Economics of Networks

Preliminary Analysis of the June 28, 2001 Appeals Court Decision

in the Microsoft Antitrust Case

By Nicholas Economides

June 29, 2001, Incomplete, not for quotation

Last Updated: 6/29/2001
Disclaimer: I am not a consultant of the United States Department of Justice, Microsoft, or any of the Attorneys General of the 19 States and the District of Columbia that have sued Microsoft

The Washington DC Court of Appeals ruled on June 28, 2001 on the appeal by Microsoft of the District Court's decision in the Microsoft antitrust case. Click here (Court) or here (Microsoft mirror) for the full decision.


Basic points of the Appeals Court decision:

1.               Microsoft’s breakup and other remedies imposed by the District Court are vacated

2.               Microsoft is found guilty of monopolization of the operating systems market for PCs

3.               Microsoft is found not guilty of bundling of Internet Explorer with Windows

4.               Microsoft is found not guilty of attempting to monopolize the Internet browser market

5.               The district court judge Thomas Penfield Jackson is taken out of the case for improper behavior

6.               The case is remanded to the District Court for remedies determination for the monopolization charge

7.               The Appeals Court instructs the District Court to examine the bundling of IE and Windows (if plaintiffs bring it up) under “a rule of reason” where the consumer benefits of bundling are balanced against the damage of anti-competitive actions


Assessment: this is a major victory for Microsoft


1.               Its breakup is rescinded

2.               Microsoft is found innocent in two thirds of the lower court guilty verdict

3.               Given the limited guilty verdict, it is very unlikely that the remedy will be a breakup

4.               Given the way the Appeals Court instructs the District Court to examine the bundling of IE and Windows, it is unlikely that the District Court will find Microsoft guilty of tying

What is the future of this case?

The case has been remanded to the District Court.  However, it is very likely that it will be settled by the Federal Government (and possibly the Attorneys General of the 19 States).  The likely remedy will be the imposition of contract restrictions on Microsoft, especially on exclusive contracts.  The use of exclusive contracts was key to the guilty finding on monopolization of the operating systems. 


Analysis of the Court of Appeals decision

1. Monopolization of the operating systems market for PCs

The court finds Microsoft guilty of monopolization of the operating systems market for PCs. To reach this finding, the court accepts the plaintiff's position that Netscape had a chance to reduce Microsoft's market power in the operating systems market by creating a cross-OS platform on which applications could be run. The court recognizes that the success of this was small. Despite this fact, it finds that various actions of Microsoft to suppress Netscape were anti-competitive. The Court finds a number of anticompetitive acts under Sherman section 2 taken by Microsoft to preserve its monopoly:
(i) Restrictions on OEM licenses that made it difficult or prohibited inclusion of a second browser
(ii) Exclusion of IE from the Add/Remove program utility and commingling of browser and operating system code
(iii) Excusive arrangements with Internet Access Providers
(iv) Exclusive arrangement with Apple Computer not to distribute Netscape
(v) Deception of Java developers, but the court of appeals reverses the lower court and finds Microsoft innocent in the development and promotion of its Java Virtual Machine
(vi) Threatening Intel on cross-platform support of Java.
Microsoft is found innocent of liability upon its general "course of conduct."

2. Attempting to monopolize the Internet browser market

Microsoft is found not guilty of attempting to monopolize the Internet browser market. Among others, the court notes that the plaintiffs and the lower court did not make the appropriate market definition and did not demonstrate that there were substantial barriers to entry in that market or that Microsoft was likely to erect barriers to entry upon acquisition of a dominant market share.

3. Tying Internet Explorer with Windows

The court vacates the lower court guilty verdict which was based on a per se reasoning. The court of appeals finds that the per se analysis is inappropriate in this case for a number of reasons. The court sends back the tying claim to the lower court to be judged (if plaintiffs pursue it) under a "rule of reason" approach. Under this approach, the plaintiffs will have to prove that the harm done by the tying was larger than any pro-consumer or pro-competitive benefits of the tying act.

4. Trial Proceeding and Remedy

The appeals court vacated the whole remedy imposed by the lower court, including the breakup of Microsoft and the various business conduct restrictions because
(i) The lower court failed to conduct an evidentiary hearing
(ii) The lower court failed to provide an adequate explanation of how the remedy it ordered would deal with the monopoly violations
(iii) The appeals court limited the liability of Microsoft since it only concurred on one of the three original antitrust violations (monopolization of the operating systems), found Microsoft innocent of attempting to monopolize the Internet, and send back the tying claim to the lower court to be examined under a different standard.

In its instructions to the lower court on the appropriate remedy, the court of appeals notes that the lower court should consider the problems that a dissolution of unitary companies creates. Moreover, the court instructs the lower court to consider whether "plaintiffs have established a sufficient causal connection between Microsoft's anticompetitive conduct and its dominant position in the OS market" (page 105) noting that "absent such causation, the antitrust defendant's unlawful behavior should be remedied by 'an injunction against continuation of that conduct."" (page 105, citation omitted). Thus, the appeals court notes that "If the court on remand is unconvinced of the causal connection between Microsoft's exclusionary conduct and the company's position in the OS market, it may well conclude that divestiture is not an appropriate remedy."

5. Judicial Misconduct by Judge Thomas Penfield Jackson

The appeals court found that the district court judge had violated judicial rules by talking to reporters and that "the violations were deliberate, repeated, egregious, and flagrant" (page 106). As a consequence, the appeals court disqualified the district court judge retroactively from the date he entered the order breaking up Microsoft, vacated the order entirely and remanded the case to a different judge.

Earlier analysis of the Microsoft Antitrust Case

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