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 also used this principle outside the area of tying arrangements. 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. THE SUPPOSED DILEMMA OF CHOOSING BETWEEN PREVENTING MICROSOFT FROM USING ITS MONOPOLY POWERS TO FORECLOSE COMPETITION ON THE MERITS AND DISCOURAGING PRODUCT IMPROVEMENT DOES NOT EXIST.

This dilemma does not exist, because a holding that Microsoft's integration of Windows and IE was an illegal tying arrangement would not require - or even permit - the Court to enjoin Microsoft's further use of the integration or make it liable for damages if it did. All that such a holding would require is that Microsoft also offer the two products separately, priced to comply with Loew's.

IV. MICROSOFT'S INTEGRATION IS NOT A SINGLE PRODUCT FOR TYING LAW PURPOSES, AS A MATTER OF LAW.

The United States Supreme Court has laid down the law for determining whether tied-together products are to be treated as a single product for tying law purposes in its two most recent tying decisions, Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984), and Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 462 (1992). Professor Lessig evidently believes that these decisions put tying law between the horns of a dilemma, which, in his opinion, is especially acute for the software industry. He believes, on the one hand, that what he calls a "direct application" of these decisions to the facts of the instant case would lead to the conclusion that Windows and IE are not a single product. And he believes, on the other hand, that this conclusion would have a devastating effect on the process of product improvement in the software industry, because product improvement in this industry frequently consists of integrating, or "bundling," previously separate products into a single product. Lessig Brief 22-24, 31-32. The way he proposes that the Court escape this dilemma is to reject a "direct application" of these decisions and use a "functionality approach" to deciding the single-product issue instead. Lessig Brief 24.

This line of thinking includes two fatal errors. First, the so-called "direct interpretation" is the only interpretation these decisions reasonably support. Moreover, in both these decisions, the Supreme Court went out of its way to expressly reject the "functionality" approach which Professor Lessig advocates. Therefore, if this Court were to adopt Professor Lessig's approach, it would almost certainly be committing reversible error. Second, applying the correct interpretation of these decisions would not discourage product improvement in the software industry, or any industry. Professor Lessig's belief that it would fails to take Loew's into account. Indeed, the law for deciding the single-product issue the Supreme Court laid down in these decisions, and the law it laid down in Loews for resolving the pricing issue, "fit each other like a glove." I will now try to explain.

Professor Lessig's Brief reads in part:

"II. Are Windows95/98 and IE Functionality (sic) a "Single Product"?

"A. Applying Jefferson Parish Directly

"The core of the inquiry is whether it is 'efficient,' as Jefferson Parish and Eastman Kodak put it, to provide the products separately. Jefferson Parish, 466 U.S., at 22; Eastman Kodak, 504 U.S., at 462. 'Efficiency' is determined indirectly. Jefferson Parish does not instruct courts to evaluate the costs and benefits of separating two products. Rather, the aim is to identify proxies for efficiency that are sufficient to indicate that a defendant should be forced to offer two products separately.

"The proxy that Jefferson Parish fixes on is 'separate demand.' . . ." Lessig Brief 22-23.

This is not a correct interpretation of Jefferson Parish. It is not even an accurate paraphrase of what the Supreme Court said at the pages of its opinion to which Professor Lessig refers. Here is what the Supreme Court actually said at these pages:

"Thus, in this case 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 services." Jefferson Parish, 466 U.S. at 21-22.

This makes it as clear as words can, I think, that the existence of a separate demand for the tied product is the test for whether two products are separate products for tie-in purposes. It is not merely a proxy for "efficiency." All the Supreme Court evidently meant by "efficient" in this context was that there was a sufficient demand for the purchase of the tied product separately from the tying product to make it profitable for the seller also to sell the tied product separately.

The Supreme Court also expressly rejected the use of a functional approach to decide the single-product issue:

"Petitioners argue that the package does not involve a tying arrangement at all - that they are merely providing a functionally integrated package of services.

"Our cases indicate, however, that the answer to the question whether one or two products are involved turns not on the functional relation between them, but rather on the character of the demand for the two items. . . . The answer to the question whether petitioners have utilized a tying arrangement must be based on whether . . . . petitioners have foreclosed competition on the merits in a product market distinct from the market for the tying item." Jefferson Parish, 466 U.S. at 18-19.

And again:

"We have often found arrangements involving functionally linked products at least one of which is useless without the other to be prohibited tying devices." Jefferson Parish, 466 U.S. at 19n.30.

Thus, it does not matter, in our case, that Web browsers are useless without a computer operating system, and it does not matter how closely linked Web browsers are with computer operating systems or any other software product. The sole and conclusive test for the existence of separate products for tying-law purposes is the existence of separate demands for the products, as the Supreme Court defined "separate demand." Kodak held the same as Jefferson Parish did on all these points. Kodak, 504 U.S. at 462, 463.

It is irrefutable that there is a demand for Web browsers separate from the demand for personal computer operating systems. Professor Lessig lays out the reasons for this conclusion, so there is no need to repeat them here. Lessig Brief 23-24. Therefore, Windows and IE are separate products for tie-in purposes, as a matter of law. This Court would flout the authority of the Supreme Court if it were to decide any differently, and in all probability be reversed by a higher court.

Moreover, the separate-demand test for when two products are, or are not, a single product fits so perfectly with the Loew's rule, that each testifies to the correctness of the other. For, if the two tests are considered together, the result is that a tying seller is only required also to sell the two products separately, at prices that conform to Loew's, if it can sell them profitably at those prices. Because if it cannot sell them profitably at those prices, there are not the "separate demands" for them that Jefferson Parish and Kodak require. The quotation from Jefferson Parish, 466 U.S. at 21-22, the top of page 9 of this Memorandum, makes this clear. Therefore, a tying (or "bundling") seller can never justly complain that its having also to offer the products separately impedes its ability to develop improved products. The requirement imposes no burden at all, because the seller only has to meet it if it can do so profitably.

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