UNITED STATES OF AMERICA,
FILED Dec. 11, 1997
CLERK, U.S. DISTRICT COURT
DISTRICT OF COLUMBIA
Civil Action 94-1564 (TPJ)
MEMORANDUM AND ORDER
Current proceedings in this civil antitrust case were commenced by the petition of the United States, filed October 20, 1997, for an order to respondent Microsoft Corporation ("Microsoft") to show cause why it should not be found in civil contempt of the consent decree that brought the action to a temporary conclusion on August 21, 1995, namely, the Final Judgment entered by this Court on that date (hereinafter "Final Judgment" or "consent decree"). Microsoft has joined issue, and the matter is before the Court for decision on the merits.
On July 15, 1994, the United States sued Microsoft, charging it with an unlawful monopoly and restraint of trade in the market for personal computer ("PC") operating system software under Sections 1 and 2 of the Sherman Act, 15 U.S.C. Secs. 1, 2. The complaint alleged, among other things, that Microsoft had engaged in multiple anticompetitive marketing practices directed at PC manufacturers who preinstall operating system software on the PCs they produce for retail sale. The parties ultimately agreed, after extensive negotiations, to the terms of the consent decree that resolved most issues.
The government submits that this first post-judgment enforcement proceeding is necessitated by what it has lately discovered to be a pervasive and ongoing violation by Microsoft of a provision of the Final Judgment. That provision, Section IV(E)(i), in pertinent part, prohibits Microsoft from requiring original equipment manufacturers ("OEMs") of PCs to commit to licensing other Microsoft products in order to obtain licenses to install Microsoft's PC operating system products.
The government observes that Microsoft has enjoyed for some time a virtual monopoly in the sale of PC operating system software, and presently possesses a market share approaching eighty percent. Because most retail purchasers of PCs expect to receive a preinstalled operating system on the PCs they buy, OEMs routinely preinstall operating system software on the hard disk drive memory of nearly all PCs they manufacture. Consumer preference for Microsoft's most recent and most successful PC operating system, Windows 95, has made it a commercial necessity for OEMs to preinstall Windows 95 as the operating system software of choice on the vast majority of the PCs they manufacture, and virtually all of them do so.
The present controversy arises from Microsoft's practice of including, in its licensing agreements with OEMs, a requirement that, as a condition of acquiring the right to Windows 95, they also accept a product known as the Internet Explorer ("IE"), a Web "browser" that affords the PC user access to the Internet. The licensing agreements also prohibit OEMs from disassembling the package; IE must remain as a component of the PCs' operating system software when they are shipped for retail sale, whether or not OEMs or their customers would prefer another brand of Internet browser, or none at all.
In other words, the government charges that Microsoft coerces OEMs to license and distribute the Internet Explorer whether they want to or not, even though, the government asserts (and Microsoft vehemently denies), refusing to install Microsoft's browser will not affect the functioning of the underlying Windows 95 operating system in any other significant respect. The effect, says the government, is a classic "tying" arrangement by which Microsoft is exploiting its operating systems monopoly in violation of an express term of the Final Judgment.
Section IV(E)(i) of the Final Judgment prohibits Microsoft from entering into any operating system license agreement that is "expressly or impliedly conditioned upon the licensing of any . . . other product" (emphasis supplied). The same section goes on, however, to provide that "this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products" (emphasis supplied). A critical element of the present dispute, therefore, is whether Internet Explorer is to be deemed an "integrated" component of Windows 95, or, to the contrary, an "other product," distinct and severable from the operating system without otherwise impairing the system's operational integrity.
The government contends that Internet Explorer possesses both a physical and commercial existence of its own, separate and apart from any Microsoft operating system, and is regarded as such by Microsoft itself when it suits its purposes. It is, therefore, an "other product" within the meaning of Section IV(E)(i). All Internet browsers, IE included, currently enjoy independent consumer demand and are regularly licensed and distributed separately from operating systems.
Microsoft's reaction is one of astonishment that the government has taken the position that the proscriptive language of Section IV(E)(i) was ever meant to encompass the relationship of Windows 95 and the Internet Explorer. At the time agreement on the terms of the consent decree was reached, the "integration" of IE and Windows 95 as a matter of cybernetic engineering was nearly complete, had been fully revealed to the government, and, to Microsoft's way of thinking at least, represented the archetype of an "integrated" product.
Microsoft claims that, during negotiations with the government, it made clear its position that the marketplace, and not the government, should dictate the evolution of the operating system and the features it incorporates. Microsoft points out that the government's original complaint made no reference to tying, and that the government publicly acknowledged as much in a response to complaints about Microsoft's licensing practices. In that response, the Department of Justice ("DOJ") stated that its original complaint did "not challenge as violations of the antitrust laws Microsoft's inclusion of new software features in its operating system products." See Response of the United States to Public Comments Concerning the Proposed Final Judgment and Notice of Hearing, 59 Fed. Reg. 59,426, 59,428 (1994). DOJ also acknowledged that "whenever Microsoft adds an attractive feature to its operating system products, it reduces the demand for software products sold by third parties as a complement to the Microsoft product that performed similar functions." Id.
Microsoft contends that DOJ has known since at least July 1994 of Microsoft's intention to include Internet-related technologies in Windows 95. Before July 1994, Microsoft produced to DOJ a number of documents disclosing its intention to make Internet-related technologies, including Web browsing functionality, an integral part of Windows 95. In April 1994, Microsoft chairman and chief executive officer Bill Gates publicly announced Microsoft's intention to include Internet software in Windows 95. And when the Final Judgment was entered in August 1995, Microsoft had already supplied a version of Windows 95, bundled with an early version of IE, to computer manufacturers.
Microsoft asserts that a reservation of its "unfettered right to incorporate new features into its operating systems" was a necessary and critical precondition to its willingness to enter into the consent decree. See Mem. of Microsoft in Opp'n to Pet. for Show Cause Order ("Microsoft Mem.") at 13. According to Microsoft, the "integrated product" proviso of Section IV(E)(i) was the result of Microsoft's insistence -- and the government's acquiescence -- that Microsoft would retain complete discretion to decide what features to include in its operating systems, limited only by the antitrust laws generally.
Finally, Microsoft argues, even if IE might be considered a "separate product" for some purposes, there is no reason it cannot also be part of an "integrated product" under Section IV(E)(i). It points out that nearly every new feature incorporated into its operating systems over the last sixteen years was once available separately. Windows 95 itself integrated the functionality of two products -- DOS 6 and Windows 3.1, each of which was available separately -- into its single new operating system. According to Microsoft, "integrated" means nothing more than "combined," "united," or "incorporated into." See Webster's Third New International Dictionary 1174 (1965). An "integrated product," Microsoft contends, is one like Windows 95, consisting of a wide range of features and functions that -- although they may also be available separately -- have been "combined" or "united" together.
At the outset the Court is presented only with the limited question of whether it must adjudge Microsoft in civil contempt of the Final Judgment. Given the present record the Court cannot conclude by "clear and convincing evidence" that Microsoft violated a "clear and unambiguous" prohibition found in the consent decree. See Armstrong v. Executive Office of the President, 1 F.3d 1274, 1289 (D.C. Cir. 1993) (internal quotation marks omitted).
The Court must resolve any ambiguities in the terms of the Final Judgment in favor of Microsoft, the party charged with contempt. See Common Cause v. Nuclear Regulatory Common, 674 F.2d 921, 927-28 (D.C. Cir. 1982). Microsoft offers a plausible interpretation of what it considers to be an "integrated product" as the term is used in Section IV(E)(i): a product that "combines" or "unites" functions that, although capable of functioning independently, undoubtedly complement one another. Windows 95 and IE enjoy such a synergy, Microsoft argues.
As Microsoft correctly observes, placing reliance on amorphous considerations, requiring the balancing of multiple factors to ascertain whether a party subject to a judicial order is in violation of its terms, is inconsistent with the requirement that a judicial order provide "explicit notice of precisely what conduct is outlawed." See Schmidt v. Lessard, 414 U.S. 473, 476 (1974); see also Gates v. Shinn, 98 F.3d 463, 472 (9th Cir. 1996) (vague standard in consent decree not sufficient to support civil contempt motion), cert. denied, 117 S.Ct. 2454 (1997).
In short, Microsoft has demonstrated, at the very least, the ambiguity of the term "integrated product." Microsoft has advanced a plausible interpretation of the term, and has provided a reasonable explanation for its understanding that the consent decree did not preclude Microsoft's insistence that OEMs accept IE as part of Windows 95. The government has not clearly convinced the Court that Microsoft violated a "clear and unambiguous" provision of the consent decree, Armstrong, 1 F.3d at 1289. Accordingly, the Court declines to hold Microsoft in civil contempt of the Final Judgment.
Although the government has not satisfied the evidentiary burden necessary to sustain a finding of contempt, it does not necessarily follow that Microsoft's licensing practices are, in fact, in compliance with the terms of the Final Judgment. Notwithstanding the Court's conclusion that Microsoft's interpretation of Section IV(E)(i) is plausible in light of the circumstances surrounding the negotiation of the consent decree, the Court is also not convinced that the interpretation is the correct one. The multi-factor test proffered by the government to distinguish "integrated products" from "other products" employs criteria applied by other courts in analyzing tying claims generally. Considering the totality of the circumstances surrounding the initiation, negotiation, and execution of the consent decree, the Court is preliminarily inclined to agree with the government's reasons for interpreting Section IV(E)(i) as it does in light of its objective purpose.
To begin with, Microsoft acknowledges that Section IV(E)(i) was drafted in contemplation of the possibility that Microsoft was engaged in illegal "tying" -- licensing one product on the condition that a computer manufacturer also agree to license a separate stand-alone product. See Microsoft Mem. at 12-14. Considering the purpose of including such a provision in an antitrust consent decree, it seems reasonable to interpret its language as it is generally understood in similar contexts. See Carey Canada, Inc. v. Columbia Cas. Co., 940 F.2d 1548, 1556 (D.C Cir. 1991) (reasonable to interpret ambiguous term by relying on the term's specialized meaning within a particular trade).