in the united states district court for the district …...nov 16, 2007 · 2 threats in the...

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

STATE OF NEW YORK ex rel. Attorney General ANDREW M. CUOMO, et al., Plaintiffs, v. MICROSOFT CORPORATION, Defendant.

Civil Action No. 98-1233 (CKK)

REPLY MEMORANDUM OF THE MOVING PLAINTIFF STATES IN SUPPORT OF MOTIONS TO EXTEND THE FINAL JUDGMENTS

FOR THE STATES OF CALIFORNIA, CONNECTICUT, IOWA, KANSAS, MASSACHUSETTS, MINNESOTA, AND THE DISTRICT OF COLUMBIA KATHLEEN FOOTE Senior Assistant Attorney General Office of the Attorney General of California 455 Golden Gate Avenue Suite 11000 San Francisco, California 91402-3664 (415) 703-5555

FOR THE STATES OF NEW YORK, MARYLAND, LOUISIANA AND FLORIDA ANDREW M. CUOMO Attorney General of New York JAY L. HIMES Chief, Antitrust Bureau 120 Broadway New York, New York 10271 (212) 416-8282

Dated: November 16, 2007

Case 1:98-cv-01233-CKK Document 668 Filed 11/16/2007 of 36

TABLE OF CONTENTS

Table of Authorities………………………………………………………………………………ii

Preliminary Statement …………………………………………………………………………….2

Argument…………………………………………………………………………………….……4

I. The Court Should Extend the Final Judgments…………………………………………….4

A. The Western Electric Court’s Application of Rufo Favors Decree Modification Where Needed to Accomplish the Final Judgments’ Objective of Restoring Competition…………………………………………………………………….............4

B. Western Electric Appropriately Integrates Rufo’s Flexible Standard Where Government Antitrust Enforcers Seek a Decree Modification………………………....8

C. Changed Circumstances Make Extension of the Final Judgments Appropriate to Assure that Their Remedial Objectives are Achieved………………….......................12

Pace of Change in the Operating System Market…………………………………12 The III.E Saga……………………………………………………………………..13 Lack of General Server Products………………………………………………….14 No Pre-Installed Competing Browser……………………………………………..16 Tailoring the Modification………………………………………………………...18

II. Microsoft Mischaracterizes, Rather Than Rebuts, the Moving States’ Arguments for an Extension……………………………………………………………………………….19

A. Microsoft’s Failure to Satisfy Its Section III.E Disclosure Obligation is

Relevant to the Court’s Consideration Whether the Final Judgments Should be Extended …………………………………………………………………….………..19

B. The New York Movants’ Position on this Motion Accords with that in Their Earlier Effectiveness Report………………………………………………………......23

C. The Moving States’ Use of Market Share Data is Appropriate……………………….24 D. The Relevant Markets Have Not Changed Rapidly as the Court Anticipated They

Would when the Final Judgments Were Entered……………………………………...28

Conclusion……………………………………………………………………………………….32

i


ii

TABLE OF AUTHORITIES

CASES

American Press Ass'n v. United States, 245 F. 91 (C.A.7 1917)...................................................4

Chrysler Corp. v. United States, 316 U.S. 556 (1942) .................................................................4

David C. v. Leavitt, 242 F.3d 1206 (10th Cir.), cert. denied, 534 U.S. 822 (2001) ............ 7, 10, 14

Hughes v. United States, 342 U.S. 353 (1952).............................................................................6

Massachusetts v. Microsoft Corp., 373 F.3d 1199 (D.C. Cir. 2004).............................................2

New York State Ass'n for Retarded Children, Inc. v. Carey, 706 F.2d 956 (2d Cir. 1983), cert. denied, 464 U.S. 915 (1983)............................................................................. 7, 8

New York v. Microsoft Corp., 224 F. Supp. 2d 76 (D.D.C. 2002)………………14, 15, 16, 17, 22

New York v. Microsoft Corp., 224 F. Supp. 2d 203 (D.D.C. 2002) ............................................ 10

NLRB v. Express Pub'g Co., 312 U.S. 426 (1941) ..................................................................... 27

Pigford v. Veneman, 292 F.3d 918 (D.C. Cir. 2002) ........................................................ 9, 10, 11

Rufo v. Inmates of the Suffolk County Jail, 502 U.S. 367 (1992)......................................... passim

Swift & Co. v. United States, 286 U.S. 106 (1932)......................................................... 4, 5, 7, 10

System Federation No. 91 v. Wright, 364 U.S. 642 (1961)....................................................... 4, 7

Thompson v. U.S. Department of Housing & Urban Development, 404 F.3d 821 (4th Cir. 2005) ................................................................................................................... 7, 10, 14

United States v. Aluminum Co. of America, 91 F. Supp. 333 (S.D.N.Y. 1950) ........................... 27

United States v. Baroid Corp., 130 F. Supp. 2d 101 (D.D.C. 2001)…………………………11

United States v. E. I. du Pont de Nemours & Co., 366 U.S. 316 (1961) .......................................7

United States v. Local 560, 974 F.2d 315 (3rd Cir. 1992) .............................................................6

United States v. Microsoft Corp., 231 F. Supp. 2d 144 (D.D.C. 2002) ........................... 10, 16, 22

United States v. United Shoe Machinery Corp, 391 U.S. 244 (1968) ........................... 2, 4, 5, 6, 8


iii

United States v. Western Electric Co., 46 F.3d 1198 (D.C. Cir. 1995) ................................ passim

Vanguards of Cleveland v. City of Cleveland, 23 F.3d 1013 (6th Cir. 1994) ......................... 12, 18

Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969)........................................ 27

OTHER AUTHORITIES

Brief for the United States in United States v. Eastman Kodak Co., Docket No. 94-6190 (2nd Cir. Sep. 1994) ........................................................................................................7

IIA Phillip E. Areeda, Herbert Hovenkamp, Roger D. Blair & Christine Piette Durrance, ANTITRUST LAW ¶ 327b (3rd ed. 2007) .............................................................2

Microsoft Corporation Form 10-K, For the Fiscal Year Ended June 30, 2007, http://www.microsoft.com/msft/SEC/default.mspx..................................................... 26-27, 29

“Microsoft finally in ‘full compliance’ with 2004 EU antitrust ruling,” Oct. 22, 2007, http://arstechnica.com/news.ars/post/20071022-microsoft-finally-in-full-compliance-with-2004-eu-antitrust-ruling.html. .................................................................... 27

Report of the Antitrust Subcomm. (Subcomm. No. 5) of the House Comm. on the Judiciary, 86th Cong., 1st Sess., Pursuant to H. Res. 27, On the Consent Decree Program of the Department of Justice (1959) ..........................................................................6

Response of the United States to Public Comment on the Proposal to Modify Final Judgment, dated Sep. 6, 2000, filed in United States v. Baroid Corp., Civil Action No. 93-2621 (RCL) (D.D.C.). ........................................................................................... 9, 11

“Roundtable Conference with Enforcement Officials,” The Antitrust Source, June 2007 http://www.abanet.org/antitrust/at-source/07/06/Jun097-EnforceRT6-20f.pdf. ............. 27

Tom Krazit, The Steady Advance of Mac OS X, Cnet News.com (Oct. 26, 2007) http://www.news.com/8301-13579_3-9804878-37.html ........................................................ 12

United States' Memorandum in Support of Joint Motion to Modify the 1956 Final Judgment and Response to Public Comments, dated Nov. 13, 1996, at 41, filed in United States v. International Business Machines Corp., Civil Action No. 72-344 (AGS) (S.D.N.Y.) (citing Rufo)...............................................................................................9


IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

STATE OF NEW YORK ex rel. Attorney General ANDREW M. CUOMO, et al., Plaintiffs, v. MICROSOFT CORPORATION, Defendant.

Civil Action No. 98-1233 (CKK)

REPLY MEMORANDUM OF THE MOVING PLAINTIFF STATES IN SUPPORT OF MOTIONS TO EXTEND THE FINAL JUDGMENTS

The two groups of moving Plaintiff States (the “Moving States”) submit this joint reply

memorandum in further support of their motions to modify the Final Judgments.1

As Microsoft observes, those joining the New York Group motion believe that the Final

Judgments are proving effective in enabling meaningful marketplace competition, and that the

Technical Committee (“TC”) is playing an invaluable role in this effort. While also strongly

endorsing the TC’s contribution, those joining the California Group motion are more skeptical of

the Final Judgments’ market impact to date. The two groups are of one mind, however, on what

matters: the Final Judgments have not yet accomplished their mission “to end Microsoft’s

restrictions on potentially threatening middleware, prevent it from hampering similar nascent

1 We attach to this memorandum, as Exhibits 1 and 2, respectively, short supplemental reports

by Ronald S. Alepin (“Alepin II”), and John E. Kwoka, Jr. (“Kwoka II”), each dated Nov. 16, 2007. Attached as Exhibit 3 is a proposed modified Final Judgment by the California Group plaintiffs, which reflects Florida’s joining the motion to extend the Final Judgment. Microsoft has stated that it has no objection to the Court ruling on the papers. Tr. Tele. Conf., dated Oct. 23, 2007, at 11. We are prepared to submit the matter on the papers, or to present oral argument, as the Court may direct.


2

threats in the future, and restore the competitive conditions created by similar middleware

threats.” Massachusetts v. Microsoft Corp., 373 F.3d 1199, 1243 (D.C. Cir. 2004).

Preliminary Statement

Microsoft provides a cramped view of the appropriate standard for modifying the Final

Judgments in this case. While citing Rufo v. Inmates of the Suffolk County Jail, 502 U.S. 367

(1992), the leading recent authority, Microsoft ignores its underpinning and misapplies its

teaching in the circumstances here – where government antitrust enforcers seek a modification to

protect the public interest.

Neither Rufo nor any of the other cases cited by Microsoft detract from the core

proposition of United States v. United Shoe Machinery Corp, 391 U.S. 244, 252 (1968): the

Court has the power and the duty to extend an antitrust remedial decree “so as to achieve the

required result,” the restoration of competition in the monopolized market. Moreover, as the

leading commentators remind, “[r]evising a decree to protect competition is quite distinct from

the revision designed to relieve the defendant from hardship or unfairness.”2 This case presents

the former situation. Rufo involved the latter. In any event, as we demonstrate below, the

Moving States satisfy the Rufo requirements, regardless of how they are applied when a

government antitrust enforcer moves to modify a litigated judgment or a consent decree.

We discuss below the changed circumstances that support extending the term of the Final

Judgments. (Point I.B) In summary, they consist of: (1) the slower pace of change that has

prevailed in the PC operating system market than was anticipated by the Court when it initially

set the term at five years; (2) Microsoft’s failure to discharge its communications protocol

disclosure obligations under § III.E; (3) the absence of any general server products shipped under

2 IIA Phillip E. Areeda, Herbert Hovenkamp, Roger D. Blair & Christine Piette Durrance,

ANTITRUST LAW ¶ 327b, at 28 (3rd ed. 2007) (“Areeda, et al.”).


3

the Microsoft communications protocol program; and (4) the failure of the remedy thus far to

“pry open” the critical OEM distribution channel to non-Microsoft browsers. Individually and

collectively, these unanticipated, changed circumstances establish an ample basis for the relief

we seek, which is suitably tailored for the needs of the case. (Point I.C)

We next respond to Microsoft’s efforts to direct attention away from the relevant issues.

We show that Microsoft’s failure to meet its § III.E disclosure obligations is highly relevant to

these motions, and that the Moving States did not waive their right to extend the other terms of

the Final Judgments when they were modified in 2006 in connection with Microsoft’s Technical

Documentation (“TD”) “reset.” (Point II.A) Similarly, the New York Movants’ position on this

motion accords fully with that in their earlier “effectiveness report.” (Point II.B)

In addition, we respond to Microsoft’s contention that the high market shares of

Windows and IE do not matter – not because reducing market share by any particular amount is

a goal of the Final Judgments – but rather because new and emerging technologies with the

potential to undermine the Windows monopoly are still at risk given Microsoft’s enduring

monopoly power and history of disregard for the antitrust laws. (Point II.C) Finally, contrary to

Microsoft’s assertion, the emergence of new products does not mean that the Final Judgments

have achieved their objectives, but instead, makes it imperative that the decree’s protections be

preserved to give those products sufficient time to develop their potential to challenge

Microsoft’s still formidable monopoly power. (Point II.D)


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Argument

I

THE COURT SHOULD EXTEND THE FINAL JUDGMENTS

A. The Western Electric Court’s Application of Rufo Favors Decree Modification Where Needed to Accomplish the Final Judgments’ Objective of Restoring Competition.

The Moving States are government enforcers who sought equitable relief in their case-in-

chief as the remedy to protect the public’s interest in competition in the operating systems

market. They now move to extend the Final Judgments so as to protect opportunities for

competitive alternatives to develop and challenge the applications barrier to entry that Windows

enjoys. In consequence, “[a]t the request of the party who sought the equitable relief, the court

may tighten the decree in order to accomplish its intended result.” United States v. Western

Electric, 46 F.3d 1198, 1202 (D.C. Cir. 1995).3 The same analysis applies, whether the

judgment sought to be modified is a consent decree or one entered after litigation: “[i]n either

event, a court does not abdicate its power to revoke or modify its mandate.” Swift & Co. v.

United States, 286 U.S. 106, 114 (1932) (citing American Press Ass’n v. United States, 245 F. 91

(C.A.7 1917)); see also Western Electric, 46 F.3d at 1205 (“[a] consent decree . . . is subject to

modification to the same extent as if it had been entered as a final judgment after a full trial”)

(citing System Federation No. 91 v. Wright, 364 U.S. 642, 651 (1961)).

The D.C. Circuit’s Western Electric test – whether modification is needed “to accomplish

[the decree’s] intended result” – is derived directly from United Shoe, 391 U.S. at 252, and an

earlier antitrust decision, Chrysler Corp. v. United States, 316 U.S. 556 (1942). In Chrysler, the

United States entered a consent decree that barred Chrysler from owning a finance company

3 Here, of course, the Moving States seek not to “tighten” the decree, but only to extend it to

give it sufficient time “to accomplish its intended result.”


5

unless, by a specified date, the United States had failed to secure relief divesting GM of its own

finance company. As the relevant date approached, the United States moved to extend the period

in the decree so that it had more time to secure relief from GM. The District Court granted the

United States’ motion to modify. Affirming, the Supreme Court wrote that “the test to be

applied in answering this question is whether the change served to effectuate or to thwart the

basic purpose of the original consent decree.” Id. at 562.

Similarly, in United Shoe the United States proved that United Shoe had unlawfully

monopolized the shoe equipment market. Although the United States sought divestiture, the

court instead ordered conduct restrictions “designed to recreate a competitive market.” 391 U.S.

at 246 (footnote and internal quotation marks omitted). Twelve years later, the United States

reported to the court that United Shoe “continued to dominate the shoe machinery market, [and]

that workable competition had not been established in that market . . . .” Id. at 247. The United

States thus sought a modification directing divestiture.

The district court denied the United States’ petition, holding that under Swift, “its power

to modify the original decree was limited to cases involving ‘(1) a clear showing of (2) grievous

wrong (3) evoked by new and unforeseen conditions.’” Id. (quoting United States v. United Shoe

Machinery Corp., 266 F. Supp. 328, 330 (D. Mass. 1967)). The Supreme Court reversed,

however, holding Swift inapplicable. In Swift, the motion to modify was made by the defendants,

who sought release from the injunctive restraints – not by the United States to ensure that the

decree accomplished its purpose of restoring competition. Thus, in United Shoe the Supreme

Court emphasized that the district court had the authority to modify the final judgment to assure

that it “achieved its ‘principal objects,’ namely, ‘to extirpate practices that have caused or may

hereafter cause monopolization, and to restore workable competition in the market’ . . . .”

United Shoe, 391 U.S. at 251-52.


6

Similarly, in Hughes v. United States, 342 U.S. 353, 357 (1952), the Supreme Court

wrote that the district court may modify an antitrust decree on motion by the Government “where

necessary to preserve competition and to prevent monopoly.” The Antitrust Division has since

told Congress that in Hughes, “the Supreme Court has relaxed the test to be used when the

Government seeks to modify a consent decree. It believes that a consent decree in appropriate

circumstances may be changed so as to afford the additional different relief that is needed to

preserve competition.” Report of the Antitrust Subcomm. (Subcomm. No. 5) of the House

Comm. on the Judiciary, 86th Cong., 1st Sess., Pursuant to H. Res. 27, On the Consent Decree

Program of the Department of Justice, at 5 (1959).

Accordingly, the Western Electric court appropriately recognized that, on motion by “the

party who sought the equitable relief,” the court may modify “the decree in order to accomplish

its intended result.” 46 F.3d at 1202. Microsoft in this very case has recognized this: “at the

request of the party seeking the equitable relief, the court is granted broad discretion to modify a

decree in order to accomplish its intended result. United States v. United Shoe Machinery Corp.,

391 U.S. 244, 252, 20 L.Ed 2d 562, 88 S.Ct 1496 (1968); United States v. Western Electric

Company, Inc., 46 F.3d 1198, 1202 (Dist. App. DC Cir. 1995).” Joint Motion by the California

Group and Microsoft to Modify the Final Judgments and Supporting Memorandum of Points and

Authorities, dated Aug. 31, 2006 (“2006 Joint Motion to Modify”), at 3-4; see also United States

v. Local 560, 974 F.2d 315, 331-32 & n.9, 333 (3rd Cir. 1992) (the court may modify an

injunction on application of the government to accomplish the remedy of the original decree).

The United States, as amicus, argues that granting modification of, at least the Final

Judgment entered in favor of the New York Group, would be unsound as a policy matter because

it is “a consent decree” that the parties negotiated, and that it should not be “unilaterally alter[ed]

in the guise of a thinly supported modification request.” U.S. Br. at 7. Microsoft similarly refers


7

to what it calls “the perversity of the incentives” that a decree modification here might foster.

MS Br. at 12. Neither the United States nor Microsoft cites any authority for this position, which

is inconsistent with the case law establishing that the Court has the responsibility to address the

public interest in restored competition. Thus, as the Supreme Court has cautioned, “the parties

cannot, by giving each other consideration, purchase from a court of equity a continuing

injunction.” System Federation No. 91 v. Wright, 364 U.S. 642, 651 (1961), cited in Western

Electric, 46 F.3d at 1205; see also Swift & Co. v. United States, 286 U.S. at 114 (“whether the

decree has been entered after litigation or by consent . . . [i]n either event, a court does not

abdicate its power to revoke or modify its mandate”) (citation omitted); David C. v. Leavitt, 242

F.3d 1206, 1211 (10th Cir.) (“We reject the general proposition that only defendants can seek

equitable modification of unlitigated consent decrees”), cert. denied, 534 U.S. 822 (2001);

Thompson v. U.S. Department of Housing & Urban Development, 404 F.3d 821, 832 n. 6 (4th

Cir. 2005) (“A court's inherent power to modify a consent decree . . . is not circumscribed by the

language of the decree”) (citing authorities).4

The Court’s equitable power is, therefore, undiminished, whether the judgment sought to

be modified is entered after litigation or upon consent. Likewise undiminished is the Court’s

responsibility to see to it that the decree achieves its remedial objective. As Judge Friendly

wrote, “[t]he power of a court of equity to modify a decree of injunctive relief is long-

established, broad, and flexible.” New York State Ass'n for Retarded Children, Inc. v. Carey, 706

4 The appropriate policy consideration is whether an extension will serve the public interest by

protecting and preserving competition in the relevant markets. As the United States has said, “[t]he entry of an antitrust decree is a matter of high public importance. United States v. E. I. du Pont de Nemours & Co., 366 U.S. 316, 323 (1961). It is for that reason that the Supreme Court and this Court have underscored the importance of the public interest in determining whether to terminate (or modify) antitrust decrees.” Brief for the United States in United States v. Eastman Kodak Co., Docket No. 94-6190, at 15 (2nd Cir. Sep. 1994).


8

F.2d 956, 967 (2d Cir.), cert. denied, 464 U.S. 915 (1983). It does no disservice to the consent

decree process for this Court to invoke that power to protect the public interest.

B. Western Electric Appropriately Integrates Rufo’s Flexible Standard Where Government Antitrust Enforcers Seek a Decree Modification

Unlike this case, Rufo involved a motion by an enjoined defendant for relief from the

decree – not a modification designed to assure the decree’s remedial effectiveness. In that

context, the Supreme Court held that Swift’s “grievous wrong” standard for modification no

longer applied, and that flexible equitable principles were appropriately invoked to resolve the

motion. As the Court explained:

[A] party seeking modification of a consent decree bears the burden of establishing that a significant change in circumstances warrants revision of the decree. If the moving party meets this standard, the court should consider whether the proposed modification is suitably tailored to the changed circumstance.

Rufo, 502 U.S. at 383 (footnote omitted).

The Rufo court itself harmonized its ruling with United Shoe, as well as with New York

State Ass’n for Retarded Children, both of which the Supreme Court cited as supporting the

more flexible modification standard. See Rufo, 502 U.S. at 379. This approach was appropriate,

the Court explained, because:

[t]he experience of District Courts and the Courts of Appeals in implementing and modifying such decrees has demonstrated that a flexible approach is often essential to achieving the goals of reform litigation. . . . The Courts of Appeals have also observed that the public interest is a particularly significant reason for applying a flexible modification standard in institutional reform litigation because such decrees reach beyond the parties involved directly in the suit and impact on the public’s right to the sound and efficient operations of its institutions.

Id. at 381 (citations and internal quotations omitted; emphasis added).

In applying the Rufo flexible standard to antitrust decrees, the D.C. Circuit recognized

that factors important in institutional reform litigation may be applied as well to major antitrust

decrees. Western Electric, 46 F.3d at 1203. Like the AT&T decree, here the Microsoft Final


9

Judgments have “a profound national impact,” which “reache[s] far ‘beyond the parties involved

directly in the suit,’ and ha[s] significantly affected the public.” Id. (citing Rufo, 502 U.S. at

381).

Thus, Rufo and Western Electric both teach that a flexible standard should be used to

resolve a modification motion. This very flexible standard recognizes that a motion to modify by

a government litigant, charged with responsibility to protect the public, is freighted with a public

interest to assure that the judgment’s remedial purpose is achieved. That public interest

consideration simply is not present when the motion is made by the defendant who seeks relief

from the decree.5

Microsoft’s other principal authorities similarly cannot carry the weight that Microsoft

loads on them. Pigford v. Veneman, 292 F.3d 918 (D.C. Cir. 2002), did not arise from a

government enforcement action at all; nor did the case involve a remedial antitrust decree. To

the contrary, there private plaintiffs brought a class action against government officials. The

Court of Appeals held that there were sufficient changed circumstances to permit modifying the

decree for the benefit of the class of victims, rather than allowing the defendant to escape the

judgment’s intended remedial effect. The D.C. Circuit therefore remanded so that the district

court could fashion a suitably tailored change. Id. at 92. 5 The United States has previously maintained that Rufo applies where the antitrust defendant

seeks relief from the final judgment that the Government opposes. Then, “[t]o prevail on a termination motion the Government opposes, the defendant, in most cases, must prove that the basic purposes of the decree have been fully achieved.” United States’ Memorandum in Support of Joint Motion to Modify the 1956 Final Judgment and Response to Public Comments, dated Nov. 13, 1996, at 41, filed in United States v. International Business Machines Corp., Civil Action No. 72-344 (AGS) (S.D.N.Y.) (citing Rufo). See also Response of the United States to Public Comment on the Proposal to Modify Final Judgment, dated Sep. 6, 2000, filed in United States v. Baroid Corp., Civil Action No. 93-2621 (RCL) (D.D.C.), at 10-11 (noting that Rufo applies in a government antitrust case “when a defendant wants to be relieved from a decree restriction, but the Department believes that the restriction should continue in effect”) (“U.S. Baroid Br.”).


10

As this Court recognized in its Tunney Act ruling, under Pigford a court’s authority may

be limited to some extent by the language of the decree itself. See United States v. Microsoft

Corp., 231 F. Supp. 2d 144, 200 (D.D.C. 2002) (“Tunney Act Ruling”) (citing Pigford, 292 F.3d

at 923). The Court, however, addressed any conceivable limitation by expressly conditioning

approval of the negotiated Final Judgment on the parties agreeing to sua sponte authority “to

ensure effective implementation of the final judgment in this case.” New York v. Microsoft

Corp., 224 F. Supp. 2d 203, 206 (D.D.C. 2002); see also Tunney Act Ruling, 231 F. Supp. 2d at

200 (“imperative” that the Court’s retention of jurisdiction be “clearly articulated and broadly

drawn”). 6

Microsoft, however, also refers to Final Judgment § VI.B – which authorizes a decree

extension of up to two years for “willful and systematic violations” – and argues that this

provision should limit the Court’s exercise of discretion. MS Br. at 1, 9. Section VI.B, however,

does not exhaust the circumstances in which the Final Judgments may be extended. As the

Tenth Circuit wrote in upholding a decree extension, “a court's equitable power to modify its

own order in the face of changed circumstances is an inherent judicial power that cannot be

limited simply because an agreement by the parties purports to do so . . . . To hold otherwise

would allow the parties, by the terms of their agreement, to divest a court of its equitable power

or significantly constrain that power by dictating its parameters.” David C. v. Leavitt, 242 F.3d

1206, 1210 (10th Cir.), cert. denied, 543 U.S. 822 (2001).7 Thus, as the United States made clear

during the Tunney Act proceedings, § VI.B “is supplemented by [the government’s] traditional

6 Thus, § VII of the Final Judgments provides that the Court retains jurisdiction to act, both sua

sponte and on motion of the parties, to issue further orders for, among other things, the carrying out, enforcement or modification of the Final Judgments.

7 See also Swift, 286 U.S. at 114 (“[a] continuing decree of injunction directed to events to come is subject always to adaptation as events may shape the need”); Thompson v. U.S. Department of Housing & Urban Development, 404 F.3d at 832 n. 6 (citing authorities).


11

enforcement and contempt authority . . . .” Response of the United States to Public Comments

on the Revised Proposed Final Judgment, dated Feb. 27, 2002 (“U.S. Resp.”), ¶ 412, at 204 n.

384 (p. 213 of 248).8

United States v. Baroid Corp., 130 F. Supp. 2d 101 (D.D.C. 2001), also cited by

Microsoft, was a situation in which the Antitrust Division joined the party subject to the

judgment's restraint, DPI, in moving to relieve DPI of the decree's restriction. The court applied

Rufo analysis in declining to modify the decree for the benefit of the defendant burdened by it.

Id. at 105. No issue of modifying the decree to assure that it achieved its pro-competitive

objectives was presented.9

Thus, neither Rufo, Pigford nor Baroid addresses the circumstance presented here: where

the government enforcers, as the proponents of injunctive relief – rather than the enjoined

defendant – seek modification to protect an antitrust judgment's effectiveness in restoring

competition. Accordingly, on these motions by government enforcers, the Court’s responsibility

is to determine whether the modification sought is needed to accomplish the Final Judgments’

intended result – specifically, the restoration of competition by middleware products and their

functional equivalent in the form of web-based applications and services.

Evidence that we offer in making this showing satisfies the requirements of Rufo as well.

The significantly changed circumstances are clear, and the decree extension sought is suitably

tailored to address them.

8 See also CIS, dated Nov. 11, 2001, at § IV.C (“[t]his provision is designed to supplement the

government’s traditional authority to bring contempt actions.”). 9 Where the United States and the defendant subject to an antitrust decree agree to a

modification, the United States holds to the view, derived from the Tunney Act and the case law under it, that the Court should approve the modification so long as it “is in the public interest.” See, e.g., Joint Motion to Modify the Final Judgment and Supporting Memorandum of Points and Authorities, dated Aug. 30, 2006, at 4, filed in United States v. Microsoft Corp., Civil Action No. 98-1232 (CKK) (D.D.C.); U.S. Baroid Br. at 9-10. In Baroid, the court disagreed, and applied Rufo’s flexible standard.


12

C. Changed Circumstances Make Extension of the Final Judgments Appropriate to Assure that Their Remedial Objectives are Achieved.

Pace of Change in the Operating System Market: We noted in our moving papers that

in the relevant market, Intel-compatible PC operating systems, the rapid pace of change – a

condition that the Court accepted as fact during the remedies and Tunney Act phases of the case

– has clearly not manifested itself, regardless of developments in the computer and software

industries more generally. Kwoka Rep., Ex. 110; Alepin Rep. ¶¶ 5-7, 19-21, 30-3111; see also

Alepin II, ¶ 10; Tom Krazit, The Steady Advance of Mac OS X, Cnet News.com (Oct. 26, 2007)

(noting that “even if Apple continues to expand its Mac market share, Windows will remain by

far the dominant PC operating system when this decade ends”), available at

http://www.news.com/8301-13579_3-9804878-37.html; NY Group Motion, dated Oct. 18, 2007,

at 2-4. In particular we noted the slower pace of product introductions by Microsoft, when

compared to the years preceding the Final Judgments. Because of Microsoft’s enduring power in

the relevant market, its slower pace of product introductions has broad ramifications. Indeed, the

very fact that Microsoft did not release Vista until October 2006 – five years after XP’s release –

is itself likely to have throttled the pace of industry change. See Alepin Rep. ¶¶ 5, 27, 73-74;

Kwoka Rep. ¶¶ 46-48.

That the assumptions underlying the term of the decree failed to materialize is itself a

changed circumstance. For example, in Vanguards of Cleveland v. City of Cleveland, 23 F.3d

1013, 1019 (6th Cir. 1994), the changed circumstance supporting a modification in a civil rights

case was “lower than expected minority pass rates on the . . . promotional examinations,” a

10 Report of John E. Kwoka, Jr., dated Oct. 16, 2007 (“Kwoka Rep.”), Ex. A to Plaintiff States

California et al. Motion to Extend the Modified Final Judgment Until November 12, 2012, dated Oct. 16, 2007 (“CA Group Motion”).

11 Report of Ronald S. Alepin, dated Oct. 16, 2007 (“Alepin Rep.”), Ex. B to CA Group Motion.


13

post-decree occurrence that “prevented the core objectives of the consent decree from being met.”

The Sixth Circuit affirmed a two-year extension, even though the city was in compliance with the

decree.

Similarly, here the assumed pace of change in the relevant market, and the speed at which

nascent competition to Microsoft’s Windows monopoly could develop, were the critical factors

that led the Court to adopt an atypically short decree term of five years. Time has not borne out

these core assumptions. See Kwoka II, ¶¶ 4-9 (Attached Ex. 2). Moreover, much more than just

this circumstance has changed from the remedies and Tunney Act phases of the case.

The III.E Saga: Microsoft’s on-going III.E activity is a clear example of changed

circumstances. The MCPP program, which is Microsoft’s attempt to discharge its § III.E

obligations, is still under development five years after the Court approved the negotiated

settlement and directed analogous relief after the remedies hearing. The TD rewrite created a

new set of documents, the last milestone of which was completed in September 2007. But

Microsoft has not yet written the overview documents needed to help users understand the basic

structure of the various protocols. There are still hundreds of TDIs that need to be addressed.

And Microsoft’s test program to help validate the documents, which is identifying yet more

TDIs, is at its early stages. See MS Supp. Status Rep., dated Oct. 15, 2007, at 3-5; MS Supp.

Status Rep., dated Nov. 15, 2007, at 4-5. The state of the TD has clearly discouraged MCPP

participation. Alepin Rep. ¶ 6.

Nothing like this was envisioned when the New York Group of Plaintiff States presented

the negotiated settlement to the Court for approval in late 2001. The TD currently under

development was due in the summer of 2002 – nine months after the settlement was submitted

for approval. As the United States told the Court during the Tunney Act proceedings,

Microsoft’s “disclosure and licensing must occur by not later than August 6, 2002.” U.S. Resp. at


14

170-71, ¶ 342 (p. 179-80 of 248; see also id. at 169, ¶ 339 (p. 178 of 248) (“August 6, 2002” was

“the latest date on which [the communications protocols] must be available for use by third

parties”).

This case is, therefore, analogous to Thompson v. U.S. Department of Housing & Urban

Development, 404 F.3d 821 (4th Cir. 2005). There, a class of African-Americans alleged housing

discrimination by HUD and local officials in Baltimore. The parties entered a consent decree,

which called for HUD supervision of local efforts for a period of time. The local officials fell

“jaw-droppingly short of fulfilling their obligations,” and were “woefully behind schedule” with

regard to parts of the consent decree. The district court granted plaintiffs’ motion to extend the

period of HUD’s oversight, and the Fourth Circuit affirmed. The court of appeals noted:

Given that the Local Defendants are so far behind in fulfilling their obligations under the Consent Decree and that many of the obligations of the parties are interrelated, the district court properly recognized the utility of retaining jurisdiction over HUD, so as to ensure that the Decree can be efficiently enforced.

Thompson, 404 F.3d at 831; see also David C. v. Leavitt, 242 F.3d 1206 (10th Cir.) (extending

enforcement period of a consent decree), cert. denied, 534 U.S. 822 (2001).

Lack of General Server Products: Equally important, the over-arching objective of §

III.E was to give non-Windows servers the ability to interoperate better with the Windows client.

This would make the competing server a more attractive platform for the development of web-

based applications and services that could be delivered to Windows users. As the Court noted:

[T]he remedy in this case will provide substantial protection for server/network computing by requiring Microsoft to disclose technical information relating to communications protocols which are “natively” supported by Windows. See infra Part IV.E.2. The disclosure of this information will significantly advance the ability of non-Microsoft server operating systems to interact with client PCs running Windows. Such assistance is appropriate as it looks toward the new model of the “platform threat” and seeks to ensure that the ill effects of Microsoft’s conduct are not felt in this related area of the industry.

New York v. Microsoft Corp., 224 F. Supp. 2d 76, 129 (D.D.C. 2002) (emphasis added)


15

(“Remedies Ruling”). See also id. at 123. (“Central to the success of server/network computing

is the ability of heterogeneous networks to interoperate successfully”) (citing Madnick ¶ 53; ¶¶

92-94; Short ¶ 28)); United States Resp. at 165-66, ¶ 332 (p. 174-75 of 248) (“Section III.E will

protect opportunities for the development and use of Non-Microsoft Middleware by ensuring that

competing, non-Microsoft server products on which such Middleware can be hosted and served

will have the same access to and opportunity to interoperate with Windows Operating System

Products as do Microsoft’s server operating system products”); Sibley Decl., at 31-32, ¶¶ 55-5712

(“it is important that rival middleware be able to operate with Microsoft server operating

systems. It is equally important that a non-Microsoft server be able to operate with Windows as

efficiently as would a Microsoft server”).

Yet, thus far, no general purpose server products have been developed under the MCPP

program.13 The reason for this is unclear, and may result from various considerations. The fact

remains, however, that this circumstance was not envisioned when the Final Judgments were

negotiated and approved, or when the Court directed its remedy. Indeed, as all plaintiffs,

including the United States, reported to the Court in their Joint Status Report, dated Jan. 16,

2004, at 5-7:

[B]earing in mind the Court’s articulated remedial goals for Section III.E., Plaintiffs are concerned that the development efforts of the current licensees are not likely to spur the emergence in the marketplace of broad competitors to the Windows desktop.14

Moreover, the MCPP licensees tend to develop products that complement, rather than compete

12 Declaration of David S. Sibley, dated Feb. 27, 2002. 13 Instead, Microsoft’s Windows share of server operating systems has increased significantly

during the period of the Final Judgment, whether measured by shipments or revenue. Kwoka II, ¶¶ 2-3 (66% if measured by shipments, 142% if measured by revenue).

14 The United States has not provided any reason to revise its assessment of the failure of the MCPP to achieve the Court’s remedial objectives.


16

with, Windows features.15 If these products are successful, their effect could fortify, rather than

weaken, the applications barrier to entry – the very opposite of the purpose of § III.E.

No Pre-Installed Competing Browser: The browser is still the pre-eminent middleware

product for computer users. While Windows users have available to them alternatives to IE –

primarily Firefox, Safari and Opera – no major Windows OEM pre-installs any of these

alternatives. This is particularly vexing when the litigation itself focused so heavily on

Microsoft conduct excluding Netscape’s Navigator from the OEM distribution channel. The

adage “once burned, twice shy,” seems apropos, despite the best intentions of the Final

Judgments.

There can be no dispute that the Final Judgments seek to afford OEMs the opportunity to

install competing middleware. During the Tunney Act proceedings, “[t]he United States

predict[ed] that §§ III.C and III.H will enhance competition between Microsoft middleware and

non-Microsoft middleware . . . .” Tunney Act Ruling, 231 F. Supp. 2d at 180 (citing Competitive

Impact Statement (“CIS”) at 29, 45). For example, the DOJ said that:

Section III.C. is designed to ensure that OEMs have the freedom to configure the personal computers they sell by preinstalling, featuring and promoting Non-Microsoft Middleware or non-Microsoft Operating Systems, products that over time could help lower the applications barrier to entry . . . . Assuring this flexibility for OEMs is important to prevent the recurrence of conduct found to be illegal by the Court of Appeals and to help restore the competitive conditions that Microsoft’s conduct undermined.

CIS, at 29. The Court, too, noted in its Remedies Ruling that:

[T]he Court’s remedy affords OEMs the freedom to configure Microsoft’s operating

15 See generally Ex. 1 to California Group’s Report on Remedial Effectiveness, dated Aug. 30,

2007 (detailing MCPP licensees, by task); Joint Status Report on Microsoft’s Compliance with the Final Judgments, dated June 19, 2007, at 14 (noting, by way of summary to the MCPP licensee survey, that “nine licensees shipping MCPP products described their products as complements to Windows server operating systems, even when deployed in networks that contain both Windows and non-Windows servers”); Joint Status Report on Microsoft’s Compliance with the Final Judgments, dated Jan. 16, 2004, at 5 (“a majority of the licensees appear to be developing a relatively narrow set of products”).


17

system products in a manner which promotes third-party middleware through the prominent display of icons, shortcuts, and menu entries, and such configuration will be protected against automatic alteration resulting from Microsoft’s product design. In addition, OEMs will have the freedom to remove all prominent means of end-user access to portions of middleware functionality integrated into Microsoft’s operating system so as to encourage the installation of third-party middleware.

Remedies Ruling, 224 F. Supp. 2d at 193; see also U.S. Resp. at 71, ¶ 131, (p. 80 of 248) (“[t]he

United States believes it is quite possible that OEMs will choose to take advantage of the RPFJ’s

flexibility even if they have not taken advantage of the very limited flexibility Microsoft has

offered them so far”).16

While OEMs offer some non-Microsoft middleware products – for example, media

players and web-based email or instant messaging services – in the browser space itself, five

years has not proven sufficient to see any OEM pre-installation. Alepin Rep. ¶¶ 88-92, 94.

Industry conditions operate against a major shift in browser share any time soon. Id. at ¶¶ 32-47.

At the very least, however, extending the OEM protections in the Final Judgments, thus sending

an important message that Court and TC oversight continues, may yet enable the decree’s

objectives to be achieved.

Moreover, although the fact that OEMs are installing some non-Microsoft middleware is

a positive sign, one should not lose track of the end objective. The Final Judgments posited the

availability of competing middleware as a means to reduce the applications barrier to entry that

protects Microsoft’s Windows monopoly. The re-invigorated middleware activity apparent

today may eventually contribute to reducing this entry barrier. But it simply is too soon to reach

a conclusion on this, one way or the other. Alepin Rep. ¶¶ 7, 16-17. The undefined “Internet 16 The United States criticizes the Moving States because they “made no showing . . . that any

conduct by Microsoft (either in violation of the decree or otherwise) has foreclosed the OEM channel to third-party browsers.” U.S. Br. at 4. The appropriate inquiry, however, is not with regard to Microsoft’s conduct, but instead whether the Final Judgments have had sufficient time to accomplish one of their principal objectives – “prying open” the key OEM channel to non-Microsoft browsers.


18

Platform,” described by Professor Iansiti as a full-featured competitive replacement for a desktop

Windows PC, does not yet exist. Alepin II, ¶¶ 1-2 (Attached Ex.1); Kwoka II, ¶¶ 8-9.

Tailoring the Modification: Rufo also requires that a judgment modification be suitably

tailored to address the changed circumstance. The five-year extension proposed here satisfies

this requirement. Kwoka II, ¶ 10. As this Court has recognized, the Final Judgments offer a

“tightly woven fabric” of complementary remedial provisions. Tunney Act Decision, 231 F.

Supp. 2d at 202. A five-year extension will, therefore, give the rewritten protocol TD, only

recently developed under the § III.E “reset” program, an opportunity to work together with the

Final Judgments’ other provisions, as intended, to accomplish the objective of restoring

marketplace competition.

A five-year extension also will provide industry participants with a meaningful

opportunity – one that corresponds to the DOJ’s more typical final judgment – to continue to

develop and offer middleware and other web-based products that may reduce the applications

barrier to entry behind which Windows thrives. See Kwoka Rep. ¶¶ 52-54.

Finally, a five-year extension of the existing decree does no more than was originally

intended by the parties and by the Court. Microsoft has failed in the first five years of the decree

to implement adequate TD for communication protocols required to be licensed by § III.E.

Extending the whole decree for five years means only that the decree will now be in effect,

together as intended, for five years. See, e.g., Vanguards of Cleveland v. City of Cleveland, 23

F.3d 1013 1020 (6th Cir. 1994) (decree narrowly tailored where it extends for a relatively short

time, operates along the lines of the consent decree, and allows additional time in which to

promote minority firefighters as would have occurred under the consent decree).


19

II

MICROSOFT MISCHARACTERIZES, RATHER THAN REBUTS, THE MOVING STATES’ ARGUMENTS FOR AN EXTENSION

According to Microsoft, the Moving States “make three main arguments in support of

their motions,” which relate to: (1) Microsoft’s persistent inability to satisfy its § III.E

obligations; (2) Windows’ and IE’s enduringly high market share; and (3) the pace of change in

the software industry. MS Br. at 3. Microsoft mischaracterizes each argument almost beyond

recognition, and then sets about rebutting the straw-person it has created – a much easier task

than trying to respond forthrightly to the arguments that the Moving States actually make.

A. Microsoft’s Failure to Satisfy Its Section III.E Disclosure Obligation is Relevant to the Court’s Consideration Whether the Final Judgments Should be Extended.

Microsoft, which would prefer to ignore the sorry history of the MCPP that has played

out before the Court over the past five years, argues that the Moving States’ “invocation of §

III.E” should be dismissed as a “red herring.” MS Br. at 3. But Microsoft does not respond to

the showing made in our moving papers that the Final Judgments were carefully constructed as a

unitary framework with their various provisions intended to complement and reinforce each

other. The New York Group Movants, for example, quoted the United States’ representation,

during the Tunney Act process, that “it is the overall impact of the various decree provisions

working together over the course of the five-year term that will restore competitive conditions in

the market.”17 Similarly, the California Group plaintiffs quoted the lengthy explanation to the

Court by Dr. David A. Sibley, the expert economist for the United States, of how the various

provisions of § III of the negotiated Final Judgment, working in combination, would “provide[]

17 NY Group Motion at 6 (emphasis added).


20

middleware developers the means to create competitive products.”18

Microsoft dismisses these representations as being just a “couple of statements on behalf

of the United States supporting entry of the Final Judgments in 2002.” MS Br. at 15. Microsoft

then observes that “the source of these statements – the United States – also does not believe

there is a basis to extend the Final Judgment.” Id. at 15-16. One looks in vain, however, in the

United States’ amicus for any reference to its own representations during the Tunney Act

proceedings, or to Dr. Sibley’s explanation to the Court. The United States neither disavows

those statements nor explains why the Final Judgments should not be allowed to function as the

United States itself told the Court they were intended to operate – with all provisions of § III

working in tandem for a full five-year period.

Moreover, neither Microsoft nor the United States explains how § III.E., acting in

isolation, can presently accomplish the remedial objectives of the Final Judgments when

Microsoft’s monopoly power remains as potent today as it was in 2002. Instead, Microsoft

(joined by the United States) argues that, by accepting Microsoft’s offer in the spring of 2006 to

extend § III.E through November 2009, the Plaintiff States sub silentio waived their rights under

the Final Judgments to seek any additional relief.19 Microsoft sought no such waiver, and none

would have been given. Any waiver by plaintiffs of such important rights under the Final

Judgments would have to be express and explicit, but none can be inferred in any event.

It is no secret – as evidenced most recently by their disagreement over the merits of

18 CA Group Motion at 14. 19 At the time § III.E was extended, so were ancillary provisions of the Final Judgment necessary

to allow § III.E to function, like those relating to the Court’s jurisdiction (§I), Microsoft’s licensing obligations (§III.I), compliance procedures (§IV) and definitions (§VI). Section III.F.1 also was modified to apply its general principle of anti-retaliation during the extended period of the Final Judgment as it relates to § III.E.


21

Google’s desktop search complaint – that plaintiffs have occasionally differed with respect to

enforcement matters. They have, however, sought to reconcile their differences, develop a

consensus, and present a common enforcement position to the Court.20 That was the process

when, in the spring of 2006, more than three years after entry of the Final Judgments, Microsoft

proposed to scrap the old TD, which was riddled with errors, and do a “reset” – a complete

rewrite of the TD.

It was then obvious that the Final Judgments had to be extended because Microsoft’s

proposed reset concept meant another lengthy delay before MCPP licensees would receive

complete and accurate TD. The Plaintiff States and the United States discussed among

themselves how long the extension should be, and whether it should include other provisions of §

III. Rather than litigating the issue with Microsoft, which favored extending only § III.E, in May

2006 all Plaintiffs accepted the limited relief that Microsoft offered, preserving their option to

seek additional relief at a later date.

Nothing in the modified Final Judgments precludes the Moving States from subsequently

seeking additional relief. Nor can any waiver of their rights be inferred from their subsequent

statements or conduct. At the May 17, 2006 status conference, when the proposed extension was

presented to the Court, counsel for the California Group observed that § III.E could no longer be

described as “forward-looking,” and stated that the extension would “help compensate” for

Microsoft’s failure to discharge its obligations under the Final Judgments, not that it would be a

complete cure. Tr., No. 98-1233 (CKK), May 17, 2006, at 33-34. Similarly, in their motion to

20 See Mar. 13, 2007 Status Conf. Tr. at 40-41. Indeed, the Final Judgments require consultation

within the respective Plaintiff States groups, and both the California and New York Groups have routinely consulted with each other and with the United States on enforcement matters. See Final Judgments § IV.A.1.


22

modify the Final Judgment, the California Group plaintiffs stated that the requested

modifications were being sought because of “continuing dissatisfaction with the quality of the

MCPP documentation,” and that the modifications were “tailored in the hope that the additional

time provided by § III.E under the Modified Final Judgment will result in Technical

Documentation that will better effectuate the remedy.” 2006 Joint Motion to Modify, dated Aug.

31, 2006, at 4.

Microsoft also argues that § III.E is unrelated to the other parts of § III because it

purportedly was not intended to enable middleware running on servers to communicate with the

client. Microsoft contends that § III.E was, instead, intended only “to ensure that issues relating

to client-server interoperability would not hinder the emergence of server software programs as

platform alternatives to Windows.” MS Br. at 16.

But interoperability is a means, not an end. It is intended to enable persons using

Windows to access non-Microsoft middleware and other application running on non-Microsoft

servers – a necessary condition to encouraging ISVs to write cross-platform so as to erode the

applications barrier to entry. As the Court explained:

Such interoperation [between client and server], in turn, will advance the ability of the server operating system to serve as a middleware-like platform upon which applications can ‘run’ for the PC.21

Microsoft likewise offers no reason – apart from its misplaced waiver argument – why

the Court should wait two more years to extend just § III.E. Problems continue with the TD, as

21 Remedies Ruling, 224 F. Supp. 2d at 171; see also Tunney Act Ruling, 231 F. Supp. 2d at 189

(“A ‘growing number of applications . . . run on servers, rather than on the desktop.” Sibley Decl. ¶ 56. These technologies ‘represent[] a strong source of competition to Microsoft in the business computing segment and may yet make a serious attack on the applications barrier to entry in the desktop PC market.’ Id. Hence, the goal of this disclosure is to ensure that rival middleware can interoperate with servers running Microsoft’s server operating system and thereby compete vigorously with Microsoft middleware. Id.”).


23

evidenced by the large number of TDIs for the rewritten documentation,22 as well as by the

concerns Icon/Nicholson has raised about the adequacy of Microsoft’s process for assuring that

all required protocols have been disclosed. Moreover, Microsoft will have to write additional

documentation, well after November 2009, to disclose new communications protocols contained

in its next client and server releases. That documentation will also have to be evaluated by the

TC and tested.23

Perhaps most significantly, given the MCPP’s problem-plagued history, prospective

licensees are entitled to the assurance that, if they take a license, the resources of the TC will

continue to be available to them, and that the Plaintiff States’ oversight of all the Final

Judgments’ provisions will continue. On the record of Microsoft’s MCPP performance to date,

there is simply no reason to wait to extend § III.E.

B. The New York Movants’ Position on this Motion Accords with that in Their Earlier Effectiveness Report

In a variation on their “waiver” theme, Microsoft (together with the United States) also

suggests that the New York Movants’ position on this motion lacks consistency with their

position in their “effectiveness” report. But the New York Group’s position in that earlier filing

was not the “mission accomplished” pronouncement that Microsoft and the United States assert.

Rather, they summarized industry developments which “suggest that the Final Judgments are

accomplishing their stated goal of fostering competitive conditions,” and which were

“encouraging and an indication that the Final Judgments are enabling the competition that they

22 As rewritten TDs are subjected to the validation test suites that Microsoft is now beginning to

develop, additional TDIs are emerging. As the testing process evolves and continues, it is fairly predictable that many more TDIs will be identified.

23 See CA Group Motion, at 11-12. Microsoft is committed to documenting new protocols in its next major client and server releases, which are tentatively scheduled for 2008 and 2010, respectively.


24

are designed to protect.” NY Group Effectiveness Rep. at 6, 8. The New York Group further

stated that, at this juncture, it was “not possible to assess whether these developments will

ultimately result in substantial long-term competition” in the operating system market. Id. at 8.

There is still work for the Court’s Final Judgments to do, and we said as much in both of our

earlier reports. See also CA Group Effectiveness Rep., dated Aug. 30, 2007, at 15.

C. The Moving States’ Use of Market Share Data is Appropriate.

According to Microsoft, the Moving States’ second argument, purportedly based on “the

continuing high share of Windows (and Internet Explorer),” is “inapposite because the Court did

not design the Final Judgments to reduce those shares.” MS Br. at 3. That, however, is not the

Moving States’ argument at all. The California Group has made clear, both at the September 11,

2007 status conference and in its Effectiveness Report, that market share numbers are not cited

because the Moving States believe the objective of the Final Judgments is to reduce Microsoft’s

market share to some acceptable percentage. See also NY Group Motion at 4 (although

Windows market share is not “the litmus test . . . the absence of meaningful erosion . . . is still

problematic for the public interest”). 24

24 See Tr., No. 98-1233 (CKK), Sep. 11, 2007, at 39 and California Group’s Report on Remedial

Effectiveness, dated Aug. 30, 2007, at 4 n.10. The United States also criticizes the California Group for citing market share numbers in its Effectiveness Report. US Br. at 3-4. That criticism is not only misplaced, but is especially odd in light of the following colloquy between the Court and counsel for the United States at the February 9, 2005 Status Conference, Tr., No. 98-1233 (CKK), Feb. 9, 2005, at 16-17:

[The Court]: All right. I guess the one question, which sort of has always been out there, is what if any effect has this had on the marketplace generally. . . .

[Ms. Hesse]: It is a question we ask ourselves relatively frequently, but don’t have a particularly good answer for. I think part of the reason for that, is there’s been, as far as we’re able to observe in the marketplace, no demonstrable change in the operating system market. That is, Microsoft continues to have a large share in that market . . . . There has been some discussion recently in the press about a slight reduction in Microsoft’s share in the Internet Explorer browser market. It’s hard to know what that’s attributable to, and I wouldn’t want to credit the final judgment with that . . . .


25

Market share data is basic evidence in virtually every antitrust case. It is relevant on a

variety of issues, including the extent of defendant’s market power, as well as the nature and

duration of the relief necessary to remedy a violation. The Moving States have shown that

Microsoft’s monopoly power in the market for Intel-compatible PC operating systems is not only

extraordinarily high, but is extraordinarily durable – greater than 90% for at least the past 15

years.25 As the California Group noted in their moving papers, last year the United States

informed the district court in the Dentsply litigation that the normal term of an antitrust consent

decree is 10 years, even in “relatively dynamic markets.”26 There can be no doubt that the

relevant market here for Intel-compatible PC operating systems is anything but “relatively

dynamic,” as evidenced not only by Microsoft’s entrenched monopoly power, but also by

Microsoft’s introduction of just one version of Windows and Internet Explorer in the five years

since the Final Judgments were entered.27

Microsoft’s continuing market power, both with respect to PC operating systems and web

browsers, gives it the means, ability and incentive to impede the development of emerging

middleware threats with the potential to erode the applications barrier to entry protecting its

Windows monopoly. Alepin II, ¶¶ 3, 4, 7; Kwoka II, ¶¶ 8-10. Microsoft argues, however, that it

“is no less entitled to the presumption that it will abide by the law than any other company with a

25 Kwoka Rep. ¶ 35. 26 CA Group Motion at 18. Like Microsoft, the defendant in Dentsply was found to have

engaged in unlawful monopoly maintenance in violation of §2 of the Sherman Act. Although critical of the Moving States’ use of market share data in these motions, the United States’ brief simply ignores its own statements in Dentsply, and makes no effort to argue that the relevant market here – for PC operating systems – is “relatively dynamic.”

27 Microsoft contends that distribution of Windows XP Service Packs 1 and 2 are evidence of innovation in the relevant market. MS Br. at 24. But these service packs – distributed free of charge to current Windows XP licensees – were effectively large bug fixes, not full-featured new operating systems. Id. (SP2 offered “technologies that would make Windows XP a more secure computing environment”); see also Alepin II, ¶ 9.


26

high market share.” MS Br. at 19. But Microsoft is no ordinary law-abiding company with a

“high” market share. Microsoft is a company with formidable, deeply entrenched, persistent

monopoly power that it has used – as this Court has found and the Court of Appeals affirmed –

to squash small competitors (Netscape), to bully larger rivals (IBM, Apple and Intel) and to

intimidate customers (OEMs) when it felt the source of its monopoly profits threatened. See

generally Findings of Fact ¶¶ 408-12; see also Alepin Rep. at ¶ 12, table 1 (Microsoft private

party litigation).

Microsoft would have the Court ignore its history of anticompetitive conduct and its

disrespect for the antitrust laws here and abroad. Microsoft complains that “operating under the

shadow of a judicial decree . . . carries a stigma.” MS Br. at 11. Any “stigma” that attaches to

Microsoft, however, is surely that which comes from having been adjudged a violator of the

Sherman Act – not from having to obey this Court’s order to refrain from engaging in

anticompetitive conduct. Microsoft further argues that companies like it, which purportedly have

“taken their decree obligations to heart, instilling them in the institution’s very fabric, should not

be enforced to endure more than they bargained for.” Id.28 But the term of the Final Judgment

in the California Group case is not one that Microsoft “bargained” for. Moreover, the New York

Group plaintiffs have yet to realize the benefit of their “bargain” because Microsoft still has not

fulfilled its § III.E disclosure obligations, an important inducement to settle the litigation.

Indeed, Microsoft’s failure – despite its enormous monetary and technical resources – to

fulfill the principal affirmative obligation imposed upon it by the Final Judgments belies its

assertion that it has taken its “decree obligations to heart.” Likewise, Microsoft’s defiant refusal

to make the protocol disclosures required by the European Commission, despite incurring fines

28 Significantly, Microsoft has not contended that extension of the Final Judgment will be

burdensome or will undermine its incentives to innovate.


27

of $605 million in 2004 and $351 million in 2006,29 hardly suggests a company “entitled to the

presumption that it will abide by the law like any other company with a high market share.” MS

Br. at 19. As the European Commissioner for Competition Nellie Kroes stated at the ABA

Antitrust Law Section meeting in Washington, D.C., on April 20, 2007, regarding the European

Commission’s experience with Microsoft:

Let me first mention that, as you are all aware, 2007 is a very important year for the European Union. We just celebrated our 50th Anniversary. How is that connected with Microsoft? Well, in those fifty years of experience of the European Union, and I’m also talking about fifty years of competition policy, we have never ever had an experience like this one before . . . . We have never ever before encountered a company that has refused to comply with a Commission decision.30

Given Microsoft’s past and continuing conduct, and persistent monopoly power, the

Court may properly recognize that, “[o]n the practical side, the mere existence of monopoly

power is instinct with the threat of future violations.” United States v. Aluminum Co. of America,

91 F. Supp. 333, 346 (S.D.N.Y. 1950). It is, therefore, wholly appropriate that the Court

“provide against the reasonable expectation of the resumption of future unlawful conditions. . . .

[I]n a remedy proceeding, it is enough to justify relief that this Court can reasonably predict that

monopoly power will probably arise in a discernable future market.” Id; see also Zenith Radio

Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 132 (1969) (the Court may enjoin acts that

“may fairly be anticipated from the defendant's conduct in the past”) (quoting NLRB v. Express

Pub’'g Co., 312 U.S. 426, 435 (1941)). 29 Microsoft Corporation Form 10-K, For the Fiscal Year Ended June 30, 2007,

http://www.microsoft.com/msft/SEC/default.mspx (“Microsoft 2007 10-K”), at 64. 30 “Roundtable Conference with Enforcement Officials,” The Antitrust Source, June 2007

http://www.abanet.org/antitrust/at-source/07/06/Jun097-EnforceRT6-20f.pdf, at 26. It was only last month, in the wake of the decision by the Court of First Instance, that Microsoft finally agreed to comply with the directives of the European Commission. See “Microsoft finally in ‘full compliance’ with 2004 EU antitrust ruling,” Oct. 22, 2007, http://arstechnica.com/news.ars/post/20071022-microsoft-finally-in-full-compliance-with 2004-eu-antitrust-ruling.html.


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We also respond briefly to Microsoft’s suggestion that its public commitment to live by

the “Windows Principles” shows that it has instilled Final Judgment obligations “in the

institution’s very fabric . . . .” MS Br. at 11. The Windows Principles simply are not self-

enforcing, and they certainly do not establish the sort of monitoring that the TC and plaintiffs

have provided these past five years. Microsoft’s professed voluntary commitment is no

substitute for continued judicial oversight to ensure that the public receive the benefits of a more

open, competitive marketplace.

D. The Relevant Markets Have Not Changed Rapidly as the Court Anticipated They Would when the Final Judgments Were Entered.

According to Microsoft, the Moving States’ third “main argument” is that “the software

industry has changed little from five years ago.” That, of course, is not the Moving States’

argument at all. What the Moving States did demonstrate in their moving papers was that the

relevant markets – those for Intel-compatible PC operating systems and web browsers – have not

experienced the rapid development that the Court had anticipated they might when it limited the

initial term of the Final Judgments to five years.31 Alepin II, ¶¶ 8-9; Kwoka II, ¶¶ 4-9. As noted

above, this is a “changed circumstance” that has an important bearing on whether the Final

Judgments have had sufficient time to achieve the procompetitive benefits that the Court

expected they would – and that the public itself is entitled to receive.

Reversing its position during the remedies phase of the case – when it argued that

technologies outside the markets that were the subject of the liability trial were irrelevant to

relief – Microsoft now asserts that “the proper focus should be on the industry, as a whole.” MS

Br. at 26; compare, e.g., Microsoft Proposed Findings of Fact and Conclusions of Law, filed

June 12, 2002, at 453 (handheld devices “No Threat to Applications Barrier to Entry”). Relying

31 See CA Group Motion at 18-20; NY Group Motion at 2-4.


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principally on the Supplemental Expert Report of Mario Iansiti, dated Nov. 6, 2007 (“Iansiti II”),

Microsoft points to “Google and its extraordinary success” as “perhaps the most notable example

of how open and competitive the software industry has become.” MS Br. at 4. Indeed, Professor

Ianisti claims that “Internet-based technologies and the firms that rely on them are not nascent,

but instead constitute a ubiquitous platform that acts as a competitive alternative to Windows.”

Iansiti II, ¶ 2. Professor Iansiti identifies Google, Salesforce.com, Yahoo, eBay and MySpace as

examples of such “Internet-based companies.” Id. at ¶ 3.

The problem with Professor Iansiti’s analysis is that none of these companies makes a PC

operating system. Alepin II, ¶¶ 1-4; see also Kwoka II, ¶¶ 8-9. In its 2007 10-K, Microsoft

breaks down its business into five operating segments:32

• Client – Windows Vista and other Windows operating system products;

• Server and Tools – Windows Server operating system and similar products;

• Online Services Business – MSN Search, MapPoint and similar products;

• Microsoft Business Division – Microsoft Office and similar products; and

• Entertainment and Devices Division – Xbox, Zune and similar products.

Microsoft identifies the competitors in each segment and, not surprisingly, fails to identify

Google or any of the other “Internet-based” companies listed by Professor Iansiti as competitors

in either business segment that has been the focus of this case: Client, or Server and Tools.33

Alepin II, ¶¶ 1-5; Kwoka II, ¶¶ 8-9. Moreover, while these companies’ products provide some

functionality for users, they still depend upon a PC operating system and browser – the two

spaces where Microsoft dominates – and thus they are not yet able to reduce the applications

32 Microsoft 2007 10-K, at 3-7. 33 Google is listed among the competition in the Online Services Business and Business Division

segments, competing against such Microsoft products as MSN Search, MapPoint and Office.


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barrier to entry. Alepin II, ¶¶ 1-4; Kwoka II, ¶¶ 8-10.

Professor Iansiti makes other statements that are at odds with the record of this case. For

example, he states that any attempt by Microsoft “to preclude access [to Internet technologies]

would be unsuccessful because switching costs are low.” Iansiti II, ¶ 1. But Professor Iansiti’s

assertion completely disregards the record, which establishes that “the average user, having

chosen a browser product, is indisposed to undergo the trouble of switching to a different one.”

Findings of Fact (“FF”) ¶ 209.

Professor Iansiti also opines that Microsoft would not engage in any conduct that

impaired users because doing so “would fail to produce any competitive financial gain for the

company.” Iansiti II, ¶ 1. Yet, the record is replete with Findings of Fact that Microsoft

repeatedly disregarded user satisfaction concerns in order to maintain its monopoly and

perpetuate the application barrier to entry. As the Court found:

Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products. Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft." (FF ¶ 412)

More specifically, Microsoft:

• Refused to license Windows without IE or to permit browser removal, and overrode user default settings, producing “performance degradation, increased risk of incompatibilities, and the introduction of bugs” (FF ¶ 173), while making running another browser “a jolting experience” (FF ¶ 160; see also FF ¶¶ 155, 171-72, 174-77, 193, and 410).

• Delayed releasing Windows 98 in order to protect the applications barrier to entry (FF

¶ 168).

• Made deals with content providers for content that “could be accessed optimally” only with IE and "explicitly require[ed] them to ensure that their content appeared degraded,” when viewed with Navigator rather than IE (FF ¶ 328; see also FF ¶¶ 322, 329, and 337).

• Refused to sell Mac Office in order to force Apple to make IE the Mac default, thus, damaging Microsoft’s goodwill, and sacrificing substantial profits for Microsoft (FF ¶


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355).

• Released a Java Virtual Machine that was incompatible with Sun’s native method, thereby “distorting competition,” and causing “serious and far-reaching, consumer harm” (FF ¶¶ 390 and 409).

Professor Iansiti also uses data in misleading ways. For example, he asserts that Firefox

has many more users than Netscape did “at its height,” and then maintains that, contrary to the

Moving States’ assertions, “Firefox growth has not stalled.” Iansiti II, ¶ 9. The first statement is

meaningless because the number of individuals using the Internet today is vastly larger than it

was seven years ago, when Navigator was “at its height.” See Alepin II, ¶¶ 6-7. Professor

Iansiti’s second statement, which is based on the absolute number of Firefox users, does not

contradict the Moving States’ assertion that Firefox’s usage share has stalled at approximately

15%, compared to IE’s usage share of approximately 80%. Alepin II, ¶ 6, Table 1.

Perhaps most significant, Professor Iansiti asserts in his supplemental expert report, that

Internet-based “alternative platforms” are not merely “nascent,” but are “established.” Iansiti II,

¶¶ 1, 2 and 10. That is flatly inconsistent with statements in his initial expert report, submitted

less than 10 weeks earlier.34 See Expert Report of Mario Iansiti, dated Aug. 29, 2007 (“Iansiti

I”); Alepin II, ¶¶ 1-2. Professor Iansiti previously described as “new” or “emerging” the very

same technologies that he now claims are “established”:

• “internet-centric” applications, specifically including plug-ins” like Java applets, “add-ons” like Google Toolbar, “development technologies” like Ajax and “software-as-a-service” – described as “emerging.” Iansiti I, ¶ 9.

• Opera browser – described as an “emerging competitor” to IE. Iansiti I, ¶ 16. • “internet-centric platforms” – described as “emerging.” Iansiti I, ¶ 62. • “internet-centric applications” using Ajax like Google Maps, Google Suggest, Google

Groups and Flickr – described as “new technologies.” Iansiti I, ¶ 72. 34 Expert Report of Mario Iansiti, dated Aug. 29, 2007 (“Iansiti I”).


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This distinction is important. These technologies – which, in fact, are “new” and

“emerging,” as Professor Iansiti initially described them – require the continued protection of the

Final Judgments to achieve their potential to erode the applications barrier to entry that protects

Windows. See Alepin Rep., ¶¶ 7, 79-87; Alepin II, ¶¶ 1-5; Kwoka II, ¶¶ 8-10.

Conclusion

For these reasons, and for those set forth in our moving papers, the Moving States

respectfully submit that their motions to extend the Final Judgments should be granted.

Dated: November 16, 2007

Respectfully submitted,

FOR THE STATES OF CALIFORNIA, CONNECTICUT, IOWA, KANSAS, MASSACHUSETTS, MINNESOTA, AND THE DISTRICT OF COLUMBIA /s/ Kathleen Foote KATHLEEN FOOTE Senior Assistant Attorney General Office of the Attorney General of California 455 Golden Gate Avenue Suite 11000 San Francisco, California 91402-3664 (415) 703-5555

FOR THE STATES OF NEW YORK, MARYLAND, LOUISIANA AND FLORIDA /s/ Jay L.Himes__________________ ANDREW M. CUOMO Attorney General of New York JAY L. HIMES Chief, Antitrust Bureau 120 Broadway New York, New York 10271 (212) 416-8282


in the united states district court for the district …...nov 16, 2007 · 2 threats in the...

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