UNITED STATES of America
Plaintiff
v. Civil Action No. A. 98-1232(TPJ)
MICROSOFT CORPORATION,
Defendant
Amicus curiae W. David Slawson is a law professor who has taught and published on the subject of Federal Antitrust Law. Amicus curiae Erwin Chemerinsky is a law professor and a member of the Bar of the District of Columbia. This memorandum argues that Counsel for the United States have inadvertently misled this Court and the United States Court of Appeals for the Federal Circuit on a point of Federal Antitrust Law that is almost certain to have an important effect on the outcome of this case, even if the outcome is a consent decree. If the error is not corrected, and the judgment of this Court rests on it, the judgment will likely be vacated or reversed.
I. THIS COURT IS NOT REQUIRED TO ENJOIN MICROSOFT FROM CONTINUING TO INTEGRATE ITS INTERNET EXPLORER WITH ITS WINDOWS OPERATING SYSTEM IF THE INTEGRATION IS AN ILLEGAL TYING ARRANGEMENT.
In its decision on the interim appeal taken to it in this case, the United States Court of Appeals for the Federal Circuit directed this Court not to enjoin Defendant Microsoft from integrating its Internet Explorer ("IE") with its Windows operating system ("Windows") unless this Court found that Microsoft's claim that the integration provided certain benefits to users was not even plausible. United States v. Microsoft Corporation, 147 F.3d 935, 950 (Fed. Cir. 1998). The Court of Appeals said it was restraining this Court in this respect because it did not want to restrict Microsoft's "freedom to design products that consumers would like." Id. at 948. Thus, it is clear that the Court of Appeals believed that the law would require Microsoft to discontinue integrating its IE into Windows if the integration is adjudged to be an illegal tying arrangement. It is also clear why the Court of Appeals was reluctant to have this Court forbid the integration. It believed that that would limit consumer choice and hinder product improvement, by restricting a manufacturer's freedom to design products that consumers might like more than they liked the other products that were available to them.
However, the law makes no such requirement. On the contrary, the United States Supreme Court held in United States v. Loew's, Inc., 371 U.S. 38, 54-55 (1962), that a seller can continue to use a tying arrangement that would otherwise be illegal, so long as it also offers the products separately at prices that exceed, in total, the price of the products tied together by no more than the seller saves by tying the products together. (The Loew's holding has been called "the cost-justification defense.") The Supreme Court has never overruled, disapproved or qualified its holding in Loew's, and lower Federal courts have followed it. E.g., American Mftrs. Mut. Ins. Co. v. American Broadcasting - Paramount Theatres, Inc., 388 F.2d 272, 283-84 (2d Cir. 1967); Ways & Means, Inc. v. IVAC Corp., 506 F.Supp. 697, 701-03 (N.D. Cal. 1979). The implication for the instant case is obvious. If this Court holds that the integration of IE into Windows is an illegal tying arrangement, this Court need not - and should not - enjoin Microsoft from continuing to use the integration. Rather, this Court should give Microsoft the choice of either ceasing to use the integration or continuing to use it but also offering IE and Windows separately at prices that comply with the Loew's rule.
The principle that underlies the decision in Loew's is that the Federal Antitrust Laws should work to enlarge the range of consumer choice. The Supreme Court has used this principle many times. For example, the question in National Society of Professional Engineers v. United States, 435 U.S. 679 (1978), was whether a rule of conduct for professional construction engineers which forbade them from bidding for jobs on the basis of their fees was a restraint of trade in violation of Section 1 of the Sherman Act. The Defendant National Society of Professional Engineers argued that the rule enhanced the quality of its members' services in various respects. The Supreme Court responded that even if this were true, the choices involved in weighing qualities against prices should be left to consumers. The Society's rule was illegal because it "impose[d] the Society's views of the costs and benefits . . . on the entire marketplace." Id. at 694-95. Likewise, Microsoft's claim that it should be allowed to continue to use its integration without also offering the two products separately imposes its views of the costs and benefits of its integration on the marketplace. This Court should require of Microsoft no more than that it let consumers decide for themselves whether they like the integration better than they like using some other manufacturer's Web browser with their Windows.
Although the law is simple, there are some complications in applying it to the facts of this case. First, it would not be enough for Microsoft merely to sell the two products separately. Consumers would still not have the real choice of only buying Windows and using some other Web browser with it, because Microsoft has designed Windows so that no other manufacturer's Web browser will work well with it. In order that consumers would have a real choice, the Court should also order Microsoft to redesign Windows so that other manufacturers can make their Web browsers work as well with it as IE does. The Supreme Court has held that a court can require a defendant to take affirmative steps to give others a fair chance to compete with it, at least if the defendant is, or otherwise probably would become, a monopolist. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) (Owner of three of the four ski areas in Aspen, Colorado, required to include the fourth area in its all-week, all-rides lift ticket.); Otter Tail Power Co. v. United States, 410 U.S. 366 (1973) (Vertically integrated electric power utility required to sell power to local governments that chose to build and operate their own retail power distribution systems.); United States v. Terminal R.R. Ass'n, 224 U.S. 383 (1912) (Group of railroads that owned the only available bridge crossing the Mississippi River near St. Louis, Missouri, required to allow other railroads to use it on a nondiscriminatory basis.).
Second, it appears from this Court's FINDINGS OF FACT that Microsoft did not save money by integrating the two products but that, on the contrary, it incurred substantial additional costs to integrate them. It apparently was willing to incur the additional costs because it wanted the integration to make it difficult for users of Windows to use any Web browser except IE. The Loew's rule and the principle of consumer choice that underlies it still apply if this is indeed the case, but the result of applying the rule now is that Microsoft must be required to charge more for the integrated product than it will charge, in total, for the products sold separately. The difference must be at least equal to the additional costs that Microsoft incurred in designing and manufacturing the integration. Three sets of costs should be computed:
(1) The cost of the integration should be what it actually cost Microsoft to design and manufacture both Windows and IE integrated together.
(2) The cost of IE, considered separately, should be what it would have cost Microsoft to design and manufacture it, if Microsoft had intended to offer it for sale separately.
(3) The cost of Windows, considered separately, should be what it would have cost Microsoft to design and manufacture it, if Microsoft had not designed and manufactured it so as to prevent any Web browser except IE being used with it.
The Loew's rule would then require that Microsoft offer the integrated product at a price that exceeded the sum of the prices of the two products offered separately by at least as much as (1) exceeds the sum of (2) and (3). Thus, Microsoft should be required to charge more for the integrated product than it will charge for the two products sold separately. Consumers could then decide for themselves whether the benefits Microsoft claims for the integrated product were worth the higher price it was charging for it.
II. THE 1994 CONSENT DECREE DOES NOT PREVENT THIS COURT FROM HOLDING THAT MICROSOFT'S INTEGRATION IS AN ILLEGAL TYING ARRANGEMENT.
The Consent Decree includes a provision that it shall "not be construed to prohibit Microsoft from developing integrated products . . . ." Under the Loew's rule, however, Microsoft would not be prohibited from selling the integration of IE into Windows if the Court were to hold that it was an illegal tying arrangement. Microsoft would only be required also to offer IE and Windows separately at prices that reflected the differences in the integrated and unintegrated products' costs. Therefore, the Consent Decree does not prevent this Court from holding that the integration is an illegal tying arrangement.
III. MICROSOFT'S INTEGRATION IS NOT A SINGLE PRODUCT FOR TYING LAW PURPOSES, AS A MATTER OF LAW.
The Government brief correctly notes that the Supreme Court held in Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 18-25 (1984), that a tied and tying product are not a single product for tying law purposes if there is a separate market for the tied product apart from the tying product. The Government brief could have added that the Supreme Court held this again in Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 462 (1992). It does not matter that one product cannot be used without the other. The Supreme Court said in Hyde, "We have often found arrangements involving functionally linked products at least one of which is useless without the other to be prohibited tying devices." Hyde, 466 U.S. at 19n.30. The Court quoted this same sentence itself in Kodak to the same end. Kodak, 504 U.S. at 463. Hyde and Kodak are the only decisions on tying arrangements the Supreme Court has handed down since 1977.
The Court of Appeals for the Federal Circuit may have believed that it was not bound by these decisions when it directed this Court not to enjoin Microsoft's integration unless it found Microsoft's claim that the integration provided certain benefits to users was not plausible, because it -- the Court of Appeals -- believed that the integration was protected by the Consent Decree. However, as I explained above, this belief was mistaken. Hyde and Kodak are controlling authorities on when two or more products are, or are not, a single product for tying law purposes, and the law of these two decisions must be applied to this case.
Therefore, Microsoft's integration is not a single product if there is a separate market for Web browsers apart from personal computer operating systems, and it does not matter that a Web browser is useless without a personal computer operating system. There undoubtedly is a separate market for Web browsers apart from personal computer operating systems, because Netscape could never have existed if there were not. Netscape has never manufactured a personal computer operating system and so could never have sold its Web browser to users of personal computer operating systems, if large numbers of those users had not purchased their Web browsers from someone other than the manufacturer of their personal computer operating systems. IE and Windows are not a single product for tying law purposes, as a matter of law.
IV. IT IS IMPORTANT THAT THE ERROR OF OVERLOOKING LOEW'S BE CORRECTED EVEN THOUGH THIS CASE IS CURRENTLY UNDER MEDIATION.
Unless this error of law is corrected, any agreement that the parties might reach as a result of the mediation will reflect the illegitimate bargaining advantage the error gives to Microsoft. The error makes it seem that the only way to protect consumers and competitors of Microsoft from Microsoft's monopoly powers and unfair methods of competition is to restrict the ability of Microsoft to improve its products. The error makes it seem that tying law itself is misconceived, because it always places a court in this dilemma.
If the error is not corrected, and the final judgment of this Court rests on it, that judgment will likely be vacated or reversed, even if it is a consent decree. In the unlikely event that it is not vacated or reversed, a precedent will have been set that defeats the true purposes of the Federal Antitrust Laws, by deterring product improvement throughout the economy.
Respectfully submitted,
________________________________
Erwin Chemerinsky
D.C. Bar #289330
University of Southern California
University Park
Los Angeles CA 90089-0071
________________________________
W. David Slawson
Torrey H. Webb Professor of Law
University of Southern California
University Park
Los Angeles CA 90089-0071