Proposed Final Judgment and Competitive Impact Statement; United States of America vs. Microsoft Corporation

DEPARTMENT OF JUSTICE

Proposed Final Judgment and Competitive Impact Statement; United

States of America vs. Microsoft Corporation

Notice is hereby given pursuant to the Antitrust Procedures and

Penalties Act, 15 U.S.C. Sec. 16(b)-(h), that a proposed Final

Judgment, Stipulation, and Competitive Impact Statement have been filed

with the United States District Court for the District of Columbia in

United States vs. Microsoft Corporation, Civ. No. 94-1564 (SS). The

proposed Final Judgment is subject to approval by the Court after the

expiration of the statutory 60-day public comment period and compliance

with the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b)-

(h).

The Complaint alleges that Microsoft uses exclusionary and

anticompetitive contracts to market certain of its personal computer

operating system software products. By these contracts Microsoft has

unlawfully maintained its monopoly of personal computer operating

systems and has unreasonably restrained trade thereby violating

Sections 1 and 2 of the Sherman Act, as amended, 15 U.S.C. Secs. 1, 2.

The proposed Final Judgment not only bans Microsoft's unlawful

practices, but also contains additional provisions which are

prophylactic in nature, and are intended to ensure that the

anticompetitive effects of those practices are not replicated through

use by Microsoft of other exclusionary practices.

The proposed Final Judgment includes four categories of limitations

on Microsoft's contracting practices. First, it limits the duration of

license agreements for operating system software between Microsoft and

personal computer manufacturers. Microsoft is prohibited from entering

into any such license with a term exceeding one year, except that a

license may include a term permitting the computer manufacturer to

renew the agreement for up to one additional year on the same terms and

conditions as those applicable in the original license period.

Second, the proposed Final Judgment restricts the manner in which

Microsoft may charge royalties for the distribution of its operating

system software with personal computers. Microsoft may not enter into

any ``per processor'' license (i.e., license requiring the computer

manufacturer to pay a royalty for each computer shipped with a

specified microprocessor). Microsoft's revenue from a license may not

be calculated on anything other than a per copy basis (i.e., royalty

for each unit of Microsoft operating system software licensed, sold or

distributed) or a per system basis (i.e., a royalty for each computer

system bearing a particular model name or number). Should Microsoft

enter into a per system agreement with a licensee it must provide a

statement, the text of which is set forth in the Final Judgment,

advising the licensee of its rights under the license.

Third, the proposed Final Judgment bans Microsoft from entering

into license agreements that prohibit or restrict a personal computer

manufacturer from licensing, selling, or distributing competing

operating system products. Microsoft may neither condition the

licensing of its operating systems on the licensing or use of other

products, nor may it enter into any license containing a minimum

commitment, nor may it use lump sum pricing.

Fourth, the proposed Final Judgment places limits on Microsoft's

use of non-disclosure agreements for its operating system products.

Microsoft is prohibited from entering into any non-disclosure agreement

whose duration extends beyond (a) the commercial release of the covered

product, (b) any prior public disclosure of information covered by the

agreement authorized by Microsoft, or (c) one year from the date of

disclosure of information covered by the agreement to a person subject

to the non-disclosure agreement, whichever comes first. Also, non-

disclosure agreements may not restrict persons subject to the agreement

from developing software products that will run on competing operating

systems, provided that such development does not entail the disclosure

or use of Microsoft proprietary information during the term of the

agreement. Nor may any non-disclosure agreement restrict the activities

of persons subject to the agreement to whom no information covered by

the agreement has been disclosed.

Computer manufacturers that currently have licenses that are

inconsistent with any provision of the Final Judgment may, without

penalty, terminate the license or negotiate with Microsoft to amend the

inconsistent provisions. Otherwise, Microsoft may enforce the license,

subject to the following restrictions: (a) if the license is a per

processor license, it must be treated as a per system license; and (b)

Microsoft may not enforce prospectively any minimum commitment.

Public comment is invited within the statutory 60-day comment

period. Such comments, and the responses thereto, will be published in

the Federal Register and filed with the Court. Written comments should

be directed to Richard L. Rosen, Chief, Communications & Finance

Section, Antitrust Division, Room 8104, 555 Forth Street NW.,

Washington, D.C. 20001 (202-514-5621). Copies of the Complaint,

proposed Final Judgment and Competitive Impact Statement are available

for inspection in Room 3233 of the Antitrust Division, Department of

Justice, Tenth Street and Pennsylvania Avenue NW., Washington. D.C.

20530 (202-633-2481) and at the office of the Clerk of the United

States District Court for the District of Columbia, Third Street and

Constitution Avenue NW., Washington, D.C. 20001.

Copies of any of these materials may be obtained upon request and

payment of a copying fee.

Mark C. Schechter,

Deputy Director of Operations, Antitrust Division.

In The United States District Court For The District of

Columbia, United States of America, Plaintiff, v. Microsoft

Corporation, Defendant. Civil Action No. 94-1564, Judge Charles R.

Richey

July 15, 1994.

Complaint

(For Violations of Sections 1 & 2 of the Sherman Act)

The United States of America, acting under the direction of the

Attorney General of the United States, brings this civil action to

prevent and restrain the defendant Microsoft Corporation

(``Microsoft'') from using exclusionary and anticompetitive contracts

to market its personal computer operating system software. By these

contracts, Microsoft has unlawfully maintained its monopoly of personal

computer (``PC'') operating systems and has unreasonably restrained

trade.

Virtually all major PC manufacturers find it necessary to offer

Microsoft operating systems on most of their PCs. Microsoft's monopoly

power allows it to induce these manufacturers to enter into

anticompetitive, long-term licenses under which they must pay royalties

to Microsoft not only when they sell PCs containing Microsoft's

operating systems, but also when they sell PCs containing non-Microsoft

operating systems.

These anticompetitive contracts help Microsoft maintain its

dominance in the PC operating system market. By inhibiting competing

operating systems' access to PC manufacturers, Microsoft's exclusionary

contracts slow innovation and deprive consumers of an effective choice

among competing PC operating systems.

These contracts outlined below constitute illegal monopolization

and unlawful restraints of trade, and the United States seeks this

Court's order declaring Microsoft's anticompetitive contracts illegal

and otherwise remedying the unlawful effects of Microsoft's

anticompetitive conduct.

Jurisdiction, Venue and Commerce

1. This Court has jurisdiction over this matter pursuant to Section

4 of the Sherman Act, 15 U.S.C. Sec. 4, and 28 U.S.C. Secs. 1331, 1337.

2. Venue is proper in this district under Section 12 of the Clayton

Act, 15 U.S.C. Sec. 22, and under 28 U.S.C. Sec. 1391 because defendant

Microsoft transacts business and is found within this district.

3. Microsoft sells and licenses operating systems for PCs

throughout the United States and the world. Microsoft delivers copies

of its operating systems to PC manufacturers and retail customers

across state lines and international borders. Thus, Microsoft is

engaged in, and its activities substantially affect, interstate and

foreign commerce. The major developers of other PC operating systems

are exclusively U.S. companies.

The Defendant Microsoft and Its Products

4. Microsoft is a corporation organized and existing under the laws

of the State of Washington, with its principal place of business

located at One Microsoft Way, Redmond, Washington.

5. Microsoft develops, licenses, sells and supports several types

of software products for PCs, including ``operating systems'' and

``applications.''

6. PC operating systems control the operation of a computer by

managing the interaction between the computer's microprocessor, memory

and attached devices such as keyboards, display screens, disk drives,

and printers. A PC operating system functions as the ``central nervous

system'' of the PC. PC operating system software is designed to work

with specific microprocessors, the integrated circuits that function as

the ``brain'' of the computer.

7. Most of the personal computers in the world today use the x86

class of microprocessors, originally designed by Intel Corporation. The

x86 class includes Intel 286, 386, 486, and Pentium microprocessors, as

well as microprocessors manufactured by other companies that use a

substantially similar architecture and instruction set. Unless

otherwise specified, the term ``PC'' refers to personal computers that

use the x86 class of microprocessors.

8. In 1980, Microsoft licensed from another company a PC operating

system which it modified and introduced in 1981 as the Microsoft Disk

Operating System (``MS-DOS''). According to Microsoft's 1993 Annual

Report, as of June 30, 1993, approximately 120 million PCs in the world

utilized MS-DOS.

9. In 1985, Microsoft introduced a more sophisticated PC operating

system product it calls ``Windows.'' Windows has a ``graphical user

interface'' which allows users to give instructions by pointing and

clicking on their computer screen with a ``mouse'' or other similar

device. Windows also allows users to run more than one application at a

time. All versions of Windows released to date require the presence of

an underlying operating system, either MS-DOS or a close substitute.

Microsoft estimates that over 50 million PCs now use Windows.

10. Applications are software programs that work ``on top of'' PC

operating systems to enable users to perform a broad range of

functions. Applications communicate through the PC operating system

with the computer's hardware. Commonly used applications include word

processors and spreadsheets, such as WordPerfect, Lotus 1-2-3, and

Quattro Pro among others. At least 50,000 applications now run on MS-

DOS and over 5,000 have been written to run on Windows. Microsoft sells

a variety of its own very successful and profitable applications.

11. Microsoft markets its PC operating system primarily through

original equipment manufacturers (``OEMs''), which manufacture PCs. It

also markets through independent, non-exclusive distributors. Microsoft

has agreements with virtually all of the major microcomputer OEMs.

12. Microsoft generally distributes MS-DOS only to OEMs. To retail

customers, Microsoft generally offers only upgrades for MS-DOS. In the

first half of 1994, the share of Windows units sold by Microsoft

through the OEM channel was approximately 80%.

The Relevant Market and Microsoft's Monopoly Power

13. The relevant product market is personal computer operating

systems for the x86 class of microprocessors (hereinafter the ``PC

operating system market''). Because operating systems written for other

microprocessors will not work on machines with an x86 class

microprocessor, OEMs who sell x86 machines and customers who buy such

machines cannot use other operating systems.

14. The relevant geographic market is the world.

15. Microsoft has monopoly power in the relevant market and has had

monopoly power since at least the mid-1980s. For almost a decade

Microsoft has retained an extremely high market share--consistently in

excess of 70%.

16. Substantial barriers to entry and expansion exist in the

relevant market. One barrier to entry and expansion is the considerable

time and expense required to develop, test, and market a new PC

operating system. Other interrelated barriers to entry and expansion

include:

a. the absence of a variety of high quality applications that run

on a new operating system, and the difficulty of convincing independent

software vendors (``ISVs'') to develop such applications;

b. the lack of a sizable installed base of users; and

c. the difficulty in convincing OEMs to offer and promote a non-

Microsoft PC operating system, particularly one with a small installed

base and relatively few applications designed to run on it.

17. These barriers magnify and reinforce each other because the

value of an operating system to a consumer is directly related to two

factors: the availability of a variety of high quality applications

that run on that system, and the number of users who use that operating

system and thus are able to share information and work with the system

without additional training. ISVs, in turn, tend to develop

applications for operating systems with a large installed base of

users, and consumers gravitate towards operating systems with a large

base of applications.

18. Microsoft's anticompetitive contracting practices described

below significantly increase the already high barriers to entry and

expansion facing competitors in the PC operating system market. These

practices reduce the likelihood that OEMs will license and promote non-

Microsoft PC operating systems, make it more difficult for Microsoft's

competitors to persuade ISVs to develop applications for their

operating systems, and impede the ability of a non-Microsoft PC

operating system to expand its installed base of users.

Microsoft's Exclusionary and Anticompetitive OEM Licenses Foreclose

Access to the OEM Channel by Microsoft's PC Operating System

Competitors

19. In 1980, IBM agreed to license the original version of MS-DOS

from Microsoft for IBM's PC, which experienced considerable success.

Other OEMs also used MS-DOS in order better to emulate the IBM PC.

Microsoft quickly dominated and gained a monopoly in the market for PC

operating systems. It then entered into a series of exclusionary and

anticompetitive contract terms to maintain its monopoly.

20. Because of Microsoft's monopoly position in the marketplace,

OEMs believe that they must offer MS-DOS and Windows to their

customers. Profit margins in the computer hardware industry are very

thin and OEMs want to obtain MS-DOS and Windows at the lowest possible

cost. Microsoft has induced many OEMs to execute anticompetitive ``per

processor'' contracts for MS-DOS and Windows, even though many would

prefer to preserve their freedom to offer PCs with non-Microsoft

operating systems.

Microsoft's Licenses Impose a Penalty or Tax Paid to Microsoft on OEMs'

Use of Non-Microsoft PC Operating Systems

21. Microsoft's licenses impose a penalty or ``tax'' paid to

Microsoft upon OEMs' use of competing PC operating systems. ``Per

processor'' licenses require OEMs to pay a royalty for each computer

the OEM sells containing a particular processor (e.g., an Intel 386

microprocessor) whether or not the OEM has included a Microsoft

operating system with that computer.

22. Microsoft's per processor contracts penalize OEMs, during the

life of the contract, for installing a non-Microsoft operating system.

OEMs that have signed per processor contracts with Microsoft are

deterred from using competitive alternatives to Microsoft operating

systems.

The Contract Length of Microsoft's Anticompetitive Per Processor

Contracts Magnifies Its Exclusionary Effects

23. Microsoft further impedes PC operating system competitors by

executing long-term contracts with major OEMs, and by requiring minimum

commitments and crediting unused balances to future contracts, which

effectively extends the contract term and makes it economically

unattractive for an OEM to install a non-Microsoft operating system.

24. Microsoft's exclusionary licenses are often for a duration of

three years or more--a period of time equal to, or exceeding, the

product life cycle of most PC operating system products. Microsoft

often extends the term of its OEM licenses through amendment. Thus,

Microsoft's anticompetitive per processor contracts can extend to

beyond five years.

Microsoft's Exclusionary Contracts Foreclose Other PC Operating System

Vendors From a Substantial and Critically Important Segment of the

Market

25. Access to the OEM channel is critical to the success of a

competing operating system. The overwhelming majority of PCs are sold

with a pre-installed operating system. Thus, to reach the ultimate

consumer of an operating system, it is important that competitors have

access to OEMs. Operating system vendors, as well as OEMs, confirm that

successful entry is extremely difficult in the absence of ``proper

support'' in the OEM channel in the form of public commitments to sell

a new operating system.

26. Since 1988, Microsoft has induced major OEMs to execute per

processor contracts, many of which extend for several years. These OEMs

are critical to the success of a new operating system entrant; it would

be virtually impossible for a new entrant to achieve commercial success

solely through license agreements with small OEMs that are not covered

by Microsoft's per processor agreements. According to Microsoft, in

fiscal year 1993, per processor agreements accounted for an estimated

60% of Microsoft's MS-DOS sales to OEMs and 43% of Window sales to

OEMs.

27. Competing operating system developers, finding the largest OEMs

contractually bound by Microsoft's exclusionary licenses, are

disadvantaged in their efforts to bring to the consumer less expensive

and/or better quality operating system products.

28. The effect of Microsoft's licensing practices has been to

exclude competitors by unreasonable and anticompetitive means and to

lessen competition in the relevant market. Microsoft's practices deter

OEMs from entering into licensing agreements with competing operating

system providers, discourage OEMs who agree to sell non-Microsoft

operating systems from promoting those products, and raise the price of

computers sold with competing operating systems, thereby depressing the

demand and restricting the output of these products. Microsoft's

licensing practices have effectively foreclosed a substantial share of

the relevant market; they are exclusionary, anticompetitive, and not

justified by legitimate business considerations.

Microsoft's Anticompetitive Non-Disclosure Agreements

29. ISVs develop applications, which motivate consumers to purchase

PCs. Microsoft has sought to have several commercially important ISVs

and their employees agree to non-disclosure agreements that would

restrict their ability to work with competing PC operating systems as

well as restrict their ability to develop competitive products.

30. Microsoft moved to impose these restrictions in connection with

its ``beta tests'' of its new operating system, the next version of

Windows, code-named Chicago. Microsoft anticipates commercially

releasing Chicago in late 1994 or early 1995. Beta tests of new

versions of an operating system, which are conducted prior to the

commercial release of that new version, help both Microsoft and the

ISVs.

31. For the ISVs, the beta tests provide, among other things,

critical information about the interfaces in the operating system that

connect with applications--information which the ISVs need to write

applications that run on the operating system. Early access to the beta

tests is especially valuable to the ISVs if they are to be able to

release their applications within a short time after the commercial

release of a new Microsoft operating system, such as Chicago.

32. For Microsoft, the beta tests enable ISVs, informed experts,

and selected members of the media to provide important feedback about

the advantages ad drawbacks of the operating system. In addition, the

demand for Microsoft's operating systems depends to a significant

extent on the availability of applications designed to work with it.

Accordingly, it is in Microsoft's interest to provide ISVs early access

to beta tests.

33. At the same time, because Microsoft necessarily must disclose

certain confidential information during the course of the beta tests,

it has legitimate interests in maintaining that confidentiality. In the

past, Microsoft has protected its interests through non-disclosure

agreements that prohibit those participating in the beta tests from

disclosing such confidential information.

34. In connection with its beta tests of Chicago, however,

Microsoft sought to impose on certain leading software companies far

more restrictive non-disclosure agreements than it had previously used.

The terms of these non-disclosure agreements would preclude developers

at these companies from working with operating system companies, other

competitors of Microsoft, and competing technologies for an

unreasonably long period of time.

The Anticompetitive Effects of Microsoft's Conduct

35. Microsoft's exclusionary contracting practices have had the

effect of excluding competitors on a basis other than competition on

the merits and have thereby allowed Microsoft illegally to perpetuate

its monopoly in the PC operating system market.

36. Through the unlawful acts and practices described above

Microsoft has harmed competition, consumers and innovation:

a. Microsoft has unlawfully maintained a monopoly in the PC

operating system market.

b. Microsoft's exclusionary conduct has significantly impeded the

ability of rival operating systems to compete in the PC operating

system market. Competitors find it more difficult to convince OEMs to

offer and/or promote their product and must incur greater marketing

expenses to penetrate the market. Microsoft raised hurdles to fair

competition even higher through unreasonably restrictive non-disclosure

agreements.

c. Microsoft's exclusionary licenses deprive rival PC operating

systems of a significant number of sales that they might otherwise

secure. These lost sales impede the ability of PC operating systems to

develop an installed base sufficient to convince OEMs to bundle the new

system with their hardware, to convince ISVs to write applications that

run on the new system, and to convince users that the system is, and

will remain, a viable alternative to the existing MS-DOS and Windows

standard.

d. Microsoft's conduct also substantially lengthens the period of

time required for competitors to recover their development costs and

earn a profit, and increases the risk that an entry attempt will fail.

In combination, all of these factors deter entry by competitors and

thus harm competition.

37. The harm to competition caused by Microsoft's unlawful conduct

harms consumers. OEMs that do offer customers a choice of operating

systems may charge customers a higher price for PCs with non-Microsoft

operating systems in order to be able to pay the double royalty

necessitated by the Microsoft per processor agreements. Thus, users who

do not receive a Microsoft operating system are still, indirectly,

paying Microsoft.

38. In addition, Microsoft's unlawful conduct has deterred the

development of competing operating systems, depriving consumers of a

choice of systems with possibly superior features. Similarly, the

slower growth of competing operating systems has slowed the development

and diffusion of applications designed to work on non-Microsoft

operating systems and has limited choices of consumers and users of

PCs.

39. Those injured by Microsoft's conduct will continue to suffer

such injury unless the relief prayed for herein is granted.

First Claim for Relief--Sherman Act Sec. 2

40. Plaintiff realleges and incorporates herein by reference the

allegations set forth in paragraphs 1 through 39 above.

41. By engaging in the acts and practices described above,

Microsoft has monopolized the market for PC operating systems in the

United States.

42. Such conduct constitutes monopolization in violation of Section

2 of the Sherman Act, 15 U.S.C. Sec. 2.

Second Claim for Relief--Sherman Act Sec. 1

43. Plaintiff realleges and incorporates by reference the

allegations set forth in paragraphs 1 through 39 above.

44. The licensing agreements and unnecessarily restrictive non-

disclosure agreements described above constitute contracts and

combinations which unreasonably restrain trade in the market for PC

operating systems, which affect interstate trade and commerce, in

violation of Section 1 of the Sherman Act, 15 U.S.C. Sec. 1.

Prayer for Relief

Wherefore, Plaintiff Prays For Relief As Follows:

1. That the Court adjudge and decree that Microsoft has monopolized

the interstate trade and commerce in the market for PC operating

systems in violation of Section 2 of the Sherman Act.

2. That the Court adjudge and decree that Microsoft has entered

into unlawful contracts and combinations which unreasonably restrain

the trade in interstate commerce in PC operating systems, in violation

of Section 1 of the Sherman Act.

3. That Microsoft and all persons, firms and corporations acting on

its behalf and under its direction or control be permanently enjoined

from engaging in, carrying out, renewing or attempting to engage, carry

out or renew, any contracts, agreements, practices, or understandings

in violation of the Sherman Act.

4. That plaintiff have such other relief that the Court may

consider necessary or appropriate to restore competitive conditions in

the markets affected by Microsoft's unlawful conduct.

5. That the plaintiff recover the cost of this action.

Dated: July 15, 1994.

Anne K. Bingaman,

Assistant Attorney General.

Robert E. Litan,

Mark C. Schechter,

Richard L. Rosen,

James D. Bates,

Assistant U.S. Attorney, Chief, Civil Division, District of Columbia,

Washington, DC 20001.

Samuel R. Miller,

Donald J. Russell,

Joyce Bartoo,

Robert J. Zastrow,

Richard L. Irvine,

Peter A. Gray,

Justin M. Dempsey,

Gilad Y. Ohana,

Lawrence M. Frankel,

Attorneys, Antitrust Division, U.S. Department of Justice, 555 4th

Street NW., (202) 514-2401.

United States District Court for the District of Columbia,

United States of America, Plaintiff vs. Microsoft Corporation,

Defendant. Civil Action No. 94-1564, July 15, 1994.

Stipulation

It is stipulated by and between the undersigned parties, by their

respective attorneys, that:

1. The Court has jurisdiction over the subject matter of this

action and over each of the parties hereto, and venue of this action is

proper in the District of Columbia.

2. The parties consent that a Final Judgment in the form hereto

attached may be filed and entered by the Court, upon the motion of any

party or upon the Court's own motion, at any time after compliance with

the requirements of the Antitrust Procedures and Penalties Act (15

U.S.C. 16), and without further notice to any party or other

proceedings, provided that Plaintiff has not withdrawn its consent,

which it may do at any time before the entry of the proposed Final

Judgment by serving notice thereof on the Defendant and by filing that

notice with the Court; and

3. Defendant agrees to be bound by the provisions of the proposed

Final Judgment pending its approval by the Court. If the Plaintiff

withdraws its consent or if the proposed Final Judgment is not entered

pursuant to this Stipulation, this Stipulation shall be of no effect

whatsoever, and the making of this Stipulation shall be without

prejudice to any party in this or in any other proceeding.

Dated This 15th day of July 1994.

For The Plaintiff The United States Of America.

Anne K. Bingaman,

Assistant Attorney General, Antitrust Division, U.S. Department of

Justice.

For The Defendant Microsoft Corporation.

William H. Neukom,

Senior Vice President, Law and Corporate Affairs, Microsoft

Corporation.

In the United States District Court for the District of the

District of Columbia. United States of America, Plaintiff, v.

Microsoft Corporation, Defendant. Civil Action No. 94-1564 (SS).

Competitive Impact Statement.

Received: July 27, 1994, Clerk, U.S. District Court, District of

Columbia.

Competitive Impact Statement

Pursuant to Section 2(b) of the Antitrust Procedures and Penalties

Act, 15 U.S.C. Sec. 16(b)-(h), the United States submits this

Competitive Impact Statement relating to the proposed Final Judgment

submitted for entry with the consent of defendant Microsoft Corporation

in this civil antitrust proceeding.

Nature and Purpose of the Proceeding

On July 15, 1994, the United States filed a civil antitrust

Complaint to prevent and restrain Microsoft Corporation (``Microsoft'')

from using exclusionary and anticompetitive contracts to market its

personal computer operating system software, in violation of Sections 1

and 2 of the Sherman Act, 15 U.S.C. 1, 2. As alleged in the Complaint,

Microsoft has used these contracts to restrain trade and to monopolize

the market for operating systems for personal computers using the x86

class of microprocessors, which comprise most of the world's personal

computers. As used herein, ``PC'' refers to personal computers that use

this class of microprocessor.

The Complaint alleges that Microsoft has used its monopoly power to

induce PC manufacturers to enter into anticompetitive, long-term

licenses under which they must pay Microsoft not only when they sell

PCs containing Microsoft's operating systems, but also when they sell

PCs containing non-Microsoft operating systems. These anticompetitive,

long-term licenses have helped Microsoft to maintain its monopoly. By

inhibiting competing operating systems' access to PC manufacturers,

Microsoft's exclusionary licenses slow innovation, raise prices, and

deprive consumers of an effective choice among competing PC operating

systems.

The Complaint also alleges that in connection with pre-release

testing of a new Microsoft operating system code-named ``Chicago,''

Microsoft sought to impose unreasonably restrictive and anticompetitive

non-disclosure agreements on a number of leading developers of

applications software products. These non-disclosure agreements would

have unreasonably restricted the ability of software developers to work

with competing operating systems or to develop competitive products or

technologies.

The Complaint seeks to prevent Microsoft from continuing or

renewing any of the anticompetitive practices alleged to violate the

Sherman Act, and thus to provide fair opportunities for other firms to

compete in the market for PC operating systems.

The United States and Microsoft have agreed that the proposed Final

Judgment may be entered after compliance with the Antitrust Procedures

and Penalties Act.\1\ Entry of the Final Judgment will terminate this

civil action, except that the Court will retain jurisdiction for

further proceedings that may be required to interpret, enforce, or

modify the Judgment, or to punish violations of any of its provisions.

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\1\The proposed Final Judgment that was filed with the Complaint

on July 15, 1994 contained several omissions and inconsistencies in

the numbering of paragraphs and subparagraphs. With the Defendant's

consent, a corrected version of the Final Judgment is being filed

with this Competitive Impact Statement. See Attachment. Paragraph

and sub-paragraph numbers in this Competitive Impact Statement refer

to the numbers used in the corrected version of the Final Judgment.

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Description of the Practices Involved in the Alleged Violations

If this case were to proceed to trial, the United State would prove

the following:

Microsoft develops, licenses, sells, and supports several types of

software products for personal computers, including operating systems

and applications. An operating system is software that controls the

basic operations of the personal computer. Applications software, such

as word processing programs and spread sheets, runs ``on top of'' an

operating system to enable the computer to perform a broad range of

useful functions. Operating systems are designed to work with specific

microprocessors, the integrated circuits that function as the ``brain''

of the computer. Most of the personal computers in the world today use

the x86 class of microprocessors, originally designed by Intel, and now

including microprocessors manufactured by other companies that use a

substantially similar architecture and instruction set. Original

equipment manufacturers (``OEMs'') that sell PCs and customers who buy

such machines cannot use operating systems written for other

microprocessors.

In 1981, Microsoft introduced a PC operating system called the

Microsoft Disk Operating System (``MS-DOS''), the original version of

which Microsoft licensed to IBM for use in IBM's PC. As IBM's PC

experienced considerable commercial success, other OEMs also used MS-

DOS in order better to emulate the IBM PC. In 1985, Microsoft

introduced ``Windows,'' a more sophisticated PC operating system

product designed for use in conjunction with MS-DOS. Windows allowed

users to give instructions with a ``mouse'' or similar device and also

to run more than one application at a time. Microsoft quickly gained a

monopoly in the market for PC operating systems worldwide. For almost a

decade, Microsoft's market share has consistently exceeded 70%.\2\

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\2\In 1993, Microsoft's MS-DOS operating system constituted

approximately 79% of the operating systems sold to PC manufacturers.

PC-DOS accounted for approximately 13% of such sales, OS/2

constituted approximately 4%, DR-DOS constituted approximately 3%,

and Unix operating systems constituted approximately 1%. A chart

showing these market shares is attached as Exh. 1.

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Development, testing, and marketing of a new PC operating system

involves considerable time and expense. A new operating system faces

additional barriers to entry, including the absence of a variety of

high quality applications to run on the system; the small number of

people trained on and using the system, which discourages customers

from buying it and software companies from writing applications to run

on it; and, since the overwhelming majority of PCs are sold with a pre-

installed operating system, the difficulty of convincing OEMs to offer

and promote the system.

Microsoft has used exclusionary and anticompetitive contract terms

to maintain its monopoly. OEMs believe that a substantial portion of

their customers will want a PC with MS-DOS and Windows, and therefore

feel that they must be able to offer their customers MS-DOS and

Windows. With thin profit margins, OEMs want to obtain these products

at the lowest possible cost.

Beginning in 1988, and continuing until July 15, 1994, Microsoft

induced many OEMs to execute anticompetitive ``per processor''

licenses. Under a per processor license, an OEM pays Microsoft a

royalty for each computer it sells containing a particular

microprocessor, whether the OEM sells the computer with a Microsoft

operating system or a non-Microsoft operating system. In effect, the

royalty payment to Microsoft when no Microsoft product is being used

acts as a penalty, or tax, on the OEM's use of a competing PC operating

system. Since 1988, Microsoft's use of per processor licenses has

increased. In fiscal year 1993, per processor licenses accounted for an

estimated 60% of MS-DOS sales to OEMs and 43% of Window sales to

OEMs.\3\ Collectively, the OEMs who have such per processor contracts

are critical to the success of competing operating system vendors, but

those OEMs effectively are foreclosed to Microsoft's competitors.

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\3\Per processor licenses accounted for an increasing proportion

of Microsoft's operating system sales in the 1988-1993 period.

Twenty per cent of all units of MS-DOS that were sold to OEMs in FY

1989 were sold pursuant to per processor licenses. That percentage

increased to 22% in FY 1990; 27% in FY 1991; 50% in FY 1992; and to

60% in FY 1993. A chart showing this increasing use of per-processor

licenses is attached as Exh. 2.

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Microsoft has further foreclosed the OEM channel through the use of

long-term contracts with major OEMs, some expiring as long as five

years from their original negotiation date. In some cases, these

contracts have left OEMs with unused balances on their minimum

commitments, which Microsoft can allow to be used if the contract is

extended, but which would be forfeited if the OEM does not extend the

contract. These practices have allowed Microsoft to extend the

effective duration of its OEM contracts, further impeding the access of

PC operating system competitors to the OEM channel.

In addition to using anticompetitive OEM licenses, Microsoft has

also employed anticompetitive restrictions in certain of its non-

disclosure agreements (``NDAs''). Microsoft anticipates commercially

releasing Chicago, the next version of Windows, in late 1994 or early

1995. In preparation for its release, Microsoft has allowed certain

third parties, including independent software vendors (``ISVs'') who

write applications, to have access to pre-release versions of Chicago,

a process known in the software industry as ``beta testing.'' This

permits Microsoft to receive feedback from the beta testers, and the

ISVs to begin writing applications for Chicago prior to its release.

In connection with beta testing Chicago, Microsoft employed, as it

has in prior beta tests, NDAs prohibiting disclosure of confidential

information. In this instance, however, Microsoft sought to impose on

certain leading software companies far more restrictive NDAs than it

had previously used. These NDAs would have precluded developers from

working on competitive products and technologies for an unreasonably

long period of time.

Through these practices, Microsoft has excluded competitors by

unreasonable and anticompetitive means, thereby lessening competition

and maintaining a monopoly in the PC operating system market.

Microsoft's licensing practices deter OEMs from entering into licensing

agreements with operating system rivals and discourage OEMs who agree

to sell non-Microsoft operating systems from promoting those systems.

By depriving rivals of a significant number of sales that they might

otherwise secure, Microsoft makes it more difficult for its rivals to

convince ISVs to write applications for their systems, for OEMs to

offer and promote their systems, and for users to believe that their

systems will remain viable alternatives to MS-DOS and Windows.

Microsoft's exclusionary contracts harm consumers. OEMs that sign

Microsoft's exclusionary licenses but offer consumers a choice of

operating systems may charge a higher price, in order to cover the

double royalty, for PCs using a non-Microsoft operating system. Even

consumers who do not receive a Microsoft operating system still pay

Microsoft indirectly. Thus, Microsoft's licensing practices have raised

the cost of personal computers to consumers.

Microsoft's conduct also substantially lengthens the period of time

required for competitors to recover their development costs and earn a

profit, and thereby increases the risk that an entry attempt will fail.

In combination, all these factors deter entry by competitors and thus

harm competition. By deterring the development of competitive operating

systems, Microsoft has deprived consumers of a choice of potentially

superior products. Similarly, the slower growth of competing operating

systems has retarded the development of applications for such systems.

Explanation of the Proposed Final Judgment

The proposed Final Judgment will end Microsoft's unlawful practices

that restrain trade and perpetuate its monopoly power in the market for

PC operating systems. In addition, the proposed Final Judgment contains

provisions that are remedial in nature and designed to assure that

Microsoft will not engage in the future in exclusionary practices

designed to produce the same or similar effects as those set forth in

the Complaint.

In particular, Sections IV (A), (C), and (F) prohibit Mirosoft's

use of the specific exclusionary practices alleged in the complaint--

``per processor'' contracts, lengthy terms, and minimum commitments--

that foreclose competing PC operating system vendors from much of the

OEM channel. Sections IV (K)-(L) prohibit the use of anticompetitive

non-disclosure agreements in conjunction with Mirosoft's distribution

of pre-commercial releases of operating system software products.

Sections IV (B), (E), (G), and (H) impose prohibitions that go beyond

the alleged exclusionary practices in order to ensure that Microsoft's

future contracting practices--not challenged here because not yet

used--do not unreasonably impede competition. Sections IV (J) and (M)

are designed to bring existing contracts into immediate compliance with

the proposed Final Judgment.

Scope of the Final Judgment

The injunctions in Section IV generally apply to ``covered

products'' which are defined, in Section II(A), as the binary code of

MS-DOS 6.22; Microsoft Windows 3.11; Windows for Workgroups 3.11;

predecessor versions of those products; the product currently code-

named ``Chicago'' (the planned successor to Microsoft Windows 3.11);

and other successor versions of or products marketed as replacements

for the aforementioned products. This definition includes all

Microsoft's PC operating system products in which the defendant

currently possesses a substantial degree of market power. The

definition does not encompass and specifically excludes, Windows NT

Workstation and Windows NT Advanced Server, neither of which has a

significant share of a relevant market at this time.

The definition of ``covered product'' was drafted with the

recognition that Microsoft will continue to modify its operating system

products throughout the duration of the Final Judgment. The

prohibitions in the decree will apply to the successor and replacement

products of those existing operating system products that have

substantial market power. The decree will govern the licensing of such

products if they are made available as stand-alone products to OEMs

pursuant to license agreements, or as unbundled products that perform

operating system software functions now embodied in the specifically

listed existing products. Moreover, the decree will govern the

licensing of successor versions of or products marketed as replacements

for MS-DOS 6.22, Microsoft Windows 3.11, Windows for Workgroups 3.11,

and ``Chicago,'' even if such successor or replacement products could

also be characterized as successors or replacements of operating system

software products that are not covered, such as windows NT Workstation

or Windows NT Advanced Server.

Prohibition of the Licensing Violations

The three anticompetitive factors of Microsoft's license agreements

that are challenged in the complaint--the excessive duration of those

agreements, the requirement of royalty payments on a ``per processor''

basis, and large minimum commitments--are addressed principally in

Sections IV(A), IV(C) and (IV)(F) of the Final Judgment.

Duration: Section IV(A) limits the duration of Microsoft's license

agreements with OEMs to one year, with OEMs having the option to renew

a license for one additional one year term on the same terms and

conditions as in the first year. This limitation on the duration of

license agreements, along with the safeguards provided in Section

IV(G), will ensure that vendors of competing operating systems will

have regular and frequent opportunities to attempt to market their

products to OEMs. Absent such opportunities, Microsoft's competitors

might be unable to reach the level of market penetration needed for

profitable operation in a reasonable period of time, even if they are

offering products that are deemed superior by those customers who have

an opportunity to buy them.

Per Processor Licenses: Section IV(C) prohibits the use of per

processor licenses.\4\ Section II(K) defines per processor licenses as

licenses that require the OEM to pay a royalty for all personal

computer systems that contain specified microprocessors. As noted

above, the requirement to pay a royalty to Microsoft on the sale of a

PC that has a non-Microsoft operating system is comparable, in its

economic effect, to the imposition of a ``tax'' on the competing

operating system. Per processor licenses are also very similar to

exclusive dealing or requirements contracts; the OEM in effect is

obtaining the right to use Microsoft's operating system, and is paying

an operating system royalty, for all of its operating system

``requirements'' for use on PCs using the designated microprocessors.

---------------------------------------------------------------------------

\4\Section IV(J)(1) converts all per processor licenses to per

system licenses, except those models which an OEM excludes, which

will thereafter be subject to the limitations imposed on Microsoft

by Section IV(G).

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Minimum Commitments: Section IV(F) will bar Microsoft from entering

into any license agreement containing a minimum commitment.\5\ While

minimum commitments are not in and of themselves illegal, they can be

used to achieve a similar effect as that accomplished through per

processor licenses or exclusive dealing contracts. If the minimum

commitment is greater than the number of units of Microsoft software

that the OEM expects or would otherwise desire to use at any time

during the term of the contract, the minimum commitment creates a

disincentive for an OEM to make incremental purchases of non-Microsoft

operating systems. In that context, the minimum commitment also

operates in effect to require a royalty payment to Microsoft, even for

PCs that use a non-Microsoft operating system. This effect will be

ended by Section (IV)(F).

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\5\Section IV(J)(2) prohibits Microsoft from prospectively

enforcing minimum commitments in existing license agreements.

---------------------------------------------------------------------------

Restoring Competition to the Market Through Prophylactic Additional

Relief

The proposed Final Judgment not only bans Microsoft's unlawful

practices, but also contains additional provisions which are

prophylactic in nature, and are intended to ensure that the

anticompetitive effects of those practices are not replicated through

use by Microsoft of other exclusionary practices.

Microsoft Prohibited From Limiting OEM Sales of Competing Operating

System Products: Section IV (B) bars Microsoft from entering into

license agreements that prohibit or restrict an OEM from licensing,

selling, or distributing competing operating system products. In

addition, Section IV (E) prohibits Microsoft from expressly or

impliedly conditioning its licenses of operating systems on the

licensing, purchase, use or distribution not only of other covered

products, but also any other Microsoft product, or non-Microsoft

product. Without these provisions Microsoft could force OEMs to

purchase covered products and thus accomplish anticompetitive effects

similar to those achieved through its unlawful licensing practices, or

attempt to extend or protect its monopoly in any covered product by

conditioning its licensing, purchase or use of other products.

Microsoft Limited to Per Copy and Per System Licenses: Sections IV

(D) and IV (G) require Microsoft to use either ``per copy'' or ``per

system'' licenses. Per copy licenses, if used in conjunction with pro-

competitive volume discounts, pose few competitive concerns. Per system

licenses, if not carefully fenced in, could be used by Microsoft to

accomplish anticompetitive ends similar to ``per processor'' licenses.

However, if an OEM easily can designate models not subject to a per

system license, it can use non-Microsoft operating systems on those

models without incurring a royalty obligation to Microsoft. If an OEM

need not pay a royalty to Microsoft for anything but the number of

copies of the Microsoft operating system that it actually uses, that

OEM will not be deterred from licensing, purchasing or using competing

operating system products.

Restriction on Per System Licenses: The Final Judgment also places

restrictions on the use of per system licenses to ensure that they are

not used in an exclusionary manner. In particular, Section IV (G)

specifies that per system licenses must allow the licensee to create

``new systems'' that can be sold without incurring a royalty obligation

to Microsoft if they do not utilize a Microsoft product. Under Section

IV (G), an OEM need only designate a new model name or number to create

a ``new system.'' Microsoft may not require the OEM even to notify

Microsoft of the creation of a new system; nor may Microsoft impose

requirements relating to the marketing or advertising of a new system,

or penalize an OEM for creating a new system. Section IV (G)(4)

requires Microsoft to notify within 30 days following entry of this

Final Judgment all existing OEM licensees under per system licenses and

all OEM licensees with per processor licenses who choose to let them to

be converted to per system licenses (a provision discussed below) of

their rights to create new systems that will not be subject to any

existing per system license. This notice provision ensures that

existing licensees promptly know of their rights to avoid royalty

payments under per system contracts if they choose to create new

systems.

Microsoft Prohibited From Using Lump Sum Pricing: Section IV (H)

also serves a prophylactic function, prohibiting the use of lump sum

pricing in license agreements for covered products. As defined in

Section II (F), lump sum pricing is any royalty payment that does not

vary with the number of copies of the covered product (under per copy

licenses) or the number of personal computer systems (under per system

licenses) that are licensed, sold, or distributed by the OEM. This

restriction, like the prohibitions on minimum commitments and

requirements contracts, restricts conduct that could be used by

Microsoft to achieve effects comparable to the effects of the conduct

challenged by the government, and for that reason is enjoined.\6\

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\6\If a license agreement established a minimum commitment

greater than the OEM's requirements for operating systems (an

agreement that would be prohibited under this decree), the minimum

commitment would constitute, in effect, a lump sum payment.

Regardless of the number of copies distributed by the OEM, its

royalty payment to Microsoft would not vary. A lump sum pricing

arrangement imposed by a monopolist that allowed unlimited use of

the licensed product for a single fee calibrated to the anticipated

total operating system needs of a particular OEM would also produce

a similar economic effect as a requirements contract or a per

processor license: the OEM would owe the same royalty to Microsoft

whether it chose to use a Microsoft operating system on all of the

PCs it sold, or only on some of the PCs it sold, and would, in

effect, ``pay twice'' if it chose to purchase a non-Microsoft

operating system for some of its PCs.

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Neither Section IV (H) nor any other provision of the proposed

Final Judgment prohibits the use of royalty rates, including rates

embodying volume discounts, agreed upon in advance with respect to each

individual OEM, each specific version or language of a covered

products, and each designated personal computer system model. Nothing

in the Final Judgment, however, in any way sanctions Microsoft

structuring any volume discount whose purpose or effect is to impose de

facto requirements contracts or exclusive arrangements on the OEM. As

discussed below in connection with alternatives to the proposed Final

Judgment, given Microsoft's monopoly power in operating systems, such

practices can violate the antitrust laws.

Transition Rules

In the Stipulation consenting to the entry of the proposed Final

Judgment, Microsoft agreed to abide by the provisions of the proposed

Final Judgment immediately upon the filing of the Complaint, i.e., as

of July 15, 1994. Among other things, the transition provisions

described herein will require Microsoft to abide by the foregoing

limitations and prohibitions when entering into any license agreements

with OEMs after July 15, 1994. Certain additional provisions of the

proposed Final Judgment also apply to existing license agreements that

are inconsistent with the proposed Final Judgment's requirements for

new license agreements.

Under Section IV (I), existing OEM licensees may terminate or

negotiate with Microsoft to amend their agreements to make them

consistent with the requirements of the Final Judgment.

Section IV (J) provides that if an OEM chooses not to exercise

either of these options, Microsoft must abide by the following rules.

First, under Section IV (J)(1), a per processor license must be treated

as a ``per system'' license' OEM models that contain the

microprocessor(s) specified in such a per processor license will be

considered to be covered by the ``per system'' license unless the OEM

opts in writing to exclude such model from coverage. As already noted,

OEMs may freely sell PCs with non-Microsoft operating systems, and

avoid any obligation to pay royalties to Microsoft under a per system

license, simply by designating such PCs as a new system with a separate

model number or name. Second, under Section IV (J)(2), Microsoft may

not enforce any minimum commitment in an existing license agreement.

These provisions further two consistent goals. Opportunities for

competition in the PC operating system market are fostered by a rapid

end to the unlawful practices embodied in existing licenses. At the

same time, the transition rules avoid creating hardships for OEMs by

not unnecessarily disrupting established commercial relationships with

Microsoft. Indeed, OEMs are not required to terminate or amend their

existing contracts with Microsoft; the choice to do so is theirs alone.

Microsoft, however, may not enforce the per processor or minimum

commitment features of any existing contract. Providing OEMs with this

choice minimizes the costs of the transition from existing license

agreements that are inconsistent with the decree to new license

agreements, while ensuring that any unavoidable transition costs be

borne largely by Microsoft.

To ensure that existing licensees learn of their rights under the

proposed Final Judgment, Section IV (M) requires Microsoft to provide a

copy of the Final Judgment to all OEMs with which it has license

agreements, except for those who have licenses only under Microsoft's

Small Volume Easy Distribution program or the Delivery Service Partner

program.

Non-Disclosure Agreements

Finally, the proposed Final Judgment contains provisions that

prevent Microsoft from imposing unlawfully restrictive NDAs on

developers of applications software.

Sections IV(K)(l) limits the duration of any NDA to the earliest of

(a) the commercial release of the product covered by the NDA, (b) an

earlier public disclosure of the information covered by the NDA, or (c)

one year after the information is disclosed to the person subject to

the NDA. Section IV(K)(2) provides that NDAs may not restrict subject

parties from developing software products that will run on competing

operating systems, if such development does not entail the use or

disclosure of Microsoft proprietary information during the term of the

NDA.

In combination, these provisions recognize that whatever

Microsoft's legitimate interest in protecting the confidentiality of

proprietary information covered by the NDAs, the need for any such

protection must be balanced against the competitive consequences of any

restriction imposed on others concerning disclosure and use of the

information. The proposed Final Judgment ensures that any NDA imposed

by Microsoft will not extend beyond the point that the information has

been released to the public or has otherwise been in the hands of

parties for more than one year.

Section IV(L) requires that the form of all standard NDAs must be

approved by a Microsoft corporate officer, and that non-standard

language in an NDA relating to matters covered in Section (K) must be

approved by a Microsoft senior attorney. These provisions are designed

to ensure that NDAs will be reviewed by company officials mindful of

the requirements of the Final Judgment.

Enforcement

Section V of the proposed Final Judgment establishes standards and

procedures by which the Department of Justice may obtain access to

documents and information from Microsoft related to its compliance with

the Final Judgment.

In particular, Section V(D) contains provisions under which the

Department can obtain information and documents relating to any

Undertaking by or Decision against Microsoft arising from parallel

antitrust proceedings of the Directorate-General for Competition of the

European Commission (``DG-IV''). This provision will allow the

Department to coordinate its monitoring and enforcement of compliance

of the Final Judgment with DG-IV's monitoring and enforcement of

parallel provisions contained in an Undertaking with DG-IV signed by

Microsoft on July 15, 1994.

Duration

Section VI of the proposed Final Judgment provides that the Final

Judgment will expire on the seventy-eighth month after its entry.

Jurisdiction will be retained by the Court to conduct further

proceedings relating to the Final Judgment, as specified in Section VI.

Remedies Available to Potential Private Litigants

Section 4 of the Clayton Act, 15 U.S.C. Sec. 15, provides that any

person who has been injured as a result of conduct prohibited by the

antitrust laws may bring suit in federal court to recover three times

the damages suffered, as well as costs and reasonable attorney's fees.

Entry of the proposed Final Judgment will neither impair nor assist the

bringing of such actions. Under the provisions of Section 5(a) of the

Clayton Act, 15 U.S.C. Sec. 16(a), the Judgment has no prima facie

effect in any subsequent lawsuit that may be brought against the

defendant in this matter.

Procedures Available for Modification of the Proposed Judgment

As provided by the Antitrust Procedures and Penalties Act, any

person believing that the proposed Final Judgment should be modified

may submit written comments to Richard L. Rosen, Chief, Communications

and Finance Section, United States Department of Justice, Antitrust

Division, 555 4th Street N.W., Room 8104, Washington, D.C. 20001,

within the 60-day period provided by the Act. These comments, and the

Department's responses, will be filed with the Court and published in

the Federal Register. All comments will be given due consideration by

the Department of Justice, which remains free to withdraw its consent

to the proposed Final Judgment at any time prior to entry. If the

Department does not withdraw its consent to the proposed Final

Judgment, it will file with the Court a Certificate of Compliance after

the requirements of the Antitrust Procedures and Penalties Act have

been satisfied. The Court then must determine whether the proposed

decree is in the public interest, pursuant to Section 5(e) of the

Clayton Act, 15 U.S.C. Sec. 16(e).\7\

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\7\In making this public interest determination, ``[t]he

balancing of competing social and political interests affected by a

proposed antitrust consent decree must be left, in the first

instance, to the discretion of the Attorney General. The court's

role in protecting the public interest is one of insuring that the

government has not breached its duty to the public in consenting to

the decree. The court is required to determine not whether a

particular decree is the one that will best serve society, but

whether the settlement is `within the reaches of the public

interest.''' United States v. Bechtel Corp., 648 F.2d 660, 666 (9th

Cir.), cert. denied, 454 U.S. 1083 (1981) (citations and internal

quotations omitted). Accord United States v. Western Electric Co.,

993 F.2d 1572, 1576 (D.C. Cir. 1993); United States v. American Tel.

and Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982), aff'd sub nom.

Maryland v. United States, 460 U.S. 1001 (1983).

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Alternatives to the Proposed Final Judgment

In addition to the remedies provided in the proposed Final

Judgment, the Department also considered whether to require limitations

on the manner in which Microsoft could structure volume discount

pricing arrangements for covered products. While the Department

recognizes that volume discount pricing can be and normally is pro-

competitive, volume discounts also can be structured by a seller with

monopoly power (such as Microsoft) in such a way that buyers, who must

purchase some substantial quantity from the monopolist, effectively are

coerced by the structure of the discount schedule (as opposed to the

level of the price) to buy all or substantially all of the supplies

they need from the monopolist. Where such a result occurs, the

Department believes that the volume discount structure would unlawfully

foreclose competing suppliers from the marketplace--in this case,

competing operating systems--and thus may be challenged.

The Department ultimately concluded that it would not require

provisions in the Final Judgment to attempt to proscribe in advance the

various means by which Microsoft could attempt to structure volume

discounts as a means to thwart competition rather than as a means of

promoting competition. The Department reached this conclusion because

it does not have evidence that Microsoft has, to date, in fact

structured its volume discounts to achieve anticompetitive ends. The

Department did, however, communicate to Microsoft its concern and

stated its intent to initiate an investigation and antitrust

enforcement proceeding, if warranted, should Microsoft adopt

anticompetitive volume discount structures in its future license

agreements. Given the procompetitive impact of the provisions of the

proposed Final Judgment, the normally procompetitive nature of volume

discount pricing, and the absence of any evidence that Microsoft has

used volume discounting in an anticompetitive manner to date, the

Department believes that this resolution is appropriate on the record

at this time.

Another alternative to the proposed Final Judgment would be a full

trial of this case. The Department of Justice believes that such a

trial would involve substantial cost to the United States and is not

warranted since the proposed Final Judgment provides all of the relief

that the United States seeks in its Complaint and includes substantial

additional prophylactic measures as well.

Determinative Materials and Documents

No materials or documents of the type described in Section 2(b) of

the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b), were

considered in formulating the proposed Final Judgment.

Dated: July 27, 1994.

Respectfully submitted,

Anne K. Bingaman,

Assistant Attorney General, Antitrust Division.

Donald J. Russell,

U.S. Department of Justice, Antitrust Division, Communications &

Finance Section, Judiciary Center Building, 555 Fourth Street, N.W.,

Washington, DC 20001, (202) 514-5814.

United States District Court for the District of Columbia,

United States of America, Plaintiff, v. Microsoft Corporation,

Defendant. Civil Action No. 94-1564 (SS)

Final Judgment

Whereas Plaintiff, United States of America, having filed its

Complaint in this action on July 15, 1994, and Plaintiff and Defendant,

by their respective attorneys, having consented to the entry of this

Final Judgment without trial or adjudication of any issue of fact or

law; and without this Final Judgment constituting any evidence or

admission by any party with respect to any issue of fact or law;

Now, Therefore, before any testimony is taken, and without trial or

adjudication of any issue of fact or law, and upon consent of the

parties, it is hereby

Ordered, Adjudged and Decreed as follows:

I. Jurisdiction

This Court has jurisdiction of the subject matter of this action

and of the person of the Defendant, Microsoft Corporation

(``Microsoft''). The Complaint states a claim upon which relief may be

granted against the Defendant under Sections 1 and 2 of the Sherman

Act, 15 U.S.C. Secs. 1, 2.

II. Definitions

(A) Covered Product(s) means the binary code of (1) MS-DOS 6.22,

(2) Microsoft Windows 3.11, (3) Windows for Workgroups 3.11, (4)

predecessor versions of the aforementioned products, (5) the product

currently code-named ``Chicago,'' and (6) successor versions of or

replacement products marketed as replacements for the aforementioned

products, whether or not such successor versions or replacement

products could also be characterized as successor versions or

replacement products of other Microsoft Operating System Software

products that are made available (a) as stand-alone products to OEMs

pursuant to License Agreements, or (b) as unbundled products that

perform Operating System Software functions now embodied in the

products listed in subsections (1) through (5). The term ``Covered

Products'' shall not include ``Customized'' versions of the

aforementioned products developed by Microsoft; nor shall it apply to

Windows NT Workstation and its successor versions, or Windows NT

Advanced Server.

(B) Customized means the substantial modification of a product by

Microsoft to meet the particular and specialized requirements of a

final customer of a computer system. It does not include the adaptation

of such a product in order to optimize its performance in connection

with a Personal Computer System manufactured by an OEM.

(C) Duration means, with respect to a License Agreement, the period

of time during which an OEM is authorized to license, sell or

distribute any of the Covered Products.

(D) A License Agreement means any license, contract, agreement or

understanding, or any amendment thereto, written or oral, express or

implied, pursuant to which Microsoft authorizes an OEM to license, sell

or distribute any Covered Product with its Personal Computer System(s).

(E) A Minimum Commitment means an obligation of an OEM to pay

Microsoft a minimum amount under a License Agreement, regardless of

actual sales.

(F) Lump Sum Pricing means any royalty payment for a Covered

Product that does not vary with the number of copies of the Covered

Product that are licensed, sold or distributed by the OEM or of

Personal Computer Systems distributed by the OEM.

(G) New System means a system not included or designated in a Per

System License.

(H) NDA means any non-disclosure agreement for any pre-commercial

release of a Covered Product that imposes any restriction on the

disclosure or use of any such pre-commercial release of any Covered

Product or any information relating thereto.

(I) OEM means an original equipment manufacturer or assembler of

Personal Computer Systems or Personal Computer System components (such

as motherboards or sound cards) or peripherals (e.g., printers or mice)

that is a party to a License Agreement.

(J) Per Copy License means any License Agreement pursuant to which

the OEM's royalty payments are calculated by multiplying (1) the number

of copies of each Covered Product licensed, sold or distributed during

the term of the License Agreement, by (2) a per copy royalty rate

agreed upon by the OEM and Microsoft, which rate may be determined as

provided in Section IV (H).

(K) Per Processor License means a License Agreement under which

Microsoft requires the OEM to pay Microsoft a royalty for all Personal

Computer Systems that contain the particular microprocessor type(s)

specified in the License Agreement.

(L) Per System License means a License Agreement under which

Microsoft requires the OEM to pay Microsoft a royalty for all Personal

Computer Systems which bear the particular model name(s) or number(s)

which are included or designated in the License Agreement by the OEM to

Microsoft, at the OEM's sole option and under the terms and conditions

as set forth herein.

(M) Personal Computer System means a computer designed to use a

video display and keyboard (whether or not the video display and

keyboard are actually included) which contains an Intel x86, or Intel

x86-compatible microprocessor.

(N) Operating System Software means any set of instructions, codes,

and ancillary information that controls the operation of a Personal

Computer System and manages the interaction between the computer's

memory and attached devices such as keyboards, display screens, disk

drives, and printers.

III. Applicability

This Final Judgment applies to Microsoft and to each of its

officers, directors, agents, employees, subsidiaries, successors and

assigns; and to all other persons in active concert or participation

with any of them who shall have received actual notice of this Final

Judgment by personal service or otherwise.

IV. Prohibited Conduct

Microsoft is enjoined and restrained as follows:

(A) Microsoft shall not enter into any License Agreement for any

Covered Product that has a total Duration that exceeds one year

(measured from the end of the calendar quarter in which the agreement

is executed).

Microsoft may include as a term in any such License Agreement that

the OEM may, at its sole discretion, at any time between 90 and 120

days prior to the expiration of the original License Agreement, renew

such License Agreement for up to one additional year on the same terms

and conditions as those applicable in the original license period.

The License Agreement shall not impose a penalty or charge of any

kind on an OEM for its election not to renew all or any portion of a

License Agreement. In the event that an OEM does not exercise the

option to renew a License Agreement as provided above, and a new

License Agreement is entered between Microsoft and the OEM, the arm's

length negotiation of different terms and conditions, specifically

including a higher royalty rate(s), will not by itself constitute a

penalty or other charge within the meaning of the foregoing sentence.

The Duration of any License Agreement with an OEM not domiciled in

the United States or the European Economic Area that will not be

effective prior to regulatory approval in the country of its domicile

may be extended at the option of Microsoft or the OEM during the time

required for any such regulatory approval.

License Agreement provisions that do not bear on the licensing or

distribution of the Covered Products may survive expiration or

termination of the License Agreement.

(B) Microsoft shall not enter into any License Agreement that by

its terms prohibits or restricts the OEM's licensing, sale or

distribution of any non-Microsoft Operating System Software product.

(C) Microsoft shall not enter into any Per Processor License.

(D) Except to the extent permitted by Section IV (G) below,

Microsoft shall not enter into any License Agreement other than a Per

Copy License.

(E) Microsoft shall not enter into any License Agreement in which

the terms of that agreement are expressly or impliedly conditioned

upon:

(1) the licensing of any other Covered Product, Operating System

Software product or other product (provided, however, that this

provision in and of itself shall not be construed to prohibit Microsoft

from developing integrated products); or

(2) the OEM not licensing, purchasing, using or distributing any

non-Microsoft product.

(F) Microsoft shall not enter into any License Agreement containing

a Minimum Commitment. However, nothing contained herein shall prohibit

Microsoft and any OEM from developing non-binding estimates of

projected sales of Microsoft's Covered Products for use in calculating

royalty payments.

(G) Microsoft's revenue from a License Agreement for any Covered

Product shall not be derived from other than Per Copy or Per System

Licenses, as defined herein. In any Per System License:

(1) Microsoft shall not explicitly or implicitly require as a

condition of entering into any License Agreement, or for purposes of

applying any volume discount, or otherwise, that any OEM include under

its Per System License more than one of its Personal Computer Systems;

(2) Microsoft shall not charge or collect royalties for any Covered

Product on any Personal Computer System unless the Personal Computer

System is designated by the OEM in the License Agreement or in a

written amendment. Microsoft shall not require an OEM which creates a

New System to notify Microsoft of the existence of such a New System,

or to take any particular actions regarding marketing or advertising of

that New System, other than creation of a unique model name or model

number that the OEM shall use for internal and external identification

purposes. The requirement of external identification may be satisfied

by placement of the unique model name or model number on the machine

and its container (if any), without more. The OEM and Microsoft may

agree to amend the License Agreement to include any new model of

Personal Computer System in a Per System License. Nothing in this

clause shall be deemed to preclude Microsoft from seeking compensation

from an OEM that makes or distributes copies of a Covered Product in

breach of its License Agreement or in violation of copyright law;

(3) The License Agreement shall not impose a penalty or charge on

account of an OEM's choosing at any time to create a New System.

Addition of a New System to the OEM's License Agreement so that Covered

Products are licensed for distribution with such New System and

royalties are payable with respect thereto shall not be deemed to

constitute a penalty or other charge of any kind within the meaning of

the foregoing sentence;

(4) All OEMs with existing Per System Licenses, or Per Processor

Licenses treated by Microsoft under Section IV (J) as Per System

Licenses, will be sent within 30 days following entry of this Final

Judgment in a separately mailed notice printed in bold, boxed type

which shall begin with the sentence ``You are operating under a

Microsoft Per System License,'' and shall continue with the language

contained in the first four quoted paragraphs below. All new or amended

Per System Licenses executed after September 1, 1994 shall contain a

provision that appears on the top half of the signature page in bold,

boxed type shall begin with the sentence ``This is a Microsoft Per

System License,'' and which shall continue with the language contained

in the first four quoted paragraphs below.

``As a Customer, you may create a `New System' at any time that

does not require the payment of a royalty to Microsoft unless the

Customer and Microsoft agree to add it to the Licensing Agreement.''

``Any New System created may be identical in every respect to a

system as to which the Customer pays a Per System royalty to

Microsoft provided that the New System has a unique model number or

model name for internal and external identification purposes which

distinguishes it from any system the Customer sells that is included

in a Per System License. The requirement of external identification

may be satisfied by placement of the unique model name or model

number on the machine and its container (if any), without more.''

``If the customer does not intend to include a Microsoft

operating system product with a New System, the Customer does not

need to notify Microsoft at any time of the creation, use or sale of

any such New System, nor does it need to take any particular steps

to market or advertise the New System.''

``Under Microsoft's License Agreement, there is no charge or

penalty if a Customer chooses at any time to create a New System

incorporating a non-Microsoft operating system. If the Customer

intends to include a Microsoft operating system product with the New

System, the Customer must so notify Microsoft, after which the

parties may enter into arm's length negotiation with respect to a

license to apply to the New System.''

In the case of OEMs with Per Processor Licenses treated as Per

System Licenses pursuant to Section IV (J), the notice shall include

the following paragraph at the beginning of the notice:

``All models covered by your Per Processor License are now

treated as subject to a Per System License. You may exclude any such

model from being treated as subject to a Per System License by

notifying Microsoft in writing. Such notice to Microsoft must

include the model designation to be excluded from the Per System

License. Such exclusion shall take effect on the first day of the

calendar quarter next following Microsoft's receipt of such

notice.''

(H) Microsoft may not use any form of Lump Sum Pricing in any

License Agreement of Covered Product(s) executed after the date of this

Final Judgment. It is not a violation of this Final Judgment for

Microsoft to use royalty rates, including rates embodying volume

discounts, agreed upon in advance with respect to each individual OEM,

each specific version or language of a Covered Product, and each

designated Personal Computer System model subject to the License

Agreement.

(I) OEMs that currently have a License Agreement that is

inconsistent with any provision of this Final Judgment may, without

penalty, terminate the License Agreement or negotiate with Microsoft to

amend the License Agreement to eliminate such inconsistent provisions.

An OEM desiring to terminate or amend such a License Agreement shall

give Microsoft ninety (90) days written notice at any time prior to

January 1, 1995.

(J) If an OEM has a License Agreement that is inconsistent with any

provision of this Final Judgment, Microsoft may enforce that License

Agreement subject to the following:

(1) if the License Agreement is a Per Processor License, Microsoft

shall treat it as a Per System License for all existing OEM models that

contain the microprocessor type(s) specified in the License Agreement

except those models that the OEM opts in writing to exclude and such

exclusion shall take effect on the first day of the calendar quarter

net following Microsoft's receipt of such notice, and

(2) Microsoft may not enforce prospectively any Minimum Commitment.

(K) Microsoft shall not enter into any NDA:

(1) whose duration extends beyond (a) commercial release of the

product covered by the NDA, (b) an earlier public disclosure authorized

by Microsoft of information covered by the NDA, or (c) one year from

the date of disclosure of information covered by the NDA to a person

subject to the NDA, whichever comes first; or

(2) that would restrict in any manner any person subject to the NDA

from developing software products that will run on competing Operating

System Software products, provided that such development efforts do not

entail the disclosure or use of any Microsoft proprietary information

during the term of the NDA; or

(3) that would restrict any activities of any person subject to the

NDA to whom no information covered by the NDA has been disclosed.

(L) The form of standard NDAs will be approved by a Microsoft

corporate officer and all non-standard language in NDAs that pertains

to matters covered in Section (k) above will be approved by a Microsoft

senior corporate attorney.

(M) Within thirty (30) days of the entry of this Final Judgment,

Microsoft will provide a copy of this Final Judgment to all OEMs with

whom it has License Agreements at that time except for those with

licenses solely under the Small Volume Easy Distribution (SVED) program

or the Delivery Service Partner (DSP) program.

V. Reporting

(A) To determine or secure compliance with this Final Judgment,

duly authorized representatives of the Plaintiff shall, upon written

request of the Assistant Attorney General in charge of the Antitrust

Division, on reasonable notice given to Defendant at its principal

office, subject to any lawful privilege, be permitted:

(1) Access during normal office hours to inspect and copy all

books, ledgers, accounts, correspondence, memoranda and other documents

and records in the possession, custody, or control of Defendant, which

may have counsel present, relating to any matters contained in this

Final Judgment.

(2) Subject to the reasonable convenience of Defendant and without

restraint or interference from it, to interview officers, employees, or

agents of Defendant, who may have counsel present, regarding any

matters contained in this Final Judgment.

(B) Upon written request of the Assistant Attorney General in

charge of the Antitrust Division, on reasonable notice given to

Defendant at its principal office, subject to any lawful privilege,

Defendant shall submit such written reports, under oath if requested,

with respect to any matters contained in this Final Judgment.

(C) No information or documents obtained by the means provided by

this Section shall be divulged by the Plaintiff to any person other

than a duly authorized representative of the Executive Branch of the

United States government, except in the course of legal proceedings to

which the United States is a party, or for the purpose of securing

compliance with the Final Judgment, or as otherwise required by law.

(D) Defendant shall produce to plaintiff, within forty-five (45)

days, any documents provided to the Directorate-General for Competition

of the European Commission (``DG-IV'') in connection with its

monitoring or securing of compliance with any Undertaking by or

Decision against Microsoft that relates to Microsoft's licensing of any

Covered Product. In addition, Defendant shall not object to disclosure

to Plaintiff by DG-IV of any other information provided by defendant to

DG-IV, or to cooperation between DG-IV and Plaintiff in the enforcement

of this Judgment, provided that Microsoft shall receive in advance a

detailed description of the information to be provided and the

Plaintiff will accord any Microsoft information received from DG-IV the

maximum confidentiality protection available under applicable law.

Specifically, Plaintiff will treat Microsoft information that it

receives from DG-IV as ``confidential business information'' within the

meaning of the Freedom of Information Act, 5 U.S.C. Sec. 552, with

Microsoft deemed a ``submitter'' of the information under the statute.

Plaintiff shall take precautions to ensure the security and

confidentiality of Microsoft information provided in electronic form.

(E) If at the time information or documents are furnished by

Defendant to Plaintiff, Defendant represents and identifies in writing

the material in any such information or document to which a claim of

protection may be asserted under Rule 26(c)(7) of the Federal Rules of

Civil Procedure, and Defendant marks each pertinent page of such

material ``Subject to claim of protection under Rule 26(c)(7) of the

Federal Rules of Civil Procedure,'' then ten days notice shall be given

by Plaintiff to Defendant prior to divulging such material in any legal

proceeding (other than a grand jury proceeding) to which Defendant is

not a party.

VI. Further Elements of Judgment

(A) This Final Judgment shall expire on the seventy eighth month

after its entry.

(B) Jurisdiction is retained by this Court over this action and the

parties thereto for the purpose of enabling any of the parties thereto

to apply to this Court at any time for further orders and directions as

may be necessary or appropriate to carry out or construe this Final

Judgment, to modify or terminate any of its provisions, to enforce

compliance, and to punish violations of its provisions.

VII. Public Interest

Entry of this Final Judgment is in the public interest.

Entered:---------------------------------------------------------------

United States District Judge

----------------------------------------------------------------------

Page 15 of the Final Judgment

Section VII Public Interest

Entered and United States District Judge should be printed as is.

This is not an omission.

Cynthia Preston,

Office of Operations.

[FR Doc. 94-20216 Filed 8-18-94; 8:45 am]

BILLING CODE 4410-01-M