Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-00-05212/USCOURTS-caDC-00-05212-0/pdf.json

Nature of Suit Code: 410
Nature of Suit: Antitrust
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 26 and 27, 2001

Decided June 28, 2001

No. 00-5212

United States of America,

Appellee

v.

Microsoft Corporation,

Appellant

Consolidated with

00-5213

Appeals from the United States District Court

for the District of Columbia

(No. 98cv01232)

(No. 98cv01233)

Richard J. Urowsky and Steven L. Holley argued the

causes for appellant. With them on the briefs were John L.

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Warden, Richard C. Pepperman, II, William H. Neukom,

Thomas W. Burt, David A. Heiner, Jr., Charles F. Rule,

Robert A. Long, Jr., and Carter G. Phillips. Christopher J.

Meyers entered an appearance.

Lars H. Liebeler, Griffin B. Bell, Lloyd N. Cutler, Louis R.

Cohen, C. Boyden Gray, William J. Kolasky, William F.

Adkinson, Jr., Jeffrey D. Ayer, and Jay V. Prabhu were on

the brief of amici curiae The Association for Competitive

Technology and Computing Technology Industry Association

in support of appellant.

David R. Burton was on the brief for amicus curiae

Center for the Moral Defense of Capitalism in support of

appellant.

Robert S. Getman was on the brief for amicus curiae

Association for Objective Law in support of appellant.

Jeffrey P. Minear and David C. Frederick, Assistants to

the Solicitor General, United States Department of Justice,

and John G. Roberts, Jr., argued the causes for appellees.

With them on the brief were A. Douglas Melamed, Acting

Assistant Attorney General, United States Department of

Justice, Jeffrey H. Blattner, Deputy Assistant Attorney General, Catherine G. O'Sullivan, Robert B. Nicholson, Adam D.

Hirsh, Andrea Limmer, David Seidman, and Christopher

Sprigman, Attorneys, Eliot Spitzer, Attorney General, State

of New York, Richard L. Schwartz, Assistant Attorney General, and Kevin J. O'Connor, Office of the Attorney General,

State of Wisconsin.

John Rogovin, Kenneth W. Starr, John F. Wood, Elizabeth

Petrela, Robert H. Bork, Jason M. Mahler, Stephen M.

Shapiro, Donald M. Falk, Mitchell S. Pettit, Kevin J. Arquit,

and Michael C. Naughton were on the brief for amici curiae

America Online, Inc., et al., in support of appellee. Paul T.

Cappuccio entered an appearance.

Lee A. Hollaar, appearing pro se, was on the brief for

amicus curiae Lee A. Hollaar.

Carl Lundgren, appearing pro se, was on the brief for

amicus curiae Carl Lundgren.

Table of Contents

Summary 5

I. Introduction 7

A. Background 7

B. Overview 10

II. Monopolization 13

A. Monopoly Power 14

1. Market Structure 15

a. Market definition 15

b. Market power 19

2. Direct Proof 23

B. Anticompetitive Conduct 25

1. Licenses Issued to Original Equipment Manufacturers 28

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a. Anticompetitive effect of the license restrictions 29

b. Microsoft's justifications for the

license restrictions 33

2. Integration of IE and Windows 36

a. Anticompetitive effect of integration 36

b. Microsoft's justifications for integration 39

3. Agreements with Internet Access

Providers 40

4. Dealings with Internet Content Providers, Independent Software Vendors, and Apple Computer 47

5. Java 52

a. The incompatible JVM 52

b. The First Wave Agreements 53

c. Deception of Java developers 55

d. The threat to Intel 56

6. Course of Conduct 58

C. Causation 59

III. Attempted Monopolization 62

A. Relevant Market 63

B. Barriers to Entry 65

IV. Tying 68

A. Separate-Products Inquiry Under the

Per Se Test 70

B. Per Se Analysis Inappropriate for this

Case 77

C. On Remand 86

V. Trial Proceedings and Remedy 90

A. Factual Background 91

B. Trial Proceedings 95

C. Failure to Hold an Evidentiary Hearing 96

D. Failure to Provide an Adequate Explanation 99

E. Modification of Liability 100

F. On Remand 103

G. Conclusion 106

VI. Judicial Misconduct 106

A. The District Judge's Communications

with the Press 107

B. Violations of the Code of Conduct for

United States Judges 113

C. Appearance of Partiality 117

D. Remedies for Judicial Misconduct and

Appearance of Partiality 120

1. Disqualification 120

2. Review of Findings of Fact and Conclusions of Law 123

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VII. Conclusion 125

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Before: Edwards, Chief Judge, Williams, Ginsburg,

Sentelle, Randolph, Rogers and Tatel, Circuit Judges.

Opinion for the Court filed Per Curiam.

Per Curiam: Microsoft Corporation appeals from judgments of the District Court finding the company in violation

of ss 1 and 2 of the Sherman Act and ordering various

remedies.

The action against Microsoft arose pursuant to a complaint

filed by the United States and separate complaints filed by

individual States. The District Court determined that Microsoft had maintained a monopoly in the market for Intelcompatible PC operating systems in violation of s 2; attempted to gain a monopoly in the market for internet browsers in

violation of s 2; and illegally tied two purportedly separate

products, Windows and Internet Explorer ("IE"), in violation

of s 1. United States v. Microsoft Corp., 87 F. Supp. 2d 30

(D.D.C. 2000) ("Conclusions of Law"). The District Court

then found that the same facts that established liability under

ss 1 and 2 of the Sherman Act mandated findings of liability

under analogous state law antitrust provisions. Id. To remedy the Sherman Act violations, the District Court issued a

Final Judgment requiring Microsoft to submit a proposed

plan of divestiture, with the company to be split into an

operating systems business and an applications business.

United States v. Microsoft Corp., 97 F. Supp. 2d 59, 64-65

(D.D.C. 2000) ("Final Judgment"). The District Court's remedial order also contains a number of interim restrictions on

Microsoft's conduct. Id. at 66-69.

Microsoft's appeal contests both the legal conclusions and

the resulting remedial order. There are three principal

aspects of this appeal. First, Microsoft challenges the District Court's legal conclusions as to all three alleged antitrust

violations and also a number of the procedural and factual

foundations on which they rest. Second, Microsoft argues

that the remedial order must be set aside, because the

District Court failed to afford the company an evidentiary

hearing on disputed facts and, also, because the substantive

provisions of the order are flawed. Finally, Microsoft asserts

that the trial judge committed ethical violations by engaging

in impermissible ex parte contacts and making inappropriate

public comments on the merits of the case while it was

pending. Microsoft argues that these ethical violations compromised the District Judge's appearance of impartiality,

thereby necessitating his disqualification and vacatur of his

Findings of Fact, Conclusions of Law, and Final Judgment.

After carefully considering the voluminous record on appeal--including the District Court's Findings of Fact and

Conclusions of Law, the testimony and exhibits submitted at

trial, the parties' briefs, and the oral arguments before this

court--we find that some but not all of Microsoft's liability

challenges have merit. Accordingly, we affirm in part and

reverse in part the District Court's judgment that Microsoft

violated s 2 of the Sherman Act by employing anticompetitive

means to maintain a monopoly in the operating system market; we reverse the District Court's determination that MiUSCA Case #00-5212 Document #606393 Filed: 06/28/2001 Page 5 of 124
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crosoft violated s 2 of the Sherman Act by illegally attempting to monopolize the internet browser market; and we

remand the District Court's finding that Microsoft violated

s 1 of the Sherman Act by unlawfully tying its browser to its

operating system. Our judgment extends to the District

Court's findings with respect to the state law counterparts of

the plaintiffs' Sherman Act claims.

We also find merit in Microsoft's challenge to the Final

Judgment embracing the District Court's remedial order.

There are several reasons supporting this conclusion. First,

the District Court's Final Judgment rests on a number of

liability determinations that do not survive appellate review;

therefore, the remedial order as currently fashioned cannot

stand. Furthermore, we would vacate and remand the remedial order even were we to uphold the District Court's

liability determinations in their entirety, because the District

Court failed to hold an evidentiary hearing to address remedies-specific factual disputes.

Finally, we vacate the Final Judgment on remedies, because the trial judge engaged in impermissible ex parte

contacts by holding secret interviews with members of the

media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom,

giving rise to an appearance of partiality. Although we find

no evidence of actual bias, we hold that the actions of the trial

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judge seriously tainted the proceedings before the District

Court and called into question the integrity of the judicial

process. We are therefore constrained to vacate the Final

Judgment on remedies, remand the case for reconsideration

of the remedial order, and require that the case be assigned

to a different trial judge on remand. We believe that this

disposition will be adequate to cure the cited improprieties.

In sum, for reasons more fully explained below, we affirm

in part, reverse in part, and remand in part the District

Court's judgment assessing liability. We vacate in full the

Final Judgment embodying the remedial order and remand

the case to a different trial judge for further proceedings

consistent with this opinion.

I. Introduction

A. Background

In July 1994, officials at the Department of Justice

("DOJ"), on behalf of the United States, filed suit against

Microsoft, charging the company with, among other things,

unlawfully maintaining a monopoly in the operating system

market through anticompetitive terms in its licensing and

software developer agreements. The parties subsequently

entered into a consent decree, thus avoiding a trial on the

merits. See United States v. Microsoft Corp., 56 F.3d 1448

(D.C. Cir. 1995) ("Microsoft I"). Three years later, the

Justice Department filed a civil contempt action against Microsoft for allegedly violating one of the decree's provisions.

On appeal from a grant of a preliminary injunction, this court

held that Microsoft's technological bundling of IE 3.0 and 4.0

with Windows 95 did not violate the relevant provision of the

consent decree. United States v. Microsoft Corp., 147 F.3d

935 (D.C. Cir. 1998) ("Microsoft II"). We expressly reserved

the question whether such bundling might independently

violate ss 1 or 2 of the Sherman Act. Id. at 950 n.14.

On May 18, 1998, shortly before issuance of the Microsoft

II decision, the United States and a group of State plaintiffs

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filed separate (and soon thereafter consolidated) complaints,

asserting antitrust violations by Microsoft and seeking preliminary and permanent injunctions against the company's

allegedly unlawful conduct. The complaints also sought any

"other preliminary and permanent relief as is necessary and

appropriate to restore competitive conditions in the markets

affected by Microsoft's unlawful conduct." Gov't's Compl. at

53, United States v. Microsoft Corp., No. 98-1232 (D.D.C.

1999). Relying almost exclusively on Microsoft's varied efforts to unseat Netscape Navigator as the preeminent internet browser, plaintiffs charged four distinct violations of the

Sherman Act: (1) unlawful exclusive dealing arrangements in

violation of s 1; (2) unlawful tying of IE to Windows 95 and

Windows 98 in violation of s 1; (3) unlawful maintenance of a

monopoly in the PC operating system market in violation of

s 2; and (4) unlawful attempted monopolization of the internet browser market in violation of s 2. The States also

brought pendent claims charging Microsoft with violations of

various State antitrust laws.

The District Court scheduled the case on a "fast track."

The hearing on the preliminary injunction and the trial on the

merits were consolidated pursuant to Fed. R. Civ. P. 65(a)(2).

The trial was then scheduled to commence on September 8,

1998, less than four months after the complaints had been

filed. In a series of pretrial orders, the District Court limited

each side to a maximum of 12 trial witnesses plus two

rebuttal witnesses. It required that all trial witnesses' direct

testimony be submitted to the court in the form of written

declarations. The District Court also made allowances for

the use of deposition testimony at trial to prove subordinate

or predicate issues. Following the grant of three brief continuances, the trial started on October 19, 1998.

After a 76-day bench trial, the District Court issued its

Findings of Fact. United States v. Microsoft Corp., 84

F. Supp. 2d 9 (D.D.C. 1999) ("Findings of Fact"). This

triggered two independent courses of action. First, the District Court established a schedule for briefing on possible

legal conclusions, inviting Professor Lawrence Lessig to participate as amicus curiae. Second, the District Court reUSCA Case #00-5212 Document #606393 Filed: 06/28/2001 Page 8 of 124
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ferred the case to mediation to afford the parties an opportunity to settle their differences. The Honorable Richard A.

Posner, Chief Judge of the United States Court of Appeals

for the Seventh Circuit, was appointed to serve as mediator.

The parties concurred in the referral to mediation and in the

choice of mediator.

Mediation failed after nearly four months of settlement

talks between the parties. On April 3, 2000, with the parties'

briefs having been submitted and considered, the District

Court issued its conclusions of law. The District Court found

Microsoft liable on the s 1 tying and s 2 monopoly maintenance and attempted monopolization claims, Conclusions of

Law, at 35-51, while ruling that there was insufficient evidence to support a s 1 exclusive dealing violation, id. at 51-

54. As to the pendent State actions, the District Court found

the State antitrust laws conterminous with ss 1 and 2 of the

Sherman Act, thereby obviating the need for further Statespecific analysis. Id. at 54-56. In those few cases where a

State's law required an additional showing of intrastate impact on competition, the District Court found the requirement

easily satisfied on the evidence at hand. Id. at 55.

Having found Microsoft liable on all but one count, the

District Court then asked plaintiffs to submit a proposed

remedy. Plaintiffs' proposal for a remedial order was subsequently filed within four weeks, along with six supplemental

declarations and over 50 new exhibits. In their proposal,

plaintiffs sought specific conduct remedies, plus structural

relief that would split Microsoft into an applications company

and an operating systems company. The District Court

rejected Microsoft's request for further evidentiary proceedings and, following a single hearing on the merits of the

remedy question, issued its Final Judgment on June 7, 2000.

The District Court adopted plaintiffs' proposed remedy without substantive change.

Microsoft filed a notice of appeal within a week after the

District Court issued its Final Judgment. This court then

ordered that any proceedings before it be heard by the court

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dressed by this court, however, the District Court certified

appeal of the case brought by the United States directly to

the Supreme Court pursuant to 15 U.S.C. s 29(b), while

staying the final judgment order in the federal and state

cases pending appeal. The States thereafter petitioned the

Supreme Court for a writ of certiorari in their case. The

Supreme Court declined to hear the appeal of the Government's case and remanded the matter to this court; the Court

likewise denied the States' petition for writ of certiorari.

Microsoft Corp. v. United States, 530 U.S. 1301 (2000). This

consolidated appeal followed.

B. Overview

Before turning to the merits of Microsoft's various arguments, we pause to reflect briefly on two matters of note, one

practical and one theoretical.

The practical matter relates to the temporal dimension of

this case. The litigation timeline in this case is hardly

problematic. Indeed, it is noteworthy that a case of this

magnitude and complexity has proceeded from the filing of

complaints through trial to appellate decision in a mere three

years. See, e.g., Data Gen. Corp. v. Grumman Sys. Support

Corp., 36 F.3d 1147, 1155 (1st Cir. 1994) (six years from filing

of complaint to appellate decision); Transamerica Computer

Co., Inc. v. IBM, 698 F.2d 1377, 1381 (9th Cir. 1983) (over

four years from start of trial to appellate decision); United

States v. United Shoe Mach. Corp., 110 F. Supp. 295, 298 (D.

Mass. 1953) (over five years from filing of complaint to trial

court decision).

What is somewhat problematic, however, is that just over

six years have passed since Microsoft engaged in the first

conduct plaintiffs allege to be anticompetitive. As the record

in this case indicates, six years seems like an eternity in the

computer industry. By the time a court can assess liability,

firms, products, and the marketplace are likely to have

changed dramatically. This, in turn, threatens enormous

practical difficulties for courts considering the appropriate

measure of relief in equitable enforcement actions, both in

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ing those remedies in the second. Conduct remedies may be

unavailing in such cases, because innovation to a large degree

has already rendered the anticompetitive conduct obsolete

(although by no means harmless). And broader structural

remedies present their own set of problems, including how a

court goes about restoring competition to a dramatically

changed, and constantly changing, marketplace. That is just

one reason why we find the District Court's refusal in the

present case to hold an evidentiary hearing on remedies--to

update and flesh out the available information before seriously entertaining the possibility of dramatic structural relief--so

problematic. See infra Section V.

We do not mean to say that enforcement actions will no

longer play an important role in curbing infringements of the

antitrust laws in technologically dynamic markets, nor do we

assume this in assessing the merits of this case. Even in

those cases where forward-looking remedies appear limited,

the Government will continue to have an interest in defining

the contours of the antitrust laws so that law-abiding firms

will have a clear sense of what is permissible and what is not.

And the threat of private damage actions will remain to deter

those firms inclined to test the limits of the law.

The second matter of note is more theoretical in nature.

We decide this case against a backdrop of significant debate

amongst academics and practitioners over the extent to

which "old economy" s 2 monopolization doctrines should

apply to firms competing in dynamic technological markets

characterized by network effects. In markets characterized

by network effects, one product or standard tends towards

dominance, because "the utility that a user derives from consumption of the good increases with the number of other

agents consuming the good." Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility,

75 Am. Econ. Rev. 424, 424 (1985). For example, "[a]n

individual consumer's demand to use (and hence her benefit

from) the telephone network ... increases with the number

of other users on the network whom she can call or from

whom she can receive calls." Howard A. Shelanski & J.

Gregory Sidak, Antitrust Divestiture in Network Industries,

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68 U. Chi. L. Rev. 1, 8 (2001). Once a product or standard

achieves wide acceptance, it becomes more or less entrenched. Competition in such industries is "for the field"

rather than "within the field." See Harold Demsetz, Why

Regulate Utilities?, 11 J.L. & Econ. 55, 57 & n.7 (1968)

(emphasis omitted).

In technologically dynamic markets, however, such entrenchment may be temporary, because innovation may alter

the field altogether. See Joseph A. Schumpeter, Capitalism,

Socialism and Democracy 81-90 (Harper Perennial 1976)

(1942). Rapid technological change leads to markets in which

"firms compete through innovation for temporary market

dominance, from which they may be displaced by the next

wave of product advancements." Shelanski & Sidak, at 11-12

(discussing Schumpeterian competition, which proceeds "sequentially over time rather than simultaneously across a

market"). Microsoft argues that the operating system market is just such a market.

Whether or not Microsoft's characterization of the operating system market is correct does not appreciably alter our

mission in assessing the alleged antitrust violations in the

present case. As an initial matter, we note that there is no

consensus among commentators on the question of whether,

and to what extent, current monopolization doctrine should be

amended to account for competition in technologically dynamic markets characterized by network effects. Compare Steven C. Salop & R. Craig Romaine, Preserving Monopoly:

Economic Analysis, Legal Standards, and Microsoft, 7 Geo.

Mason L. Rev. 617, 654-55, 663-64 (1999) (arguing that

exclusionary conduct in high-tech networked industries deserves heightened antitrust scrutiny in part because it may

threaten to deter innovation), with Ronald A. Cass & Keith

N. Hylton, Preserving Competition: Economic Analysis, Legal Standards and Microsoft, 8 Geo. Mason L. Rev. 1, 36-39

(1999) (equivocating on the antitrust implications of network

effects and noting that the presence of network externalities

may actually encourage innovation by guaranteeing more

durable monopolies to innovating winners). Indeed, there is

some suggestion that the economic consequences of network

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effects and technological dynamism act to offset one another,

thereby making it difficult to formulate categorical antitrust

rules absent a particularized analysis of a given market. See

Shelanski & Sidak, at 6-7 ("High profit margins might appear

to be the benign and necessary recovery of legitimate investment returns in a Schumpeterian framework, but they might

represent exploitation of customer lock-in and monopoly power when viewed through the lens of network economics....

The issue is particularly complex because, in network industries characterized by rapid innovation, both forces may be

operating and can be difficult to isolate.").

Moreover, it should be clear that Microsoft makes no claim

that anticompetitive conduct should be assessed differently in

technologically dynamic markets. It claims only that the

measure of monopoly power should be different. For reasons

fully discussed below, we reject Microsoft's monopoly power

argument. See infra Section II.A.

With this backdrop in mind, we turn to the specific challenges raised in Microsoft's appeal.

II. Monopolization

Section 2 of the Sherman Act makes it unlawful for a firm

to "monopolize." 15 U.S.C. s 2. The offense of monopolization has two elements: "(1) the possession of monopoly power

in the relevant market and (2) the willful acquisition or

maintenance of that power as distinguished from growth or

development as a consequence of a superior product, business

acumen, or historic accident." United States v. Grinnell

Corp., 384 U.S. 563, 570-71 (1966). The District Court applied this test and found that Microsoft possesses monopoly

power in the market for Intel-compatible PC operating systems. Focusing primarily on Microsoft's efforts to suppress

Netscape Navigator's threat to its operating system monopoly, the court also found that Microsoft maintained its power

not through competition on the merits, but through unlawful

means. Microsoft challenges both conclusions. We defer to

the District Court's findings of fact, setting them aside only if

clearly erroneous. Fed R. Civ. P. 52(a). We review legal

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questions de novo. United States ex rel. Modern Elec., Inc.

v. Ideal Elec. Sec. Co., 81 F.3d 240, 244 (D.C. Cir. 1996).

We begin by considering whether Microsoft possesses monopoly power, see infra Section II.A, and finding that it does,

we turn to the question whether it maintained this power

through anticompetitive means. Agreeing with the District

Court that the company behaved anticompetitively, see infra

Section II.B, and that these actions contributed to the maintenance of its monopoly power, see infra Section II.C, we affirm

the court's finding of liability for monopolization.

A. Monopoly Power

While merely possessing monopoly power is not itself an

antitrust violation, see Northeastern Tel. Co. v. AT & T, 651

F.2d 76, 84-85 (2d Cir. 1981), it is a necessary element of a

monopolization charge, see Grinnell, 384 U.S. at 570. The

Supreme Court defines monopoly power as "the power to

control prices or exclude competition." United States v. E.I.

du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). More

precisely, a firm is a monopolist if it can profitably raise

prices substantially above the competitive level. 2A Phillip

E. Areeda et al., Antitrust Law p 501, at 85 (1995); cf. Ball

Mem'l Hosp., Inc. v. Mut. Hosp. Ins., Inc., 784 F.2d 1325,

1335 (7th Cir. 1986) (defining market power as "the ability to

cut back the market's total output and so raise price").

Where evidence indicates that a firm has in fact profitably

done so, the existence of monopoly power is clear. See Rebel

Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir.

1995); see also FTC v. Indiana Fed'n of Dentists, 476 U.S.

447, 460-61 (1986) (using direct proof to show market power

in Sherman Act s 1 unreasonable restraint of trade action).

Because such direct proof is only rarely available, courts

more typically examine market structure in search of circumstantial evidence of monopoly power. 2A Areeda et al.,

Antitrust Law p 531a, at 156; see also, e.g., Grinnell, 384 U.S.

at 571. Under this structural approach, monopoly power may

be inferred from a firm's possession of a dominant share of a

relevant market that is protected by entry barriers. See

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Rebel Oil, 51 F.3d at 1434. "Entry barriers" are factors

(such as certain regulatory requirements) that prevent new

rivals from timely responding to an increase in price above

the competitive level. See S. Pac. Communications Co. v.

AT & T, 740 F.2d 980, 1001-02 (D.C. Cir. 1984).

The District Court considered these structural factors and

concluded that Microsoft possesses monopoly power in a

relevant market. Defining the market as Intel-compatible

PC operating systems, the District Court found that Microsoft has a greater than 95% share. It also found the company's market position protected by a substantial entry barrier.

Conclusions of Law, at 36.

Microsoft argues that the District Court incorrectly defined

the relevant market. It also claims that there is no barrier to

entry in that market. Alternatively, Microsoft argues that

because the software industry is uniquely dynamic, direct

proof, rather than circumstantial evidence, more appropriately indicates whether it possesses monopoly power. Rejecting

each argument, we uphold the District Court's finding of

monopoly power in its entirety.

1. Market Structure

a. Market definition

"Because the ability of consumers to turn to other suppliers

restrains a firm from raising prices above the competitive

level," Rothery Storage & Van Co. v. Atlas Van Lines, Inc.,

792 F.2d 210, 218 (D.C. Cir. 1986), the relevant market must

include all products "reasonably interchangeable by consumers for the same purposes." du Pont, 351 U.S. at 395. In

this case, the District Court defined the market as "the

licensing of all Intel-compatible PC operating systems worldwide," finding that there are "currently no products--and ...

there are not likely to be any in the near future--that a

significant percentage of computer users worldwide could

substitute for [these operating systems] without incurring

substantial costs." Conclusions of Law, at 36. Calling this

market definition "far too narrow," Appellant's Opening Br.

at 84, Microsoft argues that the District Court improperly

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excluded three types of products: non-Intel compatible operating systems (primarily Apple's Macintosh operating system,

Mac OS), operating systems for non-PC devices (such as

handheld computers and portal websites), and "middleware"

products, which are not operating systems at all.

We begin with Mac OS. Microsoft's argument that Mac

OS should have been included in the relevant market suffers

from a flaw that infects many of the company's monopoly

power claims: the company fails to challenge the District

Court's factual findings, or to argue that these findings do not

support the court's conclusions. The District Court found

that consumers would not switch from Windows to Mac OS in

response to a substantial price increase because of the costs

of acquiring the new hardware needed to run Mac OS (an

Apple computer and peripherals) and compatible software

applications, as well as because of the effort involved in

learning the new system and transferring files to its format.

Findings of Fact p 20. The court also found the Apple

system less appealing to consumers because it costs considerably more and supports fewer applications. Id. p 21. Microsoft responds only by saying: "the district court's market

definition is so narrow that it excludes Apple's Mac OS, which

has competed with Windows for years, simply because the

Mac OS runs on a different microprocessor." Appellant's

Opening Br. at 84. This general, conclusory statement falls

far short of what is required to challenge findings as clearly

erroneous. Pendleton v. Rumsfeld, 628 F.2d 102, 106 (D.C.

Cir. 1980); see also Terry v. Reno, 101 F.3d 1412, 1415 (D.C.

Cir. 1996) (holding that claims made but not argued in a brief

are waived). Microsoft neither points to evidence contradicting the District Court's findings nor alleges that supporting

record evidence is insufficient. And since Microsoft does not

argue that even if we accept these findings, they do not

support the District Court's conclusion, we have no basis for

upsetting the court's decision to exclude Mac OS from the

relevant market.

Microsoft's challenge to the District Court's exclusion of

non-PC based competitors, such as information appliances

(handheld devices, etc.) and portal websites that host serverbased software applications, suffers from the same defect:

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the company fails to challenge the District Court's key factual

findings. In particular, the District Court found that because

information appliances fall far short of performing all of the

functions of a PC, most consumers will buy them only as a

supplement to their PCs. Findings of Fact p 23. The District Court also found that portal websites do not presently

host enough applications to induce consumers to switch, nor

are they likely to do so in the near future. Id. p 27. Again,

because Microsoft does not argue that the District Court's

findings do not support its conclusion that information appliances and portal websites are outside the relevant market, we

adhere to that conclusion.

This brings us to Microsoft's main challenge to the District

Court's market definition: the exclusion of middleware. Because of the importance of middleware to this case, we pause

to explain what it is and how it relates to the issue before us.

Operating systems perform many functions, including allocating computer memory and controlling peripherals such as

printers and keyboards. See Direct Testimony of Frederick

Warren-Boulton p 20, reprinted in 5 J.A. at 3172-73. Operating systems also function as platforms for software applications. They do this by "exposing"--i.e., making available to

software developers--routines or protocols that perform certain widely-used functions. These are known as Application

Programming Interfaces, or "APIs." See Direct Testimony

of James Barksdale p 70, reprinted in 5 J.A. at 2895-96. For

example, Windows contains an API that enables users to

draw a box on the screen. See Direct Testimony of Michael

T. Devlin p 12, reprinted in 5 J.A. at 3525. Software developers wishing to include that function in an application need not

duplicate it in their own code. Instead, they can "call"--i.e.,

use--the Windows API. See Direct Testimony of James

Barksdale p p 70-71, reprinted in 5 J.A. at 2895-97. Windows contains thousands of APIs, controlling everything from

data storage to font display. See Direct Testimony of Michael Devlin p 12, reprinted in 5 J.A. at 3525.

Every operating system has different APIs. Accordingly,

a developer who writes an application for one operating

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system and wishes to sell the application to users of another

must modify, or "port," the application to the second operating system. Findings of Fact p 4. This process is both timeconsuming and expensive. Id. p 30.

"Middleware" refers to software products that expose their

own APIs. Id. p 28; Direct Testimony of Paul Maritz

p p 234-36, reprinted in 6 J.A. at 3727-29. Because of this, a

middleware product written for Windows could take over

some or all of Windows's valuable platform functions--that is,

developers might begin to rely upon APIs exposed by the

middleware for basic routines rather than relying upon the

API set included in Windows. If middleware were written

for multiple operating systems, its impact could be even

greater. The more developers could rely upon APIs exposed

by such middleware, the less expensive porting to different

operating systems would be. Ultimately, if developers could

write applications relying exclusively on APIs exposed by

middleware, their applications would run on any operating

system on which the middleware was also present. See

Direct Testimony of Avadis Tevanian, Jr. p 45, reprinted in 5

J.A. at 3113. Netscape Navigator and Java--both at issue in

this case--are middleware products written for multiple operating systems. Findings of Fact p 28.

Microsoft argues that, because middleware could usurp the

operating system's platform function and might eventually

take over other operating system functions (for instance, by

controlling peripherals), the District Court erred in excluding

Navigator and Java from the relevant market. The District

Court found, however, that neither Navigator, Java, nor any

other middleware product could now, or would soon, expose

enough APIs to serve as a platform for popular applications,

much less take over all operating system functions. Id.

p p 28-29. Again, Microsoft fails to challenge these findings,

instead simply asserting middleware's "potential" as a competitor. Appellant's Opening Br. at 86. The test of reasonable interchangeability, however, required the District Court

to consider only substitutes that constrain pricing in the

reasonably foreseeable future, and only products that can

enter the market in a relatively short time can perform this

function. See Rothery, 792 F.2d at 218 ("Because the ability

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of consumers to turn to other suppliers restrains a firm from

raising prices above the competitive level, the definition of the

'relevant market' rests on a determination of available substitutes."); see also Findings of Fact p 29 ("[I]t would take

several years for middleware ... to evolve" into a product

that can constrain operating system pricing.). Whatever

middleware's ultimate potential, the District Court found that

consumers could not now abandon their operating systems

and switch to middleware in response to a sustained price for

Windows above the competative level. Findings of Fact

p p 28, 29. Nor is middleware likely to overtake the operating system as the primary platform for software development

any time in the near future. Id.

Alternatively, Microsoft argues that the District Court

should not have excluded middleware from the relevant market because the primary focus of the plaintiffs' s 2 charge is

on Microsoft's attempts to suppress middleware's threat to its

operating system monopoly. According to Microsoft, it is

"contradict[ory]," 2/26/2001 Ct. Appeals Tr. at 20, to define

the relevant market to exclude the "very competitive threats

that gave rise" to the action. Appellant's Opening Br. at 84.

The purported contradiction lies between plaintiffs' s 2 theory, under which Microsoft preserved its monopoly against

middleware technologies that threatened to become viable

substitutes for Windows, and its theory of the relevant market, under which middleware is not presently a viable substitute for Windows. Because middleware's threat is only nascent, however, no contradiction exists. Nothing in s 2 of the

Sherman Act limits its prohibition to actions taken against

threats that are already well-developed enough to serve as

present substitutes. See infra Section II.C. Because market

definition is meant to identify products "reasonably interchangeable by consumers," du Pont, 351 U.S. at 395, and

because middleware is not now interchangeable with Windows, the District Court had good reason for excluding

middleware from the relevant market.

b. Market power

Having thus properly defined the relevant market, the

District Court found that Windows accounts for a greater

than 95% share. Findings of Fact p 35. The court also

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found that even if Mac OS were included, Microsoft's share

would exceed 80%. Id. Microsoft challenges neither finding,

nor does it argue that such a market share is not predominant. Cf. Grinnell, 384 U.S. at 571 (87% is predominant);

Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S.

451, 481 (1992) (80%); du Pont, 351 U.S. at 379, 391 (75%).

Instead, Microsoft claims that even a predominant market

share does not by itself indicate monopoly power. Although

the "existence of [monopoly] power ordinarily may be inferred from the predominant share of the market," Grinnell,

384 U.S. at 571, we agree with Microsoft that because of the

possibility of competition from new entrants, see Ball Mem'l

Hosp., Inc., 784 F.2d at 1336, looking to current market share

alone can be "misleading." Hunt-Wesson Foods, Inc. v.

Ragu Foods, Inc., 627 F.2d 919, 924 (9th Cir. 1980); see also

Ball Mem'l Hosp., Inc., 784 F.2d at 1336 ("Market share

reflects current sales, but today's sales do not always indicate

power over sales and price tomorrow.") In this case, however, the District Court was not misled. Considering the

possibility of new rivals, the court focused not only on Microsoft's present market share, but also on the structural barrier

that protects the company's future position. Conclusions of

Law, at 36. That barrier--the "applications barrier to entry"--stems from two characteristics of the software market:

(1) most consumers prefer operating systems for which a

large number of applications have already been written; and

(2) most developers prefer to write for operating systems that

already have a substantial consumer base. See Findings of

Fact p p 30, 36. This "chicken-and-egg" situation ensures

that applications will continue to be written for the already

dominant Windows, which in turn ensures that consumers will

continue to prefer it over other operating systems. Id.

Challenging the existence of the applications barrier to

entry, Microsoft observes that software developers do write

applications for other operating systems, pointing out that at

its peak IBM's OS/2 supported approximately 2,500 applications. Id. p 46. This misses the point. That some developers write applications for other operating systems is not at all

inconsistent with the finding that the applications barrier to

entry discourages many from writing for these less popular

platforms. Indeed, the District Court found that IBM's

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difficulty in attracting a larger number of software developers

to write for its platform seriously impeded OS/2's success.

Id. p 46.

Microsoft does not dispute that Windows supports many

more applications than any other operating system. It argues instead that "[i]t defies common sense" to suggest that

an operating system must support as many applications as

Windows does (more than 70,000, according to the District

Court, id. p 40) to be competitive. Appellant's Opening Br. at

96. Consumers, Microsoft points out, can only use a very

small percentage of these applications. Id. As the District

Court explained, however, the applications barrier to entry

gives consumers reason to prefer the dominant operating

system even if they have no need to use all applications

written for it:

The consumer wants an operating system that runs not

only types of applications that he knows he will want to

use, but also those types in which he might develop an

interest later. Also, the consumer knows that if he

chooses an operating system with enough demand to

support multiple applications in each product category,

he will be less likely to find himself straitened later by

having to use an application whose features disappoint

him. Finally, the average user knows that, generally

speaking, applications improve through successive versions. He thus wants an operating system for which

successive generations of his favorite applications will be

released--promptly at that. The fact that a vastly larger

number of applications are written for Windows than for

other PC operating systems attracts consumers to Windows, because it reassures them that their interests will

be met as long as they use Microsoft's product.

Findings of Fact p 37. Thus, despite the limited success of

its rivals, Microsoft benefits from the applications barrier to

entry.

Of course, were middleware to succeed, it would erode the

applications barrier to entry. Because applications written

for multiple operating systems could run on any operating

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system on which the middleware product was present with

little, if any, porting, the operating system market would

become competitive. Id. p p 29, 72. But as the District Court

found, middleware will not expose a sufficient number of

APIs to erode the applications barrier to entry in the foreseeable future. See id. p p 28-29.

Microsoft next argues that the applications barrier to entry

is not an entry barrier at all, but a reflection of Windows'

popularity. It is certainly true that Windows may have

gained its initial dominance in the operating system market

competitively--through superior foresight or quality. But

this case is not about Microsoft's initial acquisition of monopoly power. It is about Microsoft's efforts to maintain this

position through means other than competition on the merits.

Because the applications barrier to entry protects a dominant

operating system irrespective of quality, it gives Microsoft

power to stave off even superior new rivals. The barrier is

thus a characteristic of the operating system market, not of

Microsoft's popularity, or, as asserted by a Microsoft witness,

the company's efficiency. See Direct Testimony of Richard

Schmalensee p 115, reprinted in 25 J.A. at 16153-14.

Finally, Microsoft argues that the District Court should not

have considered the applications barrier to entry because it

reflects not a cost borne disproportionately by new entrants,

but one borne by all participants in the operating system

market. According to Microsoft, it had to make major investments to convince software developers to write for its new

operating system, and it continues to "evangelize" the Windows platform today. Whether costs borne by all market

participants should be considered entry barriers is the subject of much debate. Compare 2A Areeda & Hovenkamp,

Antitrust Law s 420c, at 61 (arguing that these costs are

entry barriers), and Joe S. Bain, Barriers to New Competition: Their Character and Consequences in Manufacturing

Industries 6-7 (1956) (considering these costs entry barriers),

with L.A. Land Co. v. Brunswick Corp., 6 F.3d 1422, 1428

(9th Cir. 1993) (evaluating cost based on "[t]he disadvantage

of new entrants as compared to incumbents"), and George

Stigler, The Organization of Industry 67 (1968) (excluding

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these costs). We need not resolve this issue, however, for

even under the more narrow definition it is clear that there

are barriers. When Microsoft entered the operating system

market with MS-DOS and the first version of Windows, it did

not confront a dominant rival operating system with as massive an installed base and as vast an existing array of

applications as the Windows operating systems have since

enjoyed. Findings of Fact p p 6, 7, 43. Moreover, when

Microsoft introduced Windows 95 and 98, it was able to

bypass the applications barrier to entry that protected the

incumbent Windows by including APIs from the earlier version in the new operating systems. See id. p 44. This made

porting existing Windows applications to the new version of

Windows much less costly than porting them to the operating

systems of other entrants who could not freely include APIs

from the incumbent Windows with their own.

2. Direct Proof

Having sustained the District Court's conclusion that circumstantial evidence proves that Microsoft possesses monopoly power, we turn to Microsoft's alternative argument that it

does not behave like a monopolist. Claiming that software

competition is uniquely "dynamic," Appellant's Opening Br. at

84 (quoting Findings of Fact p 59), the company suggests a

new rule: that monopoly power in the software industry

should be proven directly, that is, by examining a company's

actual behavior to determine if it reveals the existence of

monopoly power. According to Microsoft, not only does no

such proof of its power exist, but record evidence demonstrates the absence of monopoly power. The company claims

that it invests heavily in research and development, id. at 88-

89 (citing Direct Testimony of Paul Maritz p 155, reprinted in

6 J.A. at 3698 (testifying that Microsoft invests approximately

17% of its revenue in R&D)), and charges a low price for

Windows (a small percentage of the price of an Intelcompatible PC system and less than the price of its rivals, id.

at 90 (citing Findings of Fact p p 19, 21, 46)).

Microsoft's argument fails because, even assuming that the

software market is uniquely dynamic in the long term, the

District Court correctly applied the structural approach to

determine if the company faces competition in the short term.

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Structural market power analyses are meant to determine

whether potential substitutes constrain a firm's ability to

raise prices above the competitive level; only threats that are

likely to materialize in the relatively near future perform this

function to any significant degree. Rothery, 792 F.2d at 218

(quoting Lawrence Sullivan, Antitrust s 12, at 41 (1977))

(only substitutes that can enter the market "promptly" should

be considered). The District Court expressly considered and

rejected Microsoft's claims that innovations such as handheld

devices and portal websites would soon expand the relevant

market beyond Intel-compatible PC operating systems. Because the company does not challenge these findings, we have

no reason to believe that prompt substitutes are available.

The structural approach, as applied by the District Court, is

thus capable of fulfilling its purpose even in a changing

market. Microsoft cites no case, nor are we aware of one,

requiring direct evidence to show monopoly power in any

market. We decline to adopt such a rule now.

Even if we were to require direct proof, moreover, Microsoft's behavior may well be sufficient to show the existence of

monopoly power. Certainly, none of the conduct Microsoft

points to--its investment in R&D and the relatively low price

of Windows--is inconsistent with the possession of such power. Conclusions of Law, at 37. The R&D expenditures

Microsoft points to are not simply for Windows, but for its

entire company, which most likely does not possess a monopoly for all of its products. Moreover, because innovation can

increase an already dominant market share and further delay

the emergence of competition, even monopolists have reason

to invest in R&D. Findings of Fact p 61. Microsoft's pricing

behavior is similarly equivocal. The company claims only

that it never charged the short-term profit-maximizing price

for Windows. Faced with conflicting expert testimony, the

District Court found that it could not accurately determine

what this price would be. Id. p 65. In any event, the court

found, a price lower than the short-term profit-maximizing

price is not inconsistent with possession or improper use of

monopoly power. Id. p p 65-66. Cf. Berkey Photo, Inc. v.

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Eastman Kodak Co., 603 F.2d 263, 274 (2d Cir. 1979) ("[I]f

monopoly power has been acquired or maintained through

improper means, the fact that the power has not been used to

extract [a monopoly price] provides no succor to the monopolist."). Microsoft never claims that it did not charge the longterm monopoly price. Micosoft does argue that the price of

Windows is a fraction of the price of an Intel-compatible PC

system and lower than that of rival operating systems, but

these facts are not inconsistent with the District Court's

finding that Microsoft has monopoly power. See Findings of

Fact p 36 ("Intel-compatible PC operating systems other than

Windows [would not] attract[ ] significant demand ... even if

Micosoft held its prices substantially above the competitive

level.").

More telling, the District Court found that some aspects of

Microsoft's behavior are difficult to explain unless Windows is

a monopoly product. For instance, according to the District

Court, the company set the price of Windows without considering rivals' prices, Findings of Fact p 62, something a firm

without a monopoly would have been unable to do. The

District Court also found that Microsoft's pattern of exclusionary conduct could only be rational "if the firm knew that

it possessed monopoly power." Conclusions of Law, at 37. It

is to that conduct that we now turn.

B. Anticompetitive Conduct

As discussed above, having a monopoly does not by itself

violate s 2. A firm violates s 2 only when it acquires or

maintains, or attempts to acquire or maintain, a monopoly by

engaging in exclusionary conduct "as distinguished from

growth or development as a consequence of a superior product, business acumen, or historic accident." Grinnell, 384

U.S. at 571; see also United States v. Aluminum Co. of Am.,

148 F.2d 416, 430 (2d Cir. 1945) (Hand, J.) ("The successful

competitor, having been urged to compete, must not be

turned upon when he wins.").

In this case, after concluding that Microsoft had monopoly

power, the District Court held that Microsoft had violated s 2

by engaging in a variety of exclusionary acts (not including

predatory pricing), to maintain its monopoly by preventing

the effective distribution and use of products that might

threaten that monopoly. Specifically, the District Court held

Microsoft liable for: (1) the way in which it integrated IE into

Windows; (2) its various dealings with Original Equipment

Manufacturers ("OEMs"), Internet Access Providers

("IAPs"), Internet Content Providers ("ICPs"), Independent

Software Vendors ("ISVs"), and Apple Computer; (3) its

efforts to contain and to subvert Java technologies; and (4)

its course of conduct as a whole. Upon appeal, Microsoft

argues that it did not engage in any exclusionary conduct.

Whether any particular act of a monopolist is exclusionary,

rather than merely a form of vigorous competition, can be

difficult to discern: the means of illicit exclusion, like the

means of legitimate competition, are myriad. The challenge

for an antitrust court lies in stating a general rule for

distinguishing between exclusionary acts, which reduce social

welfare, and competitive acts, which increase it.

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From a century of case law on monopolization under s 2,

however, several principles do emerge. First, to be condemned as exclusionary, a monopolist's act must have an

"anticompetitive effect." That is, it must harm the competitive process and thereby harm consumers. In contrast, harm

to one or more competitors will not suffice. "The [Sherman

Act] directs itself not against conduct which is competitive,

even severely so, but against conduct which unfairly tends to

destroy competition itself." Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993); see also Brooke Group Ltd. v.

Brown & Williamson Tobacco Corp., 509 U.S. 209, 225 (1993)

("Even an act of pure malice by one business competitor

against another does not, without more, state a claim under

the federal antitrust laws....").

Second, the plaintiff, on whom the burden of proof of

course rests, see, e.g., Monsanto Co. v. Spray-Rite Serv.

Corp., 465 U.S. 752, 763 (1984); see also United States v.

Arnold, Schwinn & Co., 388 U.S. 365, 374 n.5 (1967), overruled on other grounds, Cont'l T.V., Inc. v. GTE Sylvania

Inc., 433 U.S. 36 (1977), must demonstrate that the monopolist's conduct indeed has the requisite anticompetitive effect.

See generally Brooke Group, 509 U.S. at 225-26. In a case

brought by a private plaintiff, the plaintiff must show that its

injury is "of 'the type that the statute was intended to

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forestall,' " Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429

U.S. 477, 487-88 (1977) (quoting Wyandotte Transp. v. United

States, 389 U.S. 191, 202 (1967)); no less in a case brought by

the Government, it must demonstrate that the monopolist's

conduct harmed competition, not just a competitor.

Third, if a plaintiff successfully establishes a prima facie

case under s 2 by demonstrating anticompetitive effect, then

the monopolist may proffer a "procompetitive justification"

for its conduct. See Eastman Kodak, 504 U.S. at 483. If the

monopolist asserts a procompetitive justification--a nonpretextual claim that its conduct is indeed a form of competition

on the merits because it involves, for example, greater efficiency or enhanced consumer appeal--then the burden shifts

back to the plaintiff to rebut that claim. Cf. Capital Imaging

Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d

537, 543 (2d Cir. 1993).

Fourth, if the monopolist's procompetitive justification

stands unrebutted, then the plaintiff must demonstrate that

the anticompetitive harm of the conduct outweighs the procompetitive benefit. In cases arising under s 1 of the Sherman Act, the courts routinely apply a similar balancing

approach under the rubric of the "rule of reason." The

source of the rule of reason is Standard Oil Co. v. United

States, 221 U.S. 1 (1911), in which the Supreme Court used

that term to describe the proper inquiry under both sections

of the Act. See id. at 61-62 ("[W]hen the second section [of

the Sherman Act] is thus harmonized with ... the first, it

becomes obvious that the criteria to be resorted to in any

given case for the purpose of ascertaining whether violations

of the section have been committed, is the rule of reason

guided by the established law...."). As the Fifth Circuit

more recently explained, "[i]t is clear ... that the analysis

under section 2 is similar to that under section 1 regardless

whether the rule of reason label is applied...." Mid-Texas

Communications Sys., Inc. v. AT & T, 615 F.2d 1372, 1389

n.13 (5th Cir. 1980) (citing Byars v. Bluff City News Co., 609

F.2d 843, 860 (6th Cir. 1979)); see also Cal. Computer Prods.,

Inc. v. IBM Corp., 613 F.2d 727, 737 (9th Cir. 1979).

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Finally, in considering whether the monopolist's conduct on

balance harms competition and is therefore condemned as

exclusionary for purposes of s 2, our focus is upon the effect

of that conduct, not upon the intent behind it. Evidence of

the intent behind the conduct of a monopolist is relevant only

to the extent it helps us understand the likely effect of the

monopolist's conduct. See, e.g., Chicago Bd. of Trade v.

United States, 246 U.S. 231, 238 (1918) ("knowledge of intent

may help the court to interpret facts and to predict consequences"); Aspen Skiing Co. v. Aspen Highlands Skiing

Corp., 472 U.S. 585, 603 (1985).

With these principles in mind, we now consider Microsoft's

objections to the District Court's holding that Microsoft violated s 2 of the Sherman Act in a variety of ways.

1. Licenses Issued to Original Equipment Manufacturers

The District Court condemned a number of provisions in

Microsoft's agreements licensing Windows to OEMs, because

it found that Microsoft's imposition of those provisions (like

many of Microsoft's other actions at issue in this case) serves

to reduce usage share of Netscape's browser and, hence,

protect Microsoft's operating system monopoly. The reason

market share in the browser market affects market power in

the operating system market is complex, and warrants some

explanation.

Browser usage share is important because, as we explained

in Section II.A above, a browser (or any middleware product,

for that matter) must have a critical mass of users in order to

attract software developers to write applications relying upon

the APIs it exposes, and away from the APIs exposed by

Windows. Applications written to a particular browser's

APIs, however, would run on any computer with that browser, regardless of the underlying operating system. "The

overwhelming majority of consumers will only use a PC

operating system for which there already exists a large and

varied set of ... applications, and for which it seems relatively certain that new types of applications and new versions of

existing applications will continue to be marketed...."

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Findings of Fact p 30. If a consumer could have access to

the applications he desired--regardless of the operating system he uses--simply by installing a particular browser on his

computer, then he would no longer feel compelled to select

Windows in order to have access to those applications; he

could select an operating system other than Windows based

solely upon its quality and price. In other words, the market

for operating systems would be competitive.

Therefore, Microsoft's efforts to gain market share in one

market (browsers) served to meet the threat to Microsoft's

monopoly in another market (operating systems) by keeping

rival browsers from gaining the critical mass of users necessary to attract developer attention away from Windows as the

platform for software development. Plaintiffs also argue that

Microsoft's actions injured competition in the browser market--an argument we will examine below in relation to their

specific claims that Microsoft attempted to monopolize the

browser market and unlawfully tied its browser to its operating system so as to foreclose competition in the browser

market. In evaluating the s 2 monopoly maintenance claim,

however, our immediate concern is with the anticompetitive

effect of Microsoft's conduct in preserving its monopoly in the

operating system market.

In evaluating the restrictions in Microsoft's agreements

licensing Windows to OEMs, we first consider whether plaintiffs have made out a prima facie case by demonstrating that

the restrictions have an anticompetitive effect. In the next

subsection, we conclude that plaintiffs have met this burden

as to all the restrictions. We then consider Microsoft's

proffered justifications for the restrictions and, for the most

part, hold those justifications insufficient.

a. Anticompetitive effect of the license restrictions

The restrictions Microsoft places upon Original Equipment

Manufacturers are of particular importance in determining

browser usage share because having an OEM pre-install a

browser on a computer is one of the two most cost-effective

methods by far of distributing browsing software. (The other

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uted by an IAP.) Findings of Fact p 145. The District

Court found that the restrictions Microsoft imposed in licensing Windows to OEMs prevented many OEMs from distributing browsers other than IE. Conclusions of Law, at 39-40.

In particular, the District Court condemned the license provisions prohibiting the OEMs from: (1) removing any desktop

icons, folders, or "Start" menu entries; (2) altering the initial

boot sequence; and (3) otherwise altering the appearance of

the Windows desktop. Findings of Fact p 213.

The District Court concluded that the first license restriction--the prohibition upon the removal of desktop icons,

folders, and Start menu entries--thwarts the distribution of a

rival browser by preventing OEMs from removing visible

means of user access to IE. Id. p 203. The OEMs cannot

practically install a second browser in addition to IE, the

court found, in part because "[p]re-installing more than one

product in a given category ... can significantly increase an

OEM's support costs, for the redundancy can lead to confusion among novice users." Id. p 159; see also id. p 217. That

is, a certain number of novice computer users, seeing two

browser icons, will wonder which to use when and will call the

OEM's support line. Support calls are extremely expensive

and, in the highly competitive original equipment market,

firms have a strong incentive to minimize costs. Id. p 210.

Microsoft denies the "consumer confusion" story; it observes that some OEMs do install multiple browsers and that

executives from two OEMs that do so denied any knowledge

of consumers being confused by multiple icons. See 11/5/98

pm Tr. at 41-42 (trial testimony of Avadis Tevanian of Apple),

reprinted in 9 J.A. at 5493-94; 11/18/99 am Tr. at 69 (trial

testimony of John Soyring of IBM), reprinted in 10 J.A. at

6222.

Other testimony, however, supports the District Court's

finding that fear of such confusion deters many OEMs from

pre-installing multiple browsers. See, e.g., 01/13/99 pm Tr. at

614-15 (deposition of Microsoft's Gayle McClain played to the

court) (explaining that redundancy of icons may be confusing

to end users); 02/18/99 pm Tr. at 46-47 (trial testimony of

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John Rose of Compaq), reprinted in 21 J.A. at 14237-38

(same); 11/17/98 am Tr. at 68 (deposition of John Kies of

Packard Bell-NEC played to the court), reprinted in 9 J.A.

at 6016 (same); 11/17/98 am Tr. at 67-72 (trial testimony of

Glenn Weadock), reprinted in 9 J.A. at 6015-20 (same). Most

telling, in presentations to OEMs, Microsoft itself represented that having only one icon in a particular category would be

"less confusing for endusers." See Government's Trial Exhibit ("GX") 319 at MS98 0109453. Accordingly, we reject

Microsoft's argument that we should vacate the District

Court's Finding of Fact 159 as it relates to consumer confusion.

As noted above, the OEM channel is one of the two

primary channels for distribution of browsers. By preventing

OEMs from removing visible means of user access to IE, the

license restriction prevents many OEMs from pre-installing a

rival browser and, therefore, protects Microsoft's monopoly

from the competition that middleware might otherwise present. Therefore, we conclude that the license restriction at

issue is anticompetitive. We defer for the moment the question whether that anticompetitive effect is outweighed by

Microsoft's proffered justifications.

The second license provision at issue prohibits OEMs from

modifying the initial boot sequence--the process that occurs

the first time a consumer turns on the computer. Prior to

the imposition of that restriction, "among the programs that

many OEMs inserted into the boot sequence were Internet

sign-up procedures that encouraged users to choose from a

list of IAPs assembled by the OEM." Findings of Fact

p 210. Microsoft's prohibition on any alteration of the boot

sequence thus prevents OEMs from using that process to

promote the services of IAPs, many of which--at least at the

time Microsoft imposed the restriction--used Navigator rather than IE in their internet access software. See id. p 212;

GX 295, reprinted in 12 J.A. at 14533 (Upon learning of OEM

practices including boot sequence modification, Microsoft's

Chairman, Bill Gates, wrote: "Apparently a lot of OEMs are

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chines in a FAR more prominent way than MSN or our

Internet browser."). Microsoft does not deny that the prohibition on modifying the boot sequence has the effect of

decreasing competition against IE by preventing OEMs from

promoting rivals' browsers. Because this prohibition has a

substantial effect in protecting Microsoft's market power, and

does so through a means other than competition on the

merits, it is anticompetitive. Again the question whether the

provision is nonetheless justified awaits later treatment.

Finally, Microsoft imposes several additional provisions

that, like the prohibition on removal of icons, prevent OEMs

from making various alterations to the desktop: Microsoft

prohibits OEMs from causing any user interface other than

the Windows desktop to launch automatically, from adding

icons or folders different in size or shape from those supplied

by Microsoft, and from using the "Active Desktop" feature to

promote third-party brands. These restrictions impose significant costs upon the OEMs; prior to Microsoft's prohibiting the practice, many OEMs would change the appearance of

the desktop in ways they found beneficial. See, e.g., Findings

of Fact p 214; GX 309, reprinted in 22 J.A. at 14551 (March

1997 letter from Hewlett-Packard to Microsoft: "We are

responsible for the cost of technical support of our customers,

including the 33% of calls we get related to the lack of quality

or confusion generated by your product.... We must have

more ability to decide how our system is presented to our end

users. If we had a choice of another supplier, based on your

actions in this area, I assure you [that you] would not be our

supplier of choice.").

The dissatisfaction of the OEM customers does not, of

course, mean the restrictions are anticompetitive. The anticompetitive effect of the license restrictions is, as Microsoft

itself recognizes, that OEMs are not able to promote rival

browsers, which keeps developers focused upon the APIs in

Windows. Findings of Fact p 212 (quoting Microsoft's Gates

as writing, "[w]inning Internet browser share is a very very

important goal for us," and emphasizing the need to prevent

OEMs from promoting both rival browsers and IAPs that

might use rivals' browsers); see also 01/13/99 Tr. at 305-06

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(excerpts from deposition of James Von Holle of Gateway)

(prior to restriction Gateway had pre-installed non-IE internet registration icon that was larger than other desktop

icons). This kind of promotion is not a zero-sum game; but

for the restrictions in their licenses to use Windows, OEMs

could promote multiple IAPs and browsers. By preventing

the OEMs from doing so, this type of license restriction, like

the first two restrictions, is anticompetitive: Microsoft reduced rival browsers' usage share not by improving its own

product but, rather, by preventing OEMs from taking actions

that could increase rivals' share of usage.

b. Microsoft's justifications for the license restrictions

Microsoft argues that the license restrictions are legally

justified because, in imposing them, Microsoft is simply "exercising its rights as the holder of valid copyrights." Appellant's Opening Br. at 102. Microsoft also argues that the

licenses "do not unduly restrict the opportunities of Netscape

to distribute Navigator in any event." Id.

Microsoft's primary copyright argument borders upon the

frivolous. The company claims an absolute and unfettered

right to use its intellectual property as it wishes: "[I]f

intellectual property rights have been lawfully acquired," it

says, then "their subsequent exercise cannot give rise to

antitrust liability." Appellant's Opening Br. at 105. That is

no more correct than the proposition that use of one's personal property, such as a baseball bat, cannot give rise to tort

liability. As the Federal Circuit succinctly stated: "Intellectual property rights do not confer a privilege to violate the

antitrust laws." In re Indep. Serv. Orgs. Antitrust Litig., 203

F.3d 1322, 1325 (Fed. Cir. 2000).

Although Microsoft never overtly retreats from its bold and

incorrect position on the law, it also makes two arguments to

the effect that it is not exercising its copyright in an unreasonable manner, despite the anticompetitive consequences of

the license restrictions discussed above. In the first variation

upon its unqualified copyright defense, Microsoft cites two

cases indicating that a copyright holder may limit a licensee's

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ability to engage in significant and deleterious alterations of a

copyrighted work. See Gilliam v. ABC, 538 F.2d 14, 21 (2d

Cir. 1976); WGN Cont'l Broad. Co. v. United Video, Inc., 693

F.2d 622, 625 (7th Cir. 1982). The relevance of those two

cases for the present one is limited, however, both because

those cases involved substantial alterations of a copyrighted

work, see Gilliam, 538 F.2d at 18, and because in neither case

was there any claim that the copyright holder was, in asserting its rights, violating the antitrust laws, see WGN Cont'l

Broad., 693 F.2d at 626; see also Cmty. for Creative NonViolence v. Reid, 846 F.2d 1485, 1498 (D.C. Cir. 1988) (noting,

again in a context free of any antitrust concern, that "an

author [ ] may have rights against" a licensee that "excessively mutilated or altered" the copyrighted work).

The only license restriction Microsoft seriously defends as

necessary to prevent a "substantial alteration" of its copyrighted work is the prohibition on OEMs automatically

launching a substitute user interface upon completion of the

boot process. See Findings of Fact p 211 ("[A] few large

OEMs developed programs that ran automatically at the

conclusion of a new PC system's first boot sequence. These

programs replaced the Windows desktop either with a user

interface designed by the OEM or with Navigator's user

interface."). We agree that a shell that automatically prevents the Windows desktop from ever being seen by the user

is a drastic alteration of Microsoft's copyrighted work, and

outweighs the marginal anticompetitive effect of prohibiting

the OEMs from substituting a different interface automatically upon completion of the initial boot process. We therefore

hold that this particular restriction is not an exclusionary

practice that violates s 2 of the Sherman Act.

In a second variation upon its copyright defense, Microsoft

argues that the license restrictions merely prevent OEMs

from taking actions that would reduce substantially the value

of Microsoft's copyrighted work: that is, Microsoft claims

each license restriction in question is necessary to prevent

OEMs from so altering Windows as to undermine "the principal value of Windows as a stable and consistent platform that

supports a broad range of applications and that is familiar to

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users." Appellant's Opening Br. at 102. Microsoft, however,

never substantiates this claim, and, because an OEM's altering the appearance of the desktop or promoting programs in

the boot sequence does not affect the code already in the

product, the practice does not self-evidently affect either the

"stability" or the "consistency" of the platform. See Conclusions of Law, at 41; Findings of Fact p 227. Microsoft cites

only one item of evidence in support of its claim that the

OEMs' alterations were decreasing the value of Windows.

Defendant's Trial Exhibit ("DX") 2395 at MSV0009378A, reprinted in 19 J.A. at 12575. That document, prepared by

Microsoft itself, states: "there are quality issues created by

OEMs who are too liberal with the pre-install process,"

referring to the OEMs' installation of Windows and additional

software on their PCs, which the document says may result in

"user concerns and confusion." To the extent the OEMs'

modifications cause consumer confusion, of course, the OEMs

bear the additional support costs. See Findings of Fact

p 159. Therefore, we conclude Microsoft has not shown that

the OEMs' liberality reduces the value of Windows except in

the sense that their promotion of rival browsers undermines

Microsoft's monopoly--and that is not a permissible justification for the license restrictions.

Apart from copyright, Microsoft raises one other defense of

the OEM license agreements: It argues that, despite the

restrictions in the OEM license, Netscape is not completely

blocked from distributing its product. That claim is insufficient to shield Microsoft from liability for those restrictions

because, although Microsoft did not bar its rivals from all

means of distribution, it did bar them from the cost-efficient

ones.

In sum, we hold that with the exception of the one restriction prohibiting automatically launched alternative interfaces,

all the OEM license restrictions at issue represent uses of

Microsoft's market power to protect its monopoly, unredeemed by any legitimate justification. The restrictions

therefore violate s 2 of the Sherman Act.

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2. Integration of IE and Windows

Although Microsoft's license restrictions have a significant

effect in closing rival browsers out of one of the two primary

channels of distribution, the District Court found that "Microsoft's executives believed ... its contractual restrictions

placed on OEMs would not be sufficient in themselves to

reverse the direction of Navigator's usage share. Consequently, in late 1995 or early 1996, Microsoft set out to bind

[IE] more tightly to Windows 95 as a technical matter."

Findings of Fact p 160.

Technologically binding IE to Windows, the District Court

found, both prevented OEMs from pre-installing other browsers and deterred consumers from using them. In particular,

having the IE software code as an irremovable part of

Windows meant that pre-installing a second browser would

"increase an OEM's product testing costs," because an OEM

must test and train its support staff to answer calls related to

every software product preinstalled on the machine; moreover, pre-installing a browser in addition to IE would to many

OEMs be "a questionable use of the scarce and valuable space

on a PC's hard drive." Id. p 159.

Although the District Court, in its Conclusions of Law,

broadly condemned Microsoft's decision to bind "Internet

Explorer to Windows with ... technological shackles," Conclusions of Law, at 39, its findings of fact in support of that

conclusion center upon three specific actions Microsoft took to

weld IE to Windows: excluding IE from the "Add/Remove

Programs" utility; designing Windows so as in certain circumstances to override the user's choice of a default browser

other than IE; and commingling code related to browsing

and other code in the same files, so that any attempt to delete

the files containing IE would, at the same time, cripple the

operating system. As with the license restrictions, we consider first whether the suspect actions had an anticompetitive

effect, and then whether Microsoft has provided a procompetitive justification for them.

a. Anticompetitive effect of integration

As a general rule, courts are properly very skeptical about

claims that competition has been harmed by a dominant

firm's product design changes. See, e.g., Foremost Pro Color,

Inc. v. Eastman Kodak Co., 703 F.2d 534, 544-45 (9th Cir.

1983). In a competitive market, firms routinely innovate in

the hope of appealing to consumers, sometimes in the process

making their products incompatible with those of rivals; the

imposition of liability when a monopolist does the same thing

will inevitably deter a certain amount of innovation. This is

all the more true in a market, such as this one, in which the

product itself is rapidly changing. See Findings of Fact p 59.

Judicial deference to product innovation, however, does not

mean that a monopolist's product design decisions are per se

lawful. See Foremost Pro Color, 703 F.2d at 545; see also

Cal. Computer Prods., 613 F.2d at 739, 744; In re IBM

Peripheral EDP Devices Antitrust Litig., 481 F. Supp. 965,

1007-08 (N.D. Cal. 1979).

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The District Court first condemned as anticompetitive Microsoft's decision to exclude IE from the "Add/Remove Programs" utility in Windows 98. Findings of Fact p 170. Microsoft had included IE in the Add/Remove Programs utility

in Windows 95, see id. p p 175-76, but when it modified

Windows 95 to produce Windows 98, it took IE out of the

Add/Remove Programs utility. This change reduces the usage share of rival browsers not by making Microsoft's own

browser more attractive to consumers but, rather, by discouraging OEMs from distributing rival products. See id. p 159.

Because Microsoft's conduct, through something other than

competition on the merits, has the effect of significantly

reducing usage of rivals' products and hence protecting its

own operating system monopoly, it is anticompetitive; we

defer for the moment the question whether it is nonetheless

justified.

Second, the District Court found that Microsoft designed

Windows 98 "so that using Navigator on Windows 98 would

have unpleasant consequences for users" by, in some circumstances, overriding the user's choice of a browser other than

IE as his or her default browser. Id. p p 171-72. Plaintiffs

argue that this override harms the competitive process by

deterring consumers from using a browser other than IE

even though they might prefer to do so, thereby reducing

rival browsers' usage share and, hence, the ability of rival

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browsers to draw developer attention away from the APIs

exposed by Windows. Microsoft does not deny, of course,

that overriding the user's preference prevents some people

from using other browsers. Because the override reduces

rivals' usage share and protects Microsoft's monopoly, it too

is anticompetitive.

Finally, the District Court condemned Microsoft's decision

to bind IE to Windows 98 "by placing code specific to Web

browsing in the same files as code that provided operating

system functions." Id. p 161; see also id. p p 174, 192. Putting code supplying browsing functionality into a file with

code supplying operating system functionality "ensure[s] that

the deletion of any file containing browsing-specific routines

would also delete vital operating system routines and thus

cripple Windows...." Id. p 164. As noted above, preventing

an OEM from removing IE deters it from installing a second

browser because doing so increases the OEM's product testing and support costs; by contrast, had OEMs been able to

remove IE, they might have chosen to pre-install Navigator

alone. See id. p 159.

Microsoft denies, as a factual matter, that it commingled

browsing and non-browsing code, and it maintains the District Court's findings to the contrary are clearly erroneous.

According to Microsoft, its expert "testified without contradiction that '[t]he very same code in Windows 98 that provides Web browsing functionality' also performs essential

operating system functions--not code in the same files, but

the very same software code." Appellant's Opening Br. at 79

(citing 5 J.A. 3291-92).

Microsoft's expert did not testify to that effect "without

contradiction," however. A Government expert, Glenn Weadock, testified that Microsoft "design[ed] [IE] so that some of

the code that it uses co-resides in the same library files as

other code needed for Windows." Direct Testimony p 30.

Another Government expert likewise testified that one library

file, SHDOCVW.DLL, "is really a bundle of separate functions. It contains some functions that have to do specifically

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face functions as well." 12/14/98 am Tr. at 60-61 (trial

testimony of Edward Felten), reprinted in 11 J.A. at 6953-54.

One of Microsoft's own documents suggests as much. See

Plaintiffs' Proposed Findings of Fact p 131.2.vii (citing GX

1686 (under seal) (Microsoft document indicating some functions in SHDOCVW.DLL can be described as "IE only,"

others can be described as "shell only" and still others can be

described as providing both "IE" and "shell" functions)).

In view of the contradictory testimony in the record, some

of which supports the District Court's finding that Microsoft

commingled browsing and non-browsing code, we cannot conclude that the finding was clearly erroneous. See Anderson

v. City of Bessemer City, 470 U.S. 564, 573-74 (1985) ("If the

district court's account of the evidence is plausible in light of

the record viewed in its entirety, the court of appeals may not

reverse it even though convinced that had it been sitting as

the trier of fact, it would have weighed the evidence differently."). Accordingly, we reject Microsoft's argument that we

should vacate Finding of Fact 159 as it relates to the commingling of code, and we conclude that such commingling has

an anticompetitive effect; as noted above, the commingling

deters OEMs from pre-installing rival browsers, thereby reducing the rivals' usage share and, hence, developers' interest

in rivals' APIs as an alternative to the API set exposed by

Microsoft's operating system.

b. Microsoft's justifications for integration

Microsoft proffers no justification for two of the three

challenged actions that it took in integrating IE into Windows--excluding IE from the Add/Remove Programs utility

and commingling browser and operating system code. Although Microsoft does make some general claims regarding

the benefits of integrating the browser and the operating

system, see, e.g., Direct Testimony of James Allchin p 94,

reprinted in 5 J.A. at 3321 ("Our vision of deeper levels of

technical integration is highly efficient and provides substantial benefits to customers and developers."), it neither specifies nor substantiates those claims. Nor does it argue that

either excluding IE from the Add/Remove Programs utility or

commingling code achieves any integrative benefit. Plaintiffs

plainly made out a prima facie case of harm to competition in

the operating system market by demonstrating that Microsoft's actions increased its browser usage share and thus

protected its operating system monopoly from a middleware

threat and, for its part, Microsoft failed to meet its burden of

showing that its conduct serves a purpose other than protecting its operating system monopoly. Accordingly, we hold

that Microsoft's exclusion of IE from the Add/Remove Programs utility and its commingling of browser and operating

system code constitute exclusionary conduct, in violation of

s 2.

As for the other challenged act that Microsoft took in

integrating IE into Windows--causing Windows to override

the user's choice of a default browser in certain circumstances--Microsoft argues that it has "valid technical reasons." Specifically, Microsoft claims that it was necessary to

design Windows to override the user's preferences when he

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or she invokes one of "a few" out "of the nearly 30 means of

accessing the Internet." Appellant's Opening Br. at 82.

According to Microsoft:

The Windows 98 Help system and Windows Update

feature depend on ActiveX controls not supported by

Navigator, and the now-discontinued Channel Bar utilized Microsoft's Channel Definition Format, which Navigator also did not support. Lastly, Windows 98 does not

invoke Navigator if a user accesses the Internet through

"My Computer" or "Windows Explorer" because doing

so would defeat one of the purposes of those features--

enabling users to move seamlessly from local storage

devices to the Web in the same browsing window.

Id. (internal citations omitted). The plaintiff bears the burden not only of rebutting a proffered justification but also of

demonstrating that the anticompetitive effect of the challenged action outweighs it. In the District Court, plaintiffs

appear to have done neither, let alone both; in any event,

upon appeal, plaintiffs offer no rebuttal whatsoever. Accordingly, Microsoft may not be held liable for this aspect of its

product design.

3. Agreements with Internet Access Providers

The District Court also condemned as exclusionary Microsoft's agreements with various IAPs. The IAPs include both

Internet Service Providers, which offer consumers internet

access, and Online Services ("OLSs") such as America Online

("AOL"), which offer proprietary content in addition to internet access and other services. Findings of Fact p 15. The

District Court deemed Microsoft's agreements with the IAPs

unlawful because:

Microsoft licensed [IE] and the [IE] Access Kit [(of

which, more below)] to hundreds of IAPs for no charge.

[Findings of Fact] p p 250-51. Then, Microsoft extended

valuable promotional treatment to the ten most important IAPs in exchange for their commitment to promote

and distribute [IE] and to exile Navigator from the

desktop. Id. p p 255-58, 261, 272, 288-90, 305-06. Finally, in exchange for efforts to upgrade existing subscribers to client software that came bundled with [IE] instead of Navigator, Microsoft granted rebates--and in

some cases made outright payments--to those same

IAPs. Id. p p 259-60, 295.

Conclusions of Law, at 41.

The District Court condemned Microsoft's actions in (1)

offering IE free of charge to IAPs and (2) offering IAPs a

bounty for each customer the IAP signs up for service using

the IE browser. In effect, the court concluded that Microsoft

is acting to preserve its monopoly by offering IE to IAPs at

an attractive price. Similarly, the District Court held Microsoft liable for (3) developing the IE Access Kit ("IEAK"), a

software package that allows an IAP to "create a distinctive

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ing the [IE] title bar, icon, start and search pages," Findings

of Fact p 249, and (4) offering the IEAK to IAPs free of

charge, on the ground that those acts, too, helped Microsoft

preserve its monopoly. Conclusions of Law, at 41-42. Finally, the District Court found that (5) Microsoft agreed to

provide easy access to IAPs' services from the Windows

desktop in return for the IAPs' agreement to promote IE

exclusively and to keep shipments of internet access software

using Navigator under a specific percentage, typically 25%.

See Conclusions of Law, at 42 (citing Findings of Fact

p p 258, 262, 289). We address the first four items--Microsoft's inducements--and then its exclusive agreements with

IAPs.

Although offering a customer an attractive deal is the

hallmark of competition, the Supreme Court has indicated

that in very rare circumstances a price may be unlawfully

low, or "predatory." See generally Brooke Group, 509 U.S. at

220-27. Plaintiffs argued before the District Court that

Microsoft's pricing was indeed predatory; but instead of

making the usual predatory pricing argument--that the predator would drive out its rivals by pricing below cost on a

particular product and then, sometime in the future, raise its

prices on that product above the competitive level in order to

recoup its earlier losses--plaintiffs argued that by pricing

below cost on IE (indeed, even paying people to take it),

Microsoft was able simultaneously to preserve its stream of

monopoly profits on Windows, thereby more than recouping

its investment in below-cost pricing on IE. The District

Court did not assign liability for predatory pricing, however,

and plaintiffs do not press this theory on appeal.

The rare case of price predation aside, the antitrust laws do

not condemn even a monopolist for offering its product at an

attractive price, and we therefore have no warrant to condemn Microsoft for offering either IE or the IEAK free of

charge or even at a negative price. Likewise, as we said

above, a monopolist does not violate the Sherman Act simply

by developing an attractive product. See Grinnell, 384 U.S.

at 571 ("[G]rowth or development as a consequence of a

superior product [or] business acumen" is no violation.).

Therefore, Microsoft's development of the IEAK does not

violate the Sherman Act.

We turn now to Microsoft's deals with IAPs concerning

desktop placement. Microsoft concluded these exclusive

agreements with all "the leading IAPs," Findings of Fact

p 244, including the major OLSs. Id. p 245; see also id.

p p 305, 306. The most significant of the OLS deals is with

AOL, which, when the deal was reached, "accounted for a

substantial portion of all existing Internet access subscriptions and ... attracted a very large percentage of new IAP

subscribers." Id. p 272. Under that agreement Microsoft

puts the AOL icon in the OLS folder on the Windows desktop

and AOL does not promote any non-Microsoft browser, nor

provide software using any non-Microsoft browser except at

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the customer's request, and even then AOL will not supply

more than 15% of its subscribers with a browser other than

IE. Id. p 289.

The Supreme Court most recently considered an antitrust

challenge to an exclusive contract in Tampa Electric Co. v.

Nashville Coal Co., 365 U.S. 320 (1961). That case, which

involved a challenge to a requirements contract, was brought

under s 3 of the Clayton Act and ss 1 and 2 of the Sherman

Act. The Court held that an exclusive contract does not

violate the Clayton Act unless its probable effect is to "foreclose competition in a substantial share of the line of commerce affected." Id. at 327. The share of the market

foreclosed is important because, for the contract to have an

adverse effect upon competition, "the opportunities for other

traders to enter into or remain in that market must be

significantly limited." Id. at 328. Although "[n]either the

Court of Appeals nor the District Court [had] considered in

detail the question of the relevant market," id. at 330, the

Court in Tampa Electric examined the record and, after

defining the relevant market, determined that the contract

affected less than one percent of that market. Id. at 333.

After concluding, under the Clayton Act, that this share was

"conservatively speaking, quite insubstantial," id., the Court

went on summarily to reject the Sherman Act claims. Id. at

335 ("[I]f [the contract] does not fall within the broader

prescription of s 3 of the Clayton Act it follows that it is not

forbidden by those of the [Sherman Act].").

Following Tampa Electric, courts considering antitrust

challenges to exclusive contracts have taken care to identify

the share of the market foreclosed. Some courts have indicated that s 3 of the Clayton Act and s 1 of the Sherman Act

require an equal degree of foreclosure before prohibiting

exclusive contracts. See, e.g., Roland Mach. Co. v. Dresser

Indus., Inc., 749 F.2d 380, 393 (7th Cir. 1984) (Posner, J.).

Other courts, however, have held that a higher market share

must be foreclosed in order to establish a violation of the

Sherman Act as compared to the Clayton Act. See, e.g., Barr

Labs. v. Abbott Labs., 978 F.2d 98, 110 (3d Cir.1992); 11

Herbert Hovenkamp, Antitrust Law p 1800c4 (1998) ("[T]he

cases are divided, with a likely majority stating that the

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Clayton Act requires a smaller showing of anticompetitive

effects.").

Though what is "significant" may vary depending upon the

antitrust provision under which an exclusive deal is challenged, it is clear that in all cases the plaintiff must both

define the relevant market and prove the degree of foreclosure. This is a prudential requirement; exclusivity provisions in contracts may serve many useful purposes. See, e.g.,

Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1162 (9th

Cir. 1997) ("There are, however, well-recognized economic

benefits to exclusive dealing arrangements, including the

enhancement of interbrand competition."); Barry Wright

Corp. v. ITT Grinnell Corp., 724 F.2d 227, 236 (1st Cir. 1983)

(Breyer, J.) ("[V]irtually every contract to buy 'forecloses' or

'excludes' alternative sellers from some portion of the market,

namely the portion consisting of what was bought."). Permitting an antitrust action to proceed any time a firm enters into

an exclusive deal would both discourage a presumptively

legitimate business practice and encourage costly antitrust

actions. Because an exclusive deal affecting a small fraction

of a market clearly cannot have the requisite harmful effect

upon competition, the requirement of a significant degree of

foreclosure serves a useful screening function. Cf. Frank H.

Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 21-

23 (1984) (discussing use of presumptions in antitrust law to

screen out cases in which loss to consumers and economy is

likely outweighed by cost of inquiry and risk of deterring

procompetitive behavior).

In this case, plaintiffs challenged Microsoft's exclusive dealing arrangements with the IAPs under both ss 1 and 2 of the

Sherman Act. The District Court, in analyzing the s 1 claim,

stated, "unless the evidence demonstrates that Microsoft's

agreements excluded Netscape altogether from access to

roughly forty percent of the browser market, the Court

should decline to find such agreements in violation of s 1."

Conclusions of Law, at 52. The court recognized that Microsoft had substantially excluded Netscape from "the most

efficient channels for Navigator to achieve browser usage

share," id. at 53; see also Findings of Fact p 145 ("[N]o other

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distribution channel for browsing software even approaches

the efficiency of OEM pre-installation and IAP bundling."),

and had relegated it to more costly and less effective methods

(such as mass mailing its browser on a disk or offering it for

download over the internet); but because Microsoft has not

"completely excluded Netscape" from reaching any potential

user by some means of distribution, however ineffective, the

court concluded the agreements do not violate s 1. Conclusions of Law, at 53. Plaintiffs did not cross-appeal this

holding.

Turning to s 2, the court stated: "the fact that Microsoft's

arrangements with various [IAPs and other] firms did not

foreclose enough of the relevant market to constitute a s 1

violation in no way detracts from the Court's assignment of

liability for the same arrangements under s 2.... [A]ll of

Microsoft's agreements, including the non-exclusive ones, severely restricted Netscape's access to those distribution channels leading most efficiently to the acquisition of browser

usage share." Conclusions of Law, at 53.

On appeal Microsoft argues that "courts have applied the

same standard to alleged exclusive dealing agreements under

both Section 1 and Section 2," Appellant's Opening Br. at 109,

and it argues that the District Court's holding of no liability

under s 1 necessarily precludes holding it liable under s 2.

The District Court appears to have based its holding with

respect to s 1 upon a "total exclusion test" rather than the

40% standard drawn from the caselaw. Even assuming the

holding is correct, however, we nonetheless reject Microsoft's

contention.

The basic prudential concerns relevant to ss 1 and 2 are

admittedly the same: exclusive contracts are commonplace--

particularly in the field of distribution--in our competitive,

market economy, and imposing upon a firm with market

power the risk of an antitrust suit every time it enters into

such a contract, no matter how small the effect, would create

an unacceptable and unjustified burden upon any such firm.

At the same time, however, we agree with plaintiffs that a

monopolist's use of exclusive contracts, in certain circumUSCA Case #00-5212 Document #606393 Filed: 06/28/2001 Page 44 of 124
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stances, may give rise to a s 2 violation even though the

contracts foreclose less than the roughly 40% or 50% share

usually required in order to establish a s 1 violation. See

generally Dennis W. Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal--Why Aspen and

Kodak Are Misguided, 68 Antitrust L.J. 659 (2001) (explaining various scenarios under which exclusive dealing, particularly by a dominant firm, may raise legitimate concerns about

harm to competition).

In this case, plaintiffs allege that, by closing to rivals a

substantial percentage of the available opportunities for browser distribution, Microsoft managed to preserve its monopoly

in the market for operating systems. The IAPs constitute

one of the two major channels by which browsers can be

distributed. Findings of Fact p 242. Microsoft has exclusive

deals with "fourteen of the top fifteen access providers in

North America[, which] account for a large majority of all

Internet access subscriptions in this part of the world." Id.

p 308. By ensuring that the "majority" of all IAP subscribers

are offered IE either as the default browser or as the only

browser, Microsoft's deals with the IAPs clearly have a

significant effect in preserving its monopoly; they help keep

usage of Navigator below the critical level necessary for

Navigator or any other rival to pose a real threat to Microsoft's monopoly. See, e.g., id. p 143 (Microsoft sought to

"divert enough browser usage from Navigator to neutralize it

as a platform."); see also Carlton, at 670.

Plaintiffs having demonstrated a harm to competition, the

burden falls upon Microsoft to defend its exclusive dealing

contracts with IAPs by providing a procompetitive justification for them. Significantly, Microsoft's only explanation for

its exclusive dealing is that it wants to keep developers

focused upon its APIs--which is to say, it wants to preserve

its power in the operating system market. 02/26/01 Ct.

Appeals Tr. at 45-47. That is not an unlawful end, but

neither is it a procompetitive justification for the specific

means here in question, namely exclusive dealing contracts

with IAPs. Accordingly, we affirm the District Court's deciUSCA Case #00-5212 Document #606393 Filed: 06/28/2001 Page 45 of 124
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sion holding that Microsoft's exclusive contracts with IAPs

are exclusionary devices, in violation of s 2 of the Sherman

Act.

4. Dealings with Internet Content Providers, Independent Software Vendors, and Apple Computer

The District Court held that Microsoft engages in exclusionary conduct in its dealings with ICPs, which develop

websites; ISVs, which develop software; and Apple, which is

both an OEM and a software developer. See Conclusions of

Law, at 42-43 (deals with ICPs, ISVs, and Apple "supplemented Microsoft's efforts in the OEM and IAP channels").

The District Court condemned Microsoft's deals with ICPs

and ISVs, stating: "By granting ICPs and ISVs free licenses

to bundle [IE] with their offerings, and by exchanging other

valuable inducements for their agreement to distribute, promote[,] and rely on [IE] rather than Navigator, Microsoft

directly induced developers to focus on its own APIs rather

than ones exposed by Navigator." Id. (citing Findings of

Fact p p 334-35, 340).

With respect to the deals with ICPs, the District Court's

findings do not support liability. After reviewing the ICP

agreements, the District Court specifically stated that "there

is not sufficient evidence to support a finding that Microsoft's

promotional restrictions actually had a substantial, deleterious impact on Navigator's usage share." Findings of Fact

p 332. Because plaintiffs failed to demonstrate that Microsoft's deals with the ICPs have a substantial effect upon

competition, they have not proved the violation of the Sherman Act.

As for Microsoft's ISV agreements, however, the District

Court did not enter a similar finding of no substantial effect.

The District Court described Microsoft's deals with ISVs as

follows:

In dozens of "First Wave" agreements signed between

the fall of 1997 and the spring of 1998, Microsoft has

promised to give preferential support, in the form of

early Windows 98 and Windows NT betas, other technical information, and the right to use certain Microsoft

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seals of approval, to important ISVs that agree to certain

conditions. One of these conditions is that the ISVs use

Internet Explorer as the default browsing software for

any software they develop with a hypertext-based user

interface. Another condition is that the ISVs use Microsoft's "HTML Help," which is accessible only with Internet Explorer, to implement their applications' help systems.

Id. p 339. The District Court further found that the effect of

these deals is to "ensure [ ] that many of the most popular

Web-centric applications will rely on browsing technologies

found only in Windows," id. p 340, and that Microsoft's deals

with ISVs therefore "increase[ ] the likelihood that the millions of consumers using [applications designed by ISVs that

entered into agreements with Microsoft] will use Internet

Explorer rather than Navigator." Id. p 340.

The District Court did not specifically identify what share

of the market for browser distribution the exclusive deals

with the ISVs foreclose. Although the ISVs are a relatively

small channel for browser distribution, they take on greater

significance because, as discussed above, Microsoft had largely foreclosed the two primary channels to its rivals. In that

light, one can tell from the record that by affecting the

applications used by "millions" of consumers, Microsoft's exclusive deals with the ISVs had a substantial effect in further

foreclosing rival browsers from the market. (Data introduced by Microsoft, see Direct Testimony of Cameron Myhrvold p 84, reprinted in 6 J.A. at 3922-23, and subsequently

relied upon by the District Court in its findings, see, e.g.,

Findings of Fact p 270, indicate that over the two-year period

1997-98, when Microsoft entered into the First Wave agreements, there were 40 million new users of the internet.)

Because, by keeping rival browsers from gaining widespread

distribution (and potentially attracting the attention of developers away from the APIs in Windows), the deals have a

substantial effect in preserving Microsoft's monopoly, we hold

that plaintiffs have made a prima facie showing that the deals

have an anticompetitive effect.

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Of course, that Microsoft's exclusive deals have the anticompetitive effect of preserving Microsoft's monopoly does

not, in itself, make them unlawful. A monopolist, like a

competitive firm, may have a perfectly legitimate reason for

wanting an exclusive arrangement with its distributors. Accordingly, Microsoft had an opportunity to, but did not,

present the District Court with evidence demonstrating that

the exclusivity provisions have some such procompetitive

justification. See Conclusions of Law, at 43 (citing Findings

of Fact p p 339-40) ("With respect to the ISV agreements,

Microsoft has put forward no procompetitive business ends

whatsoever to justify their exclusionary terms."). On appeal

Microsoft likewise does not claim that the exclusivity required

by the deals serves any legitimate purpose; instead, it states

only that its ISV agreements reflect an attempt "to persuade

ISVs to utilize Internet-related system services in Windows

rather than Navigator." Appellant's Opening Br. at 114. As

we explained before, however, keeping developers focused

upon Windows--that is, preserving the Windows monopoly--

is a competitively neutral goal. Microsoft having offered no

procompetitive justification for its exclusive dealing arrangements with the ISVs, we hold that those arrangements violate

s 2 of the Sherman Act.

Finally, the District Court held that Microsoft's dealings

with Apple violated the Sherman Act. See Conclusions of

Law, at 42-43. Apple is vertically integrated: it makes both

software (including an operating system, Mac OS), and hardware (the Macintosh line of computers). Microsoft primarily

makes software, including, in addition to its operating system,

a number of popular applications. One, called "Office," is a

suite of business productivity applications that Microsoft has

ported to Mac OS. The District Court found that "ninety

percent of Mac OS users running a suite of office productivity

applications [use] Microsoft's Mac Office." Findings of Fact

p 344. Further, the District Court found that:

In 1997, Apple's business was in steep decline, and many

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er.... [M]any ISVs questioned the wisdom of continuing to spend time and money developing applications for

the Mac OS. Had Microsoft announced in the midst of

this atmosphere that it was ceasing to develop new

versions of Mac Office, a great number of ISVs, customers, developers, and investors would have interpreted the

announcement as Apple's death notice.

Id. p 344. Microsoft recognized the importance to Apple of

its continued support of Mac Office. See id. p 347 (quoting

internal Microsoft e-mail) ("[We] need a way to push these

guys[, i.e., Apple] and [threatening to cancel Mac Office] is

the only one that seems to make them move."); see also id.

("[Microsoft Chairman Bill] Gates asked whether Microsoft

could conceal from Apple in the coming month the fact that

Microsoft was almost finished developing Mac Office 97.");

id. at p 354 ("I think ... Apple should be using [IE] everywhere and if they don't do it, then we can use Office as a

club.").

In June 1997 Microsoft Chairman Bill Gates determined

that the company's negotiations with Apple " 'have not been

going well at all.... Apple let us down on the browser by

making Netscape the standard install.' Gates then reported

that he had already called Apple's CEO ... to ask 'how we

should announce the cancellation of Mac Office....' " Id. at

p 349. The District Court further found that, within a month

of Gates' call, Apple and Microsoft had reached an agreement

pursuant to which

Microsoft's primary obligation is to continue releasing

up-to-date versions of Mac Office for at least five

years.... [and] Apple has agreed ... to "bundle the

most current version of [IE] ... with [Mac OS]"... [and

to] "make [IE] the default [browser]".... Navigator is

not installed on the computer hard drive during the

default installation, which is the type of installation most

users elect to employ.... [The] Agreement further

provides that ... Apple may not position icons for nonMicrosoft browsing software on the desktop of new Macintosh PC systems or Mac OS upgrades.

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Id. p p 350-52. The agreement also prohibits Apple from

encouraging users to substitute another browser for IE, and

states that Apple will "encourage its employees to use [IE]."

Id. p 352.

This exclusive deal between Microsoft and Apple has a

substantial effect upon the distribution of rival browsers. If a

browser developer ports its product to a second operating

system, such as the Mac OS, it can continue to display a

common set of APIs. Thus, usage share, not the underlying

operating system, is the primary determinant of the platform

challenge a browser may pose. Pre-installation of a browser

(which can be accomplished either by including the browser

with the operating system or by the OEM installing the

browser) is one of the two most important methods of browser distribution, and Apple had a not insignificant share of

worldwide sales of operating systems. See id. p 35 (Microsoft

has 95% of the market not counting Apple and "well above"

80% with Apple included in the relevant market). Because

Microsoft's exclusive contract with Apple has a substantial

effect in restricting distribution of rival browsers, and because (as we have described several times above) reducing

usage share of rival browsers serves to protect Microsoft's

monopoly, its deal with Apple must be regarded as anticompetitive. See Conclusions of Law, at 42 (citing Findings of

Fact p 356) ("By extracting from Apple terms that significantly diminished the usage of Navigator on the Mac OS, Microsoft helped to ensure that developers would not view Navigator as truly cross-platform middleware.").

Microsoft offers no procompetitive justification for the exclusive dealing arrangement. It makes only the irrelevant

claim that the IE-for-Mac Office deal is part of a multifaceted

set of agreements between itself and Apple, see Appellant's

Opening Br. at 61 ("Apple's 'browsing software' obligation

was [not] the quid pro quo for Microsoft's Mac Office obligation[;] ... all of the various obligations ... were part of

one 'overall agreement' between the two companies."); that

does not mean it has any procompetitive justification. Accordingly, we hold that the exclusive deal with Apple is

exclusionary, in violation of s 2 of the Sherman Act.

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5. Java

Java, a set of technologies developed by Sun Microsystems,

is another type of middleware posing a potential threat to

Windows' position as the ubiquitous platform for software

development. Findings of Fact p 28. The Java technologies

include: (1) a programming language; (2) a set of programs

written in that language, called the "Java class libraries,"

which expose APIs; (3) a compiler, which translates code

written by a developer into "bytecode"; and (4) a Java Virtual

Machine ("JVM"), which translates bytecode into instructions

to the operating system. Id. p 73. Programs calling upon the

Java APIs will run on any machine with a "Java runtime

environment," that is, Java class libraries and a JVM. Id.

p p 73, 74.

In May 1995 Netscape agreed with Sun to distribute a copy

of the Java runtime environment with every copy of Navigator, and "Navigator quickly became the principal vehicle by

which Sun placed copies of its Java runtime environment on

the PC systems of Windows users." Id. p 76. Microsoft, too,

agreed to promote the Java technologies--or so it seemed.

For at the same time, Microsoft took steps "to maximize the

difficulty with which applications written in Java could be

ported from Windows to other platforms, and vice versa."

Conclusions of Law, at 43. Specifically, the District Court

found that Microsoft took four steps to exclude Java from

developing as a viable cross-platform threat: (a) designing a

JVM incompatible with the one developed by Sun; (b) entering into contracts, the so-called "First Wave Agreements,"

requiring major ISVs to promote Microsoft's JVM exclusively; (c) deceiving Java developers about the Windows-specific

nature of the tools it distributed to them; and (d) coercing

Intel to stop aiding Sun in improving the Java technologies.

a. The incompatible JVM

The District Court held that Microsoft engaged in exclusionary conduct by developing and promoting its own JVM.

Conclusions of Law, at 43-44. Sun had already developed a

JVM for the Windows operating system when Microsoft

began work on its version. The JVM developed by Microsoft

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allows Java applications to run faster on Windows than does

Sun's JVM, Findings of Fact p 389, but a Java application

designed to work with Microsoft's JVM does not work with

Sun's JVM and vice versa. Id. p 390. The District Court

found that Microsoft "made a large investment of engineering

resources to develop a high-performance Windows JVM," id.

p 396, and, "[b]y bundling its ... JVM with every copy of

[IE] ... Microsoft endowed its Java runtime environment

with the unique attribute of guaranteed, enduring ubiquity

across the enormous Windows installed base," id. p 397. As

explained above, however, a monopolist does not violate the

antitrust laws simply by developing a product that is incompatible with those of its rivals. See supra Section II.B.1. In

order to violate the antitrust laws, the incompatible product

must have an anticompetitive effect that outweighs any procompetitive justification for the design. Microsoft's JVM is

not only incompatible with Sun's, it allows Java applications

to run faster on Windows than does Sun's JVM. Microsoft's

faster JVM lured Java developers into using Microsoft's

developer tools, and Microsoft offered those tools deceptively,

as we discuss below. The JVM, however, does allow applications to run more swiftly and does not itself have any

anticompetitive effect. Therefore, we reverse the District

Court's imposition of liability for Microsoft's development and

promotion of its JVM.

b. The First Wave Agreements

The District Court also found that Microsoft entered into

First Wave Agreements with dozens of ISVs to use Microsoft's JVM. See Findings of Fact p 401 ("[I]n exchange for

costly technical support and other blandishments, Microsoft

induced dozens of important ISVs to make their Java applications reliant on Windows-specific technologies and to refrain

from distributing to Windows users JVMs that complied with

Sun's standards."). Again, we reject the District Court's

condemnation of low but non-predatory pricing by Microsoft.

To the extent Microsoft's First Wave Agreements with the

ISVs conditioned receipt of Windows technical information

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sively, they raise a different competitive concern. The District Court found that, although not literally exclusive, the

deals were exclusive in practice because they required developers to make Microsoft's JVM the default in the software

they developed. Id. p 401.

While the District Court did not enter precise findings as to

the effect of the First Wave Agreements upon the overall

distribution of rival JVMs, the record indicates that Microsoft's deals with the major ISVs had a significant effect upon

JVM promotion. As discussed above, the products of First

Wave ISVs reached millions of consumers. Id. p 340. The

First Wave ISVs included such prominent developers as

Rational Software, see GX 970, reprinted in 15 J.A. at 9994-

10000, "a world leader" in software development tools, see

Direct Testimony of Michael Devlin p 2, reprinted in 5 J.A. at

3520, and Symantec, see GX 2071, reprinted in 22 J.A. at

14960-66 (sealed), which, according to Microsoft itself, is "the

leading supplier of utilities such as anti-virus software," Defendant's Proposed Findings of Fact p 276, reprinted in 3 J.A.

at 1689. Moreover, Microsoft's exclusive deals with the leading ISVs took place against a backdrop of foreclosure: the

District Court found that "[w]hen Netscape announced in

May 1995 [prior to Microsoft's execution of the First Wave

Agreements] that it would include with every copy of Navigator a copy of a Windows JVM that complied with Sun's

standards, it appeared that Sun's Java implementation would

achieve the necessary ubiquity on Windows." Findings of

Fact p 394. As discussed above, however, Microsoft undertook a number of anticompetitive actions that seriously reduced the distribution of Navigator, and the District Court

found that those actions thereby seriously impeded distribution of Sun's JVM. Conclusions of Law, at 43-44. Because

Microsoft's agreements foreclosed a substantial portion of the

field for JVM distribution and because, in so doing, they

protected Microsoft's monopoly from a middleware threat,

they are anticompetitive.

Microsoft offered no procompetitive justification for the

default clause that made the First Wave Agreements exclusive as a practical matter. See Findings of Fact p 401.

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Because the cumulative effect of the deals is anticompetitive

and because Microsoft has no procompetitive justification for

them, we hold that the provisions in the First Wave Agreements requiring use of Microsoft's JVM as the default are

exclusionary, in violation of the Sherman Act.

c. Deception of Java developers

Microsoft's "Java implementation" included, in addition to a

JVM, a set of software development tools it created to assist

ISVs in designing Java applications. The District Court

found that, not only were these tools incompatible with Sun's

cross-platform aspirations for Java--no violation, to be sure--

but Microsoft deceived Java developers regarding the Windows-specific nature of the tools. Microsoft's tools included

"certain 'keywords' and 'compiler directives' that could only

be executed properly by Microsoft's version of the Java

runtime environment for Windows." Id. p 394; see also

Direct Testimony of James Gosling p 58, reprinted in 21 J.A.

at 13959 (Microsoft added "programming instructions ...

that alter the behavior of the code."). As a result, even Java

"developers who were opting for portability over performance

... unwittingly [wrote] Java applications that [ran] only on

Windows." Conclusions of Law, at 43. That is, developers

who relied upon Microsoft's public commitment to cooperate

with Sun and who used Microsoft's tools to develop what

Microsoft led them to believe were cross-platform applications ended up producing applications that would run only on

the Windows operating system.

When specifically accused by a PC Week reporter of fragmenting Java standards so as to prevent cross-platform uses,

Microsoft denied the accusation and indicated it was only

"adding rich platform support" to what remained a crossplatform implementation. An e-mail message internal to

Microsoft, written shortly after the conversation with the

reporter, shows otherwise:

[O]k, i just did a followup call.... [The reporter] liked

that i kept pointing customers to w3c standards [(commonly observed internet protocols)].... [but] he accused

us of being schizo with this vs. our java approach, i said

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he misunderstood [--] that [with Java] we are merely

trying to add rich platform support to an interop layer.... this plays well.... at this point its [sic] not good

to create MORE noise around our win32 java classes.

instead we should just quietly grow j [(Microsoft's

development tools)] share and assume that people will

take more advantage of our classes without ever realizing

they are building win32-only java apps.

GX 1332, reprinted in 22 J.A. at 14922-23.

Finally, other Microsoft documents confirm that Microsoft

intended to deceive Java developers, and predicted that the

effect of its actions would be to generate Windows-dependent

Java applications that their developers believed would be

cross-platform; these documents also indicate that Microsoft's ultimate objective was to thwart Java's threat to Microsoft's monopoly in the market for operating systems. One

Microsoft document, for example, states as a strategic goal:

"Kill cross-platform Java by grow[ing] the polluted Java

market." GX 259, reprinted in 22 J.A. at 14514; see also id.

("Cross-platform capability is by far the number one reason

for choosing/using Java.") (emphasis in original).

Microsoft's conduct related to its Java developer tools

served to protect its monopoly of the operating system in a

manner not attributable either to the superiority of the

operating system or to the acumen of its makers, and therefore was anticompetitive. Unsurprisingly, Microsoft offers no

procompetitive explanation for its campaign to deceive developers. Accordingly, we conclude this conduct is exclusionary,

in violation of s 2 of the Sherman Act.

d. The threat to Intel

The District Court held that Microsoft also acted unlawfully with respect to Java by using its "monopoly power to

prevent firms such as Intel from aiding in the creation of

cross-platform interfaces." Conclusions of Law, at 43. In

1995 Intel was in the process of developing a highperformance, Windows-compatible JVM. Microsoft wanted

Intel to abandon that effort because a fast, cross-platform

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JVM would threaten Microsoft's monopoly in the operating

system market. At an August 1995 meeting, Microsoft's

Gates told Intel that its "cooperation with Sun and Netscape

to develop a Java runtime environment ... was one of the

issues threatening to undermine cooperation between Intel

and Microsoft." Findings of Fact p 396. Three months

later, "Microsoft's Paul Maritz told a senior Intel executive

that Intel's [adaptation of its multimedia software to comply

with] Sun's Java standards was as inimical to Microsoft as

Microsoft's support for non-Intel microprocessors would be to

Intel." Id. p 405.

Intel nonetheless continued to undertake initiatives related

to Java. By 1996 "Intel had developed a JVM designed to

run well ... while complying with Sun's cross-platform standards." Id. p 396. In April of that year, Microsoft again

urged Intel not to help Sun by distributing Intel's fast, Suncompliant JVM. Id. And Microsoft threatened Intel that if

it did not stop aiding Sun on the multimedia front, then

Microsoft would refuse to distribute Intel technologies bundled with Windows. Id. p 404.

Intel finally capitulated in 1997, after Microsoft delivered

the coup de grace.

[O]ne of Intel's competitors, called AMD, solicited support from Microsoft for its "3DX" technology.... Microsoft's Allchin asked Gates whether Microsoft should

support 3DX, despite the fact that Intel would oppose it.

Gates responded: "If Intel has a real problem with us

supporting this then they will have to stop supporting

Java Multimedia the way they are. I would gladly give

up supporting this if they would back off from their work

on JAVA."

Id. p 406.

Microsoft's internal documents and deposition testimony

confirm both the anticompetitive effect and intent of its

actions. See, e.g., GX 235, reprinted in 22 J.A. at 14502

(Microsoft executive, Eric Engstrom, included among Microsoft's goals for Intel: "Intel to stop helping Sun create Java

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Multimedia APIs, especially ones that run well ... on Windows."); Deposition of Eric Engstrom at 179 ("We were

successful [in convincing Intel to stop aiding Sun] for some

period of time.").

Microsoft does not deny the facts found by the District

Court, nor does it offer any procompetitive justification for

pressuring Intel not to support cross-platform Java. Microsoft lamely characterizes its threat to Intel as "advice." The

District Court, however, found that Microsoft's "advice" to

Intel to stop aiding cross-platform Java was backed by the

threat of retaliation, and this conclusion is supported by the

evidence cited above. Therefore we affirm the conclusion

that Microsoft's threats to Intel were exclusionary, in violation of s 2 of the Sherman Act.

6. Course of Conduct

The District Court held that, apart from Microsoft's specific acts, Microsoft was liable under s 2 based upon its general

"course of conduct." In reaching this conclusion the court

relied upon Continental Ore Co. v. Union Carbide & Carbon

Corp., 370 U.S. 690, 699 (1962), where the Supreme Court

stated, "[i]n [Sherman Act cases], plaintiffs should be given

the full benefit of their proof without tightly compartmentalizing the various factual components and wiping the slate clean

after scrutiny of each."

Microsoft points out that Continental Ore and the other

cases cited by plaintiffs in support of "course of conduct"

liability all involve conspiracies among multiple firms, not the

conduct of a single firm; in that setting the "course of

conduct" is the conspiracy itself, for which all the participants

may be held liable. See Appellant's Opening Br. at 112-13.

Plaintiffs respond that, as a policy matter, a monopolist's

unilateral "campaign of [acts intended to exclude a rival] that

in the aggregate has the requisite impact" warrants liability

even if the acts viewed individually would be lawful for want

of a significant effect upon competition. Appellees' Br. at 82-

83.

We need not pass upon plaintiffs' argument, however,

because the District Court did not point to any series of acts,

each of which harms competition only slightly but the cumulative effect of which is significant enough to form an independent basis for liability. The "course of conduct" section of the

District Court's opinion contains, with one exception, only

broad, summarizing conclusions. See, e.g., Conclusions of

Law, at 44 ("Microsoft placed an oppressive thumb on the

scale of competitive fortune...."). The only specific acts to

which the court refers are Microsoft's expenditures in promoting its browser, see id. ("Microsoft has expended wealth

and foresworn opportunities to realize more...."), which we

have explained are not in themselves unlawful. Because the

District Court identifies no other specific acts as a basis for

"course of conduct" liability, we reverse its conclusion that

Microsoft's course of conduct separately violates s 2 of the

Sherman Act.

C. Causation

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As a final parry, Microsoft urges this court to reverse on

the monopoly maintenance claim, because plaintiffs never

established a causal link between Microsoft's anticompetitive

conduct, in particular its foreclosure of Netscape's and Java's

distribution channels, and the maintenance of Microsoft's

operating system monopoly. See Findings of Fact p 411

("There is insufficient evidence to find that, absent Microsoft's actions, Navigator and Java already would have ignited

genuine competition in the market for Intel-compatible PC

operating systems."). This is the flip side of Microsoft's

earlier argument that the District Court should have included

middleware in the relevant market. According to Microsoft,

the District Court cannot simultaneously find that middleware is not a reasonable substitute and that Microsoft's

exclusionary conduct contributed to the maintenance of monopoly power in the operating system market. Microsoft

claims that the first finding depended on the court's view that

middleware does not pose a serious threat to Windows, see

supra Section II.A, while the second finding required the

court to find that Navigator and Java would have developed

into serious enough cross-platform threats to erode the applications barrier to entry. We disagree.

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Microsoft points to no case, and we can find none, standing

for the proposition that, as to s 2 liability in an equitable

enforcement action, plaintiffs must present direct proof that a

defendant's continued monopoly power is precisely attributable to its anticompetitive conduct. As its lone authority,

Microsoft cites the following passage from Professor Areeda's

antitrust treatise: "The plaintiff has the burden of pleading,

introducing evidence, and presumably proving by a preponderance of the evidence that reprehensible behavior has

contributed significantly to the ... maintenance of the monopoly." 3 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law p 650c, at 69 (1996) (emphasis added).

But, with respect to actions seeking injunctive relief, the

authors of that treatise also recognize the need for courts to

infer "causation" from the fact that a defendant has engaged

in anticompetitive conduct that "reasonably appear[s] capable

of making a significant contribution to ... maintaining monopoly power." Id. p 651c, at 78; see also Morgan v. Ponder,

892 F.2d 1355, 1363 (8th Cir. 1989); Barry Wright, 724 F.2d

at 230. To require that s 2 liability turn on a plaintiff's

ability or inability to reconstruct the hypothetical marketplace

absent a defendant's anticompetitive conduct would only encourage monopolists to take more and earlier anticompetitive

action.

We may infer causation when exclusionary conduct is aimed

at producers of nascent competitive technologies as well as

when it is aimed at producers of established substitutes.

Admittedly, in the former case there is added uncertainty,

inasmuch as nascent threats are merely potential substitutes.

But the underlying proof problem is the same--neither plaintiffs nor the court can confidently reconstruct a product's

hypothetical technological development in a world absent the

defendant's exclusionary conduct. To some degree, "the defendant is made to suffer the uncertain consequences of its

own undesirable conduct." 3 Areeda & Hovenkamp, Antitrust Law p 651c, at 78.

Given this rather edentulous test for causation, the question in this case is not whether Java or Navigator would

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actually have developed into viable platform substitutes, but

(1) whether as a general matter the exclusion of nascent

threats is the type of conduct that is reasonably capable of

contributing significantly to a defendant's continued monopoly

power and (2) whether Java and Navigator reasonably constituted nascent threats at the time Microsoft engaged in the

anticompetitive conduct at issue. As to the first, suffice it to

say that it would be inimical to the purpose of the Sherman

Act to allow monopolists free reign to squash nascent, albeit

unproven, competitors at will--particularly in industries

marked by rapid technological advance and frequent paradigm shifts. Findings of Fact p p 59-60. As to the second,

the District Court made ample findings that both Navigator

and Java showed potential as middleware platform threats.

Findings of Fact p p 68-77. Counsel for Microsoft admitted

as much at oral argument. 02/26/01 Ct. Appeals Tr. at 27

("There are no constraints on output. Marginal costs are

essentially zero. And there are to some extent network

effects. So a company like Netscape founded in 1994 can be

by the middle of 1995 clearly a potentially lethal competitor to

Windows because it can supplant its position in the market

because of the characteristics of these markets.").

Microsoft's concerns over causation have more purchase in

connection with the appropriate remedy issue, i.e., whether

the court should impose a structural remedy or merely enjoin

the offensive conduct at issue. As we point out later in this

opinion, divestiture is a remedy that is imposed only with

great caution, in part because its long-term efficacy is rarely

certain. See infra Section V.E. Absent some measure of

confidence that there has been an actual loss to competition

that needs to be restored, wisdom counsels against adopting

radical structural relief. See 3 Areeda & Hovenkamp, Antitrust Law p 653b, at 91-92 ("[M]ore extensive equitable relief,

particularly remedies such as divestiture designed to eliminate the monopoly altogether, raise more serious questions

and require a clearer indication of a significant causal connection between the conduct and creation or maintenance of the

market power."). But these queries go to questions of remedy, not liability. In short, causation affords Microsoft no

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defense to liability for its unlawful actions undertaken to

maintain its monopoly in the operating system market.

III. Attempted Monopolization

Microsoft further challenges the District Court's determination of liability for "attempt[ing] to monopolize ... any part

of the trade or commerce among the several States." 15

U.S.C. s 2 (1997). To establish a s 2 violation for attempted

monopolization, "a plaintiff must prove (1) that the defendant

has engaged in predatory or anticompetitive conduct with (2)

a specific intent to monopolize and (3) a dangerous probability

of achieving monopoly power." Spectrum Sports, Inc. v.

McQuillan, 506 U.S. 447, 456 (1993); see also TimesPicayune Pub. Co. v. United States, 345 U.S. 594, 626 (1953);

Lorain Journal Co. v. United States, 342 U.S. 143, 153-55

(1951). Because a deficiency on any one of the three will

defeat plaintiffs' claim, we look no further than plaintiffs'

failure to prove a dangerous probability of achieving monopoly power in the putative browser market.

The determination whether a dangerous probability of success exists is a particularly fact-intensive inquiry. Because

the Sherman Act does not identify the activities that constitute the offense of attempted monopolization, the court "must

examine the facts of each case, mindful that the determination

of what constitutes an attempt, as Justice Holmes explained,

'is a question of proximity and degree.' " United States v.

Am. Airlines, Inc., 743 F.2d 1114, 1118 (5th Cir. 1984)

(quoting Swift & Co. v. United States, 196 U.S. 375, 402

(1904)). The District Court determined that "[t]he evidence

supports the conclusion that Microsoft's actions did pose such

a danger." Conclusions of Law, at 45. Specifically, the

District Court concluded that "Netscape's assent to Microsoft's market division proposal would have, instanter, resulted

in Microsoft's attainment of monopoly power in a second

market," and that "the proposal itself created a dangerous

probability of that result." Conclusions of Law, at 46 (citation omitted). The District Court further concluded that "the

predatory course of conduct Microsoft has pursued since June

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of 1995 has revived the dangerous probability that Microsoft

will attain monopoly power in a second market." Id.

At the outset we note a pervasive flaw in the District

Court's and plaintiffs' discussion of attempted monopolization.

Simply put, plaintiffs have made the same argument under

two different headings--monopoly maintenance and attempted monopolization. They have relied upon Microsoft's s 2

liability for monopolization of the operating system market as

a presumptive indicator of attempted monopolization of an

entirely different market. The District Court implicitly accepted this approach: It agreed with plaintiffs that the events

that formed the basis for the s 2 monopolization claim "warrant[ed] additional liability as an illegal attempt to amass

monopoly power in 'the browser market.' " Id. at 45 (emphasis added). Thus, plaintiffs and the District Court failed to

recognize the need for an analysis wholly independent of the

conclusions and findings on monopoly maintenance.

To establish a dangerous probability of success, plaintiffs

must as a threshold matter show that the browser market can

be monopolized, i.e., that a hypothetical monopolist in that

market could enjoy market power. This, in turn, requires

plaintiffs (1) to define the relevant market and (2) to demonstrate that substantial barriers to entry protect that market.

Because plaintiffs have not carried their burden on either

prong, we reverse without remand.

A. Relevant Market

A court's evaluation of an attempted monopolization claim

must include a definition of the relevant market. See Spectrum Sports, 506 U.S. at 455-56. Such a definition establishes a context for evaluating the defendant's actions as well

as for measuring whether the challenged conduct presented a

dangerous probability of monopolization. See id. The District Court omitted this element of the Spectrum Sports

inquiry.

Defining a market for an attempted monopolization claim

involves the same steps as defining a market for a monopoly

maintenance claim, namely a detailed description of the purpose of a browser--what functions may be included and what

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are not--and an examination of the substitutes that are part

of the market and those that are not. See also supra Section

II.A. The District Court never engaged in such an analysis

nor entered detailed findings defining what a browser is or

what products might constitute substitutes. In the Findings

of Fact, the District Court (in a section on whether IE and

Windows are separate products) stated only that "a Web

browser provides the ability for the end user to select,

retrieve, and perceive resources on the Web." Findings of

Fact p 150. Furthermore, in discussing attempted monopolization in its Conclusions of Law, the District Court failed to

demonstrate analytical rigor when it employed varying and

imprecise references to the "market for browsing technology

for Windows," "the browser market," and "platform-level

browsing software." Conclusions of Law, at 45.

Because the determination of a relevant market is a factual

question to be resolved by the District Court, see, e.g., All

Care Nursing Serv., Inc. v. High Tech Staffing Servs., Inc.,

135 F.3d 740, 749 (11th Cir. 1998); Tunis Bros. Co., Inc. v.

Ford Motor Co., 952 F.2d 715, 722-23 (3d Cir. 1991); Westman Comm'n Co. v. Hobart Int'l, Inc., 796 F.2d 1216, 1220

(10th Cir. 1986), we would normally remand the case so that

the District Court could formulate an appropriate definition.

See Pullman-Standard v. Swint, 456 U.S. 273, 291-92 & n.22

(1982); Janini v. Kuwait Univ., 43 F.3d 1534, 1537 (D.C. Cir.

1995); Palmer v. Shultz, 815 F.2d 84, 103 (D.C. Cir. 1987). A

remand on market definition is unnecessary, however, because the District Court's imprecision is directly traceable to

plaintiffs' failure to articulate and identify evidence before the

District Court as to (1) what constitutes a browser (i.e., what

are the technological components of or functionalities provided by a browser) and (2) why certain other products are not

reasonable substitutes (e.g., browser shells or viewers for

individual internet extensions, such as Real Audio Player or

Adobe Acrobat Reader). See Plaintiffs' Joint Proposed Findings of Fact, at 817-19, reprinted in 2 J.A. at 1480-82;

Plaintiffs' Joint Proposed Conclusions of Law s IV (No. 98-

1232); see also Lee v. Interstate Fire & Cas. Co., 86 F.3d 101,

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105 (7th Cir. 1996) (stating that remand for development of a

factual record is inappropriate where plaintiff failed to meet

burden of persuasion and never suggested that additional

evidence was necessary). Indeed, when plaintiffs in their

Proposed Findings of Fact attempted to define a relevant

market for the attempt claim, they pointed only to their

separate products analysis for the tying claim. See, e.g.,

Plaintiffs' Joint Proposed Findings of Fact, at 818, reprinted

in 2 J.A. at 1481. However, the separate products analysis

for tying purposes is not a substitute for the type of market

definition that Spectrum Sports requires. See infra Section

IV.A.

Plaintiffs' proposed findings and the District Court's actual

findings on attempted monopolization pale in comparison to

their counterparts on the monopoly maintenance claim.

Compare Findings of Fact p 150, and Plaintiffs' Joint Proposed Findings of Fact, at 817-819, reprinted in 2 J.A. at

1480-82, with Findings of Fact p p 18-66, and Plaintiffs' Joint

Proposed Findings of Fact, at 20-31, reprinted in 1 J.A. at

658-69. Furthermore, in their brief and at oral argument

before this court, plaintiffs did nothing to clarify or ameliorate this deficiency. See, e.g., Appellees' Br. at 93-94.`

B. Barriers to Entry

Because a firm cannot possess monopoly power in a market

unless that market is also protected by significant barriers to

entry, see supra Section II.A, it follows that a firm cannot

threaten to achieve monopoly power in a market unless that

market is, or will be, similarly protected. See Spectrum

Sports, 506 U.S. at 456 ("In order to determine whether there

is a dangerous probability of monopolization, courts have

found it necessary to consider ... the defendant's ability to

lessen or destroy competition in that market.") (citing cases).

Plaintiffs have the burden of establishing barriers to entry

into a properly defined relevant market. See 2A Phillip E.

Areeda et al., Antitrust Law p 420b, at 57-59 (1995); 3A

Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law

p 807g, at 361-62 (1996); see also Neumann v. Reinforced

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Earth Co., 786 F.2d 424, 429 (D.C. Cir. 1986). Plaintiffs must

not only show that barriers to entry protect the properly

defined browser market, but that those barriers are "significant." See United States v. Baker Hughes Inc., 908 F.2d 981,

987 (D.C. Cir. 1990). Whether there are significant barriers

to entry cannot, of course, be answered absent an appropriate

market definition; thus, plaintiffs' failure on that score alone

is dispositive. But even were we to assume a properly

defined market, for example browsers consisting of a graphical interface plus internet protocols, plaintiffs nonetheless

failed to carry their burden on barriers to entry.

Contrary to plaintiffs' contention on appeal, see Appellees'

Br. at 91-93, none of the District Court's statements constitutes a finding of barriers to entry into the web browser

market. Finding of Fact 89 states:

At the time Microsoft presented its proposal, Navigator

was the only browser product with a significant share of

the market and thus the only one with the potential to

weaken the applications barrier to entry. Thus, had it

convinced Netscape to accept its offer of a "special

relationship," Microsoft quickly would have gained such

control over the extensions and standards that networkcentric applications (including Web sites) employ as to

make it all but impossible for any future browser rival to

lure appreciable developer interest away from Microsoft's platform.

This finding is far too speculative to establish that competing browsers would be unable to enter the market, or that

Microsoft would have the power to raise the price of its

browser above, or reduce the quality of its browser below, the

competitive level. Moreover, it is ambiguous insofar as it

appears to focus on Microsoft's response to the perceived

platform threat rather than the browser market. Finding of

Fact 144, on which plaintiffs also rely, is part of the District

Court's discussion of Microsoft's alleged anticompetitive actions to eliminate the platform threat posed by Netscape

Navigator. This finding simply describes Microsoft's reliance

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on studies indicating consumers' reluctance to switch browsers, a reluctance not shown to be any more than that which

stops consumers from switching brands of cereal. Absent

more extensive and definitive factual findings, the District

Court's legal conclusions about entry barriers amount to

nothing more than speculation.

In contrast to their minimal effort on market definition,

plaintiffs did at least offer proposed findings of fact suggesting that the possibility of network effects could potentially

create barriers to entry into the browser market. See Plaintiffs' Joint Proposed Findings of Fact, at 822-23, 825-27,

reprinted in 2 J.A. at 1485-86, 1488-90. The District Court

did not adopt those proposed findings. See Findings of Fact

p 89. However, the District Court did acknowledge the possibility of a different kind of entry barrier in its Conclusions of

Law:

In the time it would have taken an aspiring entrant to

launch a serious effort to compete against Internet Explorer, Microsoft could have erected the same type of

barrier that protects its existing monopoly power by

adding proprietary extensions to the browsing software

under its control and by extracting commitments from

OEMs, IAPs and others similar to the ones discussed in

[the monopoly maintenance section].

Conclusions of Law, at 46 (emphasis added).

Giving plaintiffs and the District Court the benefit of the

doubt, we might remand if the possible existence of entry

barriers resulting from the possible creation and exploitation

of network effects in the browser market were the only

concern. That is not enough to carry the day, however,

because the District Court did not make two key findings: (1)

that network effects were a necessary or even probable,

rather than merely possible, consequence of high market

share in the browser market and (2) that a barrier to entry

resulting from network effects would be "significant" enough

to confer monopoly power. Again, these deficiencies are in

large part traceable to plaintiffs' own failings. As to the first

point, the District Court's use of the phrase "could have"

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reflects the same uncertainty articulated in testimony cited in

plaintiffs' proposed findings. See Plaintiffs' Joint Proposed

Findings of Fact, at 822 (citing testimony of Frederick Warren-Boulton), at 826 (citing testimony of Franklin Fisher),

reprinted in 2 J.A. at 1485, 1489. As to the second point, the

cited testimony in plaintiffs' proposed findings offers little

more than conclusory statements. See id. at 822-27, reprinted in 2 J.A. at 1485-90. The proffered testimony contains no

evidence regarding the cost of "porting" websites to different

browsers or the potentially different economic incentives facing ICPs, as opposed to ISVs, in their decision to incur costs

to do so. Simply invoking the phrase "network effects"

without pointing to more evidence does not suffice to carry

plaintiffs' burden in this respect.

Any doubt that we may have had regarding remand instead

of outright reversal on the barriers to entry question was

dispelled by plaintiffs' arguments on attempted monopolization before this court. Not only did plaintiffs fail to articulate

a website barrier to entry theory in either their brief or at

oral argument, they failed to point the court to evidence in

the record that would support a finding that Microsoft would

likely erect significant barriers to entry upon acquisition of a

dominant market share.

Plaintiffs did not devote the same resources to the attempted monopolization claim as they did to the monopoly maintenance claim. But both claims require evidentiary and theoretical rigor. Because plaintiffs failed to make their case on

attempted monopolization both in the District Court and

before this court, there is no reason to give them a second

chance to flesh out a claim that should have been fleshed out

the first time around. Accordingly, we reverse the District

Court's determination of s 2 liability for attempted monopolization.

IV. Tying

Microsoft also contests the District Court's determination

of liability under s 1 of the Sherman Act. The District Court

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dling of the IE web browser (the "tied" product) with its

Windows operating system ("OS") (the "tying" product) resulted in a tying arrangement that was per se unlawful.

Conclusions of Law, at 47-51. We hold that the rule of

reason, rather than per se analysis, should govern the legality

of tying arrangements involving platform software products.

The Supreme Court has warned that " '[i]t is only after

considerable experience with certain business relationships

that courts classify them as per se violations....' " Broad.

Music, Inc. v. CBS, 441 U.S. 1, 9 (1979) (quoting United

States v. Topco Assocs., 405 U.S. 596, 607-08 (1972)). While

every "business relationship" will in some sense have unique

features, some represent entire, novel categories of dealings.

As we shall explain, the arrangement before us is an example

of the latter, offering the first up-close look at the technological integration of added functionality into software that serves

as a platform for third-party applications. There being no

close parallel in prior antitrust cases, simplistic application of

per se tying rules carries a serious risk of harm. Accordingly, we vacate the District Court's finding of a per se tying

violation and remand the case. Plaintiffs may on remand

pursue their tying claim under the rule of reason.

The facts underlying the tying allegation substantially overlap with those set forth in Section II.B in connection with the

s 2 monopoly maintenance claim. The key District Court

findings are that (1) Microsoft required licensees of Windows

95 and 98 also to license IE as a bundle at a single price,

Findings of Fact p p 137, 155, 158; (2) Microsoft refused to

allow OEMs to uninstall or remove IE from the Windows

desktop, id. p p 158, 203, 213; (3) Microsoft designed Windows 98 in a way that withheld from consumers the ability to

remove IE by use of the Add/Remove Programs utility, id.

p 170; cf. id. p 165 (stating that IE was subject to Add/Remove Programs utility in Windows 95); and (4) Microsoft

designed Windows 98 to override the user's choice of default

web browser in certain circumstances, id. p p 171, 172. The

court found that these acts constituted a per se tying violation. Conclusions of Law, at 47-51. Although the District

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tem-only and browser-only routines in the same library files,

Findings of Fact p p 161, 164, it did not include this as a basis

for tying liability despite plaintiffs' request that it do so,

Plaintiffs' Proposed Findings of Fact, p p 131-32, reprinted in

2 J.A. at 941-47.

There are four elements to a per se tying violation: (1) the

tying and tied goods are two separate products; (2) the

defendant has market power in the tying product market; (3)

the defendant affords consumers no choice but to purchase

the tied product from it; and (4) the tying arrangement

forecloses a substantial volume of commerce. See Eastman

Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 461-62

(1992); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S.

2, 12-18 (1984).

Microsoft does not dispute that it bound Windows and IE

in the four ways the District Court cited. Instead it argues

that Windows (the tying good) and IE browsers (the tied

good) are not "separate products," Appellant's Opening Br. at

69-79, and that it did not substantially foreclose competing

browsers from the tied product market, id. at 79-83. (Microsoft also contends that it does not have monopoly power in

the tying product market, id. at 84-96, but, for reasons given

in Section II.A, we uphold the District Court's finding to the

contrary.)

We first address the separate-products inquiry, a source of

much argument between the parties and of confusion in the

cases. Our purpose is to highlight the poor fit between the

separate-products test and the facts of this case. We then

offer further reasons for carving an exception to the per se

rule when the tying product is platform software. In the

final section we discuss the District Court's inquiry if plaintiffs pursue a rule of reason claim on remand.

A. Separate-Products Inquiry Under the Per Se Test

The requirement that a practice involve two separate products before being condemned as an illegal tie started as a

purely linguistic requirement: unless products are separate,

one cannot be "tied" to the other. Indeed, the nature of the

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products involved in early tying cases--intuitively distinct

items such as a movie projector and a film, Motion Picture

Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917)--

led courts either to disregard the separate-products question,

see, e.g., United Shoe Mach. Corp. v. United States, 258 U.S.

451 (1922), or to discuss it only in passing, see, e.g., Motion

Picture Patents, 243 U.S. at 508, 512, 518. It was not until

Times-Picayune Publishing Co. v. United States, 345 U.S.

594 (1953), that the separate-products issue became a distinct

element of the test for an illegal tie. Id. at 614. Even that

case engaged in a rather cursory inquiry into whether ads

sold in the morning edition of a paper were a separate

product from ads sold in the evening edition.

The first case to give content to the separate-products test

was Jefferson Parish, 466 U.S. 2. That case addressed a

tying arrangement in which a hospital conditioned surgical

care at its facility on the purchase of anesthesiological services from an affiliated medical group. The facts were a

challenge for casual separate-products analysis because the

tied service--anesthesia--was neither intuitively distinct from

nor intuitively contained within the tying service--surgical

care. A further complication was that, soon after the Court

enunciated the per se rule for tying liability in International

Salt Co. v. United States, 332 U.S. 392, 396 (1947), and

Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5-

7 (1958), new economic research began to cast doubt on the

assumption, voiced by the Court when it established the rule,

that " 'tying agreements serve hardly any purpose beyond the

suppression of competition,' " id. at 6 (quoting Standard Oil

of Cal. v. United States, 337 U.S. 293, 305-06 (1949)); see also

Jefferson Parish, 466 U.S. at 15 n.23 (citing materials); Fortner Enters. v. U.S. Steel Corp., 394 U.S. 495, 524-25 (1969)

(Fortas, J., dissenting) ("Fortner I").

The Jefferson Parish Court resolved the matter in two

steps. First, it clarified that "the answer to the question

whether one or two products are involved" does not turn "on

the functional relation between them...." Jefferson Parish,

466 U.S. at 19; see also id. at 19 n.30. In other words, the

mere fact that two items are complements, that "one ... is

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useless without the other," id., does not make them a single

"product" for purposes of tying law. Accord Eastman Kodak, 504 U.S. at 463. Second, reasoning that the "definitional

question [whether two distinguishable products are involved]

depends on whether the arrangement may have the type of

competitive consequences addressed by the rule [against tying]," Jefferson Parish, 466 U.S. at 21, the Court decreed that

"no tying arrangement can exist unless there is a sufficient

demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product

market in which it is efficient to offer anesthesiological services separately from hospital service," id. at 21-22 (emphasis

added); accord Eastman Kodak, 504 U.S. at 462.

The Court proceeded to examine direct and indirect evidence of consumer demand for the tied product separate from

the tying product. Direct evidence addresses the question

whether, when given a choice, consumers purchase the tied

good from the tying good maker, or from other firms. The

Court took note, for example, of testimony that patients and

surgeons often requested specific anesthesiologists not associated with a hospital. Jefferson Parish, 466 U.S. at 22.

Indirect evidence includes the behavior of firms without

market power in the tying good market, presumably on the

notion that (competitive) supply follows demand. If competitive firms always bundle the tying and tied goods, then they

are a single product. See id. at 22 n.36; see also Eastman

Kodak, 504 U.S. at 462; Fortner I, 394 U.S. at 525 (Fortas,

J., dissenting), cited in Jefferson Parish, 466 U.S. at 12, 22

n.35; United States v. Jerrold Elecs. Corp., 187 F. Supp. 545,

559 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961); 10

Phillip E. Areeda et al., Antitrust Law p 1744, at 197-201

(1996). Here the Court noted that only 27% of anesthesiologists in markets other than the defendant's had financial

relationships with hospitals, and that, unlike radiologists and

pathologists, anesthesiologists were not usually employed by

hospitals, i.e., bundled with hospital services. Jefferson Parish, 466 U.S. at 22 n.36. With both direct and indirect

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evidence concurring, the Court determined that hospital surgery and anesthesiological services were distinct goods.

To understand the logic behind the Court's consumer demand test, consider first the postulated harms from tying.

The core concern is that tying prevents goods from competing

directly for consumer choice on their merits, i.e., being selected as a result of "buyers' independent judgment," id. at 13

(internal quotes omitted). With a tie, a buyer's "freedom to

select the best bargain in the second market [could be]

impaired by his need to purchase the tying product, and

perhaps by an inability to evaluate the true cost of either

product...." Id. at 15. Direct competition on the merits of

the tied product is foreclosed when the tying product either is

sold only in a bundle with the tied product or, though offered

separately, is sold at a bundled price, so that the buyer pays

the same price whether he takes the tied product or not. In

both cases, a consumer buying the tying product becomes

entitled to the tied product; he will therefore likely be

unwilling to buy a competitor's version of the tied product

even if, making his own price/quality assessment, that is what

he would prefer.

But not all ties are bad. Bundling obviously saves distribution and consumer transaction costs. 9 Phillip E. Areeda,

Antitrust Law p 1703g2, at 51-52 (1991). This is likely to be

true, to take some examples from the computer industry, with

the integration of math co-processors and memory into microprocessor chips and the inclusion of spell checkers in word

processors. 11/10/98 pm Tr. at 18-19 (trial testimony of

Steven McGeady of Intel), reprinted in 9 J.A. at 5581-82

(math co-processor); Cal. Computer Prods., Inc. v. IBM

Corp., 613 F.2d 727, 744 & n.29 (9th Cir. 1979) (memory).

Bundling can also capitalize on certain economies of scope. A

possible example is the "shared" library files that perform OS

and browser functions with the very same lines of code and

thus may save drive space from the clutter of redundant

routines and memory when consumers use both the OS and

browser simultaneously. 11/16/98 pm Tr. at 44 (trial testimony of Glenn Weadock), reprinted in 9 J.A. at 5892; Direct

Testimony of Microsoft's James Allchin p p 10, 97, 100, 106-

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116, app. A (excluding p p f, g.vi), reprinted in 5 J.A. at 3292,

3322-30, 3412-17. Indeed, if there were no efficiencies from

a tie (including economizing on consumer transaction costs

such as the time and effort involved in choice), we would

expect distinct consumer demand for each individual component of every good. In a competitive market with zero

transaction costs, the computers on which this opinion was

written would only be sold piecemeal--keyboard, monitor,

mouse, central processing unit, disk drive, and memory all

sold in separate transactions and likely by different manufacturers.

Recognizing the potential benefits from tying, see Jefferson

Parish, 466 U.S. at 21 n.33, the Court in Jefferson Parish

forged a separate-products test that, like those of market

power and substantial foreclosure, attempts to screen out

false positives under per se analysis. The consumer demand

test is a rough proxy for whether a tying arrangement may,

on balance, be welfare-enhancing, and unsuited to per se

condemnation. In the abstract, of course, there is always

direct separate demand for products: assuming choice is

available at zero cost, consumers will prefer it to no choice.

Only when the efficiencies from bundling are dominated by

the benefits to choice for enough consumers, however, will we

actually observe consumers making independent purchases.

In other words, perceptible separate demand is inversely

proportional to net efficiencies. On the supply side, firms

without market power will bundle two goods only when the

cost savings from joint sale outweigh the value consumers

place on separate choice. So bundling by all competitive

firms implies strong net efficiencies. If a court finds either

that there is no noticeable separate demand for the tied

product or, there being no convincing direct evidence of

separate demand, that the entire "competitive fringe" engages in the same behavior as the defendant, 10 Areeda et

al., Antitrust Law p 1744c4, at 200, then the tying and tied

products should be declared one product and per se liability

should be rejected.

Before concluding our exegesis of Jefferson Parish's

separate-products test, we should clarify two things. First,

Jefferson Parish does not endorse a direct inquiry into the

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efficiencies of a bundle. Rather, it proposes easy-toadminister proxies for net efficiency. In describing the separate-products test we discuss efficiencies only to explain the

rationale behind the consumer demand inquiry. To allow the

separate-products test to become a detailed inquiry into

possible welfare consequences would turn a screening test

into the very process it is expected to render unnecessary.

10 Areeda et al., Antitrust Law p p 1741b & c, at 180-85; see

also Jefferson Parish, 466 U.S. at 34-35 (O'Connor, J., concurring).

Second, the separate-products test is not a one-sided inquiry into the cost savings from a bundle. Although Jefferson

Parish acknowledged that prior lower court cases looked at

cost-savings to decide separate products, see id. at 22 n.35,

the Court conspicuously did not adopt that approach in its

disposition of tying arrangement before it. Instead it chose

proxies that balance costs savings against reduction in consumer choice.

With this background, we now turn to the separateproducts inquiry before us. The District Court found that

many consumers, if given the option, would choose their

browser separately from the OS. Findings of Fact p 151

(noting that "corporate consumers ... prefer to standardize

on the same browser across different [OSs]" at the workplace). Turning to industry custom, the court found that,

although all major OS vendors bundled browsers with their

OSs, these companies either sold versions without a browser,

or allowed OEMs or end-users either not to install the

bundled browser or in any event to "uninstall" it. Id. p 153.

The court did not discuss the record evidence as to whether

OS vendors other than Microsoft sold at a bundled price, with

no discount for a browserless OS, perhaps because the record

evidence on the issue was in conflict. Compare, e.g., Direct

Testimony of Richard Schmalensee p 241, reprinted in 7 J.A.

at 4315 ("[A]ll major operating system vendors do in fact

include Web-browsing software with the operating system at

no extra charge.") (emphasis added), with, e.g., 1/6/99 pm Tr.

at 42 (trial testimony of Franklin Fisher of MIT) (suggesting

all OSs but Microsoft offer discounts).

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Microsoft does not dispute that many consumers demand

alternative browsers. But on industry custom Microsoft contends that no other firm requires non-removal because no

other firm has invested the resources to integrate web browsing as deeply into its OS as Microsoft has. Appellant's

Opening Br. at 25; cf. Direct Testimony of James Allchin

p p 262-72, reprinted in 5 J.A. at 3385-89 (Apple, IBM);

11/5/98 pm Tr. at 55-58 (trial testimony of Apple's Avadis

Tevanian, Jr.), reprinted in 9 J.A. at 5507-10 (Apple). (We

here use the term "integrate" in the rather simple sense of

converting individual goods into components of a single physical object (e.g., a computer as it leaves the OEM, or a disk or

sets of disks), without any normative implication that such

integration is desirable or achieves special advantages. Cf.

United States v. Microsoft Corp., 147 F.3d 935, 950 (D.C. Cir.

1998) ("Microsoft II").) Microsoft contends not only that its

integration of IE into Windows is innovative and beneficial

but also that it requires non-removal of IE. In our discussion

of monopoly maintenance we find that these claims fail the

efficiency balancing applicable in that context. But the separate-products analysis is supposed to perform its function as a

proxy without embarking on any direct analysis of efficiency.

Accordingly, Microsoft's implicit argument--that in this case

looking to a competitive fringe is inadequate to evaluate fully

its potentially innovative technological integration, that such a

comparison is between apples and oranges--poses a legitimate objection to the operation of Jefferson Parish's

separate-products test for the per se rule.

In fact there is merit to Microsoft's broader argument that

Jefferson Parish's consumer demand test would "chill innovation to the detriment of consumers by preventing firms from

integrating into their products new functionality previously

provided by standalone products--and hence, by definition,

subject to separate consumer demand." Appellant's Opening

Br. at 69. The per se rule's direct consumer demand and

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indirect industry custom inquiries are, as a general matter,

backward-looking and therefore systematically poor proxies

for overall efficiency in the presence of new and innovative

integration. See 10 Areeda et al., Antitrust Law p 1746, at

224-29; Amicus Brief of Lawrence Lessig at 24-25, and

sources cited therein (brief submitted regarding Conclusions

of Law). The direct consumer demand test focuses on historic consumer behavior, likely before integration, and the indirect industry custom test looks at firms that, unlike the

defendant, may not have integrated the tying and tied goods.

Both tests compare incomparables--the defendant's decision

to bundle in the presence of integration, on the one hand, and

consumer and competitor calculations in its absence, on the

other. If integration has efficiency benefits, these may be

ignored by the Jefferson Parish proxies. Because one cannot

be sure beneficial integration will be protected by the other

elements of the per se rule, simple application of that rule's

separate-products test may make consumers worse off.

In light of the monopoly maintenance section, obviously, we

do not find that Microsoft's integration is welfare-enhancing

or that it should be absolved of tying liability. Rather, we

heed Microsoft's warning that the separate-products element

of the per se rule may not give newly integrated products a

fair shake.

B. Per Se Analysis Inappropriate for this Case.

We now address directly the larger question as we see it:

whether standard per se analysis should be applied "off the

shelf" to evaluate the defendant's tying arrangement, one

which involves software that serves as a platform for thirdparty applications. There is no doubt that "[i]t is far too late

in the history of our antitrust jurisprudence to question the

proposition that certain tying arrangements pose an unacceptable risk of stifling competition and therefore are unreasonable 'per se.' " Jefferson Parish, 466 U.S. at 9 (emphasis

added). But there are strong reasons to doubt that the

integration of additional software functionality into an OS

falls among these arrangements. Applying per se analysis to

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such an amalgamation creates undue risks of error and of

deterring welfare-enhancing innovation.

The Supreme Court has warned that " '[i]t is only after

considerable experience with certain business relationships

that courts classify them as per se violations....' " Broad.

Music, 441 U.S. at 9 (quoting Topco Assocs., 405 U.S. at 607-

08); accord Cont'l T.V., Inc. v. GTE Sylvania Inc., 433 U.S.

36, 47-59 (1977); White Motor Co. v. United States, 372 U.S.

253, 263 (1963); Jerrold Elecs., 187 F. Supp. at 555-58, 560-

61; see also Frank H. Easterbrook, Allocating Antitrust

Decisionmaking Tasks, 76 Geo. L.J. 305, 308 (1987). Yet the

sort of tying arrangement attacked here is unlike any the

Supreme Court has considered. The early Supreme Court

cases on tying dealt with arrangements whereby the sale or

lease of a patented product was conditioned on the purchase

of certain unpatented products from the patentee. See Motion Picture Patents, 243 U.S. 502 (1917); United Shoe

Mach., 258 U.S. 451 (1922); IBM Corp. v. United States, 298

U.S. 131 (1936); Int'l Salt, 332 U.S. 392 (1947). Later

Supreme Court tying cases did not involve market power

derived from patents, but continued to involve contractual

ties. See Times-Picayune, 345 U.S. 594 (1953) (defendant

newspaper conditioned the purchase of ads in its evening

edition on the purchase of ads in its morning edition); N. Pac.

Ry., 356 U.S. 1 (1958) (defendant railroad leased land only on

the condition that products manufactured on the land be

shipped on its railways); United States v. Loew's Inc., 371

U.S. 38 (1962) (defendant distributor of copyrighted feature

films conditioned the sale of desired films on the purchase of

undesired films); U.S. Steel Corp. v. Fortner Enters., Inc.,

429 U.S. 610 (1977) ("Fortner II") (defendant steel company

conditioned access to low interest loans on the purchase of the

defendant's prefabricated homes); Jefferson Parish, 466 U.S.

2 (1984) (defendant hospital conditioned use of its operating

rooms on the purchase of anesthesiological services from a

medical group associated with the hospital); Eastman Kodak,

504 U.S. 451 (1992) (defendant photocopying machine manufacturer conditioned the sale of replacement parts for its

machines on the use of the defendant's repair services).

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In none of these cases was the tied good physically and

technologically integrated with the tying good. Nor did the

defendants ever argue that their tie improved the value of the

tying product to users and to makers of complementary

goods. In those cases where the defendant claimed that use

of the tied good made the tying good more valuable to users,

the Court ruled that the same result could be achieved via

quality standards for substitutes of the tied good. See, e.g.,

Int'l Salt, 332 U.S. at 397-98; IBM, 298 U.S. at 138-40.

Here Microsoft argues that IE and Windows are an integrated physical product and that the bundling of IE APIs with

Windows makes the latter a better applications platform for

third-party software. It is unclear how the benefits from IE

APIs could be achieved by quality standards for different

browser manufacturers. We do not pass judgment on Microsoft's claims regarding the benefits from integration of its

APIs. We merely note that these and other novel, purported

efficiencies suggest that judicial "experience" provides little

basis for believing that, "because of their pernicious effect on

competition and lack of any redeeming virtue," a software

firm's decisions to sell multiple functionalities as a package

should be "conclusively presumed to be unreasonable and

therefore illegal without elaborate inquiry as to the precise

harm they have caused or the business excuse for their use."

N. Pac. Ry., 356 U.S. at 5 (emphasis added).

Nor have we found much insight into software integration

among the decisions of lower federal courts. Most tying

cases in the computer industry involve bundling with hardware. See, e.g., Digital Equip. Corp. v. Uniq Digital Techs.,

Inc., 73 F.3d 756, 761 (7th Cir. 1996) (Easterbrook, J.)

(rejecting with little discussion the notion that bundling of OS

with a computer is a tie of two separate products); Datagate,

Inc. v. Hewlett-Packard Co., 941 F.2d 864, 870 (9th Cir. 1991)

(holding that plaintiff's allegation that defendant conditioned

its software on purchase of its hardware was sufficient to

survive summary judgment); Digidyne Corp. v. Data Gen.

Corp., 734 F.2d 1336, 1341-47 (9th Cir. 1984) (holding that

defendant's conditioning the sale of its OS on the purchase of

its CPU constitutes a per se tying violation); Cal. Computer

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Prods., 613 F.2d at 743-44 (holding that defendant's integration into its CPU of a disk controller designed for its own

disk drives was a useful innovation and not an impermissible

attempt to monopolize); ILC Peripherals Leasing Corp. v.

IBM Corp., 448 F. Supp. 228, 233 (N.D. Cal. 1978) (finding

that defendant's integration of magnetic disks and a head/disk

assembly was not an unlawful tie), aff'd per curiam sub. nom.

Memorex Corp. v. IBM Corp., 636 F.2d 1188 (9th Cir. 1980);

see also Transamerica Computer Co. v. IBM Corp., 698 F.2d

1377, 1382-83 (9th Cir. 1983) (finding lawful defendant's

design changes that rendered plaintiff peripheral maker's

tape drives incompatible with the defendant's CPU). The

hardware case that most resembles the present one is Telex

Corp. v. IBM Corp., 367 F. Supp. 258 (N.D. Okla. 1973), rev'd

on other grounds, 510 F.2d 894 (10th Cir. 1975). Just as

Microsoft integrated web browsing into its OS, IBM in the

1970s integrated memory into its CPUs, a hardware platform.

A peripheral manufacturer alleged a tying violation, but the

District Court dismissed the claim because it thought it

inappropriate to enmesh the courts in product design decisions. Id. at 347. The court's discussion of the tying claim

was brief and did not dwell on the effects of the integration

on competition or efficiencies. Nor did the court consider

whether per se analysis of the alleged tie was wise.

We have found four antitrust cases involving arrangements

in which a software program is tied to the purchase of a

software platform--two district court cases and two appellate

court cases, including one from this court. The first case,

Innovation Data Processing, Inc. v. IBM Corp., 585 F. Supp.

1470 (D.N.J. 1984), involved an allegation that IBM bundled

with its OS a utility used to transfer data from a tape drive to

a computer's disk drive. Although the court mentioned the

efficiencies achieved by bundling, it ultimately dismissed the

per se tying claim because IBM sold a discounted version of

the OS without the utility. Id. at 1475-76. The second case,

A.I. Root Co. v. Computer/Dynamics, Inc., 806 F.2d 673 (6th

Cir. 1986), was brought by a business customer who claimed

that an OS manufacturer illegally conditioned the sale of its

OS on the purchase of other software applications. The court

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quickly disposed of the case on the ground that defendant

Computer/Dynamics had no market power. Id. at 675-77.

There was no mention of the efficiencies from the tie. The

third case, Caldera, Inc. v. Microsoft Corp., 72 F. Supp. 2d

1295 (D. Utah 1999), involved a complaint that the technological integration of MS-DOS and Windows 3.1 into Windows 95

constituted a per se tying violation. The court formulated the

"single product" issue in terms of whether the tie constituted

a technological improvement, ultimately concluding that Microsoft was not entitled to summary judgment on that issue.

Id. at 1322-28.

The software case that bears the greatest resemblance to

that at bar is, not surprisingly, Microsoft II, 147 F.3d 935,

where we examined the bundling of IE with Windows 95.

But the issue there was whether the bundle constituted an

"integrated product" as the term was used in a 1994 consent

decree between the Department of Justice and Microsoft. Id.

at 939. We did not consider whether Microsoft's bundling

should be condemned as per se illegal. We certainly did not

make any finding that bundling IE with Windows had "no

purpose except stifling of competition," White Motor, 372 U.S.

at 263, an important consideration in defining the scope of

any of antitrust law's per se rules, see Cont'l T.V., 433 U.S. at

57-59. While we believed our interpretation of the term

"integrated product" was consistent with the test for separate

products under tying law, we made clear that the "antitrust

question is of course distinct." Microsoft II, 147 F.3d at 950

n.14. We even cautioned that our conclusion that IE and

Windows 95 were integrated was "subject to reexamination

on a more complete record." Id. at 952. To the extent that

the decision completely disclaimed judicial capacity to evaluate "high-tech product design," id., it cannot be said to

conform to prevailing antitrust doctrine (as opposed to resolution of the decree-interpretation issue then before us). In

any case, mere review of asserted breaches of a consent

decree hardly constitutes enough "experience" to warrant

application of per se analysis. See Broad. Music, 441 U.S. at

10-16 (refusing to apply per se analysis to defendant's blanket licenses even though those licenses had been thoroughly

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investigated by the Department of Justice and were the

subject of a consent decree that had been reviewed by

numerous courts).

While the paucity of cases examining software bundling

suggests a high risk that per se analysis may produce inaccurate results, the nature of the platform software market

affirmatively suggests that per se rules might stunt valuable

innovation. We have in mind two reasons.

First, as we explained in the previous section, the separateproducts test is a poor proxy for net efficiency from newly

integrated products. Under per se analysis the first firm to

merge previously distinct functionalities (e.g., the inclusion of

starter motors in automobiles) or to eliminate entirely the

need for a second function (e.g., the invention of the stainresistant carpet) risks being condemned as having tied two

separate products because at the moment of integration there

will appear to be a robust "distinct" market for the tied

product. See 10 Areeda et al., Antitrust Law p 1746, at 224.

Rule of reason analysis, however, affords the first mover an

opportunity to demonstrate that an efficiency gain from its

"tie" adequately offsets any distortion of consumer choice.

See Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d

792, 799 (1st Cir. 1988) (Breyer, J.); see also Town Sound &

Custom Tops, Inc. v. Chrysler Motor Corp., 959 F.2d 468, 482

(3d Cir. 1992); Kaiser Aluminum & Chem. Sales, Inc. v.

Avondale Shipyards, Inc., 677 F.2d 1045, 1048-49 n.5 (5th

Cir. 1982).

The failure of the separate-products test to screen out

certain cases of productive integration is particularly troubling in platform software markets such as that in which the

defendant competes. Not only is integration common in such

markets, but it is common among firms without market

power. We have already reviewed evidence that nearly all

competitive OS vendors also bundle browsers. Moreover,

plaintiffs do not dispute that OS vendors can and do incorporate basic internet plumbing and other useful functionality

into their OSs. See Direct Testimony of Richard Schmalensee p 508, reprinted in 7 J.A. at 4462-64 (disk defragmentation, memory management, peer-to-peer networking or file

sharing); 11/19/98 am Tr. at 82-83 (trial testimony of FrederUSCA Case #00-5212 Document #606393 Filed: 06/28/2001 Page 81 of 124
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ick Warren-Boulton), reprinted in 10 J.A. at 6427-28

(TCP/IP stacks). Firms without market power have no incentive to package different pieces of software together unless there are efficiency gains from doing so. The ubiquity of

bundling in competitive platform software markets should

give courts reason to pause before condemning such behavior

in less competitive markets.

Second, because of the pervasively innovative character of

platform software markets, tying in such markets may produce efficiencies that courts have not previously encountered

and thus the Supreme Court had not factored into the per se

rule as originally conceived. For example, the bundling of a

browser with OSs enables an independent software developer

to count on the presence of the browser's APIs, if any, on

consumers' machines and thus to omit them from its own

package. See Direct Testimony of Richard Schmalensee

p p 230-31, 234, reprinted in 7 J.A. at 4309-11, 4312; Direct

Testimony of Michael Devlin p p 12-21, reprinted in 5 J.A. at

3525-29; see also Findings of Fact p 2. It is true that

software developers can bundle the browser APIs they need

with their own products, see id. p 193, but that may force

consumers to pay twice for the same API if it is bundled with

two different software programs. It is also true that OEMs

can include APIs with the computers they sell, id., but

diffusion of uniform APIs by that route may be inferior.

First, many OEMs serve special subsets of Windows consumers, such as home or corporate or academic users. If just one

of these OEMs decides not to bundle an API because it does

not benefit enough of its clients, ISVs that use that API

might have to bundle it with every copy of their program.

Second, there may be a substantial lag before all OEMs

bundle the same set of APIs--a lag inevitably aggravated by

the first phenomenon. In a field where programs change

very rapidly, delays in the spread of a necessary element

(here, the APIs) may be very costly. Of course, these

arguments may not justify Microsoft's decision to bundle

APIs in this case, particularly because Microsoft did not

merely bundle with Windows the APIs from IE, but an entire

browser application (sometimes even without APIs, see id.).

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A justification for bundling a component of software may not

be one for bundling the entire software package, especially

given the malleability of software code. See id. p p 162-63;

12/9/98 am Tr. at 17 (trial testimony of David Farber); 1/6/99

am Tr. at 6-7 (trial testimony of Franklin Fisher), reprinted

in 11 J.A. at 7192-93; Direct Testimony of Joachim Kempin

p 286, reprinted in 6 J.A. at 3749. Furthermore, the interest

in efficient API diffusion obviously supplies a far stronger

justification for simple price-bundling than for Microsoft's

contractual or technological bars to subsequent removal of

functionality. But our qualms about redefining the boundaries of a defendant's product and the possibility of consumer

gains from simplifying the work of applications developers

makes us question any hard and fast approach to tying in OS

software markets.

There may also be a number of efficiencies that, although

very real, have been ignored in the calculations underlying

the adoption of a per se rule for tying. We fear that these

efficiencies are common in technologically dynamic markets

where product development is especially unlikely to follow an

easily foreseen linear pattern. Take the following example

from ILC Peripherals, 448 F. Supp. 228, a case concerning

the evolution of disk drives for computers. When IBM first

introduced such drives in 1956, it sold an integrated product

that contained magnetic disks and disk heads that read and

wrote data onto disks. Id. at 231. Consumers of the drives

demanded two functions--to store data and to access it all at

once. In the first few years consumers' demand for storage

increased rapidly, outpacing the evolution of magnetic disk

technology. To satisfy that demand IBM made it possible for

consumers to remove the magnetic disks from drives, even

though that meant consumers would not have access to data

on disks removed from the drive. This componentization

enabled makers of computer peripherals to sell consumers

removable disks. Id. at 231-32. Over time, however, the

technology of magnetic disks caught up with demand for

capacity, so that consumers needed few removable disks to

store all their data. At this point IBM reintegrated disks

into their drives, enabling consumers to once again have

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immediate access to all their data without a sacrifice in

capacity. Id. A manufacturer of removable disks sued. But

the District Court found the tie justified because it satisfied

consumer demand for immediate access to all data, and ruled

that disks and disk heads were one product. Id. at 233. A

court hewing more closely to the truncated analysis contemplated by Northern Pacific Railway would perhaps have

overlooked these consumer benefits.

These arguments all point to one conclusion: we cannot

comfortably say that bundling in platform software markets

has so little "redeeming virtue," N. Pac. Ry., 356 U.S. at 5,

and that there would be so "very little loss to society" from

its ban, that "an inquiry into its costs in the individual case

[can be] considered [ ] unnecessary." Jefferson Parish, 466

U.S. at 33-34 (O'Connor, J., concurring). We do not have

enough empirical evidence regarding the effect of Microsoft's

practice on the amount of consumer surplus created or consumer choice foreclosed by the integration of added functionality into platform software to exercise sensible judgment

regarding that entire class of behavior. (For some issues we

have no data.) "We need to know more than we do about the

actual impact of these arrangements on competition to decide

whether they ... should be classified as per se violations of

the Sherman Act." White Motor, 372 U.S. at 263. Until

then, we will heed the wisdom that "easy labels do not always

supply ready answers," Broad. Music, 441 U.S. at 8, and

vacate the District Court's finding of per se tying liability

under Sherman Act s 1. We remand the case for evaluation

of Microsoft's tying arrangements under the rule of reason.

See Pullman-Standard v. Swint, 456 U.S. 273, 292 (1982)

("[W]here findings are infirm because of an erroneous view of

the law, a remand is the proper course unless the record

permits only one resolution of the factual issue."). That rule

more freely permits consideration of the benefits of bundling

in software markets, particularly those for OSs, and a balancing of these benefits against the costs to consumers whose

ability to make direct price/quality tradeoffs in the tied

market may have been impaired. See Jefferson Parish, 466

U.S. at 25 nn.41-42 (noting that per se rule does not broadly

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permit consideration of procompetitive justifications); id. at

34-35 (O'Connor, J., concurring); N. Pac. Ry., 356 U.S. at 5.

Our judgment regarding the comparative merits of the per

se rule and the rule of reason is confined to the tying

arrangement before us, where the tying product is software

whose major purpose is to serve as a platform for third-party

applications and the tied product is complementary software

functionality. While our reasoning may at times appear to

have broader force, we do not have the confidence to speak to

facts outside the record, which contains scant discussion of

software integration generally. Microsoft's primary justification for bundling IE APIs is that their inclusion with Windows increases the value of third-party software (and Windows) to consumers. See Appellant's Opening Br. at 41-43.

Because this claim applies with distinct force when the tying

product is platform software, we have no present basis for

finding the per se rule inapplicable to software markets

generally. Nor should we be interpreted as setting a precedent for switching to the rule of reason every time a court

identifies an efficiency justification for a tying arrangement.

Our reading of the record suggests merely that integration of

new functionality into platform software is a common practice

and that wooden application of per se rules in this litigation

may cast a cloud over platform innovation in the market for

PCs, network computers and information appliances.

C. On Remand

Should plaintiffs choose to pursue a tying claim under the

rule of reason, we note the following for the benefit of the

trial court:

First, on remand, plaintiffs must show that Microsoft's

conduct unreasonably restrained competition. Meeting that

burden "involves an inquiry into the actual effect" of Microsoft's conduct on competition in the tied good market, Jefferson Parish, 466 U.S. at 29, the putative market for browsers.

To the extent that certain aspects of tying injury may depend

on a careful definition of the tied good market and a showing

of barriers to entry other than the tying arrangement itself,

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plaintiffs would have to establish these points. See Jefferson

Parish, 466 U.S. at 29 ("This competition [among anesthesiologists] takes place in a market that has not been defined.");

id. at 29 n.48 ("[N]either the District Court nor the Court of

Appeals made any findings concerning the contract's effect on

entry barriers."). But plaintiffs were required--and had

every incentive--to provide both a definition of the browser

market and barriers to entry to that market as part of their

s 2 attempted monopolization claim; yet they failed to do so.

See supra Section III. Accordingly, on remand of the s 1

tying claim, plaintiffs will be precluded from arguing any

theory of harm that depends on a precise definition of browsers or barriers to entry (for example, network effects from

Internet protocols and extensions embedded in a browser)

other than what may be implicit in Microsoft's tying arrangement.

Of the harms left, plaintiffs must show that Microsoft's

conduct was, on balance, anticompetitive. Microsoft may of

course offer procompetitive justifications, and it is plaintiffs'

burden to show that the anticompetitive effect of the conduct

outweighs its benefit.

Second, the fact that we have already considered some of

the behavior plaintiffs allege to constitute tying violations in

the monopoly maintenance section does not resolve the s 1

inquiry. The two practices that plaintiffs have most ardently

claimed as tying violations are, indeed, a basis for liability

under plaintiffs' s 2 monopoly maintenance claim. These are

Microsoft's refusal to allow OEMs to uninstall IE or remove

it from the Windows desktop, Findings of Fact p p 158, 203,

213, and its removal of the IE entry from the Add/Remove

Programs utility in Windows 98, id. p 170. See supra Section

II.B. In order for the District Court to conclude these

practices also constitute s 1 tying violations, plaintiffs must

demonstrate that their benefits--if any, see supra Sections

II.B.1.b and II.B.2.b; Findings of Fact p p 176, 186, 193--are

outweighed by the harms in the tied product market. See

Jefferson Parish, 466 U.S. at 29. If the District Court is

convinced of net harm, it must then consider whether any

additional remedy is necessary.

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In Section II.B we also considered another alleged tying

violation--the Windows 98 override of a consumer's choice of

default web browser. We concluded that this behavior does

not provide a distinct basis for s 2 liability because plaintiffs

failed to rebut Microsoft's proffered justification by demonstrating that harms in the operating system market outweigh

Microsoft's claimed benefits. See supra Section II.B. On

remand, however, although Microsoft may offer the same procompetitive justification for the override, plaintiffs must have

a new opportunity to rebut this claim, by demonstrating that

the anticompetitive effect in the browser market is greater

than these benefits.

Finally, the District Court must also consider an alleged

tying violation that we did not consider under s 2 monopoly

maintenance: price bundling. First, the court must determine if Microsoft indeed price bundled--that is, was Microsoft's charge for Windows and IE higher than its charge

would have been for Windows alone? This will require

plaintiffs to resolve the tension between Findings of Fact

p p 136-37, which Microsoft interprets as saying that no part

of the bundled price of Windows can be attributed to IE, and

Conclusions of Law, at 50, which says the opposite. Compare Direct Testimony of Paul Maritz p p 37, 296, reprinted in

6 J.A. at 3656, 3753-54 (Microsoft did not "charge separately"

for IE, but like all other major OS vendors included browsing

software at "no extra charge"), with GX 202 at MS7 004343,

esp. 004347, reprinted in 22 J.A. at 14459, esp. 14463 (memo

from Christian Wildfeuer describing focus group test used to

price Windows 98 with IE 4), and GX 1371 at MS7 003729-30,

003746, 003748, esp. 003750, reprinted in 15 J.A. at 10306-07,

10323, 10325, esp. 10327 (Windows 98 pricing and marketing

memo), and Findings of Fact p 63 (identifying GX 202 as the

basis for Windows 98 pricing).

If there is a positive price increment in Windows associated

with IE (we know there is no claim of price predation),

plaintiffs must demonstrate that the anticompetitive effects of

Microsoft's price bundling outweigh any procompetitive justifications the company provides for it. In striking this balance, the District Court should consider, among other things,

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indirect evidence of efficiency provided by "the competitive

fringe." See supra Section IV.A. Although this inquiry may

overlap with the separate-products screen under the per se

rule, that is not its role here. Because courts applying the

rule of reason are free to look at both direct and indirect

evidence of efficiencies from a tie, there is no need for a

screening device as such; thus the separate-products inquiry

serves merely to classify arrangements as subject to tying

law, as opposed to, say, liability for exclusive dealing. See

Times-Picayune, 345 U.S. at 614 (finding a single product

and then turning to a general rule of reason analysis under

s 1, though not using the term "tying"); Foster v. Md. State

Sav. & Loan Ass'n, 590 F.2d 928, 931, 933 (D.C. Cir. 1978),

cited in Jefferson Parish, 466 U.S. at 40 (O'Connor, J.,

concurring) (same); see also Chawla v. Shell Oil Co., 75 F.

Supp. 2d 626, 635, 643-44 (S.D. Tex. 1999) (considering a rule

of reason tying claim after finding a single product under the

per se rule); Montgomery County Ass'n of Realtors v. Realty

Photo Master Corp., 783 F. Supp. 952, 961 & n.26 (D. Md.

1992), aff'd mem. 993 F.2d 1538 (4th Cir. 1993) (same).

If OS vendors without market power also sell their software bundled with a browser, the natural inference is that

sale of the items as a bundle serves consumer demand and

that unbundled sale would not, for otherwise a competitor

could profitably offer the two products separately and capture

sales of the tying good from vendors that bundle. See 10

Areeda et al., Antitrust Law p 1744b, at 197-98. It does

appear that most if not all firms have sold a browser with

their OSs at a bundled price, beginning with IBM and its

OS/2 Warp OS in September 1994, Findings of Fact p 140;

see also Direct Testimony of Richard Schmalensee p 212,

reprinted in 7 J.A. at 4300-01, and running to current

versions of Apple's Mac OS, Caldera and Red Hat's Linux

OS, Sun's Solaris OS, Be's BeOS, Santa Cruz Operation's

UnixWare, Novell's NetWare OS, and others, see Findings of

Fact p 153; Direct Testimony of Richard Schmalensee

p p 215-23, 230, esp. table 5, reprinted in 7 J.A. at 4302-05,

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4310; Direct Testimony of James Allchin p p 261-77, reprinted in 5 J.A. at 3384-92.

Of course price bundling by competitive OS makers would

tend to exonerate Microsoft only if the sellers in question sold

their browser/OS combinations exclusively at a bundled price.

If a competitive seller offers a discount for a browserless

version, then--at least as to its OS and browser--the gains

from bundling are outweighed by those from separate choice.

The evidence on discounts appears to be in conflict. Compare

Direct Testimony of Richard Schmalensee p 241, reprinted in

7 J.A. at 4315, with 1/6/99 pm Tr. at 42 (trial testimony of

Franklin Fisher). If Schmalensee is correct that nearly all

OS makers do not offer a discount, then the harm from

tying--obstruction of direct consumer choice--would be theoretically created by virtually all sellers: a customer who

would prefer an alternate browser is forced to pay the full

price of that browser even though its value to him is only the

increment in value over the bundled browser. (The result is

similar to that from non-removal, which forces consumers

who want the alternate browser to surrender disk space

taken up by the unused, bundled browser.) If the failure to

offer a price discount were universal, any impediment to

direct consumer choice created by Microsoft's price-bundled

sale of IE with Windows would be matched throughout the

market; yet these OS suppliers on the competitive fringe

would have evidently found this price bundling on balance

efficient. If Schmalensee's assertions are ill-founded, of

course, no such inference could be drawn.

V. Trial Proceedings and Remedy

Microsoft additionally challenges the District Court's procedural rulings on two fronts. First, with respect to the trial

phase, Microsoft proposes that the court mismanaged its

docket by adopting an expedited trial schedule and receiving

evidence through summary witnesses. Second, with respect

to the remedies decree, Microsoft argues that the court

improperly ordered that it be divided into two separate

companies. Only the latter claim will long detain us. The

District Court's trial-phase procedures were comfortably

within the bounds of its broad discretion to conduct trials as it

sees fit. We conclude, however, that the District Court's

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remedies decree must be vacated for three independent reasons: (1) the court failed to hold a remedies-specific evidentiary hearing when there were disputed facts; (2) the court

failed to provide adequate reasons for its decreed remedies;

and (3) this Court has revised the scope of Microsoft's liability

and it is impossible to determine to what extent that should

affect the remedies provisions.

A. Factual Background

On April 3, 2000, the District Court concluded the liability

phase of the proceedings by the filing of its Conclusions of

Law holding that Microsoft had violated ss 1 and 2 of the

Sherman Act. The court and the parties then began discussions of the procedures to be followed in the imposition of

remedies. Initially, the District Court signaled that it would

enter relief only after conducting a new round of proceedings.

In its Conclusions of Law, the court stated that it would issue

a remedies order "following proceedings to be established by

further Order of the Court." Conclusions of Law, at 57.

And, when during a post-trial conference, Microsoft's counsel

asked whether the court "contemplate[d] further proceedings," the judge replied, "Yes. Yes. I assume that there

would be further proceedings." 4/4/00 Tr. at 8-9, 11, reprinted in 4 J.A. at 2445-46, 2448. The District Court further

speculated that those proceedings might "replicate the procedure at trial with testimony in written form subject to crossexamination." Id. at 11, reprinted in 4 J.A. at 2448.

On April 28, 2000, plaintiffs submitted their proposed final

judgment, accompanied by six new supporting affidavits and

several exhibits. In addition to a series of temporary conduct

restrictions, plaintiffs proposed that Microsoft be split into

two independent corporations, with one continuing Microsoft's

operating systems business and the other undertaking the

balance of Microsoft's operations. Plaintiffs' Proposed Final

Judgment at 2-3, reprinted in 4 J.A. at 2473-74. Microsoft

filed a "summary response" on May 10, contending both that

the proposed decree was too severe and that it would be

impossible to resolve certain remedies-specific factual disputes "on a highly expedited basis." Defendant's Summary

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Response at 6-7, reprinted in 4 J.A. at 2587-88. Another

May 10 submission argued that if the District Court considered imposing plaintiffs' proposed remedy, "then substantial

discovery, adequate time for preparation and a full trial on

relief will be required." Defendant's Position as to Future

Proceedings at 2, reprinted in 4 J.A. at 2646.

After the District Court revealed during a May 24 hearing

that it was prepared to enter a decree without conducting

"any further process," 5/24/00 pm Tr. at 33, reprinted in 14

J.A. at 9866, Microsoft renewed its argument that the underlying factual disputes between the parties necessitated a

remedies-specific evidentiary hearing. In two separate offers

of proof, Microsoft offered to produce a number of pieces of

evidence, including the following:

. Testimony from Dr. Robert Crandall, a Senior Fellow

at the Brookings Institution, that divestiture and

dissolution orders historically have "failed to improve

economic welfare by reducing prices or increasing

output." Defendant's Offer of Proof at 2, reprinted

in 4 J.A. at 2743.

. Testimony from Professor Kenneth Elzinga, Professor of Economics at the University of Virginia, that

plaintiffs' proposed remedies would not induce entry

into the operating systems market. Id. at 4, reprinted in 4 J.A. at 2745.

. Testimony from Dean Richard Schmalensee, Dean of

MIT's Sloan School of Management, that dividing

Microsoft likely would "harm consumers through

higher prices, lower output, reduced efficiency, and

less innovation" and would "produce immediate, substantial increases in the prices of both Windows and

Office." Id. at 8, reprinted in 4 J.A. at 2749. Indeed, it would cause the price of Windows to triple.

Id.

. Testimony from Goldman, Sachs & Co. and from

Morgan Stanley Dean Witter that dissolution would

adversely affect shareholder value. Id. at 17, 19,

reprinted in 4 J.A. at 2758, 2760.

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. Testimony from Microsoft Chairman Bill Gates that

dividing Microsoft "along the arbitrary lines proposed

by the Government" would devastate the company's

proposed Next Generation Windows Services platform, which would allow software developers to write

web-based applications that users could access from a

wide range of devices. Id. at 21-22, reprinted in 4

J.A. at 2762-63.

. Testimony from Steve Ballmer, Microsoft's President

and CEO, that Microsoft is organized as a unified

company and that "there are no natural lines along

which Microsoft could be broken up without causing

serious problems." Id. at 23, reprinted in 4 J.A. at

2764.

. Testimony from Michael Capellas, CEO of Compaq,

that splitting Microsoft in two "will make it more

difficult for OEMs to provide customers with the

tightly integrated product offerings they demand" in

part because "complementary products created by

unrelated companies do not work as well together as

products created by a single company." Defendant's

Supplemental Offer of Proof at 2, reprinted in 4 J.A.

at 2823.

Over Microsoft's objections, the District Court proceeded to

consider the merits of the remedy and on June 7, 2000

entered its final judgment. The court explained that it would

not conduct "extended proceedings on the form a remedy

should take," because it doubted that an evidentiary hearing

would "give any significantly greater assurance that it will be

able to identify what might be generally regarded as an

optimum remedy." Final Judgment, at 62. The bulk of

Microsoft's proffered facts were simply conjectures about

future events, and "[i]n its experience the Court has found

testimonial predictions of future events generally less reliable

even than testimony as to historical fact, and crossexamination to be of little use in enhancing or detracting from

their accuracy." Id. Nor was the court swayed by Microsoft's "profession of surprise" at the possibility of structural

relief. Id. at 61. "From the inception of this case Microsoft

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knew, from well-established Supreme Court precedents dating from the beginning of the last century, that a mandated

divestiture was a possibility, if not a probability, in the event

of an adverse result at trial." Id.

The substance of the District Court's remedies order is

nearly identical to plaintiffs' proposal. The decree's centerpiece is the requirement that Microsoft submit a proposed

plan of divestiture, with the company to be split into an

"Operating Systems Business," or "OpsCo," and an "Applications Business," or "AppsCo." Final Judgment, Decree

ss 1.a, l.c.i, at 64. OpsCo would receive all of Microsoft's

operating systems, such as Windows 98 and Windows 2000,

while AppsCo would receive the remainder of Microsoft's

businesses, including IE and Office. The District Court

identified four reasons for its "reluctant[ ]" conclusion that "a

structural remedy has become imperative." Id. at 62. First,

Microsoft "does not yet concede that any of its business

practices violated the Sherman Act." Id. Second, the company consequently "continues to do business as it has in the

past." Id. Third, Microsoft "has proved untrustworthy in

the past." Id. And fourth, the Government, whose officials

"are by reason of office obliged and expected to consider--

and to act in--the public interest," won the case, "and for that

reason alone have some entitlement to a remedy of their

choice." Id. at 62-63.

The decree also contains a number of interim restrictions

on Microsoft's conduct. For instance, Decree s 3.b requires

Microsoft to disclose to third-party developers the APIs and

other technical information necessary to ensure that software

effectively interoperates with Windows. Id. at 67. "To facilitate compliance," s 3.b further requires that Microsoft establish "a secure facility" at which third-party representatives

may "study, interrogate and interact with relevant and necessary portions of [Microsoft platform software] source code."

Id. Section 3.e, entitled "Ban on Exclusive Dealing," forbids

Microsoft from entering contracts which oblige third parties

to restrict their "development, production, distribution, promotion or use of, or payment for" non-Microsoft platformlevel software. Id. at 68. Under Decree s 3.f--"Ban on

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Contractual Tying"--the company may not condition its grant

of a Windows license on a party's agreement "to license,

promote, or distribute any other Microsoft software product."

Id. And s 3.g imposes a "Restriction on Binding Middleware

Products to Operating System Products" unless Microsoft

also offers consumers "an otherwise identical version" of the

operating system without the middleware. Id.

B. Trial Proceedings

Microsoft's first contention--that the District Court erred

by adopting an expedited trial schedule and receiving evidence through summary witnesses--is easily disposed of.

Trial courts have extraordinarily broad discretion to determine the manner in which they will conduct trials. "This is

particularly true in a case such as the one at bar where the

proceedings are being tried to the court without a jury." Eli

Lilly & Co., Inc. v. Generix Drug Sales, Inc., 460 F.2d 1096,

1105 (5th Cir. 1972). In such cases, "[a]n appellate court will

not interfere with the trial court's exercise of its discretion to

control its docket and dispatch its business ... except upon

the clearest showing that the procedures have resulted in

actual and substantial prejudice to the complaining litigant."

Id. Microsoft fails to clear this high hurdle. Although the

company claims that setting an early trial date inhibited its

ability to conduct discovery, it never identified a specific

deposition or document it was unable to obtain. And while

Microsoft now argues that the use of summary witnesses

made inevitable the improper introduction of hearsay evidence, the company actually agreed to the District Court's

proposal to limit each side to 12 summary witnesses. 12/2/98

am Tr. at 11, reprinted in 21 J.A. at 14083 (court admonishing Microsoft's counsel to "[k]eep in mind that both sides

agreed to the number of witnesses"). Even absent Microsoft's agreement, the company's challenge fails to show that

this use of summary witnesses falls outside the trial court's

wide latitude to receive evidence as it sees fit. General Elec.

Co. v. Joiner, 522 U.S. 136, 141-42 (1997). This is particularly true given the presumption that a judge who conducts a

bench trial has ignored any inadmissible evidence, Harris v.

Rivera, 454 U.S. 339, 346 (1981)--a presumption that MicroUSCA Case #00-5212 Document #606393 Filed: 06/28/2001 Page 94 of 124
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soft makes no serious attempt to overcome. Indeed, under

appropriate circumstances with appropriate instructions, we

have in the past approved the use of summary witnesses even

in jury trials. See, e.g., United States v. Lemire, 720 F.2d

1327 (D.C. Cir. 1983). Therefore, neither the use of the

summary witnesses nor any other aspect of the District

Court's conduct of the trial phase amounted to an abuse of

discretion.

C. Failure to Hold an Evidentiary Hearing

The District Court's remedies-phase proceedings are a

different matter. It is a cardinal principle of our system of

justice that factual disputes must be heard in open court and

resolved through trial-like evidentiary proceedings. Any other course would be contrary "to the spirit which imbues our

judicial tribunals prohibiting decision without hearing." Sims

v. Greene, 161 F.2d 87, 88 (3d Cir. 1947).

A party has the right to judicial resolution of disputed facts

not just as to the liability phase, but also as to appropriate

relief. "Normally, an evidentiary hearing is required before

an injunction may be granted." United States v. McGee, 714

F.2d 607, 613 (6th Cir. 1983); see also Charlton v. Estate of

Charlton, 841 F.2d 988, 989 (9th Cir. 1988) ("Generally the

entry or continuation of an injunction requires a hearing.

Only when the facts are not in dispute, or when the adverse

party has waived its right to a hearing, can that significant

procedural step be eliminated." (citation and internal quotation marks omitted)). Other than a temporary restraining

order, no injunctive relief may be entered without a hearing.

See generally Fed. R. Civ. P. 65. A hearing on the merits--

i.e., a trial on liability--does not substitute for a relief-specific

evidentiary hearing unless the matter of relief was part of the

trial on liability, or unless there are no disputed factual issues

regarding the matter of relief.

This rule is no less applicable in antitrust cases. The

Supreme Court "has recognized that a 'full exploration of

facts is usually necessary in order (for the District Court)

properly to draw (an antitrust) decree' so as 'to prevent

future violations and eradicate existing evils.' " United States

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v. Ward Baking Co., 376 U.S. 327, 330-31 (1964) (quoting

Associated Press v. United States, 326 U.S. 1, 22 (1945)).

Hence a remedies decree must be vacated whenever there is

"a bona fide disagreement concerning substantive items of

relief which could be resolved only by trial." Id. at 334; cf.

Sims, 161 F.2d at 89 ("It has never been supposed that a

temporary injunction could issue under the Clayton Act without giving the party against whom the injunction was sought

an opportunity to present evidence on his behalf.").

Despite plaintiffs' protestations, there can be no serious

doubt that the parties disputed a number of facts during the

remedies phase. In two separate offers of proof, Microsoft

identified 23 witnesses who, had they been permitted to

testify, would have challenged a wide range of plaintiffs'

factual representations, including the feasibility of dividing

Microsoft, the likely impact on consumers, and the effect of

divestiture on shareholders. To take but two examples,

where plaintiffs' economists testified that splitting Microsoft

in two would be socially beneficial, the company offered to

prove that the proposed remedy would "cause substantial

social harm by raising software prices, lowering rates of

innovation and disrupting the evolution of Windows as a

software development platform." Defendant's Offer of Proof

at 6, reprinted in 4 J.A. at 2747. And where plaintiffs'

investment banking experts proposed that divestiture might

actually increase shareholder value, Microsoft proffered evidence that structural relief "would inevitably result in a

significant loss of shareholder value," a loss that could reach

"tens--possibly hundreds--of billions of dollars." Id. at 19,

reprinted in 4 J.A. at 2760.

Indeed, the District Court itself appears to have conceded

the existence of acute factual disagreements between Microsoft and plaintiffs. The court acknowledged that the parties

were "sharply divided" and held "divergent opinions" on the

likely results of its remedies decree. Final Judgment, at 62.

The reason the court declined to conduct an evidentiary

hearing was not because of the absence of disputed facts, but

because it believed that those disputes could be resolved only

through "actual experience," not further proceedings. Id.

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But a prediction about future events is not, as a prediction,

any less a factual issue. Indeed, the Supreme Court has

acknowledged that drafting an antitrust decree by necessity

"involves predictions and assumptions concerning future economic and business events." Ford Motor Co. v. United

States, 405 U.S. 562, 578 (1972). Trial courts are not excused

from their obligation to resolve such matters through evidentiary hearings simply because they consider the bedrock

procedures of our justice system to be "of little use." Final

Judgment, at 62.

The presence of factual disputes thus distinguishes this

case from the decisions plaintiffs cite for the proposition that

Microsoft was not entitled to an evidentiary hearing. Indeed,

far from assisting plaintiffs, these cases actually confirm the

proposition that courts must hold evidentiary hearings when

they are confronted with disputed facts. In Ford Motor Co.,

the Supreme Court affirmed a divestiture order after emphasizing that the District Court had "held nine days of hearings

on the remedy." 405 U.S. at 571. In Davoll v. Webb, 194

F.3d 1116 (10th Cir. 1999), the defendant both failed to

submit any offers of proof, and waived its right to an evidentiary hearing by expressly agreeing that relief should be

determined based solely on written submissions. Id. at 1142-

43. The defendants in American Can Co. v. Mansukhani,

814 F.2d 421 (7th Cir. 1987), were not entitled to a hearing on

remedies because they failed "to explain to the district court

what new proof they would present to show" that the proposed remedy was unwarranted. Id. at 425. And in Socialist

Workers Party v. Illinois State Board of Elections, 566 F.2d

586 (7th Cir. 1977), aff'd, 440 U.S. 173 (1979), the Seventh

Circuit held that a remedies-specific hearing was unnecessary

because that case involved a pure question of legal interpretation and hence "[t]here was no factual dispute as to the

ground on which the injunction was ordered." Id. at 587.

Unlike the parties in Davoll, American Can, and Socialist

Workers Party, Microsoft both repeatedly asserted its right

to an evidentiary hearing and submitted two offers of proof.

The company's "summary response" to the proposed remedy

argued that it would be "impossible" to address underlying

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factual issues "on a highly expedited basis," Defendant's

Summary Response at 6-7, reprinted in 4 J.A. at 2587-88,

and Microsoft further maintained that the court could not

issue a decree unless it first permitted "substantial discovery,

adequate time for preparation and a full trial on relief."

Defendant's Position as to Future Proceedings at 2, reprinted

in 4 J.A. at 2646. And in 53 pages of submissions, Microsoft

identified the specific evidence it would introduce to challenge

plaintiffs' representations.

Plaintiffs further argue--and the District Court held--that

no evidentiary hearing was necessary given that Microsoft

long had been on notice that structural relief was a distinct

possibility. It is difficult to see why this matters. Whether

Microsoft had advance notice that dissolution was in the

works is immaterial to whether the District Court violated the

company's procedural rights by ordering it without an evidentiary hearing. To be sure, "claimed surprise at the district

court's decision to consider permanent injunctive relief does

not, alone, merit reversal." Socialist Workers, 566 F.2d at

587. But in this case, Microsoft's professed surprise does not

stand "alone." There is something more: the company's

basic procedural right to have disputed facts resolved through

an evidentiary hearing.

In sum, the District Court erred when it resolved the

parties' remedies-phase factual disputes by consulting only

the evidence introduced during trial and plaintiffs' remediesphase submissions, without considering the evidence Microsoft sought to introduce. We therefore vacate the District

Court's final judgment, and remand with instructions to conduct a remedies-specific evidentiary hearing.

D. Failure to Provide an Adequate Explanation

We vacate the District Court's remedies decree for the

additional reason that the court has failed to provide an

adequate explanation for the relief it ordered. The Supreme

Court has explained that a remedies decree in an antitrust

case must seek to "unfetter a market from anticompetitive

conduct," Ford Motor Co., 405 U.S. at 577, to "terminate the

illegal monopoly, deny to the defendant the fruits of its

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statutory violation, and ensure that there remain no practices

likely to result in monopolization in the future," United States

v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968); see

also United States v. Grinnell Corp., 384 U.S. 563, 577 (1966).

The District Court has not explained how its remedies

decree would accomplish those objectives. Indeed, the court

devoted a mere four paragraphs of its order to explaining its

reasons for the remedy. They are: (1) Microsoft "does not

yet concede that any of its business practices violated the

Sherman Act"; (2) Microsoft "continues to do business as it

has in the past"; (3) Microsoft "has proved untrustworthy in

the past"; and (4) the Government, whose officials "are by

reason of office obliged and expected to consider--and to act

in--the public interest," won the case, "and for that reason

alone have some entitlement to a remedy of their choice."

Final Judgment, at 62-63. Nowhere did the District Court

discuss the objectives the Supreme Court deems relevant.

E. Modification of Liability

Quite apart from its procedural difficulties, we vacate the

District Court's final judgment in its entirety for the additional, independent reason that we have modified the underlying

bases of liability. Of the three antitrust violations originally

identified by the District Court, one is no longer viable:

attempted monopolization of the browser market in violation

of Sherman Act s 2. One will be remanded for liability

proceedings under a different legal standard: unlawful tying

in violation of s 1. Only liability for the s 2 monopolymaintenance violation has been affirmed--and even that we

have revised. Ordinarily, of course, we review the grant or

denial of equitable relief under the abuse of discretion standard. See, e.g., Doran v. Salem Inn, Inc., 422 U.S. 922, 931-

32 (1975) ("[T]he standard of appellate review is simply

whether the issuance of the injunction, in the light of the

applicable standard, constituted an abuse of discretion.").

For obvious reasons, the application of that standard is not

sufficient to sustain the remedy in the case before us. We

cannot determine whether the District Court has abused its

discretion in remedying a wrong where the court did not

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exercise that discretion in order to remedy the properly

determined wrong. That is, the District Court determined

that the conduct restrictions and the pervasive structural

remedy were together appropriate to remedy the three antitrust violations set forth above. The court did not exercise

its discretion to determine whether all, or for that matter,

any, of those equitable remedies were required to rectify a

s 2 monopoly maintenance violation taken alone. We therefore cannot sustain an exercise of discretion not yet made.

By way of comparison, in Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993), the Supreme Court reviewed a

damages award in a Sherman Act case. In that case, the trial

court entered judgment upon a jury verdict which did not

differentiate among multiple possible theories of liability under s 2. The Supreme Court ultimately determined that the

trial record could not legally support a finding that the

defendant had committed an illegal attempt to monopolize,

and that "the trial instructions allowed the jury to infer

specific intent and dangerous probability of success from the

defendants' predatory conduct, without any proof of the relevant market or of a realistic probability that the defendants

could achieve monopoly power in that market." Id. at 459.

Therefore, the High Court reversed the Ninth Circuit's judgment affirming the District Court and remanded for further

proceedings, expressly because "the jury's verdict did not

negate the possibility that the s 2 verdict rested on the

attempt to monopolize grounds alone...." Id. Similarly,

here, we cannot presume that a District Court would exercise

its discretion to fashion the same remedy where the erroneous grounds of liability were stripped from its consideration.

The Eighth Circuit confronted a similar problem in Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039 (8th Cir.),

cert. denied, 121 S. Ct. 428 (2000). In that case, a group of

boat builders brought an action against an engine manufacturer alleging violations of Sherman Act ss 1 and 2, and

Clayton Act s 7. After a 10-week trial, the jury found

Brunswick liable on all three counts and returned a verdict

for over $44 million. On appeal, the Eighth Circuit reversed

the Clayton Act claim. Id. at 1053. That court held that, as

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a consequence, it was required to vacate the jury's remedy in

its entirety. Because the "verdict form did not require the

jury to consider what damages resulted from each type of

violation," the court could not "know what damages it found

to have been caused by the acquisitions upon which the

Section 7 claims were based." Id. at 1054. The court

rejected the proposition that "the entire damage award may

be upheld based on Brunswick's Sherman Act liability alone,"

id. at 1053, holding that, because "there is no way to know

what damages the jury assigned to the Section 7 claims," the

defendant "would be entitled at the very least to a new

damages trial on the boat builders' Sherman Act claims," id.

at 1054.

Spectrum Sports and Concord Boat are distinguishable

from the case before us in that both involved the award of

money damages rather than equitable relief. Nonetheless,

their reasoning is instructive. A court in both contexts must

base its relief on some clear "indication of a significant causal

connection between the conduct enjoined or mandated and

the violation found directed toward the remedial goal intended." 3 Phillip E. Areeda & Herbert Hovenkamp, Antitrust

Law p 653(b), at 91-92 (1996). In a case such as the one

before us where sweeping equitable relief is employed to

remedy multiple violations, and some--indeed most--of the

findings of remediable violations do not withstand appellate

scrutiny, it is necessary to vacate the remedy decree since the

implicit findings of causal connection no longer exist to warrant our deferential affirmance.

In short, we must vacate the remedies decree in its entirety

and remand the case for a new determination. This court has

drastically altered the District Court's conclusions on liability.

On remand, the District Court, after affording the parties a

proper opportunity to be heard, can fashion an appropriate

remedy for Microsoft's antitrust violations. In particular, the

court should consider which of the decree's conduct restrictions remain viable in light of our modification of the original

liability decision. While the task of drafting the remedies

decree is for the District Court in the first instance, because

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of the unusually convoluted nature of the proceedings thus

far, and a desire to advance the ultimate resolution of this

important controversy, we offer some further guidance for

the exercise of that discretion.

F. On Remand

As a general matter, a district court is afforded broad

discretion to enter that relief it calculates will best remedy

the conduct it has found to be unlawful. See, e.g., Woerner v.

United States Small Bus. Admin., 934 F.2d 1277, 1279 (D.C.

Cir. 1991) (recognizing that an appellate court reviews a trial

court's decision whether or not to grant equitable relief only

for an abuse of discretion). This is no less true in antitrust

cases. See, e.g., Ford Motor Co., 405 U.S. at 573 ("The

District Court is clothed with 'large discretion' to fit the

decree to the special needs of the individual case."); Md. &

Va. Milk Producers Ass'n, Inc. v. United States, 362 U.S. 458,

473 (1960) ("The formulation of decrees is largely left to the

discretion of the trial court...."). And divestiture is a

common form of relief in successful antitrust prosecutions: it

is indeed "the most important of antitrust remedies." See,

e.g., United States v. E.I. du Pont de Nemours & Co., 366

U.S. 316, 331 (1961).

On remand, the District Court must reconsider whether the

use of the structural remedy of divestiture is appropriate with

respect to Microsoft, which argues that it is a unitary company. By and large, cases upon which plaintiffs rely in arguing

for the split of Microsoft have involved the dissolution of

entities formed by mergers and acquisitions. On the contrary, the Supreme Court has clarified that divestiture "has

traditionally been the remedy for Sherman Act violations

whose heart is intercorporate combination and control," du

Pont, 366 U.S. at 329 (emphasis added), and that "[c]omplete

divestiture is particularly appropriate where asset or stock

acquisitions violate the antitrust laws," Ford Motor Co., 405

U.S. at 573 (emphasis added).

One apparent reason why courts have not ordered the

dissolution of unitary companies is logistical difficulty. As

the court explained in United States v. ALCOA, 91 F. Supp.

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333, 416 (S.D.N.Y. 1950), a "corporation, designed to operate

effectively as a single entity, cannot readily be dismembered

of parts of its various operations without a marked loss of

efficiency." A corporation that has expanded by acquiring its

competitors often has preexisting internal lines of division

along which it may more easily be split than a corporation

that has expanded from natural growth. Although time and

corporate modifications and developments may eventually

fade those lines, at least the identifiable entities preexisted to

create a template for such division as the court might later

decree. With reference to those corporations that are not

acquired by merger and acquisition, Judge Wyzanski accurately opined in United Shoe:

United conducts all machine manufacture at one plant in

Beverly, with one set of jigs and tools, one foundry, one

laboratory for machinery problems, one managerial staff,

and one labor force. It takes no Solomon to see that this

organism cannot be cut into three equal and viable parts.

United States v. United Shoe Machine Co., 110 F. Supp. 295,

348 (D. Mass. 1953).

Depending upon the evidence, the District Court may find

in a remedies proceeding that it would be no easier to split

Microsoft in two than United Shoe in three. Microsoft's

Offer of Proof in response to the court's denial of an evidentiary hearing included proffered testimony from its President

and CEO Steve Ballmer that the company "is, and always has

been, a unified company without free-standing business units.

Microsoft is not the result of mergers or acquisitions." Microsoft further offered evidence that it is "not organized along

product lines," but rather is housed in a single corporate

headquarters and that it has

only one sales and marketing organization which is responsible for selling all of the company's products, one

basic research organization, one product support organization, one operations department, one information technology department, one facilities department, one purchasing department, one human resources department,

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one finance department, one legal department and one

public relations department.

Defendant's Offer of Proof at 23-26, reprinted in 4 J.A. at

2764-67. If indeed Microsoft is a unitary company, division

might very well require Microsoft to reproduce each of these

departments in each new entity rather than simply allocate

the differing departments among them.

In devising an appropriate remedy, the District Court also

should consider whether plaintiffs have established a sufficient causal connection between Microsoft's anticompetitive

conduct and its dominant position in the OS market. "Mere

existence of an exclusionary act does not itself justify full

feasible relief against the monopolist to create maximum

competition." 3 Areeda & Hovenkamp, Antitrust Law p 650a,

at 67. Rather, structural relief, which is "designed to eliminate the monopoly altogether ... require[s] a clearer indication of a significant causal connection between the conduct

and creation or maintenance of the market power." Id.

p 653b, at 91-92 (emphasis added). Absent such causation,

the antitrust defendant's unlawful behavior should be remedied by "an injunction against continuation of that conduct."

Id. p 650a, at 67.

As noted above, see supra Section II.C, we have found a

causal connection between Microsoft's exclusionary conduct

and its continuing position in the operating systems market

only through inference. See 3 Areeda & Hovenkamp, Antitrust Law p 653(b), at 91-92 (suggesting that "more extensive

equitable relief, particularly remedies such as divestiture

designed to eliminate the monopoly altogether, ... require a

clearer indication of significant causal connection between the

conduct and creation or maintenance of the market power").

Indeed, the District Court expressly did not adopt the position that Microsoft would have lost its position in the OS

market but for its anticompetitive behavior. Findings of

Fact p 411 ("There is insufficient evidence to find that, absent

Microsoft's actions, Navigator and Java already would have

ignited genuine competition in the market for Intelcompatible PC operating systems."). If the court on remand

is unconvinced of the causal connection between Microsoft's

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exclusionary conduct and the company's position in the OS

market, it may well conclude that divestiture is not an

appropriate remedy.

While we do not undertake to dictate to the District Court

the precise form that relief should take on remand, we note

again that it should be tailored to fit the wrong creating the

occasion for the remedy.

G. Conclusion

In sum, we vacate the District Court's remedies decree for

three reasons. First, the District Court failed to hold an

evidentiary hearing despite the presence of remedies-specific

factual disputes. Second, the court did not provide adequate

reasons for its decreed remedies. Finally, we have drastically altered the scope of Microsoft's liability, and it is for the

District Court in the first instance to determine the propriety

of a specific remedy for the limited ground of liability which

we have upheld.

VI. Judicial Misconduct

Canon 3A(6) of the Code of Conduct for United States

Judges requires federal judges to "avoid public comment on

the merits of [ ] pending or impending" cases. Canon 2 tells

judges to "avoid impropriety and the appearance of impropriety in all activities," on the bench and off. Canon 3A(4)

forbids judges to initiate or consider ex parte communications

on the merits of pending or impending proceedings. Section

455(a) of the Judicial Code requires judges to recuse themselves when their "impartiality might reasonably be questioned." 28 U.S.C. s 455(a).

All indications are that the District Judge violated each of

these ethical precepts by talking about the case with reporters. The violations were deliberate, repeated, egregious, and

flagrant. The only serious question is what consequences

should follow. Microsoft urges us to disqualify the District

Judge, vacate the judgment in its entirety and toss out the

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findings of fact, and remand for a new trial before a different

District Judge. At the other extreme, plaintiffs ask us to do

nothing. We agree with neither position.

A. The District Judge's Communications with the Press

Immediately after the District Judge entered final judgment on June 7, 2000, accounts of interviews with him began

appearing in the press. Some of the interviews were held

after he entered final judgment. See Peter Spiegel, Microsoft Judge Defends Post-trial Comments, Fin. Times (London),

Oct. 7, 2000, at 4; John R. Wilke, For Antitrust Judge, Trust,

or Lack of It, Really Was the Issue--In an Interview,

Jackson Says Microsoft Did the Damage to Its Credibility in

Court, Wall St. J., June 8, 2000, at A1. The District Judge

also aired his views about the case to larger audiences, giving

speeches at a college and at an antitrust seminar. See James

V. Grimaldi, Microsoft Judge Says Ruling at Risk; Every

Trial Decision Called 'Vulnerable', Wash. Post, Sept. 29, 2000,

at E1; Alison Schmauch, Microsoft Judge Shares Experiences, The Dartmouth Online, Oct. 3, 2000.

From the published accounts, it is apparent that the Judge

also had been giving secret interviews to select reporters

before entering final judgment--in some instances long before. The earliest interviews we know of began in September

1999, shortly after the parties finished presenting evidence

but two months before the court issued its Findings of Fact.

See Joel Brinkley & Steve Lohr, U.S. vs. Microsoft: Pursuing a Giant; Retracing the Missteps in the Microsoft Defense, N.Y. Times, June 9, 2000, at A1. Interviews with

reporters from the New York Times and Ken Auletta, another reporter who later wrote a book on the Microsoft case,

continued throughout late 1999 and the first half of 2000,

during which time the Judge issued his Findings of Fact,

Conclusions of Law, and Final Judgment. See id.; Ken

Auletta, Final Offer, The New Yorker, Jan. 15, 2001, at 40.

The Judge "embargoed" these interviews; that is, he insisted

that the fact and content of the interviews remain secret until

he issued the Final Judgment.

Before we recount the statements attributed to the District

Judge, we need to say a few words about the state of the

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record. All we have are the published accounts and what the

reporters say the Judge said. Those accounts were not

admitted in evidence. They may be hearsay. See Fed. R.

Evid. 801(c); Metro. Council of NAACP Branches v. FCC, 46

F.3d 1154, 1165 (D.C. Cir. 1995) ("We seriously question

whether a New York Times article is admissible evidence of

the truthfulness of its contents.").

We are of course concerned about granting a request to

disqualify a federal judge when the material supporting it has

not been admitted in evidence. Disqualification is never

taken lightly. In the wrong hands, a disqualification motion

is a procedural weapon to harass opponents and delay proceedings. If supported only by rumor, speculation, or innuendo, it is also a means to tarnish the reputation of a federal

judge.

But the circumstances of this case are most unusual. By

placing an embargo on the interviews, the District Judge

ensured that the full extent of his actions would not be

revealed until this case was on appeal. Plaintiffs, in defending the judgment, do not dispute the statements attributed to

him in the press; they do not request an evidentiary hearing;

and they do not argue that Microsoft should have filed a

motion in the District Court before raising the matter on

appeal. At oral argument, plaintiffs all but conceded that the

Judge violated ethical restrictions by discussing the case in

public: "On behalf of the governments, I have no brief to

defend the District Judge's decision to discuss this case

publicly while it was pending on appeal, and I have no brief to

defend the judge's decision to discuss the case with reporters

while the trial was proceeding, even given the embargo on

any reporting concerning those conversations until after the

trial." 02/27/01 Ct. Appeals Tr. at 326.

We must consider too that the federal disqualification

provisions reflect a strong federal policy to preserve the

actual and apparent impartiality of the federal judiciary.

Judicial misconduct may implicate that policy regardless of

the means by which it is disclosed to the public. Cf. The

Washington Post v. Robinson, 935 F.2d 282, 291 (D.C. Cir.

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1991) (taking judicial notice of newspaper articles to ascertain

whether a fact was within public knowledge). Also, in our

analysis of the arguments presented by the parties, the

specifics of particular conversations are less important than

their cumulative effect.

For these reasons we have decided to adjudicate Microsoft's disqualification request notwithstanding the state of the

record. The same reasons also warrant a departure from our

usual practice of declining to address issues raised for the

first time on appeal: the "matter of what questions may be

taken up and resolved for the first time on appeal is one left

primarily to the discretion of the courts of appeals, to be

exercised on the facts of individual cases." Singleton v.

Wulff, 428 U.S. 106, 121 (1976); accord Hormel v. Helvering,

312 U.S. 552, 556-57 (1941); Nat'l Ass'n of Mfrs. v. Dep't of

Labor, 159 F.3d 597, 605-06 (D.C. Cir. 1998). We will assume

the truth of the press accounts and not send the case back for

an evidentiary hearing on this subject. We reach no judgment on whether the details of the interviews were accurately

recounted.

The published accounts indicate that the District Judge

discussed numerous topics relating to the case. Among them

was his distaste for the defense of technological integration--

one of the central issues in the lawsuit. In September 1999,

two months before his Findings of Fact and six months

before his Conclusions of Law, and in remarks that were kept

secret until after the Final Judgment, the Judge told reporters from the New York Times that he questioned Microsoft's

integration of a web browser into Windows. Stating that he

was "not a fan of integration," he drew an analogy to a 35-

millimeter camera with an integrated light meter that in his

view should also be offered separately: "You like the convenience of having a light meter built in, integrated, so all you

have to do is press a button to get a reading. But do you

think camera makers should also serve photographers who

want to use a separate light meter, so they can hold it up,

move it around?" Joel Brinkley & Steve Lohr, U.S. v.

Microsoft 263 (2001). In other remarks, the Judge commented on the integration at the heart of the case: "[I]t was

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quite clear to me that the motive of Microsoft in bundling the

Internet browser was not one of consumer convenience. The

evidence that this was done for the consumer was not credible.... The evidence was so compelling that there was an

ulterior motive." Wilke, Wall St. J. As for tying law in

general, he criticized this court's ruling in the consent decree

case, saying it "was wrongheaded on several counts" and

would exempt the software industry from the antitrust laws.

Brinkley & Lohr, U.S. v. Microsoft 78, 295; Brinkley &

Lohr, N.Y. Times.

Reports of the interviews have the District Judge describing Microsoft's conduct, with particular emphasis on what he

regarded as the company's prevarication, hubris, and impenitence. In some of his secret meetings with reporters, the

Judge offered his contemporaneous impressions of testimony.

He permitted at least one reporter to see an entry concerning

Bill Gates in his "oversized green notebook." Ken Auletta,

World War 3.0, at 112 (2001). He also provided numerous

after-the-fact credibility assessments. He told reporters that

Bill Gates' "testimony is inherently without credibility" and

"[i]f you can't believe this guy, who else can you believe?"

Brinkley & Lohr, U.S. v. Microsoft 278; Brinkley & Lohr,

N.Y. Times; see also Auletta, The New Yorker, at 40. As for

the company's other witnesses, the Judge is reported as

saying that there "were times when I became impatient with

Microsoft witnesses who were giving speeches." "[T]hey

were telling me things I just flatly could not credit." Brinkley & Lohr, N.Y. Times. In an interview given the day he

entered the break-up order, he summed things up: "Falsus in

uno, falsus in omnibus": "Untrue in one thing, untrue in

everything." "I don't subscribe to that as absolutely true.

But it does lead one to suspicion. It's a universal human

experience. If someone lies to you once, how much else can

you credit as the truth?" Wilke, Wall St. J.

According to reporter Auletta, the District Judge told him

in private that, "I thought they [Microsoft and its executives]

didn't think they were regarded as adult members of the

community. I thought they would learn." Auletta, World

War 3.0, at 14. The Judge told a college audience that "Bill

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Gates is an ingenious engineer, but I don't think he is that

adept at business ethics. He has not yet come to realise

things he did (when Microsoft was smaller) he should not

have done when he became a monopoly." Spiegel, Fin. Times.

Characterizing Gates' and his company's "crime" as hubris,

the Judge stated that "[i]f I were able to propose a remedy of

my devising, I'd require Mr. Gates to write a book report" on

Napoleon Bonaparte, "[b]ecause I think [Gates] has a Napoleonic concept of himself and his company, an arrogance that

derives from power and unalloyed success, with no leavening

hard experience, no reverses." Auletta, The New Yorker, at

41; see also Auletta, World War 3.0, at 397. The Judge

apparently became, in Auletta's words, "increasingly troubled

by what he learned about Bill Gates and couldn't get out of

his mind the group picture he had seen of Bill Gates and Paul

Allen and their shaggy-haired first employees at Microsoft."

The reporter wrote that the Judge said he saw in the picture

"a smart-mouthed young kid who has extraordinary ability

and needs a little discipline. I've often said to colleagues that

Gates would be better off if he had finished Harvard."

Auletta, World War 3.0, at 168-69; see also Auletta, The

New Yorker, at 46 (reporting the District Judge's statement

that "they [Microsoft and its executives] don't act like grownups!" "[T]o this day they continue to deny they did anything

wrong.").

The District Judge likened Microsoft's writing of incriminating documents to drug traffickers who "never figure out that

they shouldn't be saying certain things on the phone."

Brinkley & Lohr, U.S. v. Microsoft 6; Brinkley & Lohr,

N.Y. Times. He invoked the drug trafficker analogy again to

denounce Microsoft's protestations of innocence, this time

with a reference to the notorious Newton Street Crew that

terrorized parts of Washington, D.C. Reporter Auletta wrote

in The New Yorker that the Judge

went as far as to compare the company's declaration of

innocence to the protestations of gangland killers. He

was referring to five gang members in a racketeering,

drug-dealing, and murder trial that he had presided over

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four years earlier. In that case, the three victims had

had their heads bound with duct tape before they were

riddled with bullets from semi-automatic weapons. "On

the day of the sentencing, the gang members maintained

that they had done nothing wrong, saying that the whole

case was a conspiracy by the white power structure to

destroy them," Jackson recalled. "I am now under no

illusions that miscreants will realize that other parts of

society will view them that way."

Auletta, The New Yorker, at 40-41; Auletta, World War 3.0,

at 369-70 (same); see also Auletta, The New Yorker, at 46.

The District Judge also secretly divulged to reporters his

views on the remedy for Microsoft's antitrust violations. On

the question whether Microsoft was entitled to any process at

the remedy stage, the Judge told reporters in May 2000 that

he was "not aware of any case authority that says I have to

give them any due process at all. The case is over. They

lost." Brinkley & Lohr, N.Y. Times. Another reporter has

the Judge asking "[w]ere the Japanese allowed to propose

terms of their surrender?" Spiegel, Fin. Times. The District

Judge also told reporters the month before he issued his

break-up order that "[a]ssuming, as I think they are, [ ] the

Justice Department and the states are genuinely concerned

about the public interest," "I know they have carefully studied all the possible options. This isn't a bunch of amateurs.

They have consulted with some of the best minds in America

over a long period of time." "I am not in a position to

duplicate that and re-engineer their work. There's no way I

can equip myself to do a better job than they have done."

Brinkley & Lohr, N.Y. Times; cf. Final Judgment, at 62-63.

In February 2000, four months before his final order

splitting the company in two, the District Judge reportedly

told New York Times reporters that he was "not at all

comfortable with restructuring the company," because he was

unsure whether he was "competent to do that." Brinkley &

Lohr, N.Y. Times; see also Brinkley & Lohr, U.S. v. Microsoft 277-78 (same); cf. Auletta, World War 3.0, at 370

(comment by the Judge in April 2000 that he was inclining

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toward behavioral rather than structural remedies). A few

months later, he had a change of heart. He told the same

reporters that "with what looks like Microsoft intransigence,

a breakup is inevitable." Brinkley & Lohr, N.Y. Times; see

also Brinkley & Lohr, U.S. v. Microsoft 315. The Judge

recited a "North Carolina mule trainer" story to explain his

change in thinking from "[i]f it ain't broken, don't try to fix it"

and "I just don't think that [restructuring the company] is

something I want to try to do on my own" to ordering

Microsoft broken in two:

He had a trained mule who could do all kinds of wonderful tricks. One day somebody asked him: "How do you

do it? How do you train the mule to do all these

amazing things?" "Well," he answered, "I'll show you."

He took a 2-by-4 and whopped him upside the head.

The mule was reeling and fell to his knees, and the

trainer said: "You just have to get his attention."

Brinkley & Lohr, U.S. v. Microsoft 278. The Judge added:

"I hope I've got Microsoft's attention." Id.; see also Grimaldi, Wash. Post (comments by the Judge blaming the break-up

on Microsoft's intransigence and on what he perceived to be

Microsoft's responsibility for the failure of settlement talks);

Spiegel, Fin. Times (the Judge blaming break-up on Microsoft's intransigence).

B. Violations of the Code of Conduct for United States

Judges

The Code of Conduct for United States Judges was

adopted by the Judicial Conference of the United States in

1973. It prescribes ethical norms for federal judges as a

means to preserve the actual and apparent integrity of the

federal judiciary. Every federal judge receives a copy of the

Code, the Commentary to the Code, the Advisory Opinions of

the Judicial Conference's Committee on Codes of Conduct,

and digests of the Committee's informal, unpublished opinions. See II Guide to Judiciary Policies and Procedures

(1973). The material is periodically updated. Judges who

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tent with the Code may write to the Codes of Conduct

Committee for a written, confidential opinion. See Introduction, Code of Conduct. The Committee traditionally responds promptly. A judge may also seek informal advice

from the Committee's circuit representative.

While some of the Code's Canons frequently generate

questions about their application, others are straightforward

and easily understood. Canon 3A(6) is an example of the

latter. In forbidding federal judges to comment publicly "on

the merits of a pending or impending action," Canon 3A(6)

applies to cases pending before any court, state or federal,

trial or appellate. See Jeffrey M. Shaman et al., Judicial

Conduct and Ethics s 10.34, at 353 (3d ed. 2000). As "impending" indicates, the prohibition begins even before a case

enters the court system, when there is reason to believe a

case may be filed. Cf. E. Wayne Thode, Reporter's Notes to

Code of Judicial Conduct 54 (1973). An action remains

"pending" until "completion of the appellate process." Code

of Conduct Canon 3A(6) cmt.; Comm. on Codes of Conduct,

Adv. Op. No. 55 (1998).

The Microsoft case was "pending" during every one of the

District Judge's meetings with reporters; the case is "pending" now; and even after our decision issues, it will remain

pending for some time. The District Judge breached his

ethical duty under Canon 3A(6) each time he spoke to a

reporter about the merits of the case. Although the reporters interviewed him in private, his comments were public.

Court was not in session and his discussion of the case took

place outside the presence of the parties. He provided his

views not to court personnel assisting him in the case, but to

members of the public. And these were not just any members of the public. Because he was talking to reporters, the

Judge knew his comments would eventually receive widespread dissemination.

It is clear that the District Judge was not discussing purely

procedural matters, which are a permissible subject of public

comment under one of the Canon's three narrowly drawn

exceptions. He disclosed his views on the factual and legal

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matters at the heart of the case. His opinions about the

credibility of witnesses, the validity of legal theories, the

culpability of the defendant, the choice of remedy, and so

forth all dealt with the merits of the action. It is no excuse

that the Judge may have intended to "educate" the public

about the case or to rebut "public misperceptions" purportedly caused by the parties. See Grimaldi, Wash. Post; Microsoft Judge Says He May Step down from Case on Appeal,

Wall St. J., Oct. 30, 2000. If those were his intentions, he

could have addressed the factual and legal issues as he saw

them--and thought the public should see them--in his Findings of Fact, Conclusions of Law, Final Judgment, or in a

written opinion. Or he could have held his tongue until all

appeals were concluded.

Far from mitigating his conduct, the District Judge's insistence on secrecy--his embargo--made matters worse. Concealment of the interviews suggests knowledge of their impropriety. Concealment also prevented the parties from nipping

his improprieties in the bud. Without any knowledge of the

interviews, neither the plaintiffs nor the defendant had a

chance to object or to seek the Judge's removal before he

issued his Final Judgment.

Other federal judges have been disqualified for making

limited public comments about cases pending before them.

See In re Boston's Children First, 244 F.3d 164 (1st Cir.

2001); In re IBM Corp., 45 F.3d 641 (2d Cir. 1995); United

States v. Cooley, 1 F.3d 985 (10th Cir. 1993). Given the

extent of the Judge's transgressions in this case, we have

little doubt that if the parties had discovered his secret

liaisons with the press, he would have been disqualified,

voluntarily or by court order. Cf. In re Barry, 946 F.2d 913

(D.C. Cir. 1991) (per curiam); id. at 915 (Edwards, J., dissenting).

In addition to violating the rule prohibiting public comment, the District Judge's reported conduct raises serious

questions under Canon 3A(4). That Canon states that a

"judge should accord to every person who is legally interested

in a proceeding, or the person's lawyer, full right to be heard

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according to law, and, except as authorized by law, neither

initiate nor consider ex parte communications on the merits,

or procedures affecting the merits, of a pending or impending

proceeding." Code of Conduct Canon 3A(4).

What did the reporters convey to the District Judge during

their secret sessions? By one account, the Judge spent a

total of ten hours giving taped interviews to one reporter.

Auletta, World War 3.0, at 14 n.*. We do not know whether

he spent even more time in untaped conversations with the

same reporter, nor do we know how much time he spent with

others. But we think it safe to assume that these interviews

were not monologues. Interviews often become conversations. When reporters pose questions or make assertions,

they may be furnishing information, information that may

reflect their personal views of the case. The published

accounts indicate this happened on at least one occasion.

Ken Auletta reported, for example, that he told the Judge

"that Microsoft employees professed shock that he thought

they had violated the law and behaved unethically," at which

time the Judge became "agitated" by "Microsoft's 'obstinacy'." Id. at 369. It is clear that Auletta had views of the

case. As he wrote in a Washington Post editorial, "[a]nyone

who sat in [the District Judge's] courtroom during the trial

had seen ample evidence of Microsoft's sometimes thuggish

tactics." Ken Auletta, Maligning the Microsoft Judge, Wash.

Post, Mar. 7, 2001, at A23.

The District Judge's repeated violations of Canons 3A(6)

and 3A(4) also violated Canon 2, which provides that "a judge

should avoid impropriety and the appearance of impropriety

in all activities." Code of Conduct Canon 2; see also In re

Charge of Judicial Misconduct, 47 F.3d 399, 400 (10th Cir.

Jud. Council 1995) ("The allegations of extra-judicial comments cause the Council substantial concern under both

Canon 3A(6) and Canon 2 of the Judicial Code of Conduct.").

Canon 2A requires federal judges to "respect and comply

with the law" and to "act at all times in a manner that

promotes public confidence in the integrity and impartiality of

the judiciary." Code of Conduct Canon 2A. The Code of

Conduct is the law with respect to the ethical obligations of

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federal judges, and it is clear the District Judge violated it on

multiple occasions in this case. The rampant disregard for

the judiciary's ethical obligations that the public witnessed in

this case undoubtedly jeopardizes "public confidence in the

integrity" of the District Court proceedings.

Another point needs to be stressed. Rulings in this case

have potentially huge financial consequences for one of the

nation's largest publicly-traded companies and its investors.

The District Judge's secret interviews during the trial provided a select few with inside information about the case,

information that enabled them and anyone they shared it with

to anticipate rulings before the Judge announced them to the

world. Although he "embargoed" his comments, the Judge

had no way of policing the reporters. For all he knew there

may have been trading on the basis of the information he

secretly conveyed. The public cannot be expected to maintain confidence in the integrity and impartiality of the federal

judiciary in the face of such conduct.

C. Appearance of Partiality

The Code of Conduct contains no enforcement mechanism.

See Thode, Reporter's Notes to Code of Judicial Conduct 43.

The Canons, including the one that requires a judge to

disqualify himself in certain circumstances, see Code of Conduct Canon 3C, are self-enforcing. There are, however,

remedies extrinsic to the Code. One is an internal disciplinary proceeding, begun with the filing of a complaint with the

clerk of the court of appeals pursuant to 28 U.S.C. s 372(c).

Another is disqualification of the offending judge under either

28 U.S.C. s 144, which requires the filing of an affidavit while

the case is in the District Court, or 28 U.S.C. s 455, which

does not. Microsoft urges the District Judge's disqualification under s 455(a): a judge "shall disqualify himself in any

proceeding in which his impartiality might reasonably be

questioned." 28 U.S.C. s 455(a). The standard for disqualification under s 455(a) is an objective one. The question is

whether a reasonable and informed observer would question

the judge's impartiality. See In re Barry, 946 F.2d at 914;

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see also In re Aguinda, 241 F.3d 194, 201 (2d Cir. 2001);

Richard E. Flamm, Judicial Disqualification s 24.2.1 (1996).

"The very purpose of s 455(a) is to promote confidence in

the judiciary by avoiding even the appearance of impropriety

whenever possible." Liljeberg v. Health Servs. Acquisition

Corp., 486 U.S. 847, 865 (1988). As such, violations of the

Code of Conduct may give rise to a violation of s 455(a) if

doubt is cast on the integrity of the judicial process. It has

been argued that any "public comment by a judge concerning

the facts, applicable law, or merits of a case that is sub judice

in his court or any comment concerning the parties or their

attorneys would raise grave doubts about the judge's objectivity and his willingness to reserve judgment until the close of

the proceeding." William G. Ross, Extrajudicial Speech:

Charting the Boundaries of Propriety, 2 Geo. J. Legal Ethics

589, 598 (1989). Some courts of appeals have taken a hard

line on public comments, finding violations of s 455(a) for

judicial commentary on pending cases that seems mild in

comparison to what we are confronting in this case. See

Boston's Children First, 244 F.3d 164 (granting writ of

mandamus ordering district judge to recuse herself under

s 455(a) because of public comments on class certification and

standing in a pending case); In re IBM Corp., 45 F.3d 641

(granting writ of mandamus ordering district judge to recuse

himself based in part on the appearance of partiality caused

by his giving newspaper interviews); Cooley, 1 F.3d 985

(vacating convictions and disqualifying district judge for appearance of partiality because he appeared on television

program Nightline and stated that abortion protestors in a

case before him were breaking the law and that his injunction

would be obeyed).

While s 455(a) is concerned with actual and apparent impropriety, the statute requires disqualification only when a

judge's "impartiality might reasonably be questioned." 28

U.S.C. s 455(a). Although this court has condemned public

judicial comments on pending cases, we have not gone so far

as to hold that every violation of Canon 3A(6) or every

impropriety under the Code of Conduct inevitably destroys

the appearance of impartiality and thus violates s 455(a).

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See In re Barry, 946 F.2d at 914; see also Boston's Children

First, 244 F.3d at 168; United States v. Fortier, 242 F.3d

1224, 1229 (10th Cir. 2001).

In this case, however, we believe the line has been crossed.

The public comments were not only improper, but also would

lead a reasonable, informed observer to question the District

Judge's impartiality. Public confidence in the integrity and

impartiality of the judiciary is seriously jeopardized when

judges secretly share their thoughts about the merits of

pending cases with the press. Judges who covet publicity, or

convey the appearance that they do, lead any objective observer to wonder whether their judgments are being influenced by the prospect of favorable coverage in the media.

Discreet and limited public comments may not compromise a

judge's apparent impartiality, but we have little doubt that

the District Judge's conduct had that effect. Appearance

may be all there is, but that is enough to invoke the Canons

and s 455(a).

Judge Learned Hand spoke of "this America of ours where

the passion for publicity is a disease, and where swarms of

foolish, tawdry moths dash with rapture into its consuming

fire...." Learned Hand, The Spirit of Liberty 132-33 (2d

ed. 1953). Judges are obligated to resist this passion. Indulging it compromises what Edmund Burke justly regarded

as the "cold neutrality of an impartial judge." Cold or not,

federal judges must maintain the appearance of impartiality.

What was true two centuries ago is true today: "Deference to

the judgments and rulings of courts depends upon public

confidence in the integrity and independence of judges."

Code of Conduct Canon 1 cmt. Public confidence in judicial

impartiality cannot survive if judges, in disregard of their

ethical obligations, pander to the press.

We recognize that it would be extraordinary to disqualify a

judge for bias or appearance of partiality when his remarks

arguably reflected what he learned, or what he thought he

learned, during the proceedings. See Liteky v. United States,

510 U.S. 540, 554-55 (1994); United States v. Barry, 961 F.2d

260, 263 (D.C. Cir. 1992). But this "extrajudicial source" rule

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has no bearing on the case before us. The problem here is

not just what the District Judge said, but to whom he said it

and when. His crude characterizations of Microsoft, his

frequent denigrations of Bill Gates, his mule trainer analogy

as a reason for his remedy--all of these remarks and others

might not have given rise to a violation of the Canons or of

s 455(a) had he uttered them from the bench. See Liteky,

510 U.S. at 555-56; Code of Conduct Canon 3A(6) (exception

to prohibition on public comments for "statements made in

the course of the judge's official duties"). But then Microsoft

would have had an opportunity to object, perhaps even to

persuade, and the Judge would have made a record for review

on appeal. It is an altogether different matter when the

statements are made outside the courtroom, in private meetings unknown to the parties, in anticipation that ultimately

the Judge's remarks would be reported. Rather than manifesting neutrality and impartiality, the reports of the interviews with the District Judge convey the impression of a

judge posturing for posterity, trying to please the reporters

with colorful analogies and observations bound to wind up in

the stories they write. Members of the public may reasonably question whether the District Judge's desire for press

coverage influenced his judgments, indeed whether a

publicity-seeking judge might consciously or subconsciously

seek the publicity-maximizing outcome. We believe, therefore, that the District Judge's interviews with reporters created an appearance that he was not acting impartially, as the

Code of Conduct and s 455(a) require.

D. Remedies for Judicial Misconduct and Appearance of

Partiality

1. Disqualification

Disqualification is mandatory for conduct that calls a

judge's impartiality into question. See 28 U.S.C. s 455(a); In

re School Asbestos Litig., 977 F.2d 764, 783 (3d Cir. 1992).

Section 455 does not prescribe the scope of disqualification.

Rather, Congress "delegated to the judiciary the task of

fashioning the remedies that will best serve the purpose" of

the disqualification statute. Liljeberg, 486 U.S. at 862.

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At a minimum, s 455(a) requires prospective disqualification of the offending judge, that is, disqualification from the

judge's hearing any further proceedings in the case. See

United States v. Microsoft Corp., 56 F.3d 1448, 1463-65 (D.C.

Cir. 1995) (per curiam) ("Microsoft I"). Microsoft urges

retroactive disqualification of the District Judge, which would

entail disqualification antedated to an earlier part of the

proceedings and vacatur of all subsequent acts. Cf. In re

School Asbestos Litig., 977 F.2d at 786 (discussing remedy

options).

"There need not be a draconian remedy for every violation

of s 455(a)." Liljeberg, 486 U.S. at 862. Liljeberg held that

a district judge could be disqualified under s 455(a) after

entering final judgment in a case, even though the judge was

not (but should have been) aware of the grounds for disqualification before final judgment. The Court identified three

factors relevant to the question whether vacatur is appropriate: "in determining whether a judgment should be vacated

for a violation of s 455(a), it is appropriate to consider the

risk of injustice to the parties in the particular case, the risk

that the denial of relief will produce injustice in other cases,

and the risk of undermining the public's confidence in the

judicial process." Id. at 864. Although the Court was discussing s 455(a) in a slightly different context (the judgment

there had become final after appeal and the movant sought to

have it vacated under Rule 60(b)), we believe the test it

propounded applies as well to cases such as this in which the

full extent of the disqualifying circumstances came to light

only while the appeal was pending. See In re School Asbestos

Litig., 977 F.2d at 785.

Our application of Liljeberg leads us to conclude that the

appropriate remedy for the violations of s 455(a) is disqualification of the District Judge retroactive only to the date he

entered the order breaking up Microsoft. We therefore will

vacate that order in its entirety and remand this case to a

different District Judge, but will not set aside the existing

Findings of Fact or Conclusions of Law (except insofar as

specific findings are clearly erroneous or legal conclusions are

incorrect).

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This partially retroactive disqualification minimizes the risk

of injustice to the parties and the damage to public confidence

in the judicial process. Although the violations of the Code of

Conduct and s 455(a) were serious, full retroactive disqualification is unnecessary. It would unduly penalize plaintiffs,

who were innocent and unaware of the misconduct, and would

have only slight marginal deterrent effect.

Most important, full retroactive disqualification is unnecessary to protect Microsoft's right to an impartial adjudication.

The District Judge's conduct destroyed the appearance of

impartiality. Microsoft neither alleged nor demonstrated

that it rose to the level of actual bias or prejudice. There is

no reason to presume that everything the District Judge did

is suspect. See In re Allied-Signal Inc., 891 F.2d 974, 975-76

(1st Cir. 1989); cf. Liberty Lobby, Inc. v. Dow Jones & Co.,

838 F.2d 1287, 1301-02 (D.C. Cir. 1988). Although Microsoft

challenged very few of the findings as clearly erroneous, we

have carefully reviewed the entire record and discern no basis

to suppose that actual bias infected his factual findings.

The most serious judicial misconduct occurred near or

during the remedial stage. It is therefore commensurate that

our remedy focus on that stage of the case. The District

Judge's impatience with what he viewed as intransigence on

the part of the company; his refusal to allow an evidentiary

hearing; his analogizing Microsoft to Japan at the end of

World War II; his story about the mule--all of these out-ofcourt remarks and others, plus the Judge's evident efforts to

please the press, would give a reasonable, informed observer

cause to question his impartiality in ordering the company

split in two.

To repeat, we disqualify the District Judge retroactive only

to the imposition of the remedy, and thus vacate the remedy

order for the reasons given in Section V and because of the

appearance of partiality created by the District Judge's misconduct.

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2. Review of Findings of Fact and Conclusions of

Law

Given the limited scope of our disqualification of the District Judge, we have let stand for review his Findings of Fact

and Conclusions of Law. The severity of the District Judge's

misconduct and the appearance of partiality it created have

led us to consider whether we can and should subject his

factfindings to greater scrutiny. For a number of reasons we

have rejected any such approach.

The Federal Rules require that district court findings of

fact not be set aside unless they are clearly erroneous. See

Fed. R. Civ. P. 52(a). Ordinarily, there is no basis for

doubting that the District Court's factual findings are entitled

to the substantial deference the clearly erroneous standard

entails. But of course this is no ordinary case. Deference to

a district court's factfindings presumes impartiality on the

lower court's part. When impartiality is called into question,

how much deference is due?

The question implies that there is some middle ground, but

we believe there is none. As the rules are written, district

court factfindings receive either full deference under the

clearly erroneous standard or they must be vacated. There is

no de novo appellate review of factfindings and no intermediate level between de novo and clear error, not even for

findings the court of appeals may consider sub-par. See

Amadeo v. Zant, 486 U.S. 214, 228 (1988) ("The District

Court's lack of precision, however, is no excuse for the Court

of Appeals to ignore the dictates of Rule 52(a) and engage in

impermissible appellate factfinding."); Anderson v. City of

Bessemer City, 470 U.S. 564, 571-75 (1985) (criticizing district

court practice of adopting a party's proposed factfindings but

overturning court of appeals' application of "close scrutiny" to

such findings).

Rule 52(a) mandates clearly erroneous review of all district

court factfindings: "Findings of fact, whether based on oral

or documentary evidence, shall not be set aside unless clearly

erroneous, and due regard shall be given to the opportunity

of the trial court to judge of the credibility of the witnesses."

Fed. R. Civ. P. 52(a). The rule "does not make exceptions or

purport to exclude certain categories of factual findings from

the obligation of a court of appeals to accept a district court's

findings unless clearly erroneous." Pullman-Standard v.

Swint, 456 U.S. 273, 287 (1982); see also Anderson, 470 U.S.

at 574-75; Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S.

844, 855-58 (1982). The Supreme Court has emphasized on

multiple occasions that "[i]n applying the clearly erroneous

standard to the findings of a district court sitting without a

jury, appellate courts must constantly have in mind that their

function is not to decide factual issues de novo." Zenith

Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123

(1969); Anderson, 470 U.S. at 573 (quoting Zenith).

The mandatory nature of Rule 52(a) does not compel us to

accept factfindings that result from the District Court's misapplication of governing law or that otherwise do not permit

meaningful appellate review. See Pullman-Standard, 456

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U.S. at 292; Inwood Labs., 456 U.S. at 855 n.15. Nor must

we accept findings that are utterly deficient in other ways.

In such a case, we vacate and remand for further factfinding.

See 9 Moore's Federal Practice s 52.12[1] (Matthew Bender

3d ed. 2000); 9A Charles A. Wright & Arthur R. Miller,

Federal Practice and Procedure s 2577, at 514-22 (2d ed.

1995); cf. Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709,

714 (1986); Pullman-Standard, 456 U.S. at 291-92.

When there is fair room for argument that the District

Court's factfindings should be vacated in toto, the court of

appeals should be especially careful in determining that the

findings are worthy of the deference Rule 52(a) prescribes.

See, e.g., Thermo Electron Corp. v. Schiavone Constr. Co., 915

F.2d 770, 773 (1st Cir. 1990); cf. Bose Corp. v. Consumers

Union of United States, Inc., 466 U.S. 485, 499 (1984). Thus,

although Microsoft alleged only appearance of bias, not actual

bias, we have reviewed the record with painstaking care and

have discerned no evidence of actual bias. See S. Pac.

Communications Co. v. AT & T, 740 F.2d 980, 984 (D.C. Cir.

1984); Cooley, 1 F.3d at 996 (disqualifying district judge for

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appearance of partiality but noting that "the record of the

proceedings below ... discloses no bias").

In light of this conclusion, the District Judge's factual

findings both warrant deference under the clear error standard of review and, though exceedingly sparing in citations to

the record, permit meaningful appellate review. In reaching

these conclusions, we have not ignored the District Judge's

reported intention to craft his factfindings and Conclusions of

Law to minimize the breadth of our review. The Judge

reportedly told Ken Auletta that "[w]hat I want to do is

confront the Court of Appeals with an established factual

record which is a fait accompli." Auletta, World War 3.0, at

230. He explained: "part of the inspiration for doing that is

that I take mild offense at their reversal of my preliminary

injunction in the consent-decree case, where they went ahead

and made up about ninety percent of the facts on their own."

Id. Whether the District Judge takes offense, mild or severe,

is beside the point. Appellate decisions command compliance,

not agreement. We do not view the District Judge's remarks

as anything other than his expression of disagreement with

this court's decision, and his desire to provide extensive

factual findings in this case, which he did.

VII. Conclusion

The judgment of the District Court is affirmed in part,

reversed in part, and remanded in part. We vacate in full the

Final Judgment embodying the remedial order, and remand

the case to the District Court for reassignment to a different

trial judge for further proceedings consistent with this opinion.

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