United States v. Microsoft Corporation Civ. No. 94-1564 (SS) (D.D.C.); Response of the United States to Public Comments Concerning the Proposed Final Judgment and Notice of Hearing

DEPARTMENT OF JUSTICE

United States v. Microsoft Corporation Civ. No. 94-1564 (SS)

(D.D.C.); Response of the United States to Public Comments Concerning

the Proposed Final Judgment and Notice of Hearing

Pursuant to section 2(d) of the Antitrust Procedures and Penalties

Act, 15 U.S.C. Sec. 16(d), the United States publishes below the

written comments received on the proposed Final Judgment in United

States v. Microsoft Corporation, Civil Action No. 94-1564 (SS), United

States District Court for the District of Columbia, together with its

response thereto. A hearing will be held on this matter at 10 AM on

December 15, 1994, at the United States Courthouse, Third Street &

Constitution Avenue, NW., Washington, DC 20001. Any persons who may

wish to be heard at such time should make a written application to the

Court on or before December 4, 1994, and provide a copy to the

Department of Justice. Such application should include a summary of the

comments or views that the applicant wishes to express at the hearing

and a statement of why the views of the applicant should be heard by

the court. Please send the Department of Justice copy of any such

application to Donald J. Russell, 555 Fourth Street, NW., room 8104,

Washington, DC 20001, (telephone (202) 514-5621).

Copies of the written comments and the response are available for

inspection and copying in Room 3235 of the Antitrust Division, United

States Department of Justice, Tenth Street and Constitution Avenue,

NW., Washington, DC 20530 (telephone (202) 514-2481) and for inspection

at the Office of the Clerk of the United States District Court for the

District of Columbia, room, United States Courthouse, Third Street &

Constitution Avenue, NW., Washington, DC 20001.

Mark C. Schechter,

Deputy Director of Operations.

United States Response to Public Comments

Pursuant to the requirements of the Antitrust Procedures and

Penalties Act, (``APPA'' or ``Tunney Act'') 15 U.S.C. Sec. 16(b)-(h),

the United States hereby responds to public comments it has received

relating to the proposed Final Judgment in this civil antitrust

proceeding. After careful consideration of these comments, the United

States continues to believe that the proposed Final Judgment will

provide an effective and appropriate remedy for the antitrust

violations alleged in the Complaint. After the public comments and this

response have been published in the Federal Register, pursuant to 15

U.S.C. Sec. 16(d), the United States will move the Court for entry of

the proposed Final Judgment.

This action began on July 15, 1994, when the United States filed a

Complaint alleging that Microsoft Corporation had unlawfully maintained

its monopoly of personal computer operating systems and had

unreasonably restrained trade, in violation of sections 1 and 2 of the

Sherman Act, 15 U.S.C. Secs. 1, 2. Simultaneously, with the filing of

the Complaint, the United States filed a proposed Final Judgment and a

Stipulation signed by the defendant consenting to the entry of the

proposed Final Judgment after compliance with the requirements of the

APPA.

Pursuant to the APPA requirements, the United States filed a

Competitive Impact Statement (``CIS'') on July 27, 1994. The defendant

filed a description of certain written and oral communications on its

behalf, as required by section 15(g) of the APPA, on August 8, 1994. A

summary of the terms of the proposed Final Judgment and CIS, and

directions for the submission of written comments relating to the

proposal were published in the Washington Post for seven days in the

period from August 7, 1994 through August 13, 1994. The proposed Final

Judgment and the Competitive Impact Statement were published in the

Federal Register on August 19, 1994. 59 Fed. Reg. 42845-42857 (1994).

The 60-day period for public comments began on August 20, 1994 and

expired on October 18, 1994.\1\ The United States received five

comments, which are attached hereto as Exhibits 1-5. Three of these

comments relate to alleged Microsoft practices that the government did

not challenge as violations of the antitrust laws, and which are not

addressed in the proposed Consent Decree. Only one comment relates

directly to the proposed relief, and that comment suggests that an

additional remedy should have been included. Finally, one brief comment

argues that the government should not have taken any action against

Microsoft.

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\1\The United States has treated as timely all comments that it

received up to the time of the filing of this response.

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I. Background

The proposed Final Judgment is the culmination of an investigation

of Microsoft begun by the Federal Trade Commission (``FTC'') in June

1990 and continued by the Department of Justice beginning in August

1993. From April 1991 onward, the FTC's investigation had as its

central focus the licensing practices by which Microsoft distributes

its operating system software products, MS-DOS and Microsoft Windows,

to manufacturers of personal computers, a group referred to in the

computer industry as original equipment manufacturers or OEMs. In the

course of its investigation, the FTC subpoenaed documents from

Microsoft, deposed over a dozen Microsoft officers and employees, and

interviewed numerous OEMs, firms that compete against Microsoft in the

development and sale of operating system software, and other software

industry participants.

While focussing on Microsoft's licensing practices, the FTC staff

also considered whether Microsoft attempted to stifle competition in

various computer software markets through other practices. Among other

things, they considered whether Microsoft had deliberately created

incompatibilities between its Windows operating system software product

and its competitors' disk operating system products in order to

disadvantage those competing products; whether Microsoft used false

preannouncements of new products; and whether Microsoft's developers of

applications software products obtained an anticompetitive advantage

over their competitors because they received preferential access to

information about Microsoft's operating system products.

In August of 1993, following reports that the FTC's deliberations

had ended with a 2-2 vote that would result in no enforcement action

against Microsoft, the Antitrust Division of the United States

Department of Justice began its investigation of Microsoft. The Justice

Department was provided with complete access to all evidence collected

by the FTC in the course of its investigation. After reviewing this

evidence, the Department sought additional evidence from Microsoft and

other industry participants. The Department carefully examined the use

by Microsoft of per-processor and per-system licenses to distribute MS-

DOS and Windows to OEMs. The Department also looked extensively at all

other issues that had been considered by the FTC, including alleged

false product preannouncements and the relationship between Microsoft's

operating system and applications divisions. In addition, the

Department's investigation explored new issues which first emerged

during the course of its investigation, including Microsoft's use of

restrictive non-disclosure agreements.

The Department contacted dozens of OEMs, and Division staff lawyers

visited at least fifteen OEMs in person. In addition, the Division

contacted numerous other industry participants, former Microsoft

employees, and other companies and individuals knowledgeable about the

computer software and hardware industries. In total, the Department

conducted over one hundred interviews of individuals involved in the

software industry. Twenty-two depositions were conducted pursuant to

Civil Investigative Demands (``CIDs'') issued by the Department; six of

these oral examinations were of top-ranking officers of Microsoft. In

addition to reviewing the material produced to the FTC, the Department

reviewed material produced in response to twenty-one additional CIDs

that it sent to a number of software companies, including Microsoft. In

total, the Department reviewed over one million pages of documents in

connection with this investigation.

At the conclusion of this effort, the Department determined that

certain of Microsoft's licensing practices and its use of unreasonably

restrictive non-disclosure agreements violated the Sherman Act. The

Department challenged these practices, and obtain a proposed Consent

Decree which adequately addressed the competitive concerns. As to all

other areas that were investigated, the Department carefully considered

the evidence before it under the prevailing legal standard, and

determined that no further action was warranted on the evidence before

it.

II. Response to Public Comments

A. Comments That Do Not Relate to Violations Charged in the Complaint

Three of the five comments received related to conduct not charged

in the Complaint. As discussed in more detail infra, review under the

Tunney Act is confined to the terms of the proposed decree and their

adequacy as remedies for the violations alleged in the Complaint.

Public comments and the Court's review are designed to ensure that the

Department has fashioned relief to the violations alleged in the

Complaint that it reasonably believes will further the public interest.

Public comments that relate to conduct that the Department has

determined not to prosecute are beyond the scope of the Tunney Act

review procedure, for the reasons and under the law set forth fully at

section III, below.

The issues raised by the following three comments therefore are not

relevant to the Tunney Act determination of whether the proposed decree

is in the ``public interest.'' Nevertheless, the Department herewith

provides an explanation to interested members of the public on the

issues raised.

1. Comment of Anne E. Bogoch, Chan & Jodziewicz

Anne E. Bogoch, an attorney in the firm Chan & Jodziewicz,

submitted a comment on behalf of small computer companies who claim to

have been unlawfully excluded from both the hardware and software

computer market by Microsoft's monopolization of the personal operating

system software market. The comment objects to two related Microsoft

practices: (1) ``Microsoft's tying or bundling of the sale of MS-DOS to

the purchase of hardware systems'' and (2) Microsoft's ``purported

licensure to restrict the resale of copies of MS-DOS.'' The comment

attacks these practices as illegal under two theories. The first relies

on copyright law, arguing that under the First Sale Doctrine, Microsoft

cannot restrict the ability of purchases of MS-DOS to resell that MS-

DOS in any manner they see fit. The fact that Microsoft is writing

license agreements that purport to restrict resale is alleged to be an

abuse of the copyright and therefore an antitrust violation. Second,

the comment argues that Microsoft has engaged in illegal tying, by

conditioning the purchase of the typing product, MS-DOS, on the

purchase of personal computers: customers are prevented from buying MS-

DOS without a personal computer.

This comment apparently refers to Microsoft's practice of licensing

the use of its copyrighted software (Microsoft) to OEMs only for

distribution with the personal computers sold by those OEMs, and

subject to license restrictions that prohibit the OEMs from reselling

the software as a stand-alone product. Microsoft has used this

licensing policy for many years, and has initiated legal action against

a number of its licensees alleging that by distributing copies of MS-

DOS that were not sold in conjunction with a computer, the licensee had

violated the terms of its license and infringed Microsoft's copyrights.

In a number of these cases, Microsoft has apparently received favorable

results.

In general, a firm does not violate the antitrust laws merely by

enforcing its legitimate intellectual property rights. Thus, to the

extent that Microsoft's conduct is an instance of legitimately

exploiting its copyright, there is little reason to challenge that

conduct as violative of the Sherman Act. Based on the facts that were

uncovered through its inquiry, the Department did not find a basis for

challenging under the Sherman Act this aspect of Microsoft's conduct.

The Department also has not sought to challenge this alleged

conduct as an illegal tying arrangement under the antitrust laws.

Microsoft does not sell the allegedly tied product (personal

computers). This situation does not, therefore, come with the framework

for illegal tying arrangements.

2. Comment of Micro System Options

A comment from Micro System Options complaints that the developers

toolkit for Microsoft's Windows NT 3.5 contains a new, attractive

feature to create three dimensional images within software

applications. It expresses concern that Microsoft's next release of

Windows will include the same feature. Micro System Options apparently

makes a software product called 3d Graphic Tools which performs

functions similar to those of the new feature in Microsoft's software

product(s), and Micro System Options is concerned that the inclusion of

this new feature in Microsoft software products will reduce demand for

its own software product.

The Department's Complaint does not challenge as violations of the

antitrust laws Microsoft's inclusion of new software features in its

operating system products. Over the past fourteen years, Microsoft has

developed and soft numerous successive versions of its operating system

products, each more advanced and containing more software features than

the previous one. Whenever Microsoft adds an attractive software

feature to its operating system products, it reduces the demand for

software products sold by third parties as a complement to the

Microsoft product that performed similar functions.

The proposed Final Judgment, in IV (E), forbids Microsoft from

licensing covered products\2\ through agreements conditioned on ``(1)

the licensing of any * * * other product.'' However, this provision

explicitly states that ``this provision in and of itself shall not be

construed to prohibit Microsoft from developing integrated products.''

The evidence developed by the government during this investigation

would not, in its view, support a broader injunction. Activity of this

sort requires case by case analysis, and a broad injunction against

such behavior generally would not be consistent with the public

interest.

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\2\We note that the developers' toolkit for Microsoft Windows NT

3.5, the product that is the subject of Micro System Options

comment, is not a ``Covered Product'' as defined by the proposed

Final Judgment.

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3. Comment of Anthony R. Martin

A comment from Anthony R. Martin states that since the settlement

of this case, Microsoft has begun to engage in new and different forms

of monopolistic conduct. As an example of this, Mr. Martin complains

that Microsoft is pressuring software suppliers into switching from the

current version of Windows to the next version of Windows which will be

released shortly. Mr. Martin suggests that the government may have

``settled too soon, for too little,'' and that it should reopen its

investigation.

The United States does not believe that the possibility that

Microsoft might in the future engage in new forms of anticompetitive

behavior is a sufficient reason to reject the proposed Final Judgment

before the Court now. Obviously, the Department cannot, in a Consent

Decree, proscribe every conceivable kind of anticompetitive conduct in

which a firm might engage in the future. It certainly cannot allege in

a complaint anticompetitive conduct that has not yet occurred. In

addition, the government cannot be expected to continue its

investigations and litigation indefinitely, without resolution, on the

theory that the defendant might, at some point, begin to engage in

additional anticompetitive practices. The Department considered every

allegation of anticompetitive behavior that came to its attention

during the period of its investigation, and brought an action

challenging the practices that it thought should be challenged on the

facts then before it. The proposed Decree meets the Department's

competitive concerns as of the date of filing of the proposed Decree.

Should Microsoft at some future date begin to engage in new forms of

anticompetitive conduct, the government can and will initiate a new

investigation.

B. Comment of IDEA

One comment does relate directly to the terms of the proposed

decree. That comment, submitted by IDEA, an OEM which has licensed

software from Microsoft, contends that its license agreements from

January 1, 1989 to the present have resulted in more than $2,000,000 in

prepaid royalties. IDEA suggests that the decree should contain

provisions ordering Microsoft to refund such prepaid royalties to IDEA

and similarly situated companies.

This comment apparently concerns the ``minimum commitment'' feature

found in the many operating system software licenses Microsoft has

entered into with OEMs. The minimum commitments create ``take or pay''

contracts in which OEM's commit themselves to pay Microsoft not less

than a particular amount of money in a particular time period.\3\

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\3\For example, an OEM under a pet-processor license that

expected to sell 10,000 personal computers a year for the three-year

term of its license and negotiated a royalty rate of $25 for each

computer it shipped containing a microprocessor identified in its

license agreement might have a minimum commitment of $250,000 per

year. If the OEM only sold 8,000 personal computers in the first

year, it would still owe Microsoft $250,000. If it sold 11,000, it

would owe Microsoft $275,000 (11,000 times $25).

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The proposed Final Judgment prohibits Microsoft from entering into

license agreements that contain minimum commitments (section IV (F))

and from enforcing any minimum commitment in existing license

agreements (section IV (J) (2)). These prohibitions were included

because of concerns that minimum commitments could be structured in

ways that create anticompetitive disincentives for OEMs to make

incremental purchases of non-Microsoft operating systems. See

Competitive Impact Statement, pp. 10, 14. In addition, Section IV (I)

of the proposed Final Judgment provides all OEMs the right to terminate

existing license agreements for MS-DOS and Windows immediately, without

penalty. However, the government did not believe that it was necessary,

in order to create the conditions for competition in the operating

system software market on an ongoing basis, to require Microsoft to

refund ``unused'' royalty payments that were paid under minimum

commitment provisions applicable to contract periods prior to the

filing of the government's case. The principal goal of the government's

action was to ensure that OEMs' purchasing decisions in the future

would not be distorted by the existence of anticompetitive license

terms. Refunds of royalties paid by OEMs in prior periods would not

have affected prospective decisions about which operating system

products they should buy now and in the future. Further, such refunds

arguably could produce a windfall for some OEMs without producing

corrective or remedial procompetitive impact.\3\

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\3\For example, an OEM under a per-processor license that

expected to sell 10,000 personal computers a year for the three-year

term of its license and negotiated a royalty rate of $25 for each

computer it shipped containing a microprocessor identified in its

license agreement might have a minimum commitment of $250,000 per

year. If the OEM only sold 8,000 personal computers in the first

year, it would still owe Microsoft $250,000. It it sold 11,000, it

would owe Microsoft $275,000 (11,000 times $25).

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C. Comment of J. Adam Burden

A comment by J. Adam Burden complains about the ``ridiculous action

brought forth towards Microsoft.'' Mr. Burden contends that Microsoft's

large market share can be attributed to the fact that software

developers like to have an operating system standard, and that the

government has penalized Microsoft for its success.

As evidenced by the Complaint, proposed Consent Decree, and

Competitive Impact Statement filed with the Court, the Department

concluded after an extensive and thorough investigation that specific

Microsoft practices were unlawfully restraining competition in the PC

operating system market, and sought to enjoin such practices in the

proposed Final Judgment. The government's Complaint and the proposed

Decree do not suggest that Microsoft should be penalized for success or

merely for obtaining a larget market share.

III. The Legal Standard Governing the Court's Public Interest

Determination

When the United States proposes an antitrust consent decree, the

Tunney Act requires the court to determine whether ``the entry of such

judgment is in the public interest.'' 15 U.S.C. Sec. 16(e) (1988). In

making that determination, ``the court's function is not to determine

whether the resulting array of rights and liabilities `is one that will

best serve society,' but only to confirm that the resulting `settlement

is ``within the reaches of the public interest. United States v.

Western Elec. Co., 993 F.2d 1572, 1576 (D.C. Cir.), cert. denied, 114

S. Ct. 487 (1993) (quoting, in turn, United States v. Western Elect.

Co., 900 F.2d 283, 309 (D.C. Cir.), cert. denied, 498 U.S. 911 (1990);

United States v. Bechtel, 648 F.2d 660, 666 (9th Cir.), cert. denied,

454 U.S. 1083 (1981); United States v. Gillette Co., 406 F. Supp. 713,

716 (D. Mass. 1975) emphasis in 993 F. 2d)).\4\

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\4\The Western Electric decision involved a consensual

modification of an antitrust decree. The Court of Appeals assumed

that the Tunney Act standards were applicable in that context.

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Thus, under the Tunney Act, the district court plays an important

but limited role. It properly reviews the government's reasons for

proposing the decree, as explained in the competitive impact statement

and the response to comments, to ensure that the government is not

acting irrationally. But the court may not reject the proposed decree

``simply because the proposal diverge[s] from its view of the public

interest.'' Western Elec. Co., 993 F.2d at 1577. Rather, the public

interest standard requires the court to enter a proposed decree ``that

the Department * * * reasonably regard[s] as advancing the public

interest.'' Id. at 1576; see also United States v. Gillette Co., 406 F.

Supp. 713, 716 (D. Mass. 1975). The court may reject the decree ``only

if it has exceptional confidence that adverse antitrust consequences

will result--perhaps akin to the confidence that would justify a court

in overturning the predictive judgments of an administrative agency.''

Western Elect. Co. 993 F.2d at 1577.

Moreover, review under the Tunney Act is confined to the terms of

the proposed decree and their adequacy as remedies for the violations

alleged in the complaint. To the extent that comments raise issues not

addressed in the complaint, those comments are irrelevant to the

court's Tunney Act review. The Tunney Act does not contemplate that the

court will evaluate the wisdom or adequacy of the government's

complaint or consider what relief might be appropriate for violations

that the Department has not alleged. In describing the factors that may

be considered by the court in its public interest determination, the

Act refers to ``the competitive impact of such judgment'', the

``termination of alleged violations'' and the impact of the judgment

upon ``individuals alleging specific injury from the violations set

forth in the complaint.'' 15 U.S.C. 16(e) (1988) (emphasis added).

There is no suggestion in the Act that the court should consider

whether the government should have challenged other practices beyond

those detailed in its complaint.

The limitations on the scope of a court's Tunney Act review have

been explained by two Courts of Appeals. In United States v. Western

Elec. Co., 900 F.2d 283 (D.C. Cir.), cert denied, 498 U.S. 911 (1990),

the Court of Appeals for the D.C. Circuit considered whether the public

interest required the continuation of a consent decree provision

designed to protect competition in information services markets,

notwithstanding the agreement of the parties in the case that the

decree provision should be rescinded.\5\ The court noted that the

government's case ``centered exclusively on AT&T's activities in the

interexchange-service and equipment manufacturing markets,'' and did

not involve the information services market. Id at 307. Because of

that, the Court of Appeals concluded that if the parties had proposed a

decree that did not include provisions to protect information services

markets, that decree nonetheless would have been in the public

interest. Id. The Ninth Circuit Court of Appeals has recognized the

same principle: the Tunney Act ``does not authorize a district court to

base its public interest determination on antitrust concerns in markets

other than those alleged in the government's complaint.'' United States

v. BNS Inc., 858 F.2d 456, 462-63 (9th Cir. 1988); see also In re

International Business Mach. Corp., 687 F.2d 591, 603 (2d Cir. 1982)

(Department's decision to dismiss without prejudice an antitrust case

it previously had filed does not require court approval under the

Tunney Act); United States v. Mercedes-Benz of N. Am., 547 F. Supp.

399, 400 (N.D. Cal. 1982) (same).

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\5\Although there is arguably a distinction between the entry of

a consent judgment and the modification of the consent judgment,

modifications of the consent judgment in this case generally have

been governed by Tunney Act procedures and the Tunney Act's public

interest standard. See Western Elect. Co., 993 F.2d at 1576; Western

Elec. Co., 900 F.2d at 295; United States v. American Tel. & Tel.,

552 F. Supp. 131, 143 (D.D.C. 1982), aff'd, Maryland v. United

States 460 U.S. 1001(1983).

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There are many reasons that might cause the Department not to

initiate a lawsuit, or to challenge some practices and not others,

including reasons related to the factual support available for

potential claims and the enforcement resources that would be required

to establish them. These decisions are ``peculiarly within [the]

expertise'' of the Department of Justice, which is ``far better

equipped then the courts to deal with the many variables involved in

the proper ordering of its priorities.'' Heckler v. Chaney, 470 U.S.

821, 831-32 (1985); see also Maryland v. United States, 460 U.S. 1001,

1006 (1983) (Rehnquist, J., dissenting from summary affirmance) (``How

is a court to decide whether a better settlement in a case involving

one industry is more important to the public than the benefits that

might be gained by immediately working on an antitrust problem in

another industry?'').

Finally, Congress did not intend the Tunney Act to lead to

protracted hearings on the merits, and thereby undermine the incentives

for defendants and the government to enter into consent judgments. S.

Rep. No. 298, 93d Cong. 1st Sess. 3 (1973); see United States v.

American Tel. & Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982), aff'd,

Maryland v. United States, 460 U.S. 1001 (1983). Because it is not the

function of the court ``to make de novo determination of facts and

issues'' but rather to determine whether explanations of the Department

of Justice were ``reasonable under the circumstances,'' United States

v. Mid-America Dairymen, 1977-1 Trade Cas. (CCH) 61,508, at 71,980

(W.D. Mo. 1977), courts have consistently refused to consider

``contentions going to the merits of the underlying claims and

defenses.'' Bechtel Corp. 648 F.2d at 666.

IV. Conclusion

The Tunney Act requires that public comments and the government's

response to those comments be published in the Federal Register. When

that publication has been accomplished, the government will notify the

Court that all of the procedures required by the Tunney Act have been

completed, and will ask the Court to enter the proposed Final Judgment

based on its determination that the Final Judgment is in the public

interest.

The United States is firmly convinced that the proposed Final

Judgment is in the public interest, and we urge the Court to act

promptly to ratify that judgment. If the proposed Final Judgment is to

fulfill its promise of opening the personal computer operating system

software market, it must be approved without delay. Microsoft has

agreed to abide by the requirements of the proposed Final Judgment

pending the Court's Tunney Act review. However, the effectiveness of

the proposed remedy depends not only on Microsoft's conduct, but on the

perception of industry participants that the remedy will be approved

and enforced. OEMs considering alternatives to Microsoft's forthcoming

Windows '95 product need to know that they may shop the competition

without paying a royalty to Microsoft for each computer they sell.

Other operating system suppliers also need to make development and

marketing decisions with the assurance that Microsoft's per-processor

and per-system licenses will no longer artificially limit the market

for their wares. Accordingly, we urge the Court to act promptly to

approve the proposed Final Judgment following the completion of the

remaining Tunney Act requirements.

Dated: October 31, 1994.

Respectfully submitted,

Anne K. Bingaman,

Assistant Attorney General, Antitrust Division.

Donald J. Russell

John F. Greaney

Gilad Y. Ohana

Lawrence M. Frankel

Dianne Kempt Torresen

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

Finance Section, Judiciary Center Building, 555 Fourth Street, NW.,

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

To: Mr. Richard L. Rosen, Chief,

Communications and Finance Section, Department of Justice

Re: Comment, United States v. Microsoft

Attn: Mr. Gil Ohannah, Esq.

Date: Oct. 18, 1994

As per our phone conversation, I enclose my comment. I will

forward the final version under separate cover. If it is not

received in time, please consider the attached my comment.

Thank you,

Sincerely,

Anne E. Bogoch, Esq.,

Chan & Jodziewicz.

``Society * * * has found it necessary over the centuries to

restrain those engaged in competition from undue destruction of

competitors and oppression of consumers. * * * for competition,

unless supervised, like Cronus, will devour its contending young.

Cise & Lifland, Understanding Antitrust Laws, PLI, N.Y. 1991 at 4.

This comment is being filed on behalf of the small computer

companies who have been unlawfully excluded from both the hardware

and software computer market by Microsoft's monopolization of the

personal operating system software market. In this instance of

voracious market manipulation the small vendors in the computer

industry are Cronus' children.

It is the opinion of this author, that although the consent

decree in United States v. Microsoft was long needed, it has not

gone far enough, for additional pernicious anticompetitive conduct

survives, namely Microsoft's tying or bundling of the sale of MS-DOS

to the purchase of hardware systems and attempting, through contract

sale and purported licensure to restrict the resale of copies of MS-

DOS.

Microsoft's bundling restrictions have impacted four different

segments of the economy; consumers of hardware, consumers of

software, sellers of hardware and sellers of software. In addition

because Microsoft's has attempted to impose restrictions upon

downstream purchasers it has also and most severely affected

resellers of computer software and hardware, already in a submissive

market position. Microsoft's monopoly in operating systems has

effectively precluded the market for other operating systems and

accompanying applications programs. Consumers who wish to buy from

small companies which sell hardware and or equip their customers

with systems to operate their businesses must sell the tied

accompanying hardware system to which the MS-DOS was originally

bundled, effectively precluding the consumer from choosing the

hardware systems.

In addition, small computer companies are faced with

insurmountable barriers to access to the market for the sale of

hardware if they do not have licenses to sell DOS, the operating

system product used by over 70% of the market and for which most

application software on the market is written. The only thing a

small computer seller or reseller can do in the current Microsoft

regime is resell the goods tied or bundled as per Microsoft's

purported licensure agreements. This form of restriction on

alienation is an unlawful extension of federal copyright law's

monopoly grant and constitutes an antitrust violation.

The Copyright Act of 1976 grants copyright holders ``the

exclusive right to distribute copies * * * of [a] copyrighted work

to the public by `sale' or other transfer of ownership, or by

rental, lease or lending.'' 17 U.S.C. 106(3). It expressly limits,

however, this monopoly grant by prohibiting copyright holders from

imposing any restraints on alienation subsequent to the first sale

of a copy of a copyrighted work.

The First Sale Doctrine, a codified exception to the Copyright

Act's monopoly grant is based on the common law's aversion to the

restraint of alienation, Sabastian International Inc. v. Consumer

Contacts (PTY) Ltd., 847 F.2d 1093 (3rd Cir. 1988) and the principle

that ownership of a material object or copy is distinct from

ownership of a copyright or intangible, c.f. Mirage Editions, Inc.

v. Albuquerque A.R.T. Co., 856 F.2d 1341 (9th Cir. 1988). The First

Sale provision provides that where a copyright owner sells or parts

with title to a particular copy of a copyrightable work, he divests

himself of his exclusive right to vend that particular copy, 17

U.S.C. Section 109(a). Under the First Sale Doctrine, a first sale

extinguishes the copyright holder's ability to control the course of

copies placed into the stream of commerce.

Microsoft seeks to avoid the operation of the First Sale

Doctrine and unlawfully extend its copyright monopoly beyond what is

permitted by law by characterizing the sale of copies of MS-DOS as

licenses. Blanket misuse of the term ``license'' cannot veil the

fact the distribution of the hard copies of MS-DOS at issue are

sales.\1\ Microsoft, illegally attempting to control the ultimate

disposition of the over 70 Million copies of MS-DOS it has placed

into the marketplace is succeeding in market place power semantics

at the expense of Constitutional and Congressional copyright policy

and law.

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

\1\Cases under the Uniform Commercial Code have consistently

found contracts between computer companies and vendors, drafted as

if they were licenses constituted sales of goods within the meaning

of UCC 2-102 and 2-105. A number of other courts have found that

contracts for computer software cast in the form of licenses were

contracts for the sale of goods within the definition of the Uniform

Commercial Code.'' Advent Systems Ltd. v. Unisys Corp., 925 F.2d 670

(3rd Cir. 1991); see also Chatlos Systems, Inc. v. National Cash

Register Corp., 635 F.2d 1081 (3d Cir. 1980) (hardware, software and

associated services governed by U.S.C.); Carl Beasly Ford, Inc., v.

Burroughs Corp, 361 F. Supp. 325 (E.D. Pa. 1973) aff'd 493 F.2d 1400

(3d Cir. 1974) (U.C.C. applied without discussion); c.f. RRX

Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir. 1985);

c.f. Advent Sys, Ltd. v. Unisys Corp., 925 F.2d 670, 674-76 (3d Cir.

1991).

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

What Microsoft is doing is not new. The Court of Appeals for the

Ninth Circuit, in Step-Saver Data System, in finding a similar

purported license to in fact be a contract for the sale of computer

software stated:

When form licenses were first developed for software, it was, in

large part, to avoid the federal copyright law first sale doctrine.

* * * By characterizing the original transaction between the

software producer and the software rental company as a license,

rather than a sale, and by making the license personal and non-

transferable, software producers hoped to avoid the reach of the

first sale doctrine and to establish a basis in state contract law

for suing the software rental companies directly. * * * Under the

amended (copyright) statute, a purchaser of a copy of a copyrighted

computer program may still sell his copy to another without the

consent of the copyright holder. This amendment renders the need to

characterize the original transaction as a license largely

anachronistic.

The purchaser of a copy of a computer program enjoys the same

freedom to transfer a copy as the owner of copies of any other form

of copyrighted work. Goldstein, Copyright, Vol.1 Section 5.6.1 at p.

607. A copy of a computer program is a fungible good like any other

copy of a copyrighted work.

Computer programs are copyrightable intellectual property, but like

a phono record of a composition, once implanted into a medium and

widely distributed to computer owners, are merely copies. When

transferred to a readable, it becomes a readily merchantable

commodity.

``That a computer program may be copyrightable as intellectual

property does not alter the fact that once in the form of a floppy

disc or other medium, the program is tangible, moveable and

available in the marketplace.'' Like a phono record of a musical

composition, once implanted into a medium and widely distributed to

computer owners, computer programs become fungible goods.

The copyright owner who does not wish to encumber subsequent

distribution of copies, embodying his work can do so by initially

leasing rather than selling, C.F. Goldstein, Copyright, supra,

Section 5.6.1, Vol, 1 at 595. However, once there has been a valid

first sale of a copy of computer program, the First Sale Doctrine

Act as a defense to any claim of copyright infringement as to

subsequent purchases.

While perhaps Microsoft desires to control the ultimate

disposition of every one of the seventy million odd copies of its

software in existence, it may not use the copyright laws to do so.

Congress has decided wisely that when an item is sold, purchaser is

to take certain minimum rights, among which is the right to resell.

Patent decisions and copyright costs by analogy have uniformly

recognized that the purpose of patent law is fulfilled with respect

to any particular article when the patentee has received his reward

for the use of his work by the sale of an article or copy, and that

once that purpose is realized, the patent law affords no basis for

retaining the use and enjoyment of the thing sold. [Citations

omitted]. Construing and applying the patent law so as to give

affect to the public policy which limits the granted monopoly

strictly to the terms of the statutory grant, the particular form or

method by which the monopoly is sought to be extended is immaterial.

The first vending of any article manufactured under a patent or a

copy of a copyright work puts the article beyond the reach of the

monopoly which the patent confers. United States v. Univis Leno Co.,

et al., 316 U.S. 241, 251-252 (1942).

A copyright, like a patent is a statutory grant of monopoly

privileges. Broadcast Music, Inc. v. Columbia Broadcasting System,

Inc., 441 U.S. 1, 29, 99 S. Ct. 1551, 1567 (1979). Being a statutory

grant, the rights are only such as the statute confers, and may be

enjoined only on the terms and conditions which is specifies. See

Loew's Inc. v. Columbia Broadcasting System, Inc. A copyright owner,

like a patentee, may not increase the scope of the monopoly afforded

by the copyright through a license agreement with a licensee. F.E.L.

Publications v. Catholic Bishop of Chicago, 506 F. Supp. 1127, 1134

(N.D. Ill. 1981) (Plaintiff's attempt to extend his copyright

monopoly to the licensing of not-for-profit performances of

copyright religious music for worship constituted an antitrust

violation.) Microsoft's attempt to extend his monopoly beyond that

conferred by statutory grant constitutes misuse and an antitrust

violation.

In addition its attempt to do so in concert with and by

licensure agreement with hardware manufacturer constitutes a

conspiracy in violation of the antitrust laws.

Microsoft's bundling is an illegal tying arrangement, either

cast as a per se tying or a conspiracy under Section 1 of the

Sherman Act. Microsoft's ``licenses'' are ``contracts'' within the

scope of Section 1 of the Sherman Act, as well as its licensing

practices constituting monopolization under Section 2 of the Sherman

Act.

The essential characteristic of an invalid tying arrangement

lies in the seller's exploitation of its control over the tying

product to force the buyer into the purchase of tied product that

the buyer either did not want at all, or might have preferred to

purchase elsewhere.'' Jefferson Parish Hospital v. Hyde, 466 U.S. 2,

12, 104 S. Ct., 1551, 1558, 80 L.Ed.2d 2 (1984). A tying arrangement

violates Section 1 of the Sherman Act and Section 3 of the Clayton

Act if it is shown to restrain competition unreasonably or is

illegal per se. Fortner Enterprises v. U.S. Steel Corp., 394 U.S.

495, 498-500, 89 S. Ct. 1252, 1256-1257, 22 L.Ed.2d 495 (1969).

The prerequisites of per se illegality are: (1) separate

products, the purchase of one (tying product) being conditioned on

purchase of the other (tied product); (2) sufficient economic power

with respect to the tying product to restrain competition

appreciably in the tied product; and (3) an effect upon a

substantial amount of commerce in the tied product. Id. What is

required in a per section case is not power over the whole market

for the tying product, but only a ``type of market power [that] has

sometimes been referred to as leverage * * * defined here as a

supplier's ability to induce his customers for one product to buy a

second product from him that would not be purchased solely on the

merit of that second product.'' Id. at 1559 n.20 quoting V.P. Areeda

& D. Turner, Antitrust Law, 1134 at 202 (1980). Courts have

condemned tying arrangements ``when the seller has `market power' to

force a purchaser to do something that he would not do in a

competitive market.'' Id. at 1241. Id. at citing United States v.

Loew's, Inc., 371 U.S. At 45, 83 S. Ct. at 102.

Microsoft not only has sufficient power, it has a monopoly in

the MS-DOS/tying product market, that clearly enables it in

combination with its licensees to restrict competition in the tied

product. Id. at 1345. ``[T]he mere presence of competing substitutes

is insufficient to destroy the legal, and indeed the economic,

distinctiveness of the copyrighted product.'' United States v.

Loew's, Inc., 371 U.S. At 49, 83 S. Cit. at 104. Id. at 1341.

In Digidyne v. Data General Corp., 734 F.2d 1336 (9th Cir. 1984)

and Telerate Systems, Inc. v. Caro., 689 F. Supp. 221, 237 (S.D.N.Y.

1988). (Id. at 808) the Court of Appeals for the Ninth Circuit and

the District Court for the Southern District of New York found

software and CPUs, to be ``separate products,'' for purposes of

finding tie-ins.

Digidyne v. Data General Corp., 734 F.2d 1336 (9th Cir. 1984)

involved litigation between rival computer manufacturers. Data

General, the defendant, manufactured a computer system called NOVA,

consisting of a central processing unit (``CPU'') and a disk

operating system called RDOS. The operating system contained the

basic commands for operating the system. Data General refused to

license the RDOS to all except the purchasers of its NOVA hardware.

The Ninth Circuit held that defendant's refusal to license its

computer operating system software except to purchasers of central

processing units of its computer system was an unlawful tying

arrangement. Stating that tying agreements served hardly any purpose

beyond the suppression of competition. The Court found that

conditions such as existed in Digidyne successfully curbed

competition on the merits with respect to the tied product,'' by

denying competitors free access to the market for the tied product,

not because the party imposing the tying requirements has a better

product or a lower price, but because of his power or leverage in

another market. At the same time buyers are forced to forego their

free choice between competing product.'' Id. at 807. Since it is the

use of ``power or leverage in another market'' which the antitrust

laws proscribe, the Court reasoned that tie-ins are `unreasonable in

and of themselves whenever a party has sufficient economic power

with respect to the tying product to appreciably restrain free

competition in the market for the tied product and a `not

insubstantial' amount of interstate commerce is affected.'' ``If

each of the products may be purchased separately in a competitive

market, one seller's decision to sell the two in a single package

imposes no unreasonable restraint on either market particularly if

competing suppliers are free to sell either the entire package or

its several parts. Jefferson Parish, 466 U.S. At 12. Microsoft's

anticompetitive licenses prevent sellers from doing just that.

Licenses specifically restrict the sale of MS-DOS to circumstances

where it is tied to an accompanying hardware system.

Microsoft's contracts with its licensees whereby they have tied

the purchase of MS-DOS to the purchase of accompanying hardware may

be seen as a similar conspiracy as those found in patent tying

United States v. Univis Lens Co., et al., 316 U.S. 241 (1942) and

patent pooling cases see United States v. General Electric Co., 82

F. Supp. 753, 814 (D.N.J. 1949) as well as the seminal copyright

block licensing case of United States v. Paramount Pictures, 334

U.S. 131, 156-159 (1948).

Because of Microsoft's monopoly, sellers of software are

precluded from entering and competing in the market for operating

software. Because of Microsoft's monopoly, and sellers inability to

obtain MS-DOS to run it sells, seller is effectively precluded from

entering a large portion of the hardware market as well. Jefferson

Parish, 466 U.S. at 14, and increasing the social cost of market

power by facilitating price discrimination, thereby increasing

monopoly profits over what they would be absent the tie. Jefferson,

466 U.S. at 15.

From the standpoint of the consumer whose interests in the

statute was especially intended to serve the freedom to select the

best bargain in the second market is impaired by his need to

purchase the tying product, and perhaps by the inability to evaluate

the true cost of either product when they are available only as a

package. Jefferson, 466 U.S. at 15.

Microsoft may claim that it limits its licenses to hardware

companies so severely for valid quality control reasons.

Microsoft's effort to enlarge the scope of its monopoly by using

the market power it confers to restrain competition in the market

for a second product will undermine competition on the merits in

that second market. Jefferson at 16 citing United States v.

Paramount Pictures, Inc., 334 U.S. 131, 156-159, 92 L.Ed.2d 1260, 68

S. Ct. 915 (1948). Such restraint of trade violates the Sherman Act

Sec. 1.

Richard L. Rosen, Chief,

Communications & Finance Section, Antitrust Division, Room 8104, 555

Fourth Street NW., Washington, DC 20001.

October 18, 1994.

Dear Mr. Rosen. This letter refers to the Justice Department's

Proposed Final Judgment in United States of America vs. Microsoft

Corporation. I am not certain if this situation is covered. If it

is, Microsoft is already violating the principles of the consent

decree. If it is not, I believe it should be included as Prohibited

Conduct. This is not an isolated case.

Last week I purchased the developers toolkit for Microsoft's

Windows NT 3.5 and discovered that Microsoft has included third

party tools to create three dimensional images within software

applications free of charge. My product, 3d Graphic Tools, is a tool

to create three dimensional images within software applications. The

third party tools included in Windows NT 3.5 were obtained or

licensed from Silicon Graphics by Microsoft. Further I hear

(Microsoft will not cooperate and say one way or the other) that a

version of the same third party tools will be included in the

upcoming Windows 4.0 release. If this happens my product will be

dead, because why would anyone pay for something they already get

free? I think Microsoft's intent by selling this ``package'' is to

guarantee a market for one software product and squeeze may product

(and other competing products) out of this market.

I was under the impression (false) that these third party tools

would be sold separately. I was an official test site for Windows NT

3.5 and they were not included by Microsoft in the pre-release

version of the product in other than an extremely rudimentary form

which would have required the purchase of additional tool kits from

other sources. 3d Graphic Tools is not unknown to Microsoft, they

have two copies in their corporate library which are accessible to

any employee. We participate in Microsoft's Add-on Developer Tools

Program and advertise in the Companion Products catalogs which are

included in Microsoft's product boxes with the Visual Basic and

Visual C++. (I have included a copy of the most recent catalog for

Visual C++, my advertisement is on page 15). I think this

demonstrates that Microsoft is aware of my products. As with other

small companies this is my sole product. 3d Graphic Tools has been

available since 1992 to Windows developers and to MacIntosh

developers since 1988.

Please contact me if you need further information regarding this

matter.

Best Regards,

Mark M. Owen,

Owner, Micro System Options phone 206 868 5418 fax 206 868 7780

cc: Peter Miller, Microsoft Corporation

September 6, 1994.

Anne Bingaman, Deputy Attorney General

Antitrust Division, Department of Justice, Washington, DC 20530, Via

fax (202) 616-2645.

Re: Microsoft, Inc. Settlement

Dear Deputy Attorney General Bingaman: I am writing to ask you

to please send me a set of the settlement documents for the

Microsoft lawsuit which you recently settled, and also to request

that you reopen that matter to consider postsettlement conduct by

Microsoft.

As I understand the basic parameters of the settlement, you

sought to ``open up'' access to operating systems. However, I think

you may have settled too soon, for too little.

In the wake of your settlement Microsoft appears to have become

more, not less, predatory. Last week I announced I would fight to

stop Microsoft from monopolizing use of the word ``windows'' in

computers. This past Sunday the New York Times carried a story

indicating Microsoft is trying to strong-arm software suppliers into

shifting to Windows 4.0 under pain of losing permission to use a

``compatibility'' logo, thereby forcing both producers and consumers

of software to incur major expenses without any real need to do so.

These gestures are the classic activity of a monopolist.

I believe there is a reasonable, credible basis to believe that

Microsoft is using your settlement as a sword, not a shield, and has

gone on to initiate new forms of monopolistic conduct which may not

be literally touched upon by your settlement. I therefore ask that

you reopen your investigation and take meaningful steps to ensure a

level playing field/open marketplace in computer software as well as

in operating systems.\1\

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

\1\The Windows 4.0 product is also a new operating system so

Microsoft is obviously trying to move its antitrust conduct

downstream from compelled sales to compelled upgrading. I see no

distinction between each type of anticompetitive conduct. Do you?

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

Respectfully submitted,

Anthony R. Martin

ARM: sp

w/encl. NYT Sunday Sept. 4, 1994

VIA FACSIMILE AND FEDERAL EXPRESS

(202) 514-6525 (202) 307-6283 (202) 514-6381

October 17, 1994.

Anthony V. Nanni, Section Chief,

P. Terry Lubeck, Section Chief,

Gil Ohana. Esq.

U.S. Department of Justice, Antitrust Division, 10th & Constitution

Avenue, Washington, DC

RE: United States v. Microsoft Corporation Civil Action No. 94-1564

Comment in accordance with the Tunney Act

Dear Messrs. Nanni, Lubeck and Ohana: Under the terms of License

Agreements (``Agreements'') with Microsoft Corporation

(``Microsoft'') which cover the period January 1, 1989 to present,

I.D.E. Corporation (``IDEA'') has paid Microsoft prepaid royalties

which now exceed Two Million ($2,000,000.00). The Agreements

expressly state that these prepaid royalties may never be refunded

to IDEA by Microsoft. Although the Agreement provides that prepaid

royalties may be recoupable against actual earned royalties in

excess of IDEA's minimum commitment payments, it is virtually

impossible that these prepaid royalties shall ever be recouped as

set forth in the Agreement.

Although the Consent Decree (``Decree'') grants IDEA the ability

to renegotiate the terms of our Agreements, the Decree does not

grant us a remedy for the recovery of $2,000,000 of prepaid

royalties. IDEA has been able to obtain a firm commitment from

Microsoft on a refund of the prepaid royalties. It is our sincere

belief that Microsoft will not refund prepaid royalties unless they

are so ordered. We therefore respectfully request that the Final

Decree contain such a remedy to IDEA and similarly situated

companies.

Sincerely,

Wanda Washington,

Corporate Counsel.

cc: Gautam Gupta, President

David Hunter, Vice President

David Page, Vice President

VIA FACSIMILE AND FEDERAL EXPRESS

(202) 514-6525 (202) 307-6283 (202) 514-6381

October 18, 1994.

Anthony V. Nanni, Section Chief

P. Terry Lubeck, Section Chief

Gil Ohana, Esq.

U.S. Department of Justice, Antitrust Division, 10th &

Constitution Avenue, Washington, DC.

RE: United States v. Microsoft Corporation Civil Action No. 94-1564

Comment in accordance with the Tunney Act

Dear Messrs. Nanni, Lubeck and Ohana: In furtherance of comments

provided to your office dated October 17, 1994, we have enclosed a

copy of a draft Amendment submitted to I.D.E. Corporation (``IDEA'')

by Microsoft Corporation (``Microsoft''). As was stated in our

earlier comments, although the Consent Decree (``Decree'') grants

IDEA the ability to renegotiate the terms of our Agreements, the

Decree does not grant us a remedy for the recovery of $2,000,000 of

prepaid royalties.

The attached draft Amendment evidences Microsoft's unwillingness

to refund prepaid royalties. This Amendment indicates that:

``* * * prepaid royalties shall be recoupable against earned

royalties * * * only to the extent such prepaid royalties could have

been recouped had the minimum commitment payments existing prior to

the Amendment remained in effect.''

I therefore submit that by amending existing agreements in this

manner Microsoft continues to impose minimum commitments and does

not comply with the Decree which requires that it discontinue its

practice of imposing minimum commitments. Again, we respectfully

request that the Final Decree stipulate a remedy to IDEA and

similarly situated companies with respect to prepaid royalties.

Microsoft's most recent draft Amendment supports our belief that

Microsoft will not refund prepaid royalties unless they are so

ordered.

Sincerely,

Wanda Washington,

Corporate Counsel.

Janet Reno, Attorney General #4400,

Department of Justice, Constitution Ave. and 10th St., NW.,

Washington, DC 20530.

July 25, 1994.

To whom it may concern: This letter is being written in regards

to the ridiculous action brought forth towards Microsoft. Is it

Microsoft's fault that they have produced a product that is popular

due to the ease in which it takes to operate it?

In the statement issued from the Justice department it states

that Microsoft has a 70% market share. If it was a monopoly, should

that number not be around 90-95%? To me it looks a little strange to

have the Vice-President promoting the Information Super-Highway and

the Justice Department going after a company that will help provide

a user friendly interface for ``computer novices'' to use in order

to navigate the highway with. One reason that Microsoft has such a

large market share is that software developers would like to have an

operating system standard. Can you imagine the cost for developing

an application in 3 or 4 different formats? I believe that this

would cripple trade far more than the fact that Microsoft has 70% of

the market share. This clearly shows that in America you get

penalized for success.

Sincerely,

J. Adam Burden.

Internet address: [email protected]

[FR Doc. 94-28441 Filed 11-16-94; 8:45 am]

BILLING CODE 4410-01-M