Opinion ID: 185418
Heading Depth: 3
Heading Rank: 3

Heading: Agreements with Internet Access Providers

Text: 105 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: 106 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. 107 Conclusions of Law, at 41. 108 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 identity for its service in as little as a few hours by customizing 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. 109 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. 110 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. 111 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 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. 112 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 3 of the Clayton Act and 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 3 of the Clayton Act it follows that it is not forbidden by those of the [Sherman Act].). 113 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 3 of the Clayton Act and 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 Clayton Act requires a smaller showing of anticompetitive effects.). 114 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, 2123 (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). 115 In this case, plaintiffs challenged Microsoft's exclusive dealing arrangements with the IAPs under both 1 and 2 of the Sherman Act. The District Court, in analyzing the 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 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 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 1. Conclusions of Law, at 53. Plaintiffs did not cross-appeal this holding. 116 Turning to 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 1 violation in no way detracts from the Court's assignment of liability for the same arrangements under 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. 117 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 1 necessarily precludes holding it liable under 2. The District Court appears to have based its holding with respect to 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. 118 The basic prudential concerns relevant to 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 circumstances, may give rise to a 2 violation even though the contracts foreclose less than the roughly 40% or 50% share usually required in order to establish a 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). 119 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. 120 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 decision holding that Microsoft's exclusive contracts with IAPs are exclusionary devices, in violation of 2 of the Sherman Act. 121