Über die Autorin bzw. den Autor

William H. Page is the Marshall M. Criser Eminent Scholar at the University of Florida's Levin School of Law. John E. Lopatka is the A. Robert Noll Distinguished Professor of Law at Penn State University's Dickinson School of Law.

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The Microsoft Case

The University of Chicago Press

Contents

Preface..........................................................................................ix1 Origins.......................................................................................1Ideological Sources of Antimonopolization Law....................................................2Microsoft's Predecessors: The Public Monopolization Case.........................................4Microsoft's Beginnings: A Post-Chicago Convergence...............................................192 Decisions.....................................................................................33Chronology.......................................................................................34The Liability Decisions..........................................................................35The Remedial Decisions...........................................................................70The Follow-on Private Litigation.................................................................78The European Commission Decision.................................................................803 Markets.......................................................................................85Two Systems of Belief about Operating Systems and Middleware.....................................86Network Effects and Related Economic Concepts....................................................91Defining Software Markets........................................................................964 Practices I: Integration......................................................................115A Preliminary Skirmish...........................................................................119Integration on Trial.............................................................................123Rethinking and Redefining Integration under Sherman Act Standards................................1295 Practices II: The Market Division Proposal, Exclusive Contracts, and Java.....................167The Market Division Proposal.....................................................................168The Exclusive Contracts..........................................................................184Java.............................................................................................1916 Remedies......................................................................................203The Goals of Antitrust Remedies..................................................................204Structural Remedies..............................................................................205Conduct Remedies.................................................................................212Damage Remedies..................................................................................224Aftermath........................................................................................243Notes............................................................................................249Index............................................................................................331

Chapter One

United States v. Microsoft is part of a long tradition of public monopolization enforcement that began in the late nineteenth century and gained a renewed urgency in the latter years of the New Deal. That tradition, however, was interrupted in the early 1980s, when the Antitrust Division of the U.S. Department of Justice voluntarily dismissed its case against IBM and settled its case against AT&T. Those administrative decisions reflected the influence of the Chicago School of antitrust analysis, which had cast doubt on populist ideas about the consequences of large firms' competitive practices, ideas that had shaped the law of monopolization, especially since the New Deal. Cases in the post-New Deal era had seemed to condemn firms that succeeded too well by achieving dominant market shares without any taint of predation. After the IBM case, courts and enforcement officials endorsed hard competition even by dominant firms. Microsoft, however, revived the tradition of the public monopolization case. A confluence of trends in economic theory and in high technology markets made complaints about Microsoft's competitive strategies both plausible and important.

Ideological Sources of Antimonopolization Law

Congress passed the Sherman Act in 1890 in response to vast business combinations known as trusts that had emerged in an earlier "new economy," the period of explosive growth in industry and transportation that followed the Civil War. The records of the congressional debates on the statute, though voluminous, tell us little about its meaning and purpose. Congress evidently saw the trusts as a problem, but understood the problem poorly and had no clear idea how to solve it. The eventual statute prohibited "monopolization" along with contracts, combinations, and conspiracies "in restraint of trade." These terms echoed the language of the ancient common law of monopolies and restraints of trade, but delegated to the federal courts the daunting task of formulating more specific standards of liability and determining which practices violate them. As Senator John Sherman admitted, the meaning of the act "must be left for the courts to determine in each particular case."

Congress did intend to make one innovation-public and private rights of action. Under the common law, courts generally declined to enforce agreements in restraint of trade; a few states went further, revoking the corporate charters of monopolistic combinations. But the law offered no right of action for damages or injunction to those injured by illegal restraints. The Sherman Act, in contrast, made monopolization and restraints of trade both crimes and civil wrongs and authorized public and private enforcement actions in federal court. The public civil remedy presumably was included to provide a weapon against large-scale combinations such as the trusts, whose resources dwarfed those of other private litigants. Whether intended or not, the public monopolization case became a primary instrument of economic and social policy.

Unfortunately, as we will see shortly, many public monopolization cases have actually inhibited competition, the very process they were supposed to foster. In this respect, they have exemplified the phenomenon Robert Bork famously called the "antitrust paradox"-the historical tendency of antitrust law to work against its own ideals. Public choice scholars have sought to explain this paradox by arguing that the Sherman Act, despite its public interest guise, was enacted to protect inefficient firms. One scholar, for example, argues that the Sherman Act must have been passed to protect small firms from the more efficient trusts because most trusts formed in markets in which output was increasing and prices were declining. Other scholars have found evidence that agricultural interests exerted much of the political pressure for enactment of state antitrust legislation. These studies shed light on the political origins of an undeniable protectionist theme in antitrust law. They do not, however, show that the collective purpose of a unanimous Congress in passing the Sherman Act was to protect special interests.

Neither the legislative history nor the broad language of the statute identifies special interests that would predictably benefit from its enactment. As leading public choice theorists have conceded, "Unlike occupational licensing requirements and many other forms of public regulation whose winners and losers are easy to identify, antitrust does not consistently promote the interests of any single, narrowly defined constituency." This characteristic of the statute undermines the public choice account of its origins, if not its application in particular cases. Antitrust is "a policy without a constituency," unless, as we contend, that constituency is simply consumers. Congress was unable to resolve many of the fundamental issues the trusts raised and responded by transferring the question to the courts. Like much vague regulatory legislation, the antitrust laws represent an effort by Congress to do something about a politically charged social problem, while leaving the most difficult policy choices to others. It is particularly unlikely that the Sherman Act's delegation of responsibility was protectionist because Congress knew that it was placing the interpretation of an open-textured statute in the hands of an independent federal judiciary ideologically predisposed to laissez-faire social policies.

Ideology played a crucial role in the origins of antitrust. In creating its antitrust regime, Congress drew on two conflicting ideologies of government and the market. These systems of belief are rooted in the eighteenth century, but they had vigorous proponents in the era of the trusts and remain equally influential to this day in shaping perceptions of market outcomes and public policies, including antitrust. One of these ideologies, which we call the evolutionary vision, holds that free markets, framed by common law rules of property and contract, aggregate the preferences of countless consumers and producers, and eventually produce socially optimal and therefore legitimate outcomes that government should disturb only rarely. The other ideology, which we call the intentional vision, holds that markets reflect the conscious choices of powerful firms and produce unfair outcomes that a democratic government must at least supervise closely. The Sherman Act combined elements of both visions. It authorized the government to intervene in markets, but only temporarily and only in infrequent instances in which practices had undermined the market's self-correcting mechanisms. A judge in antitrust's formative period recognized Congress's ambivalence toward general regulation of the economy:

Congress wished to preserve competition because, among other reasons, it did not know what to substitute for the restraints competition imposes. It has not accepted the suggestions of some influential men that the control of a certain percentage of industry should be penalized. It has not yet been willing to go far in the way of regulating and controlling corporations merely because they are large and powerful, perhaps because many people have always felt that government control is in itself an evil, and to be avoided whenever it is not absolutely required for the prevention of greater wrong.

The evolutionary and intentional visions have influenced public antitrust enforcement for more than a century, both in the government's decisions to sue and in the courts' resolution of cases. Because of the statute's conflicting ideological origins, partisans of the competing ideologies have long advocated their favored interpretations of it. Predictably, the opposing sides in the debate have endorsed very different standards for evaluating business practices like those at issue in the Microsoft litigation. Both visions were less sophisticated than they have become in recent decades, as antitrust law has relied more explicitly on economics. The policy implications of the visions have changed as economic theory has formalized the intuitions of one vision or the other.

Nevertheless, the two visions of markets and the role of government are evident in cases throughout antitrust history. Cases from the earliest periods of antitrust continue to be cited as precedent in cases in which experts testify to theories based on the most advanced economics. So it is no anachronism to examine the cases of every period in light of modern economics, as we do in this chapter. Some of the most influential works of antitrust scholarship have reexamined the records in early cases, enriching our understanding of the practices involved and influencing the precedential value of the cases. Our application of the standard of economic welfare to the history of the public enforcement action draws on these studies and provides a foundation for a clearer understanding of Microsoft.

Microsoft's Predecessors: The Public Monopolization Case

The United States has filed more than 270 monopolization cases, the first on October 13, 1890, scarcely three months after the antitrust law was enacted. By the end of the twentieth century, however, the public monopolization case had fallen into disfavor. Scholars and antitrust enforcers came to see that monopolization cases involve a paradox, if not an outright contradiction: they attack the conduct of firms that have succeeded in the marketplace by providing products that consumers wanted. The benefits of these cases are often uncertain, and the costs are always enormous. A case might eliminate a welfare loss caused by the defendant's monopolistic conduct, but in many instances a dynamic market would accomplish the same goal without government intervention. By the time the case is over, the court may be asked to restructure an industry that has already restructured itself. Judge Colleen Kollar-Kotelly aptly observed in Microsoft itself that crafting a remedy for an innovative market was like "trying to shoe a galloping horse." A case may also establish a beneficial rule that deters anticompetitive conduct in other markets, a spillover effect that is of particular concern to the government. But, as we will see, public monopolization cases have not produced rules of sufficient clarity to provide much guidance in subsequent cases.

Whatever the benefits of public monopolization cases, they are often outweighed by the costs. Because of its size and complexity, a major monopolization case entails enormous direct costs of litigation to both the enforcers and the defendant. The indirect costs, moreover, may be even greater. Litigation diverts the attention of employees from productive activities and casts a cloud of legal suspicion that may undermine the defendant's business relationships. These costs multiply as the case drags on and expands to encompass new issues. Any eventual remedy invariably entails its own direct and indirect costs. Dissolution of the defendant, especially, may destroy economies of scale and dilute the benefits of managerial expertise. The costs of suit also include the risk of error, which may be significant given the complexity of antitrust standards. Even if the government is right about some of the offender's practices, the resulting decision may chill productive practices that come under suspicion because they resemble the illicit conduct.

This description of the costs and benefits suggests that a public enforcement agency should bring a monopolization case only in extraordinary circumstances. The government should have a credible theory that the defendant's conduct is anticompetitive; that theory should be more consistent with the reasonably available evidence than any benign explanation; and there should be a practical and foreseeable judicial remedy that could end the conduct and restore competition faster or more effectively than will market forces. Judged by these standards, large-scale monopolization cases have been more obviously harmful to consumer interests than any other form of antitrust enforcement. Courts in these cases have often erred in defining markets and identifying exclusionary practices and have granted relief that made markets less competitive rather than more so. Many of these shortcomings foreshadowed Microsoft.

Early Enforcement: The Attack on the Trusts. Because of restrictive early interpretations of the scope of congressional power under the commerce clause, prosecutions of trusts achieved few victories until the early years of the twentieth century, when Theodore Roosevelt placed trust busting at the center of his economic program. Roosevelt advocated antitrust as a less intrusive social policy than the more extreme populism of William Jennings Bryan and Robert La Follette, who argued for legislatively imposed limits on market shares. The Supreme Court's treatment of the early challenges to the trusts became a central feature of the formative period of antitrust doctrine. That period, however, was also the Lochner era in constitutional law, in which the Supreme Court invoked freedom of contract as a limitation on legislative power. Not surprisingly, the same laissez-faire outlook influenced the treatment of public monopolization cases.

In the most celebrated of Roosevelt's forty-five public antitrust cases, the government won an order dissolving the Standard Oil Company. Chief Justice Edward Douglass White's opinion for the Supreme Court reconciled his own laissez-faire perspective with this dramatic intervention in the market by identifying in the common law and legislative history of the Sherman Act an awareness of the self-correcting character of the free market. For White, the role of government under the Sherman Act was to assure that the market functioned properly to eradicate abuses by prohibiting only a small subset of restraints that inhibited free exchange. The common law defined monopoly narrowly to encompass only an exclusive privilege granted by the government. Early English prohibitions on "engrossing, forestalling, and regrating"-efforts of middlemen to acquire and resell goods-were repealed, White believed, because the law came to recognize "the inevitable operation of economic forces and the ... balance in favor of the protection of the rights of individuals which resulted." The Sherman Act likewise assured freedom of trade by prohibiting only monopolization, not monopoly itself, and only contracts in unreasonable restraint of trade. In these crucial distinctions, the act recognized "that the freedom of the individual right to contract when not unduly or improperly exercised was the most efficient means for the prevention of monopoly." This language echoed the view of some of White's contemporaries that, without state support, a "monopoly exists only as long as other citizens choose to keep out of the business."

Despite his faith in the market, White affirmed the district court's ruling for the government and its sweeping remedial order. White thought Standard's acquisition of 90 percent of U.S. oil production was so extraordinary that it justified a presumption that it occurred, not by "normal methods of industrial development, but by new means of combination ... the whole with the purpose of excluding others from the trade"; that presumption was "made conclusive" by evidence of exclusionary acts such as predatory pricing and exclusive contracts. Thus, White was able to conclude, in part by the aid of his presumption, that the combination was the result of coercive means and not voluntary combinations that left the remaining actors free to form contracts.

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Excerpted from The Microsoft Caseby William H. Page John E. Lopatka Copyright © 2007 by The University of Chicago. Excerpted by permission.
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