation. mandatory subject of bargaining, its inter- Petition for review granted and deci- pretive task was at an end, and if the sion set aside. parties wished to enforce their contract,