Microsoft Antitrust: Dueling Remedies
April 10, 2002

As the Microsoft antitrust case continues on, the AEI-Brookings Joint Center held a conference on April 10, 2002 to analyze the proposed remedies. The expert panel included Robert Litan, Joint Center; George Priest, Yale Law School; Steven Salop, Georgetown Law Center; and Richard Schmalensee, MIT.

Robert Hahn, Joint Center: Setting the scene. In the government’s 1998 civil antitrust suit against Microsoft, the trial judge, Thomas Penfield Jackson, rejected the charge that Microsoft had foreclosed Netscape’s Navigator browser software from the market. But he affirmed an illegal tying charge, and he ruled that other actions by Microsoft aimed at creating a monopoly in browser software and maintaining a monopoly in PC operating system software were also illegal. The D.C. Circuit Court of Appeals reversed many of these remaining charges, but affirmed the monopoly maintenance charge and sent the case back to a different district court judge for hearings on remedies.

There are two major remedy proposals that are on the table. One is a compromise reached by Microsoft, The Department of Justice, and nine states of the states that joined the suit. This settlement would bar Microsoft from signing contracts that restrict the licensing of competitors’ middleware. It would require Microsoft to make it possible for computer makers and end users to remove access to Microsoft middleware included in Windows. It makes it illegal for Microsoft to retaliate against any licensee who promotes competitors’ software. And it creates a full-time technical committee to monitor Microsoft’s compliance.

The Department of Justice argued that the remedy adequately addresses all of the acts that the Appeals Court found to be illegal and reaches beyond, restricting Microsoft’s power to inhibit competition from middleware. Therefore, the DOJ claims the proposed settlement is in the public interest, as the Tunney Act requires. For their part, the nine dissenting states and the District of Columbia have asked the court to impose much tougher restrictions.

Robert Litan, Joint Center: The choice of remedy turns on the goal. Choice 1, which the Justice Department has chosen, is a minimalist standard––as in, just "don’t do it again." Choice 2 is to try to restore competition to where it would have been if Microsoft had not broken the law. Choice 3 is to intervene more aggressively to deter the sorts of behavior in the future that undermined competition in the past.

Choice 1 is simply the wrong standard. But even if one were to accept it, the proposed settlement would be inadequate. It does not address the finding that Microsoft unlawfully commingled code used by the operating system of the browser. It does not address Microsoft’s efforts to "pollute" Sun’s Java middleware. The rules its sets are full of exceptions to prohibitions. And the enforcement provisions are toothless, threatening Microsoft with no more than a two-year extension of a five-year period of oversight.

The ideal remedy would divide Microsoft into one company that makes applications software and three more that make operating systems. This would go to the heart of the issue of Microsoft’s monopoly in operating systems, and it would not involve much ongoing regulation by the court.

Only one argument against this approach has serious merit––that it would fragment Windows and we’d end up with multiple standards for operating systems. But another word for fragmentation is competition, and competition leads to innovation. If the short run price is some fragmentation, I’m not going to worry about that.

Why, in general terms, should we go beyond the "don’t do it again" remedy? First, because the Justice Department won a big victory. All Justice really lost was the tying claim, and I would argue that’s irrelevant, given that the judges found that it was unlawful to mingle the Internet Explorer code with the operating systems code.

Second, there are structural characteristics to this industry that argue for remedies that go beyond ‘just don’t do it again’. There are high barriers to entry into this business. I’m sure we’re going to hear people tell me that Linux is a serious competitor to Windows. But if you’re not a professional computer geek you don’t use Linux.

Three, there is a history of anti-competitive behavior by Microsoft. This is a company that engaged in persistent anti-competitive conduct over ten years. It is about time something be done.

Finally, while people argue that rapid technological change argues against antitrust enforcement, I think the opposite is true. You want to anticipate where the market is going precisely because it can go wrong so rapidly.

George Priest, Yale Law School: It’s interesting to debate the relative merits of Bob Litan’s three standards and to consider the potential impact of breaking up Microsoft. But none of that is really on the table. The Justice Department’s settlement goes beyond the remedies justified by the Court of Appeals decision, and there is no legal basis for the broader remedies proposed by the litigating states or by Bob Litan.

The Court of Appeals’ decision is very precise. Microsoft is not guilty of monopolizing operating systems markets: Windows is a legal monopoly. This is important because it means the various proposals to restructure the operating systems market have no legal foundation. There is no legal basis for restructuring the operating system market.

The Court of Appeals did find Microsoft guilty of illegal practices in licensing restrictions, product design and coercion of competitors. The Justice Department settlement addresses each, prohibiting the illegal license restrictions, compelling Microsoft to redesign Windows to allow consumers and others to delete the browser, and enjoining all of Microsoft’s coercive practices.

Indeed, the settlement goes beyond practices found to be illegal. It extends to all of Microsoft’s middleware, not just the browser. It prohibits coercion generally, not just the specific practices found illegal. It requires the disclosure of API’s and the publication of communication protocols. And it establishes enforcement through this Technical Committee, with powers that are unprecedented in antitrust.

I really don’t think there is a legal basis for doing more. Carl Shapiro (the litigating states’ expert economic witness) is arguing that the remedy should restore competition. But the Court of Appeals found that Microsoft had a legal monopoly over the operating system market. And Microsoft’s market share in operating systems is no different after committing the acts found to be illegal than it was before. With Standard Oil or even the Alcoa case, one could argue, "let’s break up a company and you can restore the market to competition as before." Not here.

Finally, some say the "commingling" code violation requires more fundamental remedies, but I don’t read the Court of Appeals decision that way. The violation consisted of designing a product in a way that made it difficult for consumers to delete Internet Explorer without harming Windows. That’s really not much different than the violation of not including Internet Explorer in the add/delete program files––and that’s dealt with directly in the settlement.

Finally, keep in mind that the remedies hearing is not the occasion to retry the liabilities issues. It’s not the occasion to present new evidence of Microsoft’s violations. The question is whether the settlement is in the public interest. The judge is not authorized to ask whether the Justice Department could have convinced Microsoft to agree to more. And once the judge finds that the settlement is fair, there will be no legal basis for imposing any of the remedies sought by the litigating states.

Steven Salop, Georgetown University Law Center: The Department of Justice justified the settlement on the grounds that it would restore competition to where it was around 1997. I don’t think the settlement delivers on those terms. But, in any case, I think that is the wrong standard. The right standard is to aim for the market we’d have today, "but for" Microsoft’s anticompetitive acts in the past.

Of course it’s very difficult to predict now where the market would have been. But to make up for those lost years we certainly need a remedy that goes beyond what DOJ claims. In the 1996-98 period, Netscape and Java were in the lead in the new technologies that were changing the industry in fundamental ways. They had a head start, and the head start was very valuable because of the implied network effects.

The best approximation of this "but for" world is the one Microsoft feared would come to pass if it didn’t act illegally. Microsoft viewed the threat in apocalyptic terms, and responded with across-the-board exclusionary conduct that was later found to be illegal. Thus we don’t need to guess about the "but for" world; we can use Microsoft’s own expectations to justify a stronger remedy.

The DOJ’s remedy is a joke. The appeals court talked about the deception of Java developers, yet Java is never mentioned in the settlement. The appeals court also said the district court should be prudent with respect to declaring monopolist design decisions to be illegal, but it did indeed find that Microsoft’s decisions were illegal. How does the DOJ deal with it: the proposed final judgment says "the operating system shall be determined by Microsoft in its sole discretion." Microsoft could put a ham sandwich in the operating system if it wanted to.

The DOJ says Microsoft can violate the terms for reasonable cause. But you can’t just impose a rule of reason standard where the court has already decided that you have a firm that illegally monopolized the market. When you tell your teenager to come home at a reasonable hour and he shows up at 4 AM, you don’t just tell him to come home at a reasonable hour the next time. You set a specific curfew and back it up with a severe penalty.

Richard Schmalensee, MIT Sloan School of Management: In light of the Appeals Court ruling, most of the alleged bad acts are out of the case and, as the court put it, this "drastically altered" Microsoft’s liability. Bob Litan called Microsoft a "serial offender." But the Court of Appeals upheld Microsoft’s interpretation of the earlier consent decree, and you can hardly call the attempt to merge with Intuit an offense. By that standard a lot of companies would be tarred and feathered.

Thus the injunctive relief in the settlement meets reasonable standards. To go beyond, you’d have to show harm to competition in the past, and even the district court couldn’t bring itself to say the illegal acts had stifled competition. The court said Microsoft "reduced future threats" to its monopoly, but couldn’t get to a causal connection. The Appeals Court said that to go beyond injunctive relief there would have to be evidence of causation. And the litigating states have not introduced any such evidence.

The Appeals Court made a technical error in finding code commingling to be illegal. The way Windows is designed, there is no separate browser code to commingle. That’s why until the litigating states proposed this bizarre unbundling, the only remedy the government wanted was a way to block access to the browser.

The enforcement mechanism has no teeth. I find it quite amazing to think that an extension of the regulatory decree is a non-penalty. As for the idea that the remedy doesn’t meet the DOJ’s own standard, I think it goes well beyond. In particular, it covers software like instant messaging that hasn’t the remotest chance of becoming a cross-platform threat.

Code unbundling may not be technically feasible. If chunks of code were removed, other parts of Windows wouldn’t work. If the chunks of code are simply moved around, software developers will be able to make use of them––undermining the goal of unbundling. Even the states’ economic witness has declined to endorse unbundling.

It’s possible to confiscate intellectual property retroactively as a matter of equity without destroying efficiency. But the IP provisions in the litigating states’ plan are forward-looking, too, and I can’t think of a better way to dampen the incentive to innovate.

Response by Robert Litan: I would put breakup back on the table as a conditional remedy for severe violations. There is still a legal ground for a breakup if you believe that the objective of the remedy is to restore competition to where it would have been in the absence of Microsoft’s illegal conduct. I would also argue that breakup is more in line with deregulation than imposing a laundry list of provisions enforced by a court.

Perhaps unbundling is not possible. But if Microsoft stonewalls, I would come back at Microsoft with a breakup plan. With all that money riding on it––we’re talking billions––they’d figure out a way. Unbundling may favor competitors’ middleware. But that’s just the point: level the playing field that’s now tilted in Microsoft’s favor because of network effects, and the like.

Response by George Priest: Breakup is just a fantasy in light of the appeals court decision. Trying to project what competition would have been is an academic exercise without basis in law.

Regarding Steve Salop’s point that the proposed settlement doesn’t reduce the applications barrier: Microsoft didn’t do anything illegal to obtain it, and therefore it shouldn’t be part of the remedies.

Response by Steve Salop: The court couldn’t have been clearer in what it meant about commingling middleware in Windows. In any event, I can’t believe Microsoft can’t fix the problem with a little redundancy. And if it doesn’t work, there will be competitors to Windows that will work.

Response by Dick Schmalensee: Did Microsoft take vigorous action to deal with Netscape? Of course, but most of the actions weren’t illegal. The point of unbundling is punishment, not remedy to anticompetitive behavior. Hiding middleware works, as you can see in Windows XP.