By Matt Rosoff [bio]
Posted: Nov. 11, 2002

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. Each month we make one or more key articles available to non-subscribers.

In a victory for Microsoft, a federal judge has approved the company's antitrust settlement with the U.S. Department of Justice (DoJ) and nine states and declined to impose stricter penalties requested by nine other states and the District of Columbia. The ruling will have little effect on Microsoft's business because the company has already started to abide by the DoJ settlement. Although this case is probably over, the plaintiffs and the judge will be watching closely for violations of the settlement agreement, and the company still faces private antitrust lawsuits and an antitrust investigation by the European Union (EU).

What the Judge Said

On Nov. 1, 2002, U.S. District Judge Colleen Kollar-Kotelly issued two orders conditionally approving Microsoft's settlement with the DoJ and the nine settling states (with one modification to give her greater oversight power), and issued a final judgment in the non-settling states' case that essentially imposed the same settlement on them as well. She also issued more than 500 pages of documentation explaining her judgments.

DoJ Settlement Approved

Judge Kollar-Kotelly determined that, except for one part, Microsoft's settlement with the DoJ was in the public interest as per the dictates of the Tunney Act, and she ordered that the settlement be conditionally approved.

The settlement, which was first signed in Nov. 2001 and modified slightly in Feb. 2002, forces Microsoft to create and publish a uniform price list for Windows for the top 20 OEMs; gives OEMs more flexibility in the software they preinstall on PCs; gives OEMs and consumers more control over the icons on their desktop that link to "middleware" (e.g., Web browsers, media players); prevents Microsoft from granting special consideration to certain partners in exchange for promoting Microsoft middleware; and forces the company to reveal previously hidden APIs and information about how Windows desktops communicate with Windows servers. (For a detailed review of the settlement and its effect, see "Effects of the Antitrust Settlement" on page 13 of the Jan. 2002 Update.) Microsoft has already begun complying with this settlement by including a special dialog box with Windows XP Service Pack 1 that makes it easier for OEMs and users to hide and unhide desktop icons (see "DoJ Compliance Shapes First XP Service Pack" on page 8 of the Aug. 2002 Update) and by revealing required APIs and communication protocols (see "Protocols, APIs to Be Revealed" on page 32 of the Sept. 2002 Update.)

However, the judge did not feel that the settlement gave her enough oversight power and is insisting on an amendment that will give her broad power to issue orders or directions to both parties "regarding the construction or carrying out of the final judgment, the enforcement of compliance,… and the punishment of any violation…." This power will be valid until Nov. 8, 2007—five years after the settlement was finalized.

Judge Kollar-Kotelly issued a separate order conditionally approving Microsoft's identical settlement with the states of Illinois, Kentucky, Louisiana, Maryland, Michigan, New York, North Carolina, Ohio, and Wisconsin.

States' Claims Rejected

The District of Columbia and nine other states (California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, and West Virginia) did not sign the original settlement. Instead, they pressed for stricter remedies that would force Microsoft to reveal more information about how the desktop version of Windows communicates and interoperates with other products (e.g., Windows Server, handheld devices, TV set-top boxes); to create alternate versions of Windows with middleware completely removed (not just hidden); to distribute Sun Microsystems' version of the Java Virtual Machine (JVM) with Windows; to license third parties to port Office to platforms other than Windows; and to license the source code for Internet Explorer (IE). (For details, see "States Press On; Neukom to Retire" on page 16 of the Jan. 2002 Update.)

Judge Kollar-Kotelly imposed none of these penalties, and pointed out the following flaws in the non-settling states' arguments:

• The non-settling states referred frequently to many findings of fact issued by an earlier district judge in the case, Judge Thomas Penfield Jackson. But most of these findings "were ultimately not relied upon by the district and appellate courts" in determining Microsoft's liability in this case. Therefore, the acts named in these findings do not "merit any special weight" in determining Microsoft's punishment.
• The non-settling states identified a number of "new, and for lack of a better term, allegedly 'bad' acts" which bear "only a remote relationship to the liability findings," and therefore carry "little weight, if any, in the court's determination of the appropriate remedy in this case."
• Microsoft's monopoly was not illegally acquired, but only illegally maintained. Therefore, the appropriate remedy is the termination of Microsoft's exclusionary acts rather than termination of the monopoly itself.
• The non-settling states were "unable to establish a satisfactory link between the interoperability disclosures they seek and the liability in this case." Moreover, these disclosures would "likely enable wholesale copying or cloning of Windows." Judge Kollar-Kotelly wrote that "antitrust law does not exist for the protection of competitors," and therefore rejected the states' calls for these disclosures.
• The non-settling states' definition of "middleware" was far too broad, attempting to encompass "all software that exposes even a single API."

The final judgment in the non-settling states' case differs from the DoJ settlement in several small ways, including the following:

Compliance. As the non-settling states requested, Microsoft must establish an internal Compliance Committee, consisting of three members of the Microsoft board of directors who have never been employed by the company. This committee must appoint a compliance officer to maintain a record of complaints and actions taken, report promptly to the plaintiffs any evidence that the final judgment has been violated, and perform other oversight tasks. All officers and board members must sign the final judgment, and can be held in contempt of court for any violations.

Contrary to some media reports, the final judgment in the non-settling states' case does not abolish the Technical Committee which is charged with overseeing Microsoft in the DoJ settlement. However, the non-settling states argued against the Technical Committee, and thus Kollar-Kotelly gave them no input into its selection or operation: "if Plaintiffs do not want to rely on a technical committee, the Court will not require them to do so."

Communication protocols deadline.The final judgment requires Microsoft to reveal certain protocols that Windows desktop PCs use to communicate with Windows servers, and it must release this information within three months, instead of nine months. But this change is meaningless because Microsoft already revealed this information in Aug. 2001—before it was required to do so.

The non-settling states can appeal this judgment, but had indicated no intention to do so by press time.

Antitrust: A Permanent Condition

Barring an appeal by the non-settling states, Microsoft's four-year antitrust battle with various U.S. governmental bodies appears to be over. However, Microsoft still faces the specter of additional litigation stemming from the case:

Plaintiffs, judge watching. All the plaintiffs in this antitrust case will have considerable power to oversee Microsoft's actions, including the ability to examine source code, e-mail, and internal memos. If they find any evidence of wrongdoing, they are likely to complain, landing Microsoft back in court. Judge Kollar-Kotelly wrote that she will hold "Microsoft's directors, particularly those who testified before this Court, responsible for implementing each provision of this remedial decree" and will use her full range of powers "to ensure that the letter and the spirit" of the decree are carried out. The company is unlikely to fare well if it appears before this judge a second time.

Private suits. Microsoft continues to face a private antitrust lawsuit filed by Sun, Be (see "Sun, Be File Private Antitrust Lawsuits" on page 25 of the Apr. 2002 Update), AOL Time Warner (see "AOL Suit Reopens Browser Monopoly, Tying Claims" on page 22 of the Mar. 2002 Update), and individuals alleging that the company overcharged them for Windows (see "January Brings Legal Setbacks" on page 23 of the Feb. 2002 Update). Originally filed separately, these private lawsuits have been consolidated into a single case in the U.S. District Court of Maryland under Judge Frederick Motz. In addition, Microsoft faces another private antitrust lawsuit from consumers in California, who are collectively suing the company for more than US$2 billion.

To succeed, these plaintiffs will have to prove that Microsoft's monopoly caused them harm—a difficult task, given that Kollar-Kotelly found no such causal relationship. In addition, although Judge Motz has ruled that the plaintiffs in the case he's trying can refer to many of Judge Jackson's findings of fact, he also said that these facts were insufficient to establish Microsoft's liability for anticompetitive acts against Netscape, and that AOL will need new evidence to prove this claim. (Netscape is now owned by AOL.)

In the short-term, Kollar-Kotelly's decision means that Sun is unlikely to succeed in its request for an injunction to force Microsoft to include its JVM in Windows. (Motz is considering this request in December.) Kollar-Kotelly refused to grant such a remedy, calling it a "new" allegation, and noted that the appeals court found nothing illegal about Microsoft's creation of an alternate and incompatible JVM. (See "What the Appeals Court Said" on page 32 of the Aug. 2001 Update.)

EU investigation. The EU continues to investigate claims that Microsoft is using its monopoly in desktop operating systems (OSs) to expand into the market for server OSs, and that it illegally tied its media player into Windows.

Finally, every court in this antitrust case agreed on one important point: Microsoft has a monopoly in desktop OSs for Intel-based PCs. Under U.S. antitrust legal doctrines, companies that possess a monopoly are required to act under a different legal standard than other companies. This alone makes Microsoft a likely target for antitrust litigation in the future, especially given the company's cash hoard of more than US$40 billion, which some opponents would like to see distributed as punitive damages, and which others view as evidence of Microsoft’s monopoly pricing powers.

Resources

Judge Kollar-Kotelly's final judgment, orders, and memorandums of opinion can be accessed in PDF format from www.dcd.uscourts.gov/microsoft-2001.html. The final judgment in the non-settling states' case is listed as "Final Judgment"; a 22-page summary of her reasoning for that judgment is listed as "Executive Summary."