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U.S. Department of Justice Obtains Symbolic Scalp From Microsoft

When President Clinton appointed Anne Bingaman to take over the Justice Department’s Antitrust Division last year, many observers expected to see a more litigious Antitrust Division. After all, Bingaman is the first litigator to head the Division since the Carter Administration. True to expectations, she showed her aggressiveness when, in a highly unusual action, she decided to pick up the Microsoft investigation after the Federal Trade Commission deadlocked on whether to bring a case against Microsoft. Bingaman’s decision subjected Microsoft to a second federal antitrust investigation after surviving a three year investigation by the FTC. Some experts in the antitrust field were of the opinion that the Microsoft case would be the defining case of Bingaman’s tenure.

If the settlement that was struck between Microsoft and the Department of Justice (DOJ) this summer does prove to be Bingaman’s defining moment it will have been disappointing indeed. While Bingaman hailed the settlement as “a powerful message” to multinational antitrust law violators, Microsoft must have struggled to contain its satisfaction with a settlement that, to Microsoft, must have seemed as acceptable as a misdemeanor plea bargain doubtless would be to O.J. Simpson. Meanwhile, Microsoft’s competitors almost certainly are gnashing their teeth in frustration.

The entire episode began when the FTC opened an investigation into Microsoft’s business practices in June of 1990. The investigation was extensive. For example, the April 1994 issue of Wired reported that Sun, Lotus, Novell, Borland, Taligent and Wordperfect all testified against Microsoft. Their allegations included a broad list of anticompetitive practices, such as exclusive dealing, predatory pricing, a range of tying schemes, predatory disparagement of competitors, exercise of monopolistic leverage, predatory preannouncement of products and, perhaps most importantly, discriminatory access to information about operating systems features. This last issue — which many have argued is Microsoft’s principal competitive advantage — involves allegations that Microsoft application development teams have an advantage over their external competition when it comes to knowledge about upgrades and changes to the Microsoft OS code. For example, Microsoft application developers allegedly are aware of undocumented calls and other hooks which, if used, can make an application run faster and more reliably. The discriminatory access issues led to speculation that the Justice Department might even insist on the creation of separate companies (a la AT&T and the “Baby Bells”) to handle Microsoft’s basic operating system software and its applications software.

In an eleventh hour round of brinkmanship, Microsoft entered into a consent decree with DOJ just hours before DOJ said it would commence suit. Microsoft’s competitors waited with great interest to learn how severely Bill Gates would have his future activities curtailed.

It may be an understatement to observe that the consent decree that was signed on July 15th addressed fewer issues than industry allegations suggested might be resolved. The restrictions, which apply to past, present or future versions of DOS, Windows and Windows95 (a/k/a Windows 4.0 or “Chicago”), are as follows:

First, to date, Microsoft has required computer vendors to pay a license fee for every PC they ship that contains a particular microprocessor (e.g., every xxx86), regardless of whether the OEM includes DOS or Windows with the shipment. This created an economic disincentive to ship any OS other than Microsoft DOS, since the vendor was forced to pay for the Microsoft program whether or not the vendor included it. This practice must now stop. In the future, Microsoft must charge its licensees on a per copy basis; that is, a licensee must pay Microsoft only if it chooses to ship a PC unit with DOS, Windows or Windows95.

Second, Microsoft can’t impose licenses longer than one year on computer vendors or OEMs. However, Microsoft can renew annual agreements (with the same or different terms) for an unlimited number of years.

Third, Microsoft is known for its tough non-disclosure agreements (“NDAs”). In an unusual antitrust remedy, the settlement prohibits Microsoft from imposing NDAs that last more than one year, or that restrict the recipient of Microsoft’s confidential information from developing competing products. In other words, Microsoft may no longer completely preclude software companies who may be working on the next version of Windows from working with Microsoft competitors in the operating system market. Of course, the NDA may prohibit the company from disclosing Microsoft’s confidential information to the competitor.

Lastly, the settlement was coordinated with the European Commission, which simultaneously announced a parallel settlement. This represented a new level of cooperation between the U.S. and foreign antitrust enforcement agencies.

TLB Comment: Although the Justice Department has publicly proclaimed that it obtained everything it wanted in this settlement, there is no question that the settlement was at best a symbolic victory for Justice. To those software companies that view Microsoft (rightly or wrongly) as the Standard Oil of the 1990’s, these measures are at worst a slap on the hand. They do too little to address the tremendous leverage that Microsoft gains from its powerful position as the owner of DOS and Windows, and too little to prevent Microsoft from strengthening its position even further when DOS is merged into Windows95.

Clearly, there were powerful political, economic, and (not to be too cynical) even legal concerns that led to this result. On the political side, what would be the effect of an aggressive antitrust suit against a company that has become one of the leading examples of U.S. preeminence in high technology? On the economic side, would reining in Microsoft strengthen the U.S. software industry in the world marketplace by strengthening other U.S. companies, or weaken the U.S. by handicapping its strongest player? On the legal side, Bingaman must have been mindful of the time, expense and uncertainty of such a suit, as demonstrated by the federal government’s massive and unsuccessful attempt to break up IBM in the 1970s, the extraordinarily fast-moving and complex nature of the high tech marketplaces and the difficulty of defining and measuring technology markets (an integral part of much antitrust enforcement) in such an environment. In the final analysis, it would appear that Bingaman “blinked.”