United States v. Microsoft Corp.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 26 and 27, 2001

Decided June 28, 2001

No. 00-5212

United States of America,

Appellee

v.

Microsoft Corporation,

Appellant

Consolidated with

00-5213

Appeals from the United States District Court

for the District of Columbia

(No. 98cv01232)

(No. 98cv01233)

Richard J. Urowsky and Steven L. Holley argued the

causes for appellant. With them on the briefs were John L.

Warden, Richard C. Pepperman, II, William H. Neukom,

Thomas W. Burt, David A. Heiner, Jr., Charles F. Rule,

Robert A. Long, Jr., and Carter G. Phillips. Christopher J.

Meyers entered an appearance.

Lars H. Liebeler, Griffin B. Bell, Lloyd N. Cutler, Louis R.

Cohen, C. Boyden Gray, William J. Kolasky, William F.

Adkinson, Jr., Jeffrey D. Ayer, and Jay V. Prabhu were on

the brief of amici curiae The Association for Competitive

Technology and Computing Technology Industry Association

in support of appellant.

David R. Burton was on the brief for amicus curiae

Center for the Moral Defense of Capitalism in support of

appellant.

Robert S. Getman was on the brief for amicus curiae

Association for Objective Law in support of appellant.

Jeffrey P. Minear and David C. Frederick, Assistants to

the Solicitor General, United States Department of Justice,

and John G. Roberts, Jr., argued the causes for appellees.

With them on the brief were A. Douglas Melamed, Acting

Assistant Attorney General, United States Department of

Justice, Jeffrey H. Blattner, Deputy Assistant Attorney Gen-

eral, Catherine G. O'Sullivan, Robert B. Nicholson, Adam D.

Hirsh, Andrea Limmer, David Seidman, and Christopher

Sprigman, Attorneys, Eliot Spitzer, Attorney General, State

of New York, Richard L. Schwartz, Assistant Attorney Gen-

eral, and Kevin J. O'Connor, Office of the Attorney General,

State of Wisconsin.

John Rogovin, Kenneth W. Starr, John F. Wood, Elizabeth

Petrela, Robert H. Bork, Jason M. Mahler, Stephen M.

Shapiro, Donald M. Falk, Mitchell S. Pettit, Kevin J. Arquit,

and Michael C. Naughton were on the brief for amici curiae

America Online, Inc., et al., in support of appellee. Paul T.

Cappuccio entered an appearance.

Lee A. Hollaar, appearing pro se, was on the brief for

amicus curiae Lee A. Hollaar.

Carl Lundgren, appearing pro se, was on the brief for

amicus curiae Carl Lundgren.

Table of Contents

Summary 5

I. Introduction 7

A. Background 7

B. Overview 10

II. Monopolization 13

A. Monopoly Power 14

1. Market Structure 15

a. Market definition 15

b. Market power 19

2. Direct Proof 23

B. Anticompetitive Conduct 25

1. Licenses Issued to Original Equip-

ment Manufacturers 28

a. Anticompetitive effect of the li-

cense restrictions 29

b. Microsoft's justifications for the

license restrictions 33

2. Integration of IE and Windows 36

a. Anticompetitive effect of inte-

gration 36

b. Microsoft's justifications for inte-

gration 39

3. Agreements with Internet Access

Providers 40

4. Dealings with Internet Content Pro-

viders, Independent Software Ven-

dors, and Apple Computer 47

5. Java 52

a. The incompatible JVM 52

b. The First Wave Agreements 53

c. Deception of Java developers 55

d. The threat to Intel 56

6. Course of Conduct 58

C. Causation 59

III. Attempted Monopolization 62

A. Relevant Market 63

B. Barriers to Entry 65

IV. Tying 68

A. Separate-Products Inquiry Under the

Per Se Test 70

B. Per Se Analysis Inappropriate for this

Case 77

C. On Remand 86

V. Trial Proceedings and Remedy 90

A. Factual Background 91

B. Trial Proceedings 95

C. Failure to Hold an Evidentiary Hearing 96

D. Failure to Provide an Adequate Explana-

tion 99

E. Modification of Liability 100

F. On Remand 103

G. Conclusion 106

VI. Judicial Misconduct 106

A. The District Judge's Communications

with the Press 107

B. Violations of the Code of Conduct for

United States Judges 113

C. Appearance of Partiality 117

D. Remedies for Judicial Misconduct and

Appearance of Partiality 120

1. Disqualification 120

2. Review of Findings of Fact and Con-

clusions of Law 123

VII. Conclusion 125

Before: Edwards, Chief Judge, Williams, Ginsburg,

Sentelle, Randolph, Rogers and Tatel, Circuit Judges.

Opinion for the Court filed Per Curiam.

Per Curiam: Microsoft Corporation appeals from judg-

ments of the District Court finding the company in violation

of ss 1 and 2 of the Sherman Act and ordering various

remedies.

The action against Microsoft arose pursuant to a complaint

filed by the United States and separate complaints filed by

individual States. The District Court determined that Micro-

soft had maintained a monopoly in the market for Intel-

compatible PC operating systems in violation of s 2; attempt-

ed to gain a monopoly in the market for internet browsers in

violation of s 2; and illegally tied two purportedly separate

products, Windows and Internet Explorer ("IE"), in violation

of s 1. United States v. Microsoft Corp., 87 F. Supp. 2d 30

(D.D.C. 2000) ("Conclusions of Law"). The District Court

then found that the same facts that established liability under

ss 1 and 2 of the Sherman Act mandated findings of liability

under analogous state law antitrust provisions. Id. To rem-

edy the Sherman Act violations, the District Court issued a

Final Judgment requiring Microsoft to submit a proposed

plan of divestiture, with the company to be split into an

operating systems business and an applications business.

United States v. Microsoft Corp., 97 F. Supp. 2d 59, 64-65

(D.D.C. 2000) ("Final Judgment"). The District Court's re-

medial order also contains a number of interim restrictions on

Microsoft's conduct. Id. at 66-69.

Microsoft's appeal contests both the legal conclusions and

the resulting remedial order. There are three principal

aspects of this appeal. First, Microsoft challenges the Dis-

trict Court's legal conclusions as to all three alleged antitrust

violations and also a number of the procedural and factual

foundations on which they rest. Second, Microsoft argues

that the remedial order must be set aside, because the

District Court failed to afford the company an evidentiary

hearing on disputed facts and, also, because the substantive

provisions of the order are flawed. Finally, Microsoft asserts

that the trial judge committed ethical violations by engaging

in impermissible ex parte contacts and making inappropriate

public comments on the merits of the case while it was

pending. Microsoft argues that these ethical violations com-

promised the District Judge's appearance of impartiality,

thereby necessitating his disqualification and vacatur of his

Findings of Fact, Conclusions of Law, and Final Judgment.

After carefully considering the voluminous record on ap-

peal--including the District Court's Findings of Fact and

Conclusions of Law, the testimony and exhibits submitted at

trial, the parties' briefs, and the oral arguments before this

court--we find that some but not all of Microsoft's liability

challenges have merit. Accordingly, we affirm in part and

reverse in part the District Court's judgment that Microsoft

violated s 2 of the Sherman Act by employing anticompetitive

means to maintain a monopoly in the operating system mar-

ket; we reverse the District Court's determination that Mi-

crosoft violated s 2 of the Sherman Act by illegally attempt-

ing to monopolize the internet browser market; and we

remand the District Court's finding that Microsoft violated

s 1 of the Sherman Act by unlawfully tying its browser to its

operating system. Our judgment extends to the District

Court's findings with respect to the state law counterparts of

the plaintiffs' Sherman Act claims.

We also find merit in Microsoft's challenge to the Final

Judgment embracing the District Court's remedial order.

There are several reasons supporting this conclusion. First,

the District Court's Final Judgment rests on a number of

liability determinations that do not survive appellate review;

therefore, the remedial order as currently fashioned cannot

stand. Furthermore, we would vacate and remand the reme-

dial order even were we to uphold the District Court's

liability determinations in their entirety, because the District

Court failed to hold an evidentiary hearing to address reme-

dies-specific factual disputes.

Finally, we vacate the Final Judgment on remedies, be-

cause the trial judge engaged in impermissible ex parte

contacts by holding secret interviews with members of the

media and made numerous offensive comments about Micro-

soft officials in public statements outside of the courtroom,

giving rise to an appearance of partiality. Although we find

no evidence of actual bias, we hold that the actions of the trial

judge seriously tainted the proceedings before the District

Court and called into question the integrity of the judicial

process. We are therefore constrained to vacate the Final

Judgment on remedies, remand the case for reconsideration

of the remedial order, and require that the case be assigned

to a different trial judge on remand. We believe that this

disposition will be adequate to cure the cited improprieties.

In sum, for reasons more fully explained below, we affirm

in part, reverse in part, and remand in part the District

Court's judgment assessing liability. We vacate in full the

Final Judgment embodying the remedial order and remand

the case to a different trial judge for further proceedings

consistent with this opinion.

I. Introduction

A. Background

In July 1994, officials at the Department of Justice

("DOJ"), on behalf of the United States, filed suit against

Microsoft, charging the company with, among other things,

unlawfully maintaining a monopoly in the operating system

market through anticompetitive terms in its licensing and

software developer agreements. The parties subsequently

entered into a consent decree, thus avoiding a trial on the

merits. See United States v. Microsoft Corp., 56 F.3d 1448

(D.C. Cir. 1995) ("Microsoft I"). Three years later, the

Justice Department filed a civil contempt action against Mi-

crosoft for allegedly violating one of the decree's provisions.

On appeal from a grant of a preliminary injunction, this court

held that Microsoft's technological bundling of IE 3.0 and 4.0

with Windows 95 did not violate the relevant provision of the

consent decree. United States v. Microsoft Corp., 147 F.3d

935 (D.C. Cir. 1998) ("Microsoft II"). We expressly reserved

the question whether such bundling might independently

violate ss 1 or 2 of the Sherman Act. Id. at 950 n.14.

On May 18, 1998, shortly before issuance of the Microsoft

II decision, the United States and a group of State plaintiffs

filed separate (and soon thereafter consolidated) complaints,

asserting antitrust violations by Microsoft and seeking pre-

liminary and permanent injunctions against the company's

allegedly unlawful conduct. The complaints also sought any

"other preliminary and permanent relief as is necessary and

appropriate to restore competitive conditions in the markets

affected by Microsoft's unlawful conduct." Gov't's Compl. at

53, United States v. Microsoft Corp., No. 98-1232 (D.D.C.

1999). Relying almost exclusively on Microsoft's varied ef-

forts to unseat Netscape Navigator as the preeminent inter-

net browser, plaintiffs charged four distinct violations of the

Sherman Act: (1) unlawful exclusive dealing arrangements in

violation of s 1; (2) unlawful tying of IE to Windows 95 and

Windows 98 in violation of s 1; (3) unlawful maintenance of a

monopoly in the PC operating system market in violation of

s 2; and (4) unlawful attempted monopolization of the inter-

net browser market in violation of s 2. The States also

brought pendent claims charging Microsoft with violations of

various State antitrust laws.

The District Court scheduled the case on a "fast track."

The hearing on the preliminary injunction and the trial on the

merits were consolidated pursuant to Fed. R. Civ. P. 65(a)(2).

The trial was then scheduled to commence on September 8,

1998, less than four months after the complaints had been

filed. In a series of pretrial orders, the District Court limited

each side to a maximum of 12 trial witnesses plus two

rebuttal witnesses. It required that all trial witnesses' direct

testimony be submitted to the court in the form of written

declarations. The District Court also made allowances for

the use of deposition testimony at trial to prove subordinate

or predicate issues. Following the grant of three brief con-

tinuances, the trial started on October 19, 1998.

After a 76-day bench trial, the District Court issued its

Findings of Fact. United States v. Microsoft Corp., 84

F. Supp. 2d 9 (D.D.C. 1999) ("Findings of Fact"). This

triggered two independent courses of action. First, the Dis-

trict Court established a schedule for briefing on possible

legal conclusions, inviting Professor Lawrence Lessig to par-

ticipate as amicus curiae. Second, the District Court re-

ferred the case to mediation to afford the parties an opportu-

nity to settle their differences. The Honorable Richard A.

Posner, Chief Judge of the United States Court of Appeals

for the Seventh Circuit, was appointed to serve as mediator.

The parties concurred in the referral to mediation and in the

choice of mediator.

Mediation failed after nearly four months of settlement

talks between the parties. On April 3, 2000, with the parties'

briefs having been submitted and considered, the District

Court issued its conclusions of law. The District Court found

Microsoft liable on the s 1 tying and s 2 monopoly mainte-

nance and attempted monopolization claims, Conclusions of

Law, at 35-51, while ruling that there was insufficient evi-

dence to support a s 1 exclusive dealing violation, id. at 51-

54. As to the pendent State actions, the District Court found

the State antitrust laws conterminous with ss 1 and 2 of the

Sherman Act, thereby obviating the need for further State-

specific analysis. Id. at 54-56. In those few cases where a

State's law required an additional showing of intrastate im-

pact on competition, the District Court found the requirement

easily satisfied on the evidence at hand. Id. at 55.

Having found Microsoft liable on all but one count, the

District Court then asked plaintiffs to submit a proposed

remedy. Plaintiffs' proposal for a remedial order was subse-

quently filed within four weeks, along with six supplemental

declarations and over 50 new exhibits. In their proposal,

plaintiffs sought specific conduct remedies, plus structural

relief that would split Microsoft into an applications company

and an operating systems company. The District Court

rejected Microsoft's request for further evidentiary proceed-

ings and, following a single hearing on the merits of the

remedy question, issued its Final Judgment on June 7, 2000.

The District Court adopted plaintiffs' proposed remedy with-

out substantive change.

Microsoft filed a notice of appeal within a week after the

District Court issued its Final Judgment. This court then

ordered that any proceedings before it be heard by the court

sitting en banc. Before any substantive matters were ad-

dressed by this court, however, the District Court certified

appeal of the case brought by the United States directly to

the Supreme Court pursuant to 15 U.S.C. s 29(b), while

staying the final judgment order in the federal and state

cases pending appeal. The States thereafter petitioned the

Supreme Court for a writ of certiorari in their case. The

Supreme Court declined to hear the appeal of the Govern-

ment's case and remanded the matter to this court; the Court

likewise denied the States' petition for writ of certiorari.

Microsoft Corp. v. United States, 530 U.S. 1301 (2000). This

consolidated appeal followed.

B. Overview

Before turning to the merits of Microsoft's various argu-

ments, we pause to reflect briefly on two matters of note, one

practical and one theoretical.

The practical matter relates to the temporal dimension of

this case. The litigation timeline in this case is hardly

problematic. Indeed, it is noteworthy that a case of this

magnitude and complexity has proceeded from the filing of

complaints through trial to appellate decision in a mere three

years. See, e.g., Data Gen. Corp. v. Grumman Sys. Support

Corp., 36 F.3d 1147, 1155 (1st Cir. 1994) (six years from filing

of complaint to appellate decision); Transamerica Computer

Co., Inc. v. IBM, 698 F.2d 1377, 1381 (9th Cir. 1983) (over

four years from start of trial to appellate decision); United

States v. United Shoe Mach. Corp., 110 F. Supp. 295, 298 (D.

Mass. 1953) (over five years from filing of complaint to trial

court decision).

What is somewhat problematic, however, is that just over

six years have passed since Microsoft engaged in the first

conduct plaintiffs allege to be anticompetitive. As the record

in this case indicates, six years seems like an eternity in the

computer industry. By the time a court can assess liability,

firms, products, and the marketplace are likely to have

changed dramatically. This, in turn, threatens enormous

practical difficulties for courts considering the appropriate

measure of relief in equitable enforcement actions, both in

crafting injunctive remedies in the first instance and review-

ing those remedies in the second. Conduct remedies may be

unavailing in such cases, because innovation to a large degree

has already rendered the anticompetitive conduct obsolete

(although by no means harmless). And broader structural

remedies present their own set of problems, including how a

court goes about restoring competition to a dramatically

changed, and constantly changing, marketplace. That is just

one reason why we find the District Court's refusal in the

present case to hold an evidentiary hearing on remedies--to

update and flesh out the available information before serious-

ly entertaining the possibility of dramatic structural relief--so

problematic. See infra Section V.

We do not mean to say that enforcement actions will no

longer play an important role in curbing infringements of the

antitrust laws in technologically dynamic markets, nor do we

assume this in assessing the merits of this case. Even in

those cases where forward-looking remedies appear limited,

the Government will continue to have an interest in defining

the contours of the antitrust laws so that law-abiding firms

will have a clear sense of what is permissible and what is not.

And the threat of private damage actions will remain to deter

those firms inclined to test the limits of the law.

The second matter of note is more theoretical in nature.

We decide this case against a backdrop of significant debate

amongst academics and practitioners over the extent to

which "old economy" s 2 monopolization doctrines should

apply to firms competing in dynamic technological markets

characterized by network effects. In markets characterized

by network effects, one product or standard tends towards

dominance, because "the utility that a user derives from con-

sumption of the good increases with the number of other

agents consuming the good." Michael L. Katz & Carl Shapi-

ro, Network Externalities, Competition, and Compatibility,

75 Am. Econ. Rev. 424, 424 (1985). For example, "[a]n

individual consumer's demand to use (and hence her benefit

from) the telephone network ... increases with the number

of other users on the network whom she can call or from

whom she can receive calls." Howard A. Shelanski & J.

Gregory Sidak, Antitrust Divestiture in Network Industries,

68 U. Chi. L. Rev. 1, 8 (2001). Once a product or standard

achieves wide acceptance, it becomes more or less en-

trenched. Competition in such industries is "for the field"

rather than "within the field." See Harold Demsetz, Why

Regulate Utilities?, 11 J.L. & Econ. 55, 57 & n.7 (1968)

(emphasis omitted).

In technologically dynamic markets, however, such en-

trenchment may be temporary, because innovation may alter

the field altogether. See Joseph A. Schumpeter, Capitalism,

Socialism and Democracy 81-90 (Harper Perennial 1976)

(1942). Rapid technological change leads to markets in which

"firms compete through innovation for temporary market

dominance, from which they may be displaced by the next

wave of product advancements." Shelanski & Sidak, at 11-12

(discussing Schumpeterian competition, which proceeds "se-

quentially over time rather than simultaneously across a

market"). Microsoft argues that the operating system mar-

ket is just such a market.

Whether or not Microsoft's characterization of the operat-

ing system market is correct does not appreciably alter our

mission in assessing the alleged antitrust violations in the

present case. As an initial matter, we note that there is no

consensus among commentators on the question of whether,

and to what extent, current monopolization doctrine should be

amended to account for competition in technologically dynam-

ic markets characterized by network effects. Compare Ste-

ven C. Salop & R. Craig Romaine, Preserving Monopoly:

Economic Analysis, Legal Standards, and Microsoft, 7 Geo.

Mason L. Rev. 617, 654-55, 663-64 (1999) (arguing that

exclusionary conduct in high-tech networked industries de-

serves heightened antitrust scrutiny in part because it may

threaten to deter innovation), with Ronald A. Cass & Keith

N. Hylton, Preserving Competition: Economic Analysis, Le-

gal Standards and Microsoft, 8 Geo. Mason L. Rev. 1, 36-39

(1999) (equivocating on the antitrust implications of network

effects and noting that the presence of network externalities

may actually encourage innovation by guaranteeing more

durable monopolies to innovating winners). Indeed, there is

some suggestion that the economic consequences of network

effects and technological dynamism act to offset one another,

thereby making it difficult to formulate categorical antitrust

rules absent a particularized analysis of a given market. See

Shelanski & Sidak, at 6-7 ("High profit margins might appear

to be the benign and necessary recovery of legitimate invest-

ment returns in a Schumpeterian framework, but they might

represent exploitation of customer lock-in and monopoly pow-

er when viewed through the lens of network economics....

The issue is particularly complex because, in network indus-

tries characterized by rapid innovation, both forces may be

operating and can be difficult to isolate.").

Moreover, it should be clear that Microsoft makes no claim

that anticompetitive conduct should be assessed differently in

technologically dynamic markets. It claims only that the

measure of monopoly power should be different. For reasons

fully discussed below, we reject Microsoft's monopoly power

argument. See infra Section II.A.

With this backdrop in mind, we turn to the specific chal-

lenges raised in Microsoft's appeal.

II. Monopolization

Section 2 of the Sherman Act makes it unlawful for a firm

to "monopolize." 15 U.S.C. s 2. The offense of monopoliza-

tion has two elements: "(1) the possession of monopoly power

in the relevant market and (2) the willful acquisition or

maintenance of that power as distinguished from growth or

development as a consequence of a superior product, business

acumen, or historic accident." United States v. Grinnell

Corp., 384 U.S. 563, 570-71 (1966). The District Court ap-

plied this test and found that Microsoft possesses monopoly

power in the market for Intel-compatible PC operating sys-

tems. Focusing primarily on Microsoft's efforts to suppress

Netscape Navigator's threat to its operating system monopo-

ly, the court also found that Microsoft maintained its power

not through competition on the merits, but through unlawful

means. Microsoft challenges both conclusions. We defer to

the District Court's findings of fact, setting them aside only if

clearly erroneous. Fed R. Civ. P. 52(a). We review legal

questions de novo. United States ex rel. Modern Elec., Inc.

v. Ideal Elec. Sec. Co., 81 F.3d 240, 244 (D.C. Cir. 1996).

We begin by considering whether Microsoft possesses mo-

nopoly power, see infra Section II.A, and finding that it does,

we turn to the question whether it maintained this power

through anticompetitive means. Agreeing with the District

Court that the company behaved anticompetitively, see infra

Section II.B, and that these actions contributed to the mainte-

nance of its monopoly power, see infra Section II.C, we affirm

the court's finding of liability for monopolization.

A. Monopoly Power

While merely possessing monopoly power is not itself an

antitrust violation, see Northeastern Tel. Co. v. AT & T, 651

F.2d 76, 84-85 (2d Cir. 1981), it is a necessary element of a

monopolization charge, see Grinnell, 384 U.S. at 570. The

Supreme Court defines monopoly power as "the power to

control prices or exclude competition." United States v. E.I.

du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). More

precisely, a firm is a monopolist if it can profitably raise

prices substantially above the competitive level. 2A Phillip

E. Areeda et al., Antitrust Law p 501, at 85 (1995); cf. Ball

Mem'l Hosp., Inc. v. Mut. Hosp. Ins., Inc., 784 F.2d 1325,

1335 (7th Cir. 1986) (defining market power as "the ability to

cut back the market's total output and so raise price").

Where evidence indicates that a firm has in fact profitably

done so, the existence of monopoly power is clear. See Rebel

Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir.

1995); see also FTC v. Indiana Fed'n of Dentists, 476 U.S.

447, 460-61 (1986) (using direct proof to show market power

in Sherman Act s 1 unreasonable restraint of trade action).

Because such direct proof is only rarely available, courts

more typically examine market structure in search of circum-

stantial evidence of monopoly power. 2A Areeda et al.,

Antitrust Law p 531a, at 156; see also, e.g., Grinnell, 384 U.S.

at 571. Under this structural approach, monopoly power may

be inferred from a firm's possession of a dominant share of a

relevant market that is protected by entry barriers. See

Rebel Oil, 51 F.3d at 1434. "Entry barriers" are factors

(such as certain regulatory requirements) that prevent new

rivals from timely responding to an increase in price above

the competitive level. See S. Pac. Communications Co. v.

AT & T, 740 F.2d 980, 1001-02 (D.C. Cir. 1984).

The District Court considered these structural factors and

concluded that Microsoft possesses monopoly power in a

relevant market. Defining the market as Intel-compatible

PC operating systems, the District Court found that Micro-

soft has a greater than 95% share. It also found the compa-

ny's market position protected by a substantial entry barrier.

Conclusions of Law, at 36.

Microsoft argues that the District Court incorrectly defined

the relevant market. It also claims that there is no barrier to

entry in that market. Alternatively, Microsoft argues that

because the software industry is uniquely dynamic, direct

proof, rather than circumstantial evidence, more appropriate-

ly indicates whether it possesses monopoly power. Rejecting

each argument, we uphold the District Court's finding of

monopoly power in its entirety.

1. Market Structure

a. Market definition

"Because the ability of consumers to turn to other suppliers

restrains a firm from raising prices above the competitive

level," Rothery Storage & Van Co. v. Atlas Van Lines, Inc.,

792 F.2d 210, 218 (D.C. Cir. 1986), the relevant market must

include all products "reasonably interchangeable by consum-

ers for the same purposes." du Pont, 351 U.S. at 395. In

this case, the District Court defined the market as "the

licensing of all Intel-compatible PC operating systems world-

wide," finding that there are "currently no products--and ...

there are not likely to be any in the near future--that a

significant percentage of computer users worldwide could

substitute for [these operating systems] without incurring

substantial costs." Conclusions of Law, at 36. Calling this

market definition "far too narrow," Appellant's Opening Br.

at 84, Microsoft argues that the District Court improperly

excluded three types of products: non-Intel compatible oper-

ating systems (primarily Apple's Macintosh operating system,

Mac OS), operating systems for non-PC devices (such as

handheld computers and portal websites), and "middleware"

products, which are not operating systems at all.

We begin with Mac OS. Microsoft's argument that Mac

OS should have been included in the relevant market suffers

from a flaw that infects many of the company's monopoly

power claims: the company fails to challenge the District

Court's factual findings, or to argue that these findings do not

support the court's conclusions. The District Court found

that consumers would not switch from Windows to Mac OS in

response to a substantial price increase because of the costs

of acquiring the new hardware needed to run Mac OS (an

Apple computer and peripherals) and compatible software

applications, as well as because of the effort involved in

learning the new system and transferring files to its format.

Findings of Fact p 20. The court also found the Apple

system less appealing to consumers because it costs consider-

ably more and supports fewer applications. Id. p 21. Micro-

soft responds only by saying: "the district court's market

definition is so narrow that it excludes Apple's Mac OS, which

has competed with Windows for years, simply because the

Mac OS runs on a different microprocessor." Appellant's

Opening Br. at 84. This general, conclusory statement falls

far short of what is required to challenge findings as clearly

erroneous. Pendleton v. Rumsfeld, 628 F.2d 102, 106 (D.C.

Cir. 1980); see also Terry v. Reno, 101 F.3d 1412, 1415 (D.C.

Cir. 1996) (holding that claims made but not argued in a brief

are waived). Microsoft neither points to evidence contradict-

ing the District Court's findings nor alleges that supporting

record evidence is insufficient. And since Microsoft does not

argue that even if we accept these findings, they do not

support the District Court's conclusion, we have no basis for

upsetting the court's decision to exclude Mac OS from the

relevant market.

Microsoft's challenge to the District Court's exclusion of

non-PC based competitors, such as information appliances

(handheld devices, etc.) and portal websites that host server-

based software applications, suffers from the same defect:

the company fails to challenge the District Court's key factual

findings. In particular, the District Court found that because

information appliances fall far short of performing all of the

functions of a PC, most consumers will buy them only as a

supplement to their PCs. Findings of Fact p 23. The Dis-

trict Court also found that portal websites do not presently

host enough applications to induce consumers to switch, nor

are they likely to do so in the near future. Id. p 27. Again,

because Microsoft does not argue that the District Court's

findings do not support its conclusion that information appli-

ances and portal websites are outside the relevant market, we

adhere to that conclusion.

This brings us to Microsoft's main challenge to the District

Court's market definition: the exclusion of middleware. Be-

cause of the importance of middleware to this case, we pause

to explain what it is and how it relates to the issue before us.

Operating systems perform many functions, including allo-

cating computer memory and controlling peripherals such as

printers and keyboards. See Direct Testimony of Frederick

Warren-Boulton p 20, reprinted in 5 J.A. at 3172-73. Oper-

ating systems also function as platforms for software applica-

tions. They do this by "exposing"--i.e., making available to

software developers--routines or protocols that perform cer-

tain widely-used functions. These are known as Application

Programming Interfaces, or "APIs." See Direct Testimony

of James Barksdale p 70, reprinted in 5 J.A. at 2895-96. For

example, Windows contains an API that enables users to

draw a box on the screen. See Direct Testimony of Michael

T. Devlin p 12, reprinted in 5 J.A. at 3525. Software develop-

ers wishing to include that function in an application need not

duplicate it in their own code. Instead, they can "call"--i.e.,

use--the Windows API. See Direct Testimony of James

Barksdale p p 70-71, reprinted in 5 J.A. at 2895-97. Win-

dows contains thousands of APIs, controlling everything from

data storage to font display. See Direct Testimony of Mi-

chael Devlin p 12, reprinted in 5 J.A. at 3525.

Every operating system has different APIs. Accordingly,

a developer who writes an application for one operating

system and wishes to sell the application to users of another

must modify, or "port," the application to the second operat-

ing system. Findings of Fact p 4. This process is both time-

consuming and expensive. Id. p 30.

"Middleware" refers to software products that expose their

own APIs. Id. p 28; Direct Testimony of Paul Maritz

p p 234-36, reprinted in 6 J.A. at 3727-29. Because of this, a

middleware product written for Windows could take over

some or all of Windows's valuable platform functions--that is,

developers might begin to rely upon APIs exposed by the

middleware for basic routines rather than relying upon the

API set included in Windows. If middleware were written

for multiple operating systems, its impact could be even

greater. The more developers could rely upon APIs exposed

by such middleware, the less expensive porting to different

operating systems would be. Ultimately, if developers could

write applications relying exclusively on APIs exposed by

middleware, their applications would run on any operating

system on which the middleware was also present. See

Direct Testimony of Avadis Tevanian, Jr. p 45, reprinted in 5

J.A. at 3113. Netscape Navigator and Java--both at issue in

this case--are middleware products written for multiple oper-

ating systems. Findings of Fact p 28.

Microsoft argues that, because middleware could usurp the

operating system's platform function and might eventually

take over other operating system functions (for instance, by

controlling peripherals), the District Court erred in excluding

Navigator and Java from the relevant market. The District

Court found, however, that neither Navigator, Java, nor any

other middleware product could now, or would soon, expose

enough APIs to serve as a platform for popular applications,

much less take over all operating system functions. Id.

p p 28-29. Again, Microsoft fails to challenge these findings,

instead simply asserting middleware's "potential" as a com-

petitor. Appellant's Opening Br. at 86. The test of reason-

able interchangeability, however, required the District Court

to consider only substitutes that constrain pricing in the

reasonably foreseeable future, and only products that can

enter the market in a relatively short time can perform this

function. See Rothery, 792 F.2d at 218 ("Because the ability

of consumers to turn to other suppliers restrains a firm from

raising prices above the competitive level, the definition of the

'relevant market' rests on a determination of available substi-

tutes."); see also Findings of Fact p 29 ("[I]t would take

several years for middleware ... to evolve" into a product

that can constrain operating system pricing.). Whatever

middleware's ultimate potential, the District Court found that

consumers could not now abandon their operating systems

and switch to middleware in response to a sustained price for

Windows above the competative level. Findings of Fact

p p 28, 29. Nor is middleware likely to overtake the operat-

ing system as the primary platform for software development

any time in the near future. Id.

Alternatively, Microsoft argues that the District Court

should not have excluded middleware from the relevant mar-

ket because the primary focus of the plaintiffs' s 2 charge is

on Microsoft's attempts to suppress middleware's threat to its

operating system monopoly. According to Microsoft, it is

"contradict[ory]," 2/26/2001 Ct. Appeals Tr. at 20, to define

the relevant market to exclude the "very competitive threats

that gave rise" to the action. Appellant's Opening Br. at 84.

The purported contradiction lies between plaintiffs' s 2 theo-

ry, under which Microsoft preserved its monopoly against

middleware technologies that threatened to become viable

substitutes for Windows, and its theory of the relevant mar-

ket, under which middleware is not presently a viable substi-

tute for Windows. Because middleware's threat is only nas-

cent, however, no contradiction exists. Nothing in s 2 of the

Sherman Act limits its prohibition to actions taken against

threats that are already well-developed enough to serve as

present substitutes. See infra Section II.C. Because market

definition is meant to identify products "reasonably inter-

changeable by consumers," du Pont, 351 U.S. at 395, and

because middleware is not now interchangeable with Win-

dows, the District Court had good reason for excluding

middleware from the relevant market.

b. Market power

Having thus properly defined the relevant market, the

District Court found that Windows accounts for a greater

than 95% share. Findings of Fact p 35. The court also

found that even if Mac OS were included, Microsoft's share

would exceed 80%. Id. Microsoft challenges neither finding,

nor does it argue that such a market share is not predomi-

nant. Cf. Grinnell, 384 U.S. at 571 (87% is predominant);

Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S.

451, 481 (1992) (80%); du Pont, 351 U.S. at 379, 391 (75%).

Instead, Microsoft claims that even a predominant market

share does not by itself indicate monopoly power. Although

the "existence of [monopoly] power ordinarily may be in-

ferred from the predominant share of the market," Grinnell,

384 U.S. at 571, we agree with Microsoft that because of the

possibility of competition from new entrants, see Ball Mem'l

Hosp., Inc., 784 F.2d at 1336, looking to current market share

alone can be "misleading." Hunt-Wesson Foods, Inc. v.

Ragu Foods, Inc., 627 F.2d 919, 924 (9th Cir. 1980); see also

Ball Mem'l Hosp., Inc., 784 F.2d at 1336 ("Market share

reflects current sales, but today's sales do not always indicate

power over sales and price tomorrow.") In this case, howev-

er, the District Court was not misled. Considering the

possibility of new rivals, the court focused not only on Micro-

soft's present market share, but also on the structural barrier

that protects the company's future position. Conclusions of

Law, at 36. That barrier--the "applications barrier to en-

try"--stems from two characteristics of the software market:

(1) most consumers prefer operating systems for which a

large number of applications have already been written; and

(2) most developers prefer to write for operating systems that

already have a substantial consumer base. See Findings of

Fact p p 30, 36. This "chicken-and-egg" situation ensures

that applications will continue to be written for the already

dominant Windows, which in turn ensures that consumers will

continue to prefer it over other operating systems. Id.

Challenging the existence of the applications barrier to

entry, Microsoft observes that software developers do write

applications for other operating systems, pointing out that at

its peak IBM's OS/2 supported approximately 2,500 applica-

tions. Id. p 46. This misses the point. That some develop-

ers write applications for other operating systems is not at all

inconsistent with the finding that the applications barrier to

entry discourages many from writing for these less popular

platforms. Indeed, the District Court found that IBM's

difficulty in attracting a larger number of software developers

to write for its platform seriously impeded OS/2's success.

Id. p 46.

Microsoft does not dispute that Windows supports many

more applications than any other operating system. It ar-

gues instead that "[i]t defies common sense" to suggest that

an operating system must support as many applications as

Windows does (more than 70,000, according to the District

Court, id. p 40) to be competitive. Appellant's Opening Br. at

96. Consumers, Microsoft points out, can only use a very

small percentage of these applications. Id. As the District

Court explained, however, the applications barrier to entry

gives consumers reason to prefer the dominant operating

system even if they have no need to use all applications

written for it:

The consumer wants an operating system that runs not

only types of applications that he knows he will want to

use, but also those types in which he might develop an

interest later. Also, the consumer knows that if he

chooses an operating system with enough demand to

support multiple applications in each product category,

he will be less likely to find himself straitened later by

having to use an application whose features disappoint

him. Finally, the average user knows that, generally

speaking, applications improve through successive ver-

sions. He thus wants an operating system for which

successive generations of his favorite applications will be

released--promptly at that. The fact that a vastly larger

number of applications are written for Windows than for

other PC operating systems attracts consumers to Win-

dows, because it reassures them that their interests will

be met as long as they use Microsoft's product.

Findings of Fact p 37. Thus, despite the limited success of

its rivals, Microsoft benefits from the applications barrier to

entry.

Of course, were middleware to succeed, it would erode the

applications barrier to entry. Because applications written

for multiple operating systems could run on any operating

system on which the middleware product was present with

little, if any, porting, the operating system market would

become competitive. Id. p p 29, 72. But as the District Court

found, middleware will not expose a sufficient number of

APIs to erode the applications barrier to entry in the foresee-

able future. See id. p p 28-29.

Microsoft next argues that the applications barrier to entry

is not an entry barrier at all, but a reflection of Windows'

popularity. It is certainly true that Windows may have

gained its initial dominance in the operating system market

competitively--through superior foresight or quality. But

this case is not about Microsoft's initial acquisition of monopo-

ly power. It is about Microsoft's efforts to maintain this

position through means other than competition on the merits.

Because the applications barrier to entry protects a dominant

operating system irrespective of quality, it gives Microsoft

power to stave off even superior new rivals. The barrier is

thus a characteristic of the operating system market, not of

Microsoft's popularity, or, as asserted by a Microsoft witness,

the company's efficiency. See Direct Testimony of Richard

Schmalensee p 115, reprinted in 25 J.A. at 16153-14.

Finally, Microsoft argues that the District Court should not

have considered the applications barrier to entry because it

reflects not a cost borne disproportionately by new entrants,

but one borne by all participants in the operating system

market. According to Microsoft, it had to make major invest-

ments to convince software developers to write for its new

operating system, and it continues to "evangelize" the Win-

dows platform today. Whether costs borne by all market

participants should be considered entry barriers is the sub-

ject of much debate. Compare 2A Areeda & Hovenkamp,

Antitrust Law s 420c, at 61 (arguing that these costs are

entry barriers), and Joe S. Bain, Barriers to New Competi-

tion: Their Character and Consequences in Manufacturing

Industries 6-7 (1956) (considering these costs entry barriers),

with L.A. Land Co. v. Brunswick Corp., 6 F.3d 1422, 1428

(9th Cir. 1993) (evaluating cost based on "[t]he disadvantage

of new entrants as compared to incumbents"), and George

Stigler, The Organization of Industry 67 (1968) (excluding

these costs). We need not resolve this issue, however, for

even under the more narrow definition it is clear that there

are barriers. When Microsoft entered the operating system

market with MS-DOS and the first version of Windows, it did

not confront a dominant rival operating system with as mas-

sive an installed base and as vast an existing array of

applications as the Windows operating systems have since

enjoyed. Findings of Fact p p 6, 7, 43. Moreover, when

Microsoft introduced Windows 95 and 98, it was able to

bypass the applications barrier to entry that protected the

incumbent Windows by including APIs from the earlier ver-

sion in the new operating systems. See id. p 44. This made

porting existing Windows applications to the new version of

Windows much less costly than porting them to the operating

systems of other entrants who could not freely include APIs

from the incumbent Windows with their own.

2. Direct Proof

Having sustained the District Court's conclusion that cir-

cumstantial evidence proves that Microsoft possesses monop-

oly power, we turn to Microsoft's alternative argument that it

does not behave like a monopolist. Claiming that software

competition is uniquely "dynamic," Appellant's Opening Br. at

84 (quoting Findings of Fact p 59), the company suggests a

new rule: that monopoly power in the software industry

should be proven directly, that is, by examining a company's

actual behavior to determine if it reveals the existence of

monopoly power. According to Microsoft, not only does no

such proof of its power exist, but record evidence demon-

strates the absence of monopoly power. The company claims

that it invests heavily in research and development, id. at 88-

89 (citing Direct Testimony of Paul Maritz p 155, reprinted in

6 J.A. at 3698 (testifying that Microsoft invests approximately

17% of its revenue in R&D)), and charges a low price for

Windows (a small percentage of the price of an Intel-

compatible PC system and less than the price of its rivals, id.

at 90 (citing Findings of Fact p p 19, 21, 46)).

Microsoft's argument fails because, even assuming that the

software market is uniquely dynamic in the long term, the

District Court correctly applied the structural approach to

determine if the company faces competition in the short term.

Structural market power analyses are meant to determine

whether potential substitutes constrain a firm's ability to

raise prices above the competitive level; only threats that are

likely to materialize in the relatively near future perform this

function to any significant degree. Rothery, 792 F.2d at 218

(quoting Lawrence Sullivan, Antitrust s 12, at 41 (1977))

(only substitutes that can enter the market "promptly" should

be considered). The District Court expressly considered and

rejected Microsoft's claims that innovations such as handheld

devices and portal websites would soon expand the relevant

market beyond Intel-compatible PC operating systems. Be-

cause the company does not challenge these findings, we have

no reason to believe that prompt substitutes are available.

The structural approach, as applied by the District Court, is

thus capable of fulfilling its purpose even in a changing

market. Microsoft cites no case, nor are we aware of one,

requiring direct evidence to show monopoly power in any

market. We decline to adopt such a rule now.

Even if we were to require direct proof, moreover, Micro-

soft's behavior may well be sufficient to show the existence of

monopoly power. Certainly, none of the conduct Microsoft

points to--its investment in R&D and the relatively low price

of Windows--is inconsistent with the possession of such pow-

er. Conclusions of Law, at 37. The R&D expenditures

Microsoft points to are not simply for Windows, but for its

entire company, which most likely does not possess a monopo-

ly for all of its products. Moreover, because innovation can

increase an already dominant market share and further delay

the emergence of competition, even monopolists have reason

to invest in R&D. Findings of Fact p 61. Microsoft's pricing

behavior is similarly equivocal. The company claims only

that it never charged the short-term profit-maximizing price

for Windows. Faced with conflicting expert testimony, the

District Court found that it could not accurately determine

what this price would be. Id. p 65. In any event, the court

found, a price lower than the short-term profit-maximizing

price is not inconsistent with possession or improper use of

monopoly power. Id. p p 65-66. Cf. Berkey Photo, Inc. v.

Eastman Kodak Co., 603 F.2d 263, 274 (2d Cir. 1979) ("[I]f

monopoly power has been acquired or maintained through

improper means, the fact that the power has not been used to

extract [a monopoly price] provides no succor to the monopo-

list."). Microsoft never claims that it did not charge the long-

term monopoly price. Micosoft does argue that the price of

Windows is a fraction of the price of an Intel-compatible PC

system and lower than that of rival operating systems, but

these facts are not inconsistent with the District Court's

finding that Microsoft has monopoly power. See Findings of

Fact p 36 ("Intel-compatible PC operating systems other than

Windows [would not] attract[ ] significant demand ... even if

Micosoft held its prices substantially above the competitive

level.").

More telling, the District Court found that some aspects of

Microsoft's behavior are difficult to explain unless Windows is

a monopoly product. For instance, according to the District

Court, the company set the price of Windows without consid-

ering rivals' prices, Findings of Fact p 62, something a firm

without a monopoly would have been unable to do. The

District Court also found that Microsoft's pattern of exclu-

sionary conduct could only be rational "if the firm knew that

it possessed monopoly power." Conclusions of Law, at 37. It

is to that conduct that we now turn.

B. Anticompetitive Conduct

As discussed above, having a monopoly does not by itself

violate s 2. A firm violates s 2 only when it acquires or

maintains, or attempts to acquire or maintain, a monopoly by

engaging in exclusionary conduct "as distinguished from

growth or development as a consequence of a superior prod-

uct, business acumen, or historic accident." Grinnell, 384

U.S. at 571; see also United States v. Aluminum Co. of Am.,

148 F.2d 416, 430 (2d Cir. 1945) (Hand, J.) ("The successful

competitor, having been urged to compete, must not be

turned upon when he wins.").

In this case, after concluding that Microsoft had monopoly

power, the District Court held that Microsoft had violated s 2

by engaging in a variety of exclusionary acts (not including

predatory pricing), to maintain its monopoly by preventing

the effective distribution and use of products that might

threaten that monopoly. Specifically, the District Court held

Microsoft liable for: (1) the way in which it integrated IE into

Windows; (2) its various dealings with Original Equipment

Manufacturers ("OEMs"), Internet Access Providers

("IAPs"), Internet Content Providers ("ICPs"), Independent

Software Vendors ("ISVs"), and Apple Computer; (3) its

efforts to contain and to subvert Java technologies; and (4)

its course of conduct as a whole. Upon appeal, Microsoft

argues that it did not engage in any exclusionary conduct.

Whether any particular act of a monopolist is exclusionary,

rather than merely a form of vigorous competition, can be

difficult to discern: the means of illicit exclusion, like the

means of legitimate competition, are myriad. The challenge

for an antitrust court lies in stating a general rule for

distinguishing between exclusionary acts, which reduce social

welfare, and competitive acts, which increase it.

From a century of case law on monopolization under s 2,

however, several principles do emerge. First, to be con-

demned as exclusionary, a monopolist's act must have an

"anticompetitive effect." That is, it must harm the competi-

tive process and thereby harm consumers. In contrast, harm

to one or more competitors will not suffice. "The [Sherman

Act] directs itself not against conduct which is competitive,

even severely so, but against conduct which unfairly tends to

destroy competition itself." Spectrum Sports, Inc. v. McQuil-

lan, 506 U.S. 447, 458 (1993); see also Brooke Group Ltd. v.

Brown & Williamson Tobacco Corp., 509 U.S. 209, 225 (1993)

("Even an act of pure malice by one business competitor

against another does not, without more, state a claim under

the federal antitrust laws....").

Second, the plaintiff, on whom the burden of proof of

course rests, see, e.g., Monsanto Co. v. Spray-Rite Serv.

Corp., 465 U.S. 752, 763 (1984); see also United States v.

Arnold, Schwinn & Co., 388 U.S. 365, 374 n.5 (1967), over-

ruled on other grounds, Cont'l T.V., Inc. v. GTE Sylvania

Inc., 433 U.S. 36 (1977), must demonstrate that the monopo-

list's conduct indeed has the requisite anticompetitive effect.

See generally Brooke Group, 509 U.S. at 225-26. In a case

brought by a private plaintiff, the plaintiff must show that its

injury is "of 'the type that the statute was intended to

forestall,' " Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429

U.S. 477, 487-88 (1977) (quoting Wyandotte Transp. v. United

States, 389 U.S. 191, 202 (1967)); no less in a case brought by

the Government, it must demonstrate that the monopolist's

conduct harmed competition, not just a competitor.

Third, if a plaintiff successfully establishes a prima facie

case under s 2 by demonstrating anticompetitive effect, then

the monopolist may proffer a "procompetitive justification"

for its conduct. See Eastman Kodak, 504 U.S. at 483. If the

monopolist asserts a procompetitive justification--a nonpre-

textual claim that its conduct is indeed a form of competition

on the merits because it involves, for example, greater effi-

ciency or enhanced consumer appeal--then the burden shifts

back to the plaintiff to rebut that claim. Cf. Capital Imaging

Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d

537, 543 (2d Cir. 1993).

Fourth, if the monopolist's procompetitive justification

stands unrebutted, then the plaintiff must demonstrate that

the anticompetitive harm of the conduct outweighs the pro-

competitive benefit. In cases arising under s 1 of the Sher-

man Act, the courts routinely apply a similar balancing

approach under the rubric of the "rule of reason." The

source of the rule of reason is Standard Oil Co. v. United

States, 221 U.S. 1 (1911), in which the Supreme Court used

that term to describe the proper inquiry under both sections

of the Act. See id. at 61-62 ("[W]hen the second section [of

the Sherman Act] is thus harmonized with ... the first, it

becomes obvious that the criteria to be resorted to in any

given case for the purpose of ascertaining whether violations

of the section have been committed, is the rule of reason

guided by the established law...."). As the Fifth Circuit

more recently explained, "[i]t is clear ... that the analysis

under section 2 is similar to that under section 1 regardless

whether the rule of reason label is applied...." Mid-Texas

Communications Sys., Inc. v. AT & T, 615 F.2d 1372, 1389

n.13 (5th Cir. 1980) (citing Byars v. Bluff City News Co., 609

F.2d 843, 860 (6th Cir. 1979)); see also Cal. Computer Prods.,

Inc. v. IBM Corp., 613 F.2d 727, 737 (9th Cir. 1979).

Finally, in considering whether the monopolist's conduct on

balance harms competition and is therefore condemned as

exclusionary for purposes of s 2, our focus is upon the effect

of that conduct, not upon the intent behind it. Evidence of

the intent behind the conduct of a monopolist is relevant only

to the extent it helps us understand the likely effect of the

monopolist's conduct. See, e.g., Chicago Bd. of Trade v.

United States, 246 U.S. 231, 238 (1918) ("knowledge of intent

may help the court to interpret facts and to predict conse-

quences"); Aspen Skiing Co. v. Aspen Highlands Skiing

Corp., 472 U.S. 585, 603 (1985).

With these principles in mind, we now consider Microsoft's

objections to the District Court's holding that Microsoft vio-

lated s 2 of the Sherman Act in a variety of ways.

1. Licenses Issued to Original Equipment Manufac-

turers

The District Court condemned a number of provisions in

Microsoft's agreements licensing Windows to OEMs, because

it found that Microsoft's imposition of those provisions (like

many of Microsoft's other actions at issue in this case) serves

to reduce usage share of Netscape's browser and, hence,

protect Microsoft's operating system monopoly. The reason

market share in the browser market affects market power in

the operating system market is complex, and warrants some

explanation.

Browser usage share is important because, as we explained

in Section II.A above, a browser (or any middleware product,

for that matter) must have a critical mass of users in order to

attract software developers to write applications relying upon

the APIs it exposes, and away from the APIs exposed by

Windows. Applications written to a particular browser's

APIs, however, would run on any computer with that brow-

ser, regardless of the underlying operating system. "The

overwhelming majority of consumers will only use a PC

operating system for which there already exists a large and

varied set of ... applications, and for which it seems relative-

ly certain that new types of applications and new versions of

existing applications will continue to be marketed...."

Findings of Fact p 30. If a consumer could have access to

the applications he desired--regardless of the operating sys-

tem he uses--simply by installing a particular browser on his

computer, then he would no longer feel compelled to select

Windows in order to have access to those applications; he

could select an operating system other than Windows based

solely upon its quality and price. In other words, the market

for operating systems would be competitive.

Therefore, Microsoft's efforts to gain market share in one

market (browsers) served to meet the threat to Microsoft's

monopoly in another market (operating systems) by keeping

rival browsers from gaining the critical mass of users neces-

sary to attract developer attention away from Windows as the

platform for software development. Plaintiffs also argue that

Microsoft's actions injured competition in the browser mar-

ket--an argument we will examine below in relation to their

specific claims that Microsoft attempted to monopolize the

browser market and unlawfully tied its browser to its operat-

ing system so as to foreclose competition in the browser

market. In evaluating the s 2 monopoly maintenance claim,

however, our immediate concern is with the anticompetitive

effect of Microsoft's conduct in preserving its monopoly in the

operating system market.

In evaluating the restrictions in Microsoft's agreements

licensing Windows to OEMs, we first consider whether plain-

tiffs have made out a prima facie case by demonstrating that

the restrictions have an anticompetitive effect. In the next

subsection, we conclude that plaintiffs have met this burden

as to all the restrictions. We then consider Microsoft's

proffered justifications for the restrictions and, for the most

part, hold those justifications insufficient.

a. Anticompetitive effect of the license restrictions

The restrictions Microsoft places upon Original Equipment

Manufacturers are of particular importance in determining

browser usage share because having an OEM pre-install a

browser on a computer is one of the two most cost-effective

methods by far of distributing browsing software. (The other

is bundling the browser with internet access software distrib-

uted by an IAP.) Findings of Fact p 145. The District

Court found that the restrictions Microsoft imposed in licens-

ing Windows to OEMs prevented many OEMs from distribut-

ing browsers other than IE. Conclusions of Law, at 39-40.

In particular, the District Court condemned the license provi-

sions prohibiting the OEMs from: (1) removing any desktop

icons, folders, or "Start" menu entries; (2) altering the initial

boot sequence; and (3) otherwise altering the appearance of

the Windows desktop. Findings of Fact p 213.

The District Court concluded that the first license restric-

tion--the prohibition upon the removal of desktop icons,

folders, and Start menu entries--thwarts the distribution of a

rival browser by preventing OEMs from removing visible

means of user access to IE. Id. p 203. The OEMs cannot

practically install a second browser in addition to IE, the

court found, in part because "[p]re-installing more than one

product in a given category ... can significantly increase an

OEM's support costs, for the redundancy can lead to confu-

sion among novice users." Id. p 159; see also id. p 217. That

is, a certain number of novice computer users, seeing two

browser icons, will wonder which to use when and will call the

OEM's support line. Support calls are extremely expensive

and, in the highly competitive original equipment market,

firms have a strong incentive to minimize costs. Id. p 210.

Microsoft denies the "consumer confusion" story; it ob-

serves that some OEMs do install multiple browsers and that

executives from two OEMs that do so denied any knowledge

of consumers being confused by multiple icons. See 11/5/98

pm Tr. at 41-42 (trial testimony of Avadis Tevanian of Apple),

reprinted in 9 J.A. at 5493-94; 11/18/99 am Tr. at 69 (trial

testimony of John Soyring of IBM), reprinted in 10 J.A. at

6222.

Other testimony, however, supports the District Court's

finding that fear of such confusion deters many OEMs from

pre-installing multiple browsers. See, e.g., 01/13/99 pm Tr. at

614-15 (deposition of Microsoft's Gayle McClain played to the

court) (explaining that redundancy of icons may be confusing

to end users); 02/18/99 pm Tr. at 46-47 (trial testimony of

John Rose of Compaq), reprinted in 21 J.A. at 14237-38

(same); 11/17/98 am Tr. at 68 (deposition of John Kies of

Packard Bell-NEC played to the court), reprinted in 9 J.A.

at 6016 (same); 11/17/98 am Tr. at 67-72 (trial testimony of

Glenn Weadock), reprinted in 9 J.A. at 6015-20 (same). Most

telling, in presentations to OEMs, Microsoft itself represent-

ed that having only one icon in a particular category would be

"less confusing for endusers." See Government's Trial Ex-

hibit ("GX") 319 at MS98 0109453. Accordingly, we reject

Microsoft's argument that we should vacate the District

Court's Finding of Fact 159 as it relates to consumer confu-

sion.

As noted above, the OEM channel is one of the two

primary channels for distribution of browsers. By preventing

OEMs from removing visible means of user access to IE, the

license restriction prevents many OEMs from pre-installing a

rival browser and, therefore, protects Microsoft's monopoly

from the competition that middleware might otherwise pres-

ent. Therefore, we conclude that the license restriction at

issue is anticompetitive. We defer for the moment the ques-

tion whether that anticompetitive effect is outweighed by

Microsoft's proffered justifications.

The second license provision at issue prohibits OEMs from

modifying the initial boot sequence--the process that occurs

the first time a consumer turns on the computer. Prior to

the imposition of that restriction, "among the programs that

many OEMs inserted into the boot sequence were Internet

sign-up procedures that encouraged users to choose from a

list of IAPs assembled by the OEM." Findings of Fact

p 210. Microsoft's prohibition on any alteration of the boot

sequence thus prevents OEMs from using that process to

promote the services of IAPs, many of which--at least at the

time Microsoft imposed the restriction--used Navigator rath-

er than IE in their internet access software. See id. p 212;

GX 295, reprinted in 12 J.A. at 14533 (Upon learning of OEM

practices including boot sequence modification, Microsoft's

Chairman, Bill Gates, wrote: "Apparently a lot of OEMs are

bundling non-Microsoft browsers and coming up with offer-

ings together with [IAPs] that get displayed on their ma-

chines in a FAR more prominent way than MSN or our

Internet browser."). Microsoft does not deny that the prohi-

bition on modifying the boot sequence has the effect of

decreasing competition against IE by preventing OEMs from

promoting rivals' browsers. Because this prohibition has a

substantial effect in protecting Microsoft's market power, and

does so through a means other than competition on the

merits, it is anticompetitive. Again the question whether the

provision is nonetheless justified awaits later treatment.

Finally, Microsoft imposes several additional provisions

that, like the prohibition on removal of icons, prevent OEMs

from making various alterations to the desktop: Microsoft

prohibits OEMs from causing any user interface other than

the Windows desktop to launch automatically, from adding

icons or folders different in size or shape from those supplied

by Microsoft, and from using the "Active Desktop" feature to

promote third-party brands. These restrictions impose sig-

nificant costs upon the OEMs; prior to Microsoft's prohibit-

ing the practice, many OEMs would change the appearance of

the desktop in ways they found beneficial. See, e.g., Findings

of Fact p 214; GX 309, reprinted in 22 J.A. at 14551 (March

1997 letter from Hewlett-Packard to Microsoft: "We are

responsible for the cost of technical support of our customers,

including the 33% of calls we get related to the lack of quality

or confusion generated by your product.... We must have

more ability to decide how our system is presented to our end

users. If we had a choice of another supplier, based on your

actions in this area, I assure you [that you] would not be our

supplier of choice.").

The dissatisfaction of the OEM customers does not, of

course, mean the restrictions are anticompetitive. The anti-

competitive effect of the license restrictions is, as Microsoft

itself recognizes, that OEMs are not able to promote rival

browsers, which keeps developers focused upon the APIs in

Windows. Findings of Fact p 212 (quoting Microsoft's Gates

as writing, "[w]inning Internet browser share is a very very

important goal for us," and emphasizing the need to prevent

OEMs from promoting both rival browsers and IAPs that

might use rivals' browsers); see also 01/13/99 Tr. at 305-06

(excerpts from deposition of James Von Holle of Gateway)

(prior to restriction Gateway had pre-installed non-IE inter-

net registration icon that was larger than other desktop

icons). This kind of promotion is not a zero-sum game; but

for the restrictions in their licenses to use Windows, OEMs

could promote multiple IAPs and browsers. By preventing

the OEMs from doing so, this type of license restriction, like

the first two restrictions, is anticompetitive: Microsoft re-

duced rival browsers' usage share not by improving its own

product but, rather, by preventing OEMs from taking actions

that could increase rivals' share of usage.

b. Microsoft's justifications for the license restric-

tions

Microsoft argues that the license restrictions are legally

justified because, in imposing them, Microsoft is simply "exer-

cising its rights as the holder of valid copyrights." Appel-

lant's Opening Br. at 102. Microsoft also argues that the

licenses "do not unduly restrict the opportunities of Netscape

to distribute Navigator in any event." Id.

Microsoft's primary copyright argument borders upon the

frivolous. The company claims an absolute and unfettered

right to use its intellectual property as it wishes: "[I]f

intellectual property rights have been lawfully acquired," it

says, then "their subsequent exercise cannot give rise to

antitrust liability." Appellant's Opening Br. at 105. That is

no more correct than the proposition that use of one's person-

al property, such as a baseball bat, cannot give rise to tort

liability. As the Federal Circuit succinctly stated: "Intellec-

tual property rights do not confer a privilege to violate the

antitrust laws." In re Indep. Serv. Orgs. Antitrust Litig., 203

F.3d 1322, 1325 (Fed. Cir. 2000).

Although Microsoft never overtly retreats from its bold and

incorrect position on the law, it also makes two arguments to

the effect that it is not exercising its copyright in an unrea-

sonable manner, despite the anticompetitive consequences of

the license restrictions discussed above. In the first variation

upon its unqualified copyright defense, Microsoft cites two

cases indicating that a copyright holder may limit a licensee's

ability to engage in significant and deleterious alterations of a

copyrighted work. See Gilliam v. ABC, 538 F.2d 14, 21 (2d

Cir. 1976); WGN Cont'l Broad. Co. v. United Video, Inc., 693

F.2d 622, 625 (7th Cir. 1982). The relevance of those two

cases for the present one is limited, however, both because

those cases involved substantial alterations of a copyrighted

work, see Gilliam, 538 F.2d at 18, and because in neither case

was there any claim that the copyright holder was, in assert-

ing its rights, violating the antitrust laws, see WGN Cont'l

Broad., 693 F.2d at 626; see also Cmty. for Creative Non-

Violence v. Reid, 846 F.2d 1485, 1498 (D.C. Cir. 1988) (noting,

again in a context free of any antitrust concern, that "an

author [ ] may have rights against" a licensee that "excessive-

ly mutilated or altered" the copyrighted work).

The only license restriction Microsoft seriously defends as

necessary to prevent a "substantial alteration" of its copy-

righted work is the prohibition on OEMs automatically

launching a substitute user interface upon completion of the

boot process. See Findings of Fact p 211 ("[A] few large

OEMs developed programs that ran automatically at the

conclusion of a new PC system's first boot sequence. These

programs replaced the Windows desktop either with a user

interface designed by the OEM or with Navigator's user

interface."). We agree that a shell that automatically pre-

vents the Windows desktop from ever being seen by the user

is a drastic alteration of Microsoft's copyrighted work, and

outweighs the marginal anticompetitive effect of prohibiting

the OEMs from substituting a different interface automatical-

ly upon completion of the initial boot process. We therefore

hold that this particular restriction is not an exclusionary

practice that violates s 2 of the Sherman Act.

In a second variation upon its copyright defense, Microsoft

argues that the license restrictions merely prevent OEMs

from taking actions that would reduce substantially the value

of Microsoft's copyrighted work: that is, Microsoft claims

each license restriction in question is necessary to prevent

OEMs from so altering Windows as to undermine "the princi-

pal value of Windows as a stable and consistent platform that

supports a broad range of applications and that is familiar to

users." Appellant's Opening Br. at 102. Microsoft, however,

never substantiates this claim, and, because an OEM's alter-

ing the appearance of the desktop or promoting programs in

the boot sequence does not affect the code already in the

product, the practice does not self-evidently affect either the

"stability" or the "consistency" of the platform. See Conclu-

sions of Law, at 41; Findings of Fact p 227. Microsoft cites

only one item of evidence in support of its claim that the

OEMs' alterations were decreasing the value of Windows.

Defendant's Trial Exhibit ("DX") 2395 at MSV0009378A, re-

printed in 19 J.A. at 12575. That document, prepared by

Microsoft itself, states: "there are quality issues created by

OEMs who are too liberal with the pre-install process,"

referring to the OEMs' installation of Windows and additional

software on their PCs, which the document says may result in

"user concerns and confusion." To the extent the OEMs'

modifications cause consumer confusion, of course, the OEMs

bear the additional support costs. See Findings of Fact

p 159. Therefore, we conclude Microsoft has not shown that

the OEMs' liberality reduces the value of Windows except in

the sense that their promotion of rival browsers undermines

Microsoft's monopoly--and that is not a permissible justifica-

tion for the license restrictions.

Apart from copyright, Microsoft raises one other defense of

the OEM license agreements: It argues that, despite the

restrictions in the OEM license, Netscape is not completely

blocked from distributing its product. That claim is insuffi-

cient to shield Microsoft from liability for those restrictions

because, although Microsoft did not bar its rivals from all

means of distribution, it did bar them from the cost-efficient

ones.

In sum, we hold that with the exception of the one restric-

tion prohibiting automatically launched alternative interfaces,

all the OEM license restrictions at issue represent uses of

Microsoft's market power to protect its monopoly, unre-

deemed by any legitimate justification. The restrictions

therefore violate s 2 of the Sherman Act.

2. Integration of IE and Windows

Although Microsoft's license restrictions have a significant

effect in closing rival browsers out of one of the two primary

channels of distribution, the District Court found that "Micro-

soft's executives believed ... its contractual restrictions

placed on OEMs would not be sufficient in themselves to

reverse the direction of Navigator's usage share. Conse-

quently, in late 1995 or early 1996, Microsoft set out to bind

[IE] more tightly to Windows 95 as a technical matter."

Findings of Fact p 160.

Technologically binding IE to Windows, the District Court

found, both prevented OEMs from pre-installing other brow-

sers and deterred consumers from using them. In particular,

having the IE software code as an irremovable part of

Windows meant that pre-installing a second browser would

"increase an OEM's product testing costs," because an OEM

must test and train its support staff to answer calls related to

every software product preinstalled on the machine; more-

over, pre-installing a browser in addition to IE would to many

OEMs be "a questionable use of the scarce and valuable space

on a PC's hard drive." Id. p 159.

Although the District Court, in its Conclusions of Law,

broadly condemned Microsoft's decision to bind "Internet

Explorer to Windows with ... technological shackles," Con-

clusions of Law, at 39, its findings of fact in support of that

conclusion center upon three specific actions Microsoft took to

weld IE to Windows: excluding IE from the "Add/Remove

Programs" utility; designing Windows so as in certain cir-

cumstances to override the user's choice of a default browser

other than IE; and commingling code related to browsing

and other code in the same files, so that any attempt to delete

the files containing IE would, at the same time, cripple the

operating system. As with the license restrictions, we consid-

er first whether the suspect actions had an anticompetitive

effect, and then whether Microsoft has provided a procompet-

itive justification for them.

a. Anticompetitive effect of integration

As a general rule, courts are properly very skeptical about

claims that competition has been harmed by a dominant

firm's product design changes. See, e.g., Foremost Pro Color,

Inc. v. Eastman Kodak Co., 703 F.2d 534, 544-45 (9th Cir.

1983). In a competitive market, firms routinely innovate in

the hope of appealing to consumers, sometimes in the process

making their products incompatible with those of rivals; the

imposition of liability when a monopolist does the same thing

will inevitably deter a certain amount of innovation. This is

all the more true in a market, such as this one, in which the

product itself is rapidly changing. See Findings of Fact p 59.

Judicial deference to product innovation, however, does not

mean that a monopolist's product design decisions are per se

lawful. See Foremost Pro Color, 703 F.2d at 545; see also

Cal. Computer Prods., 613 F.2d at 739, 744; In re IBM

Peripheral EDP Devices Antitrust Litig., 481 F. Supp. 965,

1007-08 (N.D. Cal. 1979).

The District Court first condemned as anticompetitive Mi-

crosoft's decision to exclude IE from the "Add/Remove Pro-

grams" utility in Windows 98. Findings of Fact p 170. Mi-

crosoft had included IE in the Add/Remove Programs utility

in Windows 95, see id. p p 175-76, but when it modified

Windows 95 to produce Windows 98, it took IE out of the

Add/Remove Programs utility. This change reduces the us-

age share of rival browsers not by making Microsoft's own

browser more attractive to consumers but, rather, by discour-

aging OEMs from distributing rival products. See id. p 159.

Because Microsoft's conduct, through something other than

competition on the merits, has the effect of significantly

reducing usage of rivals' products and hence protecting its

own operating system monopoly, it is anticompetitive; we

defer for the moment the question whether it is nonetheless

justified.

Second, the District Court found that Microsoft designed

Windows 98 "so that using Navigator on Windows 98 would

have unpleasant consequences for users" by, in some circum-

stances, overriding the user's choice of a browser other than

IE as his or her default browser. Id. p p 171-72. Plaintiffs

argue that this override harms the competitive process by

deterring consumers from using a browser other than IE

even though they might prefer to do so, thereby reducing

rival browsers' usage share and, hence, the ability of rival

browsers to draw developer attention away from the APIs

exposed by Windows. Microsoft does not deny, of course,

that overriding the user's preference prevents some people

from using other browsers. Because the override reduces

rivals' usage share and protects Microsoft's monopoly, it too

is anticompetitive.

Finally, the District Court condemned Microsoft's decision

to bind IE to Windows 98 "by placing code specific to Web

browsing in the same files as code that provided operating

system functions." Id. p 161; see also id. p p 174, 192. Put-

ting code supplying browsing functionality into a file with

code supplying operating system functionality "ensure[s] that

the deletion of any file containing browsing-specific routines

would also delete vital operating system routines and thus

cripple Windows...." Id. p 164. As noted above, preventing

an OEM from removing IE deters it from installing a second

browser because doing so increases the OEM's product test-

ing and support costs; by contrast, had OEMs been able to

remove IE, they might have chosen to pre-install Navigator

alone. See id. p 159.

Microsoft denies, as a factual matter, that it commingled

browsing and non-browsing code, and it maintains the Dis-

trict Court's findings to the contrary are clearly erroneous.

According to Microsoft, its expert "testified without contra-

diction that '[t]he very same code in Windows 98 that pro-

vides Web browsing functionality' also performs essential

operating system functions--not code in the same files, but

the very same software code." Appellant's Opening Br. at 79

(citing 5 J.A. 3291-92).

Microsoft's expert did not testify to that effect "without

contradiction," however. A Government expert, Glenn Wea-

dock, testified that Microsoft "design[ed] [IE] so that some of

the code that it uses co-resides in the same library files as

other code needed for Windows." Direct Testimony p 30.

Another Government expert likewise testified that one library

file, SHDOCVW.DLL, "is really a bundle of separate func-

tions. It contains some functions that have to do specifically

with Web browsing, and it contains some general user inter-

face functions as well." 12/14/98 am Tr. at 60-61 (trial

testimony of Edward Felten), reprinted in 11 J.A. at 6953-54.

One of Microsoft's own documents suggests as much. See

Plaintiffs' Proposed Findings of Fact p 131.2.vii (citing GX

1686 (under seal) (Microsoft document indicating some func-

tions in SHDOCVW.DLL can be described as "IE only,"

others can be described as "shell only" and still others can be

described as providing both "IE" and "shell" functions)).

In view of the contradictory testimony in the record, some

of which supports the District Court's finding that Microsoft

commingled browsing and non-browsing code, we cannot con-

clude that the finding was clearly erroneous. See Anderson

v. City of Bessemer City, 470 U.S. 564, 573-74 (1985) ("If the

district court's account of the evidence is plausible in light of

the record viewed in its entirety, the court of appeals may not

reverse it even though convinced that had it been sitting as

the trier of fact, it would have weighed the evidence different-

ly."). Accordingly, we reject Microsoft's argument that we

should vacate Finding of Fact 159 as it relates to the com-

mingling of code, and we conclude that such commingling has

an anticompetitive effect; as noted above, the commingling

deters OEMs from pre-installing rival browsers, thereby re-

ducing the rivals' usage share and, hence, developers' interest

in rivals' APIs as an alternative to the API set exposed by

Microsoft's operating system.

b. Microsoft's justifications for integration

Microsoft proffers no justification for two of the three

challenged actions that it took in integrating IE into Win-

dows--excluding IE from the Add/Remove Programs utility

and commingling browser and operating system code. Al-

though Microsoft does make some general claims regarding

the benefits of integrating the browser and the operating

system, see, e.g., Direct Testimony of James Allchin p 94,

reprinted in 5 J.A. at 3321 ("Our vision of deeper levels of

technical integration is highly efficient and provides substan-

tial benefits to customers and developers."), it neither speci-

fies nor substantiates those claims. Nor does it argue that

either excluding IE from the Add/Remove Programs utility or

commingling code achieves any integrative benefit. Plaintiffs

plainly made out a prima facie case of harm to competition in

the operating system market by demonstrating that Micro-

soft's actions increased its browser usage share and thus

protected its operating system monopoly from a middleware

threat and, for its part, Microsoft failed to meet its burden of

showing that its conduct serves a purpose other than protect-

ing its operating system monopoly. Accordingly, we hold

that Microsoft's exclusion of IE from the Add/Remove Pro-

grams utility and its commingling of browser and operating

system code constitute exclusionary conduct, in violation of

s 2.

As for the other challenged act that Microsoft took in

integrating IE into Windows--causing Windows to override

the user's choice of a default browser in certain circum-

stances--Microsoft argues that it has "valid technical rea-

sons." Specifically, Microsoft claims that it was necessary to

design Windows to override the user's preferences when he

or she invokes one of "a few" out "of the nearly 30 means of

accessing the Internet." Appellant's Opening Br. at 82.

According to Microsoft:

The Windows 98 Help system and Windows Update

feature depend on ActiveX controls not supported by

Navigator, and the now-discontinued Channel Bar uti-

lized Microsoft's Channel Definition Format, which Navi-

gator also did not support. Lastly, Windows 98 does not

invoke Navigator if a user accesses the Internet through

"My Computer" or "Windows Explorer" because doing

so would defeat one of the purposes of those features--

enabling users to move seamlessly from local storage

devices to the Web in the same browsing window.

Id. (internal citations omitted). The plaintiff bears the bur-

den not only of rebutting a proffered justification but also of

demonstrating that the anticompetitive effect of the chal-

lenged action outweighs it. In the District Court, plaintiffs

appear to have done neither, let alone both; in any event,

upon appeal, plaintiffs offer no rebuttal whatsoever. Accord-

ingly, Microsoft may not be held liable for this aspect of its

product design.

3. Agreements with Internet Access Providers

The District Court also condemned as exclusionary Micro-

soft'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 inter-

net access and other services. Findings of Fact p 15. The

District Court deemed Microsoft's agreements with the IAPs

unlawful because:

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 impor-

tant 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. Final-

ly, in exchange for efforts to upgrade existing subscrib-

ers to client software that came bundled with [IE] in-

stead of Navigator, Microsoft granted rebates--and in

some cases made outright payments--to those same

IAPs. Id. p p 259-60, 295.

Conclusions of Law, at 41.

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 Micro-

soft 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 customiz-

ing 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. Final-

ly, 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--Micro-

soft's inducements--and then its exclusive agreements with

IAPs.

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 pre-

dator 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.

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 con-

demn 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.

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 subscrip-

tions 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.

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 s 3 of the Clayton Act and ss 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 "fore-

close competition in a substantial share of the line of com-

merce 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 s 3 of the Clayton Act it follows that it is not

forbidden by those of the [Sherman Act].").

Following Tampa Electric, courts considering antitrust

challenges to exclusive contracts have taken care to identify

the share of the market foreclosed. Some courts have indi-

cated that s 3 of the Clayton Act and s 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.").

Though what is "significant" may vary depending upon the

antitrust provision under which an exclusive deal is chal-

lenged, it is clear that in all cases the plaintiff must both

define the relevant market and prove the degree of foreclo-

sure. This is a prudential requirement; exclusivity provi-

sions 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."). Permit-

ting 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, 21-

23 (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).

In this case, plaintiffs challenged Microsoft's exclusive deal-

ing arrangements with the IAPs under both ss 1 and 2 of the

Sherman Act. The District Court, in analyzing the s 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 s 1."

Conclusions of Law, at 52. The court recognized that Micro-

soft 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 s 1. Conclu-

sions of Law, at 53. Plaintiffs did not cross-appeal this

holding.

Turning to s 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 s 1

violation in no way detracts from the Court's assignment of

liability for the same arrangements under s 2.... [A]ll of

Microsoft's agreements, including the non-exclusive ones, se-

verely restricted Netscape's access to those distribution chan-

nels leading most efficiently to the acquisition of browser

usage share." Conclusions of Law, at 53.

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 s 1 necessarily precludes holding it liable under s 2.

The District Court appears to have based its holding with

respect to s 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.

The basic prudential concerns relevant to ss 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 circum-

stances, may give rise to a s 2 violation even though the

contracts foreclose less than the roughly 40% or 50% share

usually required in order to establish a s 1 violation. See

generally Dennis W. Carlton, A General Analysis of Exclu-

sionary Conduct and Refusal to Deal--Why Aspen and

Kodak Are Misguided, 68 Antitrust L.J. 659 (2001) (explain-

ing various scenarios under which exclusive dealing, particu-

larly by a dominant firm, may raise legitimate concerns about

harm to competition).

In this case, plaintiffs allege that, by closing to rivals a

substantial percentage of the available opportunities for brow-

ser 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 Micro-

soft'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.

Plaintiffs having demonstrated a harm to competition, the

burden falls upon Microsoft to defend its exclusive dealing

contracts with IAPs by providing a procompetitive justifica-

tion 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 deci-

sion holding that Microsoft's exclusive contracts with IAPs

are exclusionary devices, in violation of s 2 of the Sherman

Act.

4. Dealings with Internet Content Providers, Inde-

pendent Software Vendors, and Apple Computer

The District Court held that Microsoft engages in exclu-

sionary conduct in its dealings with ICPs, which develop

websites; ISVs, which develop software; and Apple, which is

both an OEM and a software developer. See Conclusions of

Law, at 42-43 (deals with ICPs, ISVs, and Apple "supple-

mented Microsoft's efforts in the OEM and IAP channels").

The District Court condemned Microsoft's deals with ICPs

and ISVs, stating: "By granting ICPs and ISVs free licenses

to bundle [IE] with their offerings, and by exchanging other

valuable inducements for their agreement to distribute, pro-

mote[,] and rely on [IE] rather than Navigator, Microsoft

directly induced developers to focus on its own APIs rather

than ones exposed by Navigator." Id. (citing Findings of

Fact p p 334-35, 340).

With respect to the deals with ICPs, the District Court's

findings do not support liability. After reviewing the ICP

agreements, the District Court specifically stated that "there

is not sufficient evidence to support a finding that Microsoft's

promotional restrictions actually had a substantial, deleteri-

ous impact on Navigator's usage share." Findings of Fact

p 332. Because plaintiffs failed to demonstrate that Micro-

soft's deals with the ICPs have a substantial effect upon

competition, they have not proved the violation of the Sher-

man Act.

As for Microsoft's ISV agreements, however, the District

Court did not enter a similar finding of no substantial effect.

The District Court described Microsoft's deals with ISVs as

follows:

In dozens of "First Wave" agreements signed between

the fall of 1997 and the spring of 1998, Microsoft has

promised to give preferential support, in the form of

early Windows 98 and Windows NT betas, other techni-

cal information, and the right to use certain Microsoft

seals of approval, to important ISVs that agree to certain

conditions. One of these conditions is that the ISVs use

Internet Explorer as the default browsing software for

any software they develop with a hypertext-based user

interface. Another condition is that the ISVs use Micro-

soft's "HTML Help," which is accessible only with Inter-

net Explorer, to implement their applications' help sys-

tems.

Id. p 339. The District Court further found that the effect of

these deals is to "ensure [ ] that many of the most popular

Web-centric applications will rely on browsing technologies

found only in Windows," id. p 340, and that Microsoft's deals

with ISVs therefore "increase[ ] the likelihood that the mil-

lions of consumers using [applications designed by ISVs that

entered into agreements with Microsoft] will use Internet

Explorer rather than Navigator." Id. p 340.

The District Court did not specifically identify what share

of the market for browser distribution the exclusive deals

with the ISVs foreclose. Although the ISVs are a relatively

small channel for browser distribution, they take on greater

significance because, as discussed above, Microsoft had large-

ly foreclosed the two primary channels to its rivals. In that

light, one can tell from the record that by affecting the

applications used by "millions" of consumers, Microsoft's ex-

clusive deals with the ISVs had a substantial effect in further

foreclosing rival browsers from the market. (Data intro-

duced by Microsoft, see Direct Testimony of Cameron Myhr-

vold p 84, reprinted in 6 J.A. at 3922-23, and subsequently

relied upon by the District Court in its findings, see, e.g.,

Findings of Fact p 270, indicate that over the two-year period

1997-98, when Microsoft entered into the First Wave agree-

ments, there were 40 million new users of the internet.)

Because, by keeping rival browsers from gaining widespread

distribution (and potentially attracting the attention of devel-

opers away from the APIs in Windows), the deals have a

substantial effect in preserving Microsoft's monopoly, we hold

that plaintiffs have made a prima facie showing that the deals

have an anticompetitive effect.

Of course, that Microsoft's exclusive deals have the anti-

competitive effect of preserving Microsoft's monopoly does

not, in itself, make them unlawful. A monopolist, like a

competitive firm, may have a perfectly legitimate reason for

wanting an exclusive arrangement with its distributors. Ac-

cordingly, Microsoft had an opportunity to, but did not,

present the District Court with evidence demonstrating that

the exclusivity provisions have some such procompetitive

justification. See Conclusions of Law, at 43 (citing Findings

of Fact p p 339-40) ("With respect to the ISV agreements,

Microsoft has put forward no procompetitive business ends

whatsoever to justify their exclusionary terms."). On appeal

Microsoft likewise does not claim that the exclusivity required

by the deals serves any legitimate purpose; instead, it states

only that its ISV agreements reflect an attempt "to persuade

ISVs to utilize Internet-related system services in Windows

rather than Navigator." Appellant's Opening Br. at 114. As

we explained before, however, keeping developers focused

upon Windows--that is, preserving the Windows monopoly--

is a competitively neutral goal. Microsoft having offered no

procompetitive justification for its exclusive dealing arrange-

ments with the ISVs, we hold that those arrangements violate

s 2 of the Sherman Act.

Finally, the District Court held that Microsoft's dealings

with Apple violated the Sherman Act. See Conclusions of

Law, at 42-43. Apple is vertically integrated: it makes both

software (including an operating system, Mac OS), and hard-

ware (the Macintosh line of computers). Microsoft primarily

makes software, including, in addition to its operating system,

a number of popular applications. One, called "Office," is a

suite of business productivity applications that Microsoft has

ported to Mac OS. The District Court found that "ninety

percent of Mac OS users running a suite of office productivity

applications [use] Microsoft's Mac Office." Findings of Fact

p 344. Further, the District Court found that:

In 1997, Apple's business was in steep decline, and many

doubted that the company would survive much long-

er.... [M]any ISVs questioned the wisdom of continu-

ing to spend time and money developing applications for

the Mac OS. Had Microsoft announced in the midst of

this atmosphere that it was ceasing to develop new

versions of Mac Office, a great number of ISVs, custom-

ers, developers, and investors would have interpreted the

announcement as Apple's death notice.

Id. p 344. Microsoft recognized the importance to Apple of

its continued support of Mac Office. See id. p 347 (quoting

internal Microsoft e-mail) ("[We] need a way to push these

guys[, i.e., Apple] and [threatening to cancel Mac Office] is

the only one that seems to make them move."); see also id.

("[Microsoft Chairman Bill] Gates asked whether Microsoft

could conceal from Apple in the coming month the fact that

Microsoft was almost finished developing Mac Office 97.");

id. at p 354 ("I think ... Apple should be using [IE] every-

where and if they don't do it, then we can use Office as a

club.").

In June 1997 Microsoft Chairman Bill Gates determined

that the company's negotiations with Apple " 'have not been

going well at all.... Apple let us down on the browser by

making Netscape the standard install.' Gates then reported

that he had already called Apple's CEO ... to ask 'how we

should announce the cancellation of Mac Office....' " Id. at

p 349. The District Court further found that, within a month

of Gates' call, Apple and Microsoft had reached an agreement

pursuant to which

Microsoft's primary obligation is to continue releasing

up-to-date versions of Mac Office for at least five

years.... [and] Apple has agreed ... to "bundle the

most current version of [IE] ... with [Mac OS]"... [and

to] "make [IE] the default [browser]".... Navigator is

not installed on the computer hard drive during the

default installation, which is the type of installation most

users elect to employ.... [The] Agreement further

provides that ... Apple may not position icons for non-

Microsoft browsing software on the desktop of new Ma-

cintosh PC systems or Mac OS upgrades.

Id. p p 350-52. The agreement also prohibits Apple from

encouraging users to substitute another browser for IE, and

states that Apple will "encourage its employees to use [IE]."

Id. p 352.

This exclusive deal between Microsoft and Apple has a

substantial effect upon the distribution of rival browsers. If a

browser developer ports its product to a second operating

system, such as the Mac OS, it can continue to display a

common set of APIs. Thus, usage share, not the underlying

operating system, is the primary determinant of the platform

challenge a browser may pose. Pre-installation of a browser

(which can be accomplished either by including the browser

with the operating system or by the OEM installing the

browser) is one of the two most important methods of brow-

ser distribution, and Apple had a not insignificant share of

worldwide sales of operating systems. See id. p 35 (Microsoft

has 95% of the market not counting Apple and "well above"

80% with Apple included in the relevant market). Because

Microsoft's exclusive contract with Apple has a substantial

effect in restricting distribution of rival browsers, and be-

cause (as we have described several times above) reducing

usage share of rival browsers serves to protect Microsoft's

monopoly, its deal with Apple must be regarded as anticom-

petitive. See Conclusions of Law, at 42 (citing Findings of

Fact p 356) ("By extracting from Apple terms that significant-

ly diminished the usage of Navigator on the Mac OS, Micro-

soft helped to ensure that developers would not view Naviga-

tor as truly cross-platform middleware.").

Microsoft offers no procompetitive justification for the ex-

clusive dealing arrangement. It makes only the irrelevant

claim that the IE-for-Mac Office deal is part of a multifaceted

set of agreements between itself and Apple, see Appellant's

Opening Br. at 61 ("Apple's 'browsing software' obligation

was [not] the quid pro quo for Microsoft's Mac Office obli-

gation[;] ... all of the various obligations ... were part of

one 'overall agreement' between the two companies."); that

does not mean it has any procompetitive justification. Ac-

cordingly, we hold that the exclusive deal with Apple is

exclusionary, in violation of s 2 of the Sherman Act.

5. Java

Java, a set of technologies developed by Sun Microsystems,

is another type of middleware posing a potential threat to

Windows' position as the ubiquitous platform for software

development. Findings of Fact p 28. The Java technologies

include: (1) a programming language; (2) a set of programs

written in that language, called the "Java class libraries,"

which expose APIs; (3) a compiler, which translates code

written by a developer into "bytecode"; and (4) a Java Virtual

Machine ("JVM"), which translates bytecode into instructions

to the operating system. Id. p 73. Programs calling upon the

Java APIs will run on any machine with a "Java runtime

environment," that is, Java class libraries and a JVM. Id.

p p 73, 74.

In May 1995 Netscape agreed with Sun to distribute a copy

of the Java runtime environment with every copy of Naviga-

tor, and "Navigator quickly became the principal vehicle by

which Sun placed copies of its Java runtime environment on

the PC systems of Windows users." Id. p 76. Microsoft, too,

agreed to promote the Java technologies--or so it seemed.

For at the same time, Microsoft took steps "to maximize the

difficulty with which applications written in Java could be

ported from Windows to other platforms, and vice versa."

Conclusions of Law, at 43. Specifically, the District Court

found that Microsoft took four steps to exclude Java from

developing as a viable cross-platform threat: (a) designing a

JVM incompatible with the one developed by Sun; (b) enter-

ing into contracts, the so-called "First Wave Agreements,"

requiring major ISVs to promote Microsoft's JVM exclusive-

ly; (c) deceiving Java developers about the Windows-specific

nature of the tools it distributed to them; and (d) coercing

Intel to stop aiding Sun in improving the Java technologies.

a. The incompatible JVM

The District Court held that Microsoft engaged in exclu-

sionary conduct by developing and promoting its own JVM.

Conclusions of Law, at 43-44. Sun had already developed a

JVM for the Windows operating system when Microsoft

began work on its version. The JVM developed by Microsoft

allows Java applications to run faster on Windows than does

Sun's JVM, Findings of Fact p 389, but a Java application

designed to work with Microsoft's JVM does not work with

Sun's JVM and vice versa. Id. p 390. The District Court

found that Microsoft "made a large investment of engineering

resources to develop a high-performance Windows JVM," id.

p 396, and, "[b]y bundling its ... JVM with every copy of

[IE] ... Microsoft endowed its Java runtime environment

with the unique attribute of guaranteed, enduring ubiquity

across the enormous Windows installed base," id. p 397. As

explained above, however, a monopolist does not violate the

antitrust laws simply by developing a product that is incom-

patible with those of its rivals. See supra Section II.B.1. In

order to violate the antitrust laws, the incompatible product

must have an anticompetitive effect that outweighs any pro-

competitive justification for the design. Microsoft's JVM is

not only incompatible with Sun's, it allows Java applications

to run faster on Windows than does Sun's JVM. Microsoft's

faster JVM lured Java developers into using Microsoft's

developer tools, and Microsoft offered those tools deceptively,

as we discuss below. The JVM, however, does allow applica-

tions to run more swiftly and does not itself have any

anticompetitive effect. Therefore, we reverse the District

Court's imposition of liability for Microsoft's development and

promotion of its JVM.

b. The First Wave Agreements

The District Court also found that Microsoft entered into

First Wave Agreements with dozens of ISVs to use Micro-

soft's JVM. See Findings of Fact p 401 ("[I]n exchange for

costly technical support and other blandishments, Microsoft

induced dozens of important ISVs to make their Java applica-

tions reliant on Windows-specific technologies and to refrain

from distributing to Windows users JVMs that complied with

Sun's standards."). Again, we reject the District Court's

condemnation of low but non-predatory pricing by Microsoft.

To the extent Microsoft's First Wave Agreements with the

ISVs conditioned receipt of Windows technical information

upon the ISVs' agreement to promote Microsoft's JVM exclu-

sively, they raise a different competitive concern. The Dis-

trict Court found that, although not literally exclusive, the

deals were exclusive in practice because they required devel-

opers to make Microsoft's JVM the default in the software

they developed. Id. p 401.

While the District Court did not enter precise findings as to

the effect of the First Wave Agreements upon the overall

distribution of rival JVMs, the record indicates that Micro-

soft's deals with the major ISVs had a significant effect upon

JVM promotion. As discussed above, the products of First

Wave ISVs reached millions of consumers. Id. p 340. The

First Wave ISVs included such prominent developers as

Rational Software, see GX 970, reprinted in 15 J.A. at 9994-

10000, "a world leader" in software development tools, see

Direct Testimony of Michael Devlin p 2, reprinted in 5 J.A. at

3520, and Symantec, see GX 2071, reprinted in 22 J.A. at

14960-66 (sealed), which, according to Microsoft itself, is "the

leading supplier of utilities such as anti-virus software," De-

fendant's Proposed Findings of Fact p 276, reprinted in 3 J.A.

at 1689. Moreover, Microsoft's exclusive deals with the lead-

ing ISVs took place against a backdrop of foreclosure: the

District Court found that "[w]hen Netscape announced in

May 1995 [prior to Microsoft's execution of the First Wave

Agreements] that it would include with every copy of Naviga-

tor a copy of a Windows JVM that complied with Sun's

standards, it appeared that Sun's Java implementation would

achieve the necessary ubiquity on Windows." Findings of

Fact p 394. As discussed above, however, Microsoft under-

took a number of anticompetitive actions that seriously re-

duced the distribution of Navigator, and the District Court

found that those actions thereby seriously impeded distribu-

tion of Sun's JVM. Conclusions of Law, at 43-44. Because

Microsoft's agreements foreclosed a substantial portion of the

field for JVM distribution and because, in so doing, they

protected Microsoft's monopoly from a middleware threat,

they are anticompetitive.

Microsoft offered no procompetitive justification for the

default clause that made the First Wave Agreements exclu-

sive as a practical matter. See Findings of Fact p 401.

Because the cumulative effect of the deals is anticompetitive

and because Microsoft has no procompetitive justification for

them, we hold that the provisions in the First Wave Agree-

ments requiring use of Microsoft's JVM as the default are

exclusionary, in violation of the Sherman Act.

c. Deception of Java developers

Microsoft's "Java implementation" included, in addition to a

JVM, a set of software development tools it created to assist

ISVs in designing Java applications. The District Court

found that, not only were these tools incompatible with Sun's

cross-platform aspirations for Java--no violation, to be sure--

but Microsoft deceived Java developers regarding the Win-

dows-specific nature of the tools. Microsoft's tools included

"certain 'keywords' and 'compiler directives' that could only

be executed properly by Microsoft's version of the Java

runtime environment for Windows." Id. p 394; see also

Direct Testimony of James Gosling p 58, reprinted in 21 J.A.

at 13959 (Microsoft added "programming instructions ...

that alter the behavior of the code."). As a result, even Java

"developers who were opting for portability over performance

... unwittingly [wrote] Java applications that [ran] only on

Windows." Conclusions of Law, at 43. That is, developers

who relied upon Microsoft's public commitment to cooperate

with Sun and who used Microsoft's tools to develop what

Microsoft led them to believe were cross-platform applica-

tions ended up producing applications that would run only on

the Windows operating system.

When specifically accused by a PC Week reporter of frag-

menting Java standards so as to prevent cross-platform uses,

Microsoft denied the accusation and indicated it was only

"adding rich platform support" to what remained a cross-

platform implementation. An e-mail message internal to

Microsoft, written shortly after the conversation with the

reporter, shows otherwise:

[O]k, i just did a followup call.... [The reporter] liked

that i kept pointing customers to w3c standards [(com-

monly observed internet protocols)].... [but] he accused

us of being schizo with this vs. our java approach, i said

he misunderstood [--] that [with Java] we are merely

trying to add rich platform support to an interop lay-

er.... this plays well.... at this point its [sic] not good

to create MORE noise around our win32 java classes.

instead we should just quietly grow j [(Microsoft's

development tools)] share and assume that people will

take more advantage of our classes without ever realizing

they are building win32-only java apps.

GX 1332, reprinted in 22 J.A. at 14922-23.

Finally, other Microsoft documents confirm that Microsoft

intended to deceive Java developers, and predicted that the

effect of its actions would be to generate Windows-dependent

Java applications that their developers believed would be

cross-platform; these documents also indicate that Micro-

soft's ultimate objective was to thwart Java's threat to Micro-

soft's monopoly in the market for operating systems. One

Microsoft document, for example, states as a strategic goal:

"Kill cross-platform Java by grow[ing] the polluted Java

market." GX 259, reprinted in 22 J.A. at 14514; see also id.

("Cross-platform capability is by far the number one reason

for choosing/using Java.") (emphasis in original).

Microsoft's conduct related to its Java developer tools

served to protect its monopoly of the operating system in a

manner not attributable either to the superiority of the

operating system or to the acumen of its makers, and there-

fore was anticompetitive. Unsurprisingly, Microsoft offers no

procompetitive explanation for its campaign to deceive devel-

opers. Accordingly, we conclude this conduct is exclusionary,

in violation of s 2 of the Sherman Act.

d. The threat to Intel

The District Court held that Microsoft also acted unlawful-

ly with respect to Java by using its "monopoly power to

prevent firms such as Intel from aiding in the creation of

cross-platform interfaces." Conclusions of Law, at 43. In

1995 Intel was in the process of developing a high-

performance, Windows-compatible JVM. Microsoft wanted

Intel to abandon that effort because a fast, cross-platform

JVM would threaten Microsoft's monopoly in the operating

system market. At an August 1995 meeting, Microsoft's

Gates told Intel that its "cooperation with Sun and Netscape

to develop a Java runtime environment ... was one of the

issues threatening to undermine cooperation between Intel

and Microsoft." Findings of Fact p 396. Three months

later, "Microsoft's Paul Maritz told a senior Intel executive

that Intel's [adaptation of its multimedia software to comply

with] Sun's Java standards was as inimical to Microsoft as

Microsoft's support for non-Intel microprocessors would be to

Intel." Id. p 405.

Intel nonetheless continued to undertake initiatives related

to Java. By 1996 "Intel had developed a JVM designed to

run well ... while complying with Sun's cross-platform stan-

dards." Id. p 396. In April of that year, Microsoft again

urged Intel not to help Sun by distributing Intel's fast, Sun-

compliant JVM. Id. And Microsoft threatened Intel that if

it did not stop aiding Sun on the multimedia front, then

Microsoft would refuse to distribute Intel technologies bun-

dled with Windows. Id. p 404.

Intel finally capitulated in 1997, after Microsoft delivered

the coup de grace.

[O]ne of Intel's competitors, called AMD, solicited sup-

port from Microsoft for its "3DX" technology.... Mi-

crosoft's Allchin asked Gates whether Microsoft should

support 3DX, despite the fact that Intel would oppose it.

Gates responded: "If Intel has a real problem with us

supporting this then they will have to stop supporting

Java Multimedia the way they are. I would gladly give

up supporting this if they would back off from their work

on JAVA."

Id. p 406.

Microsoft's internal documents and deposition testimony

confirm both the anticompetitive effect and intent of its

actions. See, e.g., GX 235, reprinted in 22 J.A. at 14502

(Microsoft executive, Eric Engstrom, included among Micro-

soft's goals for Intel: "Intel to stop helping Sun create Java

Multimedia APIs, especially ones that run well ... on Win-

dows."); Deposition of Eric Engstrom at 179 ("We were

successful [in convincing Intel to stop aiding Sun] for some

period of time.").

Microsoft does not deny the facts found by the District

Court, nor does it offer any procompetitive justification for

pressuring Intel not to support cross-platform Java. Micro-

soft lamely characterizes its threat to Intel as "advice." The

District Court, however, found that Microsoft's "advice" to

Intel to stop aiding cross-platform Java was backed by the

threat of retaliation, and this conclusion is supported by the

evidence cited above. Therefore we affirm the conclusion

that Microsoft's threats to Intel were exclusionary, in viola-

tion of s 2 of the Sherman Act.

6. Course of Conduct

The District Court held that, apart from Microsoft's specif-

ic acts, Microsoft was liable under s 2 based upon its general

"course of conduct." In reaching this conclusion the court

relied upon Continental Ore Co. v. Union Carbide & Carbon

Corp., 370 U.S. 690, 699 (1962), where the Supreme Court

stated, "[i]n [Sherman Act cases], plaintiffs should be given

the full benefit of their proof without tightly compartmentaliz-

ing the various factual components and wiping the slate clean

after scrutiny of each."

Microsoft points out that Continental Ore and the other

cases cited by plaintiffs in support of "course of conduct"

liability all involve conspiracies among multiple firms, not the

conduct of a single firm; in that setting the "course of

conduct" is the conspiracy itself, for which all the participants

may be held liable. See Appellant's Opening Br. at 112-13.

Plaintiffs respond that, as a policy matter, a monopolist's

unilateral "campaign of [acts intended to exclude a rival] that

in the aggregate has the requisite impact" warrants liability

even if the acts viewed individually would be lawful for want

of a significant effect upon competition. Appellees' Br. at 82-

83.

We need not pass upon plaintiffs' argument, however,

because the District Court did not point to any series of acts,

each of which harms competition only slightly but the cumula-

tive effect of which is significant enough to form an indepen-

dent basis for liability. The "course of conduct" section of the

District Court's opinion contains, with one exception, only

broad, summarizing conclusions. See, e.g., Conclusions of

Law, at 44 ("Microsoft placed an oppressive thumb on the

scale of competitive fortune...."). The only specific acts to

which the court refers are Microsoft's expenditures in pro-

moting its browser, see id. ("Microsoft has expended wealth

and foresworn opportunities to realize more...."), which we

have explained are not in themselves unlawful. Because the

District Court identifies no other specific acts as a basis for

"course of conduct" liability, we reverse its conclusion that

Microsoft's course of conduct separately violates s 2 of the

Sherman Act.

C. Causation

As a final parry, Microsoft urges this court to reverse on

the monopoly maintenance claim, because plaintiffs never

established a causal link between Microsoft's anticompetitive

conduct, in particular its foreclosure of Netscape's and Java's

distribution channels, and the maintenance of Microsoft's

operating system monopoly. See Findings of Fact p 411

("There is insufficient evidence to find that, absent Micro-

soft's actions, Navigator and Java already would have ignited

genuine competition in the market for Intel-compatible PC

operating systems."). This is the flip side of Microsoft's

earlier argument that the District Court should have included

middleware in the relevant market. According to Microsoft,

the District Court cannot simultaneously find that middle-

ware is not a reasonable substitute and that Microsoft's

exclusionary conduct contributed to the maintenance of mo-

nopoly power in the operating system market. Microsoft

claims that the first finding depended on the court's view that

middleware does not pose a serious threat to Windows, see

supra Section II.A, while the second finding required the

court to find that Navigator and Java would have developed

into serious enough cross-platform threats to erode the appli-

cations barrier to entry. We disagree.

Microsoft points to no case, and we can find none, standing

for the proposition that, as to s 2 liability in an equitable

enforcement action, plaintiffs must present direct proof that a

defendant's continued monopoly power is precisely attribut-

able to its anticompetitive conduct. As its lone authority,

Microsoft cites the following passage from Professor Areeda's

antitrust treatise: "The plaintiff has the burden of pleading,

introducing evidence, and presumably proving by a prepon-

derance of the evidence that reprehensible behavior has

contributed significantly to the ... maintenance of the mo-

nopoly." 3 Phillip E. Areeda & Herbert Hovenkamp, Anti-

trust Law p 650c, at 69 (1996) (emphasis added).

But, with respect to actions seeking injunctive relief, the

authors of that treatise also recognize the need for courts to

infer "causation" from the fact that a defendant has engaged

in anticompetitive conduct that "reasonably appear[s] capable

of making a significant contribution to ... maintaining mo-

nopoly power." Id. p 651c, at 78; see also Morgan v. Ponder,

892 F.2d 1355, 1363 (8th Cir. 1989); Barry Wright, 724 F.2d

at 230. To require that s 2 liability turn on a plaintiff's

ability or inability to reconstruct the hypothetical marketplace

absent a defendant's anticompetitive conduct would only en-

courage monopolists to take more and earlier anticompetitive

action.

We may infer causation when exclusionary conduct is aimed

at producers of nascent competitive technologies as well as

when it is aimed at producers of established substitutes.

Admittedly, in the former case there is added uncertainty,

inasmuch as nascent threats are merely potential substitutes.

But the underlying proof problem is the same--neither plain-

tiffs nor the court can confidently reconstruct a product's

hypothetical technological development in a world absent the

defendant's exclusionary conduct. To some degree, "the de-

fendant is made to suffer the uncertain consequences of its

own undesirable conduct." 3 Areeda & Hovenkamp, Anti-

trust Law p 651c, at 78.

Given this rather edentulous test for causation, the ques-

tion in this case is not whether Java or Navigator would

actually have developed into viable platform substitutes, but

(1) whether as a general matter the exclusion of nascent

threats is the type of conduct that is reasonably capable of

contributing significantly to a defendant's continued monopoly

power and (2) whether Java and Navigator reasonably consti-

tuted nascent threats at the time Microsoft engaged in the

anticompetitive conduct at issue. As to the first, suffice it to

say that it would be inimical to the purpose of the Sherman

Act to allow monopolists free reign to squash nascent, albeit

unproven, competitors at will--particularly in industries

marked by rapid technological advance and frequent para-

digm shifts. Findings of Fact p p 59-60. As to the second,

the District Court made ample findings that both Navigator

and Java showed potential as middleware platform threats.

Findings of Fact p p 68-77. Counsel for Microsoft admitted

as much at oral argument. 02/26/01 Ct. Appeals Tr. at 27

("There are no constraints on output. Marginal costs are

essentially zero. And there are to some extent network

effects. So a company like Netscape founded in 1994 can be

by the middle of 1995 clearly a potentially lethal competitor to

Windows because it can supplant its position in the market

because of the characteristics of these markets.").

Microsoft's concerns over causation have more purchase in

connection with the appropriate remedy issue, i.e., whether

the court should impose a structural remedy or merely enjoin

the offensive conduct at issue. As we point out later in this

opinion, divestiture is a remedy that is imposed only with

great caution, in part because its long-term efficacy is rarely

certain. See infra Section V.E. Absent some measure of

confidence that there has been an actual loss to competition

that needs to be restored, wisdom counsels against adopting

radical structural relief. See 3 Areeda & Hovenkamp, Anti-

trust Law p 653b, at 91-92 ("[M]ore extensive equitable relief,

particularly remedies such as divestiture designed to elimi-

nate the monopoly altogether, raise more serious questions

and require a clearer indication of a significant causal connec-

tion between the conduct and creation or maintenance of the

market power."). But these queries go to questions of reme-

dy, not liability. In short, causation affords Microsoft no

defense to liability for its unlawful actions undertaken to

maintain its monopoly in the operating system market.

III. Attempted Monopolization

Microsoft further challenges the District Court's determi-

nation of liability for "attempt[ing] to monopolize ... any part

of the trade or commerce among the several States." 15

U.S.C. s 2 (1997). To establish a s 2 violation for attempted

monopolization, "a plaintiff must prove (1) that the defendant

has engaged in predatory or anticompetitive conduct with (2)

a specific intent to monopolize and (3) a dangerous probability

of achieving monopoly power." Spectrum Sports, Inc. v.

McQuillan, 506 U.S. 447, 456 (1993); see also Times-

Picayune Pub. Co. v. United States, 345 U.S. 594, 626 (1953);

Lorain Journal Co. v. United States, 342 U.S. 143, 153-55

(1951). Because a deficiency on any one of the three will

defeat plaintiffs' claim, we look no further than plaintiffs'

failure to prove a dangerous probability of achieving monopo-

ly power in the putative browser market.

The determination whether a dangerous probability of suc-

cess exists is a particularly fact-intensive inquiry. Because

the Sherman Act does not identify the activities that consti-

tute the offense of attempted monopolization, the court "must

examine the facts of each case, mindful that the determination

of what constitutes an attempt, as Justice Holmes explained,

'is a question of proximity and degree.' " United States v.

Am. Airlines, Inc., 743 F.2d 1114, 1118 (5th Cir. 1984)

(quoting Swift & Co. v. United States, 196 U.S. 375, 402

(1904)). The District Court determined that "[t]he evidence

supports the conclusion that Microsoft's actions did pose such

a danger." Conclusions of Law, at 45. Specifically, the

District Court concluded that "Netscape's assent to Micro-

soft's market division proposal would have, instanter, resulted

in Microsoft's attainment of monopoly power in a second

market," and that "the proposal itself created a dangerous

probability of that result." Conclusions of Law, at 46 (cita-

tion omitted). The District Court further concluded that "the

predatory course of conduct Microsoft has pursued since June

of 1995 has revived the dangerous probability that Microsoft

will attain monopoly power in a second market." Id.

At the outset we note a pervasive flaw in the District

Court's and plaintiffs' discussion of attempted monopolization.

Simply put, plaintiffs have made the same argument under

two different headings--monopoly maintenance and attempt-

ed monopolization. They have relied upon Microsoft's s 2

liability for monopolization of the operating system market as

a presumptive indicator of attempted monopolization of an

entirely different market. The District Court implicitly ac-

cepted this approach: It agreed with plaintiffs that the events

that formed the basis for the s 2 monopolization claim "war-

rant[ed] additional liability as an illegal attempt to amass

monopoly power in 'the browser market.' " Id. at 45 (empha-

sis added). Thus, plaintiffs and the District Court failed to

recognize the need for an analysis wholly independent of the

conclusions and findings on monopoly maintenance.

To establish a dangerous probability of success, plaintiffs

must as a threshold matter show that the browser market can

be monopolized, i.e., that a hypothetical monopolist in that

market could enjoy market power. This, in turn, requires

plaintiffs (1) to define the relevant market and (2) to demon-

strate that substantial barriers to entry protect that market.

Because plaintiffs have not carried their burden on either

prong, we reverse without remand.

A. Relevant Market

A court's evaluation of an attempted monopolization claim

must include a definition of the relevant market. See Spec-

trum Sports, 506 U.S. at 455-56. Such a definition estab-

lishes a context for evaluating the defendant's actions as well

as for measuring whether the challenged conduct presented a

dangerous probability of monopolization. See id. The Dis-

trict Court omitted this element of the Spectrum Sports

inquiry.

Defining a market for an attempted monopolization claim

involves the same steps as defining a market for a monopoly

maintenance claim, namely a detailed description of the pur-

pose of a browser--what functions may be included and what

are not--and an examination of the substitutes that are part

of the market and those that are not. See also supra Section

II.A. The District Court never engaged in such an analysis

nor entered detailed findings defining what a browser is or

what products might constitute substitutes. In the Findings

of Fact, the District Court (in a section on whether IE and

Windows are separate products) stated only that "a Web

browser provides the ability for the end user to select,

retrieve, and perceive resources on the Web." Findings of

Fact p 150. Furthermore, in discussing attempted monopoli-

zation in its Conclusions of Law, the District Court failed to

demonstrate analytical rigor when it employed varying and

imprecise references to the "market for browsing technology

for Windows," "the browser market," and "platform-level

browsing software." Conclusions of Law, at 45.

Because the determination of a relevant market is a factual

question to be resolved by the District Court, see, e.g., All

Care Nursing Serv., Inc. v. High Tech Staffing Servs., Inc.,

135 F.3d 740, 749 (11th Cir. 1998); Tunis Bros. Co., Inc. v.

Ford Motor Co., 952 F.2d 715, 722-23 (3d Cir. 1991); West-

man Comm'n Co. v. Hobart Int'l, Inc., 796 F.2d 1216, 1220

(10th Cir. 1986), we would normally remand the case so that

the District Court could formulate an appropriate definition.

See Pullman-Standard v. Swint, 456 U.S. 273, 291-92 & n.22

(1982); Janini v. Kuwait Univ., 43 F.3d 1534, 1537 (D.C. Cir.

1995); Palmer v. Shultz, 815 F.2d 84, 103 (D.C. Cir. 1987). A

remand on market definition is unnecessary, however, be-

cause the District Court's imprecision is directly traceable to

plaintiffs' failure to articulate and identify evidence before the

District Court as to (1) what constitutes a browser (i.e., what

are the technological components of or functionalities provid-

ed by a browser) and (2) why certain other products are not

reasonable substitutes (e.g., browser shells or viewers for

individual internet extensions, such as Real Audio Player or

Adobe Acrobat Reader). See Plaintiffs' Joint Proposed Find-

ings of Fact, at 817-19, reprinted in 2 J.A. at 1480-82;

Plaintiffs' Joint Proposed Conclusions of Law s IV (No. 98-

1232); see also Lee v. Interstate Fire & Cas. Co., 86 F.3d 101,

105 (7th Cir. 1996) (stating that remand for development of a

factual record is inappropriate where plaintiff failed to meet

burden of persuasion and never suggested that additional

evidence was necessary). Indeed, when plaintiffs in their

Proposed Findings of Fact attempted to define a relevant

market for the attempt claim, they pointed only to their

separate products analysis for the tying claim. See, e.g.,

Plaintiffs' Joint Proposed Findings of Fact, at 818, reprinted

in 2 J.A. at 1481. However, the separate products analysis

for tying purposes is not a substitute for the type of market

definition that Spectrum Sports requires. See infra Section

IV.A.

Plaintiffs' proposed findings and the District Court's actual

findings on attempted monopolization pale in comparison to

their counterparts on the monopoly maintenance claim.

Compare Findings of Fact p 150, and Plaintiffs' Joint Pro-

posed Findings of Fact, at 817-819, reprinted in 2 J.A. at

1480-82, with Findings of Fact p p 18-66, and Plaintiffs' Joint

Proposed Findings of Fact, at 20-31, reprinted in 1 J.A. at

658-69. Furthermore, in their brief and at oral argument

before this court, plaintiffs did nothing to clarify or amelio-

rate this deficiency. See, e.g., Appellees' Br. at 93-94.`

B. Barriers to Entry

Because a firm cannot possess monopoly power in a market

unless that market is also protected by significant barriers to

entry, see supra Section II.A, it follows that a firm cannot

threaten to achieve monopoly power in a market unless that

market is, or will be, similarly protected. See Spectrum

Sports, 506 U.S. at 456 ("In order to determine whether there

is a dangerous probability of monopolization, courts have

found it necessary to consider ... the defendant's ability to

lessen or destroy competition in that market.") (citing cases).

Plaintiffs have the burden of establishing barriers to entry

into a properly defined relevant market. See 2A Phillip E.

Areeda et al., Antitrust Law p 420b, at 57-59 (1995); 3A

Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law

p 807g, at 361-62 (1996); see also Neumann v. Reinforced

Earth Co., 786 F.2d 424, 429 (D.C. Cir. 1986). Plaintiffs must

not only show that barriers to entry protect the properly

defined browser market, but that those barriers are "signifi-

cant." See United States v. Baker Hughes Inc., 908 F.2d 981,

987 (D.C. Cir. 1990). Whether there are significant barriers

to entry cannot, of course, be answered absent an appropriate

market definition; thus, plaintiffs' failure on that score alone

is dispositive. But even were we to assume a properly

defined market, for example browsers consisting of a graphi-

cal interface plus internet protocols, plaintiffs nonetheless

failed to carry their burden on barriers to entry.

Contrary to plaintiffs' contention on appeal, see Appellees'

Br. at 91-93, none of the District Court's statements consti-

tutes a finding of barriers to entry into the web browser

market. Finding of Fact 89 states:

At the time Microsoft presented its proposal, Navigator

was the only browser product with a significant share of

the market and thus the only one with the potential to

weaken the applications barrier to entry. Thus, had it

convinced Netscape to accept its offer of a "special

relationship," Microsoft quickly would have gained such

control over the extensions and standards that network-

centric applications (including Web sites) employ as to

make it all but impossible for any future browser rival to

lure appreciable developer interest away from Micro-

soft's platform.

This finding is far too speculative to establish that compet-

ing browsers would be unable to enter the market, or that

Microsoft would have the power to raise the price of its

browser above, or reduce the quality of its browser below, the

competitive level. Moreover, it is ambiguous insofar as it

appears to focus on Microsoft's response to the perceived

platform threat rather than the browser market. Finding of

Fact 144, on which plaintiffs also rely, is part of the District

Court's discussion of Microsoft's alleged anticompetitive ac-

tions to eliminate the platform threat posed by Netscape

Navigator. This finding simply describes Microsoft's reliance

on studies indicating consumers' reluctance to switch brow-

sers, a reluctance not shown to be any more than that which

stops consumers from switching brands of cereal. Absent

more extensive and definitive factual findings, the District

Court's legal conclusions about entry barriers amount to

nothing more than speculation.

In contrast to their minimal effort on market definition,

plaintiffs did at least offer proposed findings of fact suggest-

ing that the possibility of network effects could potentially

create barriers to entry into the browser market. See Plain-

tiffs' Joint Proposed Findings of Fact, at 822-23, 825-27,

reprinted in 2 J.A. at 1485-86, 1488-90. The District Court

did not adopt those proposed findings. See Findings of Fact

p 89. However, the District Court did acknowledge the possi-

bility of a different kind of entry barrier in its Conclusions of

Law:

In the time it would have taken an aspiring entrant to

launch a serious effort to compete against Internet Ex-

plorer, Microsoft could have erected the same type of

barrier that protects its existing monopoly power by

adding proprietary extensions to the browsing software

under its control and by extracting commitments from

OEMs, IAPs and others similar to the ones discussed in

[the monopoly maintenance section].

Conclusions of Law, at 46 (emphasis added).

Giving plaintiffs and the District Court the benefit of the

doubt, we might remand if the possible existence of entry

barriers resulting from the possible creation and exploitation

of network effects in the browser market were the only

concern. That is not enough to carry the day, however,

because the District Court did not make two key findings: (1)

that network effects were a necessary or even probable,

rather than merely possible, consequence of high market

share in the browser market and (2) that a barrier to entry

resulting from network effects would be "significant" enough

to confer monopoly power. Again, these deficiencies are in

large part traceable to plaintiffs' own failings. As to the first

point, the District Court's use of the phrase "could have"

reflects the same uncertainty articulated in testimony cited in

plaintiffs' proposed findings. See Plaintiffs' Joint Proposed

Findings of Fact, at 822 (citing testimony of Frederick War-

ren-Boulton), at 826 (citing testimony of Franklin Fisher),

reprinted in 2 J.A. at 1485, 1489. As to the second point, the

cited testimony in plaintiffs' proposed findings offers little

more than conclusory statements. See id. at 822-27, reprint-

ed in 2 J.A. at 1485-90. The proffered testimony contains no

evidence regarding the cost of "porting" websites to different

browsers or the potentially different economic incentives fac-

ing ICPs, as opposed to ISVs, in their decision to incur costs

to do so. Simply invoking the phrase "network effects"

without pointing to more evidence does not suffice to carry

plaintiffs' burden in this respect.

Any doubt that we may have had regarding remand instead

of outright reversal on the barriers to entry question was

dispelled by plaintiffs' arguments on attempted monopoliza-

tion before this court. Not only did plaintiffs fail to articulate

a website barrier to entry theory in either their brief or at

oral argument, they failed to point the court to evidence in

the record that would support a finding that Microsoft would

likely erect significant barriers to entry upon acquisition of a

dominant market share.

Plaintiffs did not devote the same resources to the attempt-

ed monopolization claim as they did to the monopoly mainte-

nance claim. But both claims require evidentiary and theo-

retical rigor. Because plaintiffs failed to make their case on

attempted monopolization both in the District Court and

before this court, there is no reason to give them a second

chance to flesh out a claim that should have been fleshed out

the first time around. Accordingly, we reverse the District

Court's determination of s 2 liability for attempted monopoli-

zation.

IV. Tying

Microsoft also contests the District Court's determination

of liability under s 1 of the Sherman Act. The District Court

concluded that Microsoft's contractual and technological bun-

dling of the IE web browser (the "tied" product) with its

Windows operating system ("OS") (the "tying" product) re-

sulted in a tying arrangement that was per se unlawful.

Conclusions of Law, at 47-51. We hold that the rule of

reason, rather than per se analysis, should govern the legality

of tying arrangements involving platform software products.

The Supreme Court has warned that " '[i]t is only after

considerable experience with certain business relationships

that courts classify them as per se violations....' " Broad.

Music, Inc. v. CBS, 441 U.S. 1, 9 (1979) (quoting United

States v. Topco Assocs., 405 U.S. 596, 607-08 (1972)). While

every "business relationship" will in some sense have unique

features, some represent entire, novel categories of dealings.

As we shall explain, the arrangement before us is an example

of the latter, offering the first up-close look at the technologi-

cal integration of added functionality into software that serves

as a platform for third-party applications. There being no

close parallel in prior antitrust cases, simplistic application of

per se tying rules carries a serious risk of harm. According-

ly, we vacate the District Court's finding of a per se tying

violation and remand the case. Plaintiffs may on remand

pursue their tying claim under the rule of reason.

The facts underlying the tying allegation substantially over-

lap with those set forth in Section II.B in connection with the

s 2 monopoly maintenance claim. The key District Court

findings are that (1) Microsoft required licensees of Windows

95 and 98 also to license IE as a bundle at a single price,

Findings of Fact p p 137, 155, 158; (2) Microsoft refused to

allow OEMs to uninstall or remove IE from the Windows

desktop, id. p p 158, 203, 213; (3) Microsoft designed Win-

dows 98 in a way that withheld from consumers the ability to

remove IE by use of the Add/Remove Programs utility, id.

p 170; cf. id. p 165 (stating that IE was subject to Add/Re-

move Programs utility in Windows 95); and (4) Microsoft

designed Windows 98 to override the user's choice of default

web browser in certain circumstances, id. p p 171, 172. The

court found that these acts constituted a per se tying viola-

tion. Conclusions of Law, at 47-51. Although the District

Court also found that Microsoft commingled operating sys-

tem-only and browser-only routines in the same library files,

Findings of Fact p p 161, 164, it did not include this as a basis

for tying liability despite plaintiffs' request that it do so,

Plaintiffs' Proposed Findings of Fact, p p 131-32, reprinted in

2 J.A. at 941-47.

There are four elements to a per se tying violation: (1) the

tying and tied goods are two separate products; (2) the

defendant has market power in the tying product market; (3)

the defendant affords consumers no choice but to purchase

the tied product from it; and (4) the tying arrangement

forecloses a substantial volume of commerce. See Eastman

Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 461-62

(1992); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S.

2, 12-18 (1984).

Microsoft does not dispute that it bound Windows and IE

in the four ways the District Court cited. Instead it argues

that Windows (the tying good) and IE browsers (the tied

good) are not "separate products," Appellant's Opening Br. at

69-79, and that it did not substantially foreclose competing

browsers from the tied product market, id. at 79-83. (Micro-

soft also contends that it does not have monopoly power in

the tying product market, id. at 84-96, but, for reasons given

in Section II.A, we uphold the District Court's finding to the

contrary.)

We first address the separate-products inquiry, a source of

much argument between the parties and of confusion in the

cases. Our purpose is to highlight the poor fit between the

separate-products test and the facts of this case. We then

offer further reasons for carving an exception to the per se

rule when the tying product is platform software. In the

final section we discuss the District Court's inquiry if plain-

tiffs pursue a rule of reason claim on remand.

A. Separate-Products Inquiry Under the Per Se Test

The requirement that a practice involve two separate prod-

ucts before being condemned as an illegal tie started as a

purely linguistic requirement: unless products are separate,

one cannot be "tied" to the other. Indeed, the nature of the

products involved in early tying cases--intuitively distinct

items such as a movie projector and a film, Motion Picture

Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917)--

led courts either to disregard the separate-products question,

see, e.g., United Shoe Mach. Corp. v. United States, 258 U.S.

451 (1922), or to discuss it only in passing, see, e.g., Motion

Picture Patents, 243 U.S. at 508, 512, 518. It was not until

Times-Picayune Publishing Co. v. United States, 345 U.S.

594 (1953), that the separate-products issue became a distinct

element of the test for an illegal tie. Id. at 614. Even that

case engaged in a rather cursory inquiry into whether ads

sold in the morning edition of a paper were a separate

product from ads sold in the evening edition.

The first case to give content to the separate-products test

was Jefferson Parish, 466 U.S. 2. That case addressed a

tying arrangement in which a hospital conditioned surgical

care at its facility on the purchase of anesthesiological ser-

vices from an affiliated medical group. The facts were a

challenge for casual separate-products analysis because the

tied service--anesthesia--was neither intuitively distinct from

nor intuitively contained within the tying service--surgical

care. A further complication was that, soon after the Court

enunciated the per se rule for tying liability in International

Salt Co. v. United States, 332 U.S. 392, 396 (1947), and

Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5-

7 (1958), new economic research began to cast doubt on the

assumption, voiced by the Court when it established the rule,

that " 'tying agreements serve hardly any purpose beyond the

suppression of competition,' " id. at 6 (quoting Standard Oil

of Cal. v. United States, 337 U.S. 293, 305-06 (1949)); see also

Jefferson Parish, 466 U.S. at 15 n.23 (citing materials); Fort-

ner Enters. v. U.S. Steel Corp., 394 U.S. 495, 524-25 (1969)

(Fortas, J., dissenting) ("Fortner I").

The Jefferson Parish Court resolved the matter in two

steps. First, it clarified that "the answer to the question

whether one or two products are involved" does not turn "on

the functional relation between them...." Jefferson Parish,

466 U.S. at 19; see also id. at 19 n.30. In other words, the

mere fact that two items are complements, that "one ... is

useless without the other," id., does not make them a single

"product" for purposes of tying law. Accord Eastman Ko-

dak, 504 U.S. at 463. Second, reasoning that the "definitional

question [whether two distinguishable products are involved]

depends on whether the arrangement may have the type of

competitive consequences addressed by the rule [against ty-

ing]," Jefferson Parish, 466 U.S. at 21, the Court decreed that

"no tying arrangement can exist unless there is a sufficient

demand for the purchase of anesthesiological services sepa-

rate from hospital services to identify a distinct product

market in which it is efficient to offer anesthesiological ser-

vices separately from hospital service," id. at 21-22 (emphasis

added); accord Eastman Kodak, 504 U.S. at 462.

The Court proceeded to examine direct and indirect evi-

dence of consumer demand for the tied product separate from

the tying product. Direct evidence addresses the question

whether, when given a choice, consumers purchase the tied

good from the tying good maker, or from other firms. The

Court took note, for example, of testimony that patients and

surgeons often requested specific anesthesiologists not associ-

ated with a hospital. Jefferson Parish, 466 U.S. at 22.

Indirect evidence includes the behavior of firms without

market power in the tying good market, presumably on the

notion that (competitive) supply follows demand. If competi-

tive firms always bundle the tying and tied goods, then they

are a single product. See id. at 22 n.36; see also Eastman

Kodak, 504 U.S. at 462; Fortner I, 394 U.S. at 525 (Fortas,

J., dissenting), cited in Jefferson Parish, 466 U.S. at 12, 22

n.35; United States v. Jerrold Elecs. Corp., 187 F. Supp. 545,

559 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961); 10

Phillip E. Areeda et al., Antitrust Law p 1744, at 197-201

(1996). Here the Court noted that only 27% of anesthesiolo-

gists in markets other than the defendant's had financial

relationships with hospitals, and that, unlike radiologists and

pathologists, anesthesiologists were not usually employed by

hospitals, i.e., bundled with hospital servi

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