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Brief by 27 states against Microsoft

A "friend of the court" brief by 27 states supports the Justice Department's antitrust case against the software giant.

Tech Industry
The following is a brief filed by 27 states in federal appeals court in Washington today supporting the Justice Department's antitrust case against Microsoft:

IN THE

UNITED STATES COURT OF
APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT
___________
No. 97-5343
_________

MICROSOFT CORPORATION ,
Respondent - Appellant,
v.
UNITED STATES OF AMERICA ,
Petitioner - Appellee.
____________
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
=======================================
BRIEF OF AMICI STATES
ON BEHALF OF THE UNITED STATES

DENNIS C. VACCO, RICHARD BLUMENTHAL
Attorney General of the State of New York, Attorney General of the State of Connecticut

BARBARA BILLETT, STEVEN M. RUTSTEIN
Solicitor General, Assistant Attorney General
Chief, Antitrust and Consumer
PAMELA JONES HARBOUR
Protection Department Deputy Attorney General Public Advocacy

RACHEL O. DAVIS
Assistant Attorney General
STEPHEN D. HOUCK Office of the Attorney General
Assistant Attorney General in Charge 110 Sherman Street
Chief, Antitrust Bureau Hartford, Connecticut
120 Broadway, Suite 2602 (860) 808-5400
New York, New York 10271
(212) 416-8275

Richard L. Schwartz
Deputy Chief, Antitrust Bureau
of Counsel

(Additional Attorneys General listed inside)

LIST OF COUNSEL

Counsel for the State of California
DANIEL E. LUNGREN
Attorney General of California
Wayne R. Smith
Special Assistant Attorney General
Roderick E. Walston
Chief Assistant Attorney General
Barbara M. Motz
Acting Assistant Attorney General
Richard N. Light
Deputy Attorney General
50 Fremont Street, Room 300
San Francisco, California 94015
(415) 356-6314

Counsel for the State of Delaware
M. JANE BRADY
Attorney General of Delaware
Stuart B. Drowos
Deputy Attorney General
Antitrust/Major Litigation Unit
Department of Justice
820 North French Street
Wilmington, Delaware 19801
(302) 577-8400

Counsel for the State of Florida
ROBERT A. BUTTERWORTH
Attorney General of Florida
Patricia A. Conners
Assistant Attorney General
Antitrust Section
Office of the Attorney General
State of Florida
PL-01, The Capitol
Tallahassee, Florida 32399-1050
(904) 488-9105

Counsel for the State of Illinois
JAMES E. RYAN
Attorney General of Illinois
Christine H. Rosso
Assistant Attorney General
Chief, Antitrust Bureau
100 West Randolph Street
Chicago, Illinois 60601
(312) 814-5610

Counsel for the State of Iowa
THOMAS J. MILLER
Attorney General of Iowa
Hoover Building
Des Moines, Iowa 50319
(515) 281-3349

Counsel for the State of Kansas
CARLA J. STOVALL
Attorney General of Kansas
Terry A. Iles
Assistant Attorney General
Kansas Judicial Center
301 SW 10th Avenue
Topeka, Kansas 66612-1597
(785) 296-3751

Counsel for the State of Maryland
J. JOSEPH CURRAN, JR.
Attorney General of Maryland
Ellen S. Cooper
Assistant Attorney General and Chief,
Antitrust Division
200 St. Paul Place
Baltimore, Maryland 21202
(410) 576-6470

Counsel for the Commonwealth of Massachusetts
SCOTT HARSHBARGER
Attorney General for the Commonwealth of Massachusetts
Kevin M. Nasca
Glenn Kaplan
Assistant Attorneys General
Massachusetts Attorney General's Office
One Ashburton PlaceMassachusetts 02108
(617) 727-2200

Counsel for the State of Minnesota
HUBERT H. HUMPHREY III
Attorney General of Minnesota
Riddhi Jani
Assistant Attorney General
1400 NCL Tower
445 Minnesota Street
St. Paul, Minnesota 55101-2131
(612) 296-7575

Counsel for the State of Mississippi
MIKE MOORE
Attorney General of Mississippi
Robert E. Sanders
Assistant Attorney General
Office of the Attorney General
P.O. Box 220
Jackson, Mississippi 39205
(601) 359-3815

Counsel for the State of Missouri
JEREMIAH W. (JAY) NIXON
Attorney General of Missouri
Penny G. Newman
Assistant Attorney General in
Charge of Antitrust Enforcement
Penntower Office Building
3100 Broadway, Suite 609
Kansas City, Missouri 64111
(816) 889-5000

Counsel for the State of Montana
JOSEPH P. MAZUREK
Attorney General of Montana
State of Montana
Justice Building
P.O. Box 201401
Helena, Montana 59620-1401
(406) 444-2026

Counsel for the State of Nevada
FRANKIE SUE DEL PAPA General of Nevada
Kathleen M. Marshall
Senior Deputy Attorney General
Office of the Attorney General
555 East Washington Avenue
Las Vegas, Nevada 89101

Counsel for the State of New Hampshire
PHILIP T. MCLAUGHLIN
Attorney General of New Hampshire
Walter L. Maroney
Senior Assistant Attorney General
33 Capitol Street
Concord, New Hampshire 03301
(603) 271-3643

Counsel for the State of New Mexico
TOM UDALL
Attorney General of New Mexico
Michael P. Fricke
Assistant Attorney General
Antitrust Unit
Office of the Attorney General
6301 Indian School Road, NE
Albuquerque, New Mexico 87110
(505) 841-8098

Counsel for the State of North Carolina
MICHAEL F. EASLEY
Attorney General of North Carolina
K.D. Sturgis
Assistant Attorney General
North Carolina Department of Justice
Post Office Box 629
Raleigh, North Carolina 27602
(919) 716-6000

Counsel for the State of Oklahoma
W.A. DREW EDMONDSON
Attorney General of Oklahoma
Steven J. Leippert
Assistant Attorney General
Consumer Protection Unit
4545 N. Lincoln Blvd., Suite 260
Oklahoma City, Oklahoma 73105521-4274

Counsel for the State of Oregon
HARDY MYERS
Attorney General of Oregon
Oregon Department of Justice
100 Justice Building
Salem, Oregon 97310

Counsel for the State of Rhode Island
JEFFREY B. PINE
Attorney General of Rhode Island
and Providence Plantations
J.O. Alston
Special Assistant Attorney General,
Antitrust
150 South Main Street
Providence, Rhode Island 02903
(401) 274-4400

Counsel for the State of South Carolina
CHARLES M. CONDON
Attorney General of South Carolina
P.O. Box 11549
Columbia, South Carolina 29211
(803) 734-3680

Counsel for the State of South Dakota
MARK W. BARNETT
Attorney General of South Dakota
State of South Dakota
500 East Capitol Avenue
Pierre, South Dakota 57501-5070
(605) 773-3215

Counsel for the State of Texas
DAN MORALES
Attorney General of Texas
Office of the Attorney General of Texas
Post Office Box 12548
Austin, Texas 78711-2548
(512) 463-2185

Counsel for the State of Utah
JAN GRAHAM General of Utah
Reed Richards
Chief Deputy
Office of the Attorney General
160 East 300 South
Box 140872
Salt Lake City, Utah 84114-0872
(801) 366-0310

Counsel for the State of West Virginia
DARRELL V. MCGRAW, JR.
Attorney General of West Virginia
Jill L. Miles
Deputy Attorney General
Douglas L. Davis
Assistant Attorney General
Consumer Protection/Antitrust Division
P.O. Box 1789
Charleston, West Virginia 25326-1789
(314) 558-8986

Counsel for the State of Wisconsin
JAMES E. DOYLE
Attorney General of Wisconsin
Kevin J. O'Connor
Assistant Attorney General in Charge of
Antitrust Enforcement
Wisconsin Department of Justice
Post Office Box 7857
Madison, Wisconsin 53707-7857
(608) 266-8986

i
TABLE OF AUTHORITIES
1

Page
Cases

FTC v. University Health, Inc., 928 F.2d 1206 (11th Cir. 1991) 7

Hawaii v. Standard Oil Co., 405 U.S. 251 (1972) 1

Standard & Poor's Corp. v. Commodity Exchange, Inc.,
683 F.2d 704 (2d Cir. 1982) 6

State of New York, et al. v. Primestar Partners, et al.,
1993-2 Trade Cas. (CCH) ¶ 70,403 (S.D.N.Y. 1993) 2

State of New York, et al. v. Visa USA Inc., et al.,
1990-1 Trade Cas. (CCH) ¶ 69,016 (S.D.N.Y. 1990) 3

United States v. Western Electric Co., 12 F.3d 225 (D.C. Cir. 1993) 5

Statutes

15 U.S.C. § 15 1

15 U.S.C. § 15c 1

Fed. R. App. P. 29 1

Other Authorities

House Report No. 94-499, 94th Cong., 1st Sess., reprinted in [1976] U.S.
Code Cong. & Admin. News 22572 1

"Antitrust in the Digital Age," Remarks of Sen. Orrin G. Hatch before the
Progress and Freedom Foundation," Washington, D.C., February 5, 1998 2

David A. Balto, "End of On-Line Debit Decree Raises Questions,"
American Banker , May 8, 1997 3

Mark Robichaux, "Once a Laughingstock, Direct-Broadcast TV Gives
Cable a Scare," Wall St. J. , Nov. 7, 1996 at A1. 3

ii

INTEREST OF THE AMICI STATES
The Attorneys General of the Amici States 2 (the "Attorneys General") are the chief antitrust law enforcers in their respective States 3 and have broad rights to prosecute antitrust matters under federal law. 4 Under state law, the Attorneys General generally represent their respective States in actions to secure injunctive and monetary relief. They also typically possess broad investigatory powers and primary or exclusive authority to bring criminal antitrust actions. State antitrust laws are often construed in light of federal precedent.
The Attorneys General are cognizant of the ever growing importance of computer and software technology to the economy of the nation as a whole and of their respective States generally, and of the central role that desktop computing in particular plays for many consumers and businesses. They view as equally if not more vital the key role such technologies are beginning to play in the dissemination of information. As their States' chief antitrust enforcers and consumer advocates, the Attorneys General believe that fostering competition in such markets is the single best means to ensure that consumers receive the benefits of fairly priced, high quality, and innovative goods and services, and that such markets continue to serve as robust drivers of economic growth. 5

There is widespread concern that the competitive health of such markets may be threatened by the practices of a dominant firm, such as Microsoft Corporation ("Microsoft"), which could prevent competing and potentially competing products from getting a "fair market test." 6 "Antitrust in the Digital Age," Remarks of Sen. Orrin G. Hatch Before the Progress and Freedom Foundation," Washington, D.C., February 5, 1998.Without prejudging the difficult issues raised in this context, the Attorneys General share those concerns. Indeed, their own experience, as reflected in recent enforcement actions, has suggested that probing antitrust scrutiny and carefully calibrated action may in appropriate circumstances be necessary and feasible to forestall monopolists in high technology markets from seeking to defend or extend their dominance by co-opting new technologies which they view as competitive threats. 7 Recent reports indicate that the States effort to protect direct broadcast technology as a source of competition to traditional cable may have begun to bear fruit. [insert cite to WSJ article]. 8 Similarly, fourteen States successfully barred dominant credit card associations from pursuing a joint venture which the States alleged was designed to eliminate potential competition from a new technology, point of sale debit cards, which presented a competitive threat to the higher-cost credit card systems. State of New York, et al. v.. Visa USA Inc., et al. , 1990-1 Trade Cas. (CCH) ¶ 69,016 (S.D.N.Y. 1990). Commentators have noted the States' success in fostering network competition in the point of sale debit card market. See David A. Balto, "End of On-Line Debit Decree Raises Questions," American Banker , May 8, 1997. State of New York, et al. v. Visa USA, Inc., et al. [insert cite]. See Balto Article. 9
While federal and state antitrust laws may have originated in an era of smokestacks, the Attorneys General are confident that in an age of software and the "digital revolution" such laws retain the power, if vigorously enforced and wisely applied, to foster vibrant, competitive markets, consumer choice and welfare, innovation, and economic growth.

SUMMARY OF ARGUMENT

The District Court properly read the Final Judgment to authorize the issuance of preliminary relief designed to preserve the status quo pendentelite by prohibiting Microsoft from tying its Internet Explorer browser software product to its Windows 95 operating system software. The public interest, which is here implicated to an extraordinary degree, strongly favors the issuance of such status quo-preserving relief pending a fuller exploration of the issues.

ARGUMENT
POINT I

THE DISTRICT COURT PROPERLY READ THE FINAL JUDGMENT
TO AUTHORIZE THE ISSUANCE OF STATUS QUO-PRESERVING RELIEF

The Final Judgment 10 and in particular Section IV(E)(i) thereof 11 prohibit Microsoft from requiring personal computer manufacturers to license other Microsoft products in order to obtain a license to Microsoft's personal computer ("PC") operating system software.
The District Court properly read Section IV(E)(i) and the Final Judgement to authorize the issuance of preliminary relief designed to preserve the status quo pendentelite by barring Microsoft from tying its Internet Explorer browser software product to its "Windows 95" operating system software.
As the District Court noted, the Final Judgment was entered in response to complaint allegations 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." 12 As the District Court also noted, it is a "commercial necessity" for PC manufacturers to preinstall Microsoft's Windows 95 operating system software on the vast majority of the PCs they sell. Id ., at 3. Retail purchasers of PCs expect to receive preinstalled operating system software, and Microsoft's Windows 95 product is dominant in the marketplace, with a market share approaching 80%. Id ., at 2.
Microsoft now seeks to condition its licenses of Windows 95 operating system software to PC manufacturers on such manufacturers' agreement to also license Microsoft's web browser product, Internet Explorer. Such conditioning could effectively foreclose both PC manufacturers and consumers from choosing a competing web browser product and might enable Microsoft to use its dominance in operating system software to deny a potential competitor a "fair market test." The purpose of the Final Judgment, and specifically of its anti-tying provision, Section IV(E), was to prevent Microsoft's use of such conditioning to extend or protect its operating systems software monopoly. 13 59 Fed . Reg . 42845, 42852 (1994). The Final Judgment may properly be read by reference to the circumstances and purpose surrounding its formation. See,e.g. , United States v. Western Electric Co. , 12 F.3d 225, 230 (D.C. Cir. 1993).Indeed, Microsoft does not appear to dispute that Section IV(E) was intended to prevent illegal tying. 14

The District Court also properly concluded that the "integrated products" proviso of Section IV(E) should not be read to bar interim relief. The District Court noted that the government had adduced evidence of the "separate marketing practices and independent consumer demand that exists for the two products." Memorandum and Order, at 12. This evidence indicated that Microsoft itself currently markets and distributes Internet Explorer as a separate product.
Accordingly, the injunction, while preserving the status quo, allows Microsoft considerable latitude with respect to the precise method of compliance, expands options for PC manufacturers and consumers, and works little or no hardship on Microsoft. On the other hand, as the District Court pointed out, if "Microsoft continues with its 'integration' process in the expectation that its licensing practices will continue to make it ever more profitable to do so, the cost of a compulsory unbundling of Windows 95 and IE in the future could be prohibitive." Id ., at 16. Indeed, if Microsoft is allowed to continue improper tying in violation of the consent decree during the pendency of the action, the result might be irremediable harm to the competitive process. In these circumstances, relief reasonably designed, as was the District Court's order, merely to preserve the status quo so that the important issues raised can receive appropriate scrutiny was a proper use of the District Court's equitable powers.

POINT II
THE PUBLIC INTEREST STRONGLY FAVORS INTERIM RELIEF
PENDING A FULLER EXPLORATION OF THE ISSUES

The District Court's status quo-preserving relief is also amply justified by the extraordinary degree to which the issues raised in this matter implicate the public interest. Courts of equity have recognized that they "may go much further both to give or to withhold relief in furtherance of the public interest than where only private interests are involved." Standard & Poor's Corp v. Commodity Exchange, Inc. , 683 F.2d 704, 711 (2d Cir. 1982) (collecting cases). Where the public may suffer substantial injury from anticompetitive practices, that injury is not outweighed by any private injuries resulting from the entry of injunctive relief. FTC v. University Health, Inc. , 938 F.2d 1206, 1225 (11th Cir. 1991).
Here, the gravity of the potential injury to the public interest arising from possibly anticompetitive practices strongly suggests that the status quo should be preserved pending thorough scrutiny of the issues. In particular, three categories of evidence introduced by the government raise serious questions implicating the public interest in the preservation of free and open markets.
First, the government has introduced evidence showing that Microsoft itself believes what many analysts and knowledgeable industry participants have suggested: that web browser technology represents a threat to Microsoft's dominance of operating system software because it offers the possibility of an alternative platform for which applications (the software programs most directly used by businesses and consumers) can be written. Microsoft's expressed concern is that such a development could "commoditize the underlying operating system." App. Exhibit 26, Bill Gates e-mail to the Microsoft Executive Committee, May 26, 1995, p. 1 (at MS6 5004550), quoted at Memorandum of the United States in Support of Petition, dated October 20, 1997, at 33. To the extent that is true, Microsoft may have sufficient incentive to use its monopoly power in operating system software to crush or co-opt the competitive challenge from a new technology.
Second, the government brought forward evidence indicating that Microsoft had itself contemplated "leveraging" its greatest strategic asset, "Windows' market share" to help its Internet Explorer product win the browser war. December 20, 1996 e-mail from Jim Allchin to Paul Maritz, quoted at pp. 12-13 of Reply Brief of Petitioner United States Any such leveraging, if allowed to proceed unchecked during the pendency of this litigation, could produce lasting harm in the marketplace, given the dominance of Microsoft's Windows 95 operating system software.
Finally, the government presented evidence that, when an important PC manufacturer refused to preinstall Internet Explorer, Microsoft threatened to terminate that manufacturer's Windows 95 license agreement. The manufacturer thereupon capitulated and agreed to preinstall Internet Explorer. App. Exs. 17 and 18, App. Ex. 9, Decker Dep. At p. 18, line 21- p. 21, line 6; and p. 21, lines 7-14, summarized at Memorandum of the United States in support of Petition, at 16-17. Such evidence demonstrates the extent of Microsoft's influence over PC manufacturers, which are among the most significant purchasers and distributors of web browser software.
These three categories of evidence show that serious issues exist as to the exercise of coercive monopoly power by Microsoft in ways violative of the Final Judgment. The Amici States respectfully suggest that the preservation of the status quo in accordance with the District Court's order pending the fuller exploration of such issues is plainly in the public interest.

CONCLUSION

For all the reasons set forth above, the Amici States respectfully request that the order of the District Court granting preliminary relief to preserve the status quo pendentelite be affirmed.

Dated: March 2, 1998

Respectfully submitted,

DENNIS C. VACCO, RICHARD BLUMENTHAL
Attorney General of the State of New York, Attorney General of the State of Connecticut
BARBARA BILLETT, STEVEN M. RUTSTEIN
Solicitor General Assistant Attorney General
PAMELA JONES HARBOUR Chief, Antitrust and Consumer
Deputy Attorney General Protection Department Public Advocacy

RACHEL O. DAVIS
STEPHEN D. HOUCK Assistant Attorney General
Assistant Attorney General in Charge Office of the Attorney General
Chief, Antitrust Bureau 110 Sherman Street
120 Broadway, Suite 2602 Hartford, Connecticut
New York, New York 10271 (860) 808-5400
(212) 416-8275

RICHARD L. SCHWARTZ
Deputy Chief, Antitrust Bureau
120 Broadway, Suite 2601
New York, New York 10271
(212) 416-8284

CERTIFICATE OF SERVICE

I hereby certify that on March 2, 1998, I caused the foregoing BRIEF OF AMICI STATES ON BEHALF OF THE UNITED STATES to be hand-served upon:

Richard Urowsky, Esq. c/o
Sullivan & Cromwell
125 Broad Street
New York, New York 10004

and to be served by facsimile upon:

Richard Urowsky, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004

William H. Neukom, Esq.
Microsoft Corporation
One Microsoft Way
Redmond, Washington 98052

James R. Weiss
Preston Gates Ellis & Rouvelas Meeds
1725 New York Avenue, N.W.
Washington, D.C. 20006

A. Douglas Melamed
Principal Deputy Assistant Attorney General
Antitrust Division
U.S. Department of Justice
10th Street & Constitution Avenue, N.W.
Washington, D.C. 20530

I also hereby certify that the foregoing brief complies with the word count limitation specified in Circuit Rule 28(d).

RICHARD L. SCHWARTZ
Deputy Bureau Chief
Antitrust Bureau
New York State Attorney General's Office
120 Broadway, Suite 2601
New York, New York 10271
(212) 416-8284


1

Pursuant to Circuit Rule 28(a)(2) there are no authorities upon which we chiefly rely.

2 The Amici States are New York, Connecticut, California, Delaware, Florida, Illinois, Iowa, Kansas, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, New Hampshire, New Mexico, Nevada, North Carolina, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Utah, West Virginia, and Wisconsin.

3 The Amici States submit this brief pursuant to Rule 29 of the Federal Rules of Appellate Procedure, which permits the filing of an amicus brief by a "State, Territory, or Commonwealth" without consent of the parties or leave of the Court.

4 15 U.S.C. § 15 (right to sue for proprietary damages to the State); 15 U.S.C. § 15c (right to sue for damages as parenspatriae on behalf of natural person citizens); Hawaii v. Standard Oil Co. , 405 U.S. 251, 257-60 (1972) (authority to seek injunctive relief on behalf of the general economy of the State). In granting such authority, Congress found that "[a] state attorney general is an effective and ideal spokesman for the public in antitrust cases." House Report No. 94-499, 94th Cong., 1st Sess., reprinted in [1976] U.S. Code Cong. & Admin. News 22572, 2575.

5 As reported in the press, certain of the Amici States are investigating potentially anticompetitive practices engaged in by Microsoft relating to browsers similar to those at issue here.

6 As Senator Orrin Hatch, the current Chairman of the Senate Judiciary Committee, put it:

"The practices of a currently dominant firm, such as Microsoft, must be scrutinized ... and the appropriate rules of the road must be clarified and enforced.... The question that ... must be addressed is whether [tying and other exclusionary practices], when engaged in by an entrenched monopolist with respect to paradigm shifting innovations, have the predatory effect of foreclosing innovators from getting a fair market test."

7 For example, in State of New York, et al. v. Primestar Partners, et al. 1993-2 Trade Cas. (CCH) ¶ 70, 403 (S.DNY.1993) , forty-five States sued cable monopolists, alleging that they had conspired to suppress competition from direct broadcast satellites, an emerging technology which was then beginning to offer an alternative to the incumbent cable system operators.

8 Recent reports indicate that the States' efforts to assure direct broadcast technology a fair opportunity to compete with traditional cable may have begun to bear fruit. See Mark Robichaux, Once a Laughingstock, Direct-Broadcast TV Gives Cable a Scare , Wall St. J., Nov. 7, 1996 at A1.

9

10 The Final Judgement sought to be enforced by the government was entered on August 21, 1995, in United States v. Microsoft , 1995 Trade Cas. ¶ 71,096 (D.D.C. 1995).

11 Section IV(E)(i) provides:
Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon:
(i) the licensing of any other Covered Product, Operating System Software product or other product (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products).

12 Memorandum and Order, dated December 11, 1997, at 1.

13 The Competitive Impact Statement filed in connection with the Final Judgement stated:

Without these provisions Microsoft could ... attempt to extend or protect its monopoly in [Windows] by conditioning its licenses on the licensing, purchase or use of other products...

14 Memorandum and Order, at 9, citing Microsoft's Memorandum in Opposition to Petition, dated November 10, 1997, at 12-14.

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