AOL Time Warner has filed a private antitrust lawsuit against Microsoft alleging that illegal activities helped Microsoft win the browser war, and seeking damages for lost business. Because of the damages sought and the fact that it reopens claims that had been dropped from the federal antitrust case, this suit poses the most significant legal threat to Microsoft's business since a judge's breakup order in June 2000.

What AOL Wants

On Jan. 22, 2002, AOL filed a 20-page document in the District Court for the District of Columbia (the same court in which Microsoft's federal antitrust case is currently being decided) alleging that Microsoft's illegal activity "inflicted considerable harm" on the business of Netscape, the pioneering Web browser company that AOL bought in Nov. 1998. To counter this harm, AOL is asking the court for three things:

• Court orders to prevent further damage to Netscape, to restore competition in the Web browser market, and to enable "middleware platforms" (such as Netscape's Web browser) to compete with Windows as an alternative operating system (OS) for Intel-based PCs.
• A determination of the actual damages to Netscape's business caused by Microsoft's illegal activity and payment equal to three times these damages (which is standard under U.S. antitrust law).
• Punitive damages sufficient to deter Microsoft from repeating its illegal activity in the future.

AOL suggested no numeric figures or specific penalties, leaving these matters to be determined at trial.

Drawing on the Federal Case

AOL's filing suggests that its lawyers have scrutinized the federal antitrust case very closely and are being careful not to repeat the mistakes that caused the appeals court to reverse or question some of the judgments originally made against Microsoft. (For an analysis of the appeals court's decision, see "What the Appeals Court Said" on page 32 of the Aug. 2001 Update.) In its filing, AOL makes the following claims:

Browser monopolization. The original judge in the federal case, U.S. District Judge Thomas Penfield Jackson, determined that Microsoft used illegal tactics to popularize its Web browser, Internet Explorer (IE), in an attempt to monopolize the browser market. However, the appeals court dismissed this charge—not necessarily because the claim was false, but because the plaintiffs did not define the Web browser market and did not establish the existence of barriers to entry in that market that would enable Microsoft to monopolize it.

AOL is avoiding the pitfalls that doomed this claim the first time around by including a detailed definition of the browser market and explaining the barriers to entry. This will force the court to reconsider this claim based on the facts of the case, rather than throwing it out on purely legal grounds.

Tying. Jackson also ruled that Microsoft illegally integrated IE with Windows. But the appeals court thought that Jackson had used the wrong legal standard for tying in his decision, and sent this decision back to a lower court for reexamination. In its order, the appeals court instructed the lower court to look at the "actual effect" of the tying on the browser market (i.e., did the tying cause Microsoft to gain market share?). The appeals court also warned that the plaintiffs would have to prove that the anticompetitive effects of this integration outweighed any benefits to consumers.

Shortly after the appeals court's decision, the Department of Justice (DoJ) dropped the tying claim. Rather than spending months building a complete case for tying, the DoJ sought immediate restrictions on Microsoft that would stop the company's most troublesome practices.

AOL is now reopening the tying claim and is paying close attention to the appeals court's guidelines. In its filing, AOL reiterates that the browser market exists and is relevant; alleges that the "purpose and effect" of Microsoft's integration was to "unreasonably restrain…competition" in that market; and claims that "there are no benefits from this tying that outweigh the harm to competition" in that market. With these arguments, AOL hopes to accomplish what the DoJ chose not to pursue: restrictions that will prevent Microsoft from tying future products (such as media players or instant messaging clients) to its desktop OS.

Monopoly maintenance. Jackson found, and the appeals court agreed, that Microsoft used its OS monopoly to prevent middleware (such as Netscape's browser) from evolving into an alternative OS. Currently, the plaintiffs in the federal case are proposing behavioral remedies that would prevent Microsoft from illegally maintaining its OS monopoly in the future.

But AOL argues that the federal antitrust case did not determine damages from this proven illegal behavior, which is one reason that this private lawsuit is necessary.

In addition, AOL says that even after Jackson handed down his decision, Microsoft "engaged in further anticompetitive behavior" to prevent Netscape from gaining market share. In court, AOL might argue that this calls for injunctions against Microsoft products and services that were never mentioned in the original trial, such as MSN Internet Access (which encourages users to use a simplified Web browsing client based on IE) and the MSN Web sites (which, after a redesign in Oct. 2001, briefly denied access to users of Netscape's newest Web browser and offered them a chance to download IE instead).

Near-Term Effects on Microsoft

The mere fact that AOL has based its arguments on rulings in the federal case does not assure victory on any of the claims, and AOL's case will probably wind its way through the courts for at least two years (unless a settlement is reached).

Nonetheless, AOL filed its lawsuit just as the current judge in the federal antitrust case, Colleen Kollar-Kotelly, is deciding whether to accept, amend, or reject the proposed settlement between Microsoft, the DoJ, and nine of the 18 states in that case. In addition, AOL filed this lawsuit in the District of Columbia court where the federal antitrust case is being tried, even though its main offices are in Virginia and New York. The timing and location of the lawsuit suggest that AOL is trying to influence Kollar-Kotelly to reject or amend the settlement in the federal case.

Regardless of the outcome of the federal case, media coverage of the AOL-Microsoft trial is guaranteed to be intense and could lead to the same kinds of embarrassing revelations that Microsoft suffered in the federal case. The negative publicity from that case has already had a tangible effect on certain Microsoft initiatives, such as Passport and.NET My Services, which are viewed with suspicion by privacy groups, competitors, and potential partners. By settling its case with the DoJ, Microsoft hoped these publicity problems would soon go away. The AOL suit means it's unlikely to get its wish.

Resources

AOL's filing is available in PDF format at news.com.com/pdf/ne/2002/01/Complaint_Netscape_FINAL.pdf.

For background on the proposed settlement in the federal antitrust case, see "Microsoft Wins Antitrust Battle; War Will Continue" on page 30 of the Dec. 2001 Update.

For background on what the dissenting states in the federal antitrust case want, see "States Press On; Neukom to Retire" on page 16 of the Jan. 2002 Update.