Analysis of the Appellate Court Opinion on Microsoft's Antitrust Case

Unless you were far from a TV or newspaper late last week, you probably heard that the US Court of Appeals had finally weighed in on the Microsoft antitrust case. The Court reversed the initial ruling to break up Microsoft and sent the case back to the District Court for new hearings about a remedy. Although both sides—Microsoft and the US Department of Justice (DOJ)—have taken the decision as a win, most news outlets have declared the decision a major Microsoft victory. After examining the Appellate Court's opinion, I don't agree. In fact, I think Microsoft still has a lot to worry about.

The Appellate Court reviewed a wide range of topics related to the Microsoft antitrust case, including the charges and evidence presented during the original trial, Judge Thomas Penfield Jackson's findings of fact, Jackson's recommended remedy, and Jackson's behavior during and after the trial. The most controversial issue in the appeals phase has been Jackson's conduct—neither Microsoft nor the DOJ had asked that the Court address this matter. Jackson and the Appellate Court have a long history of mutual dislike, particularly where Microsoft is concerned, and clearly, the Appellate Court had an axe to grind in this regard.

In short, the Appellate Court affirmed and reversed parts of Jackson's ruling. The most important reversal was the decision not to break up the company; Microsoft is cheering this reversal as total victory. However, the Appellate Court didn't give Microsoft a broad mandate to continue business as usual. In many ways, the Appellate Court actually affirmed the most important parts of the DOJ's case against the software giant.

Monopoly Power
Judge Jackson decided that Microsoft passed the test for being a monopoly and ruled that the company's Windows product possesses a monopoly in the Intel-compatible PC OS market. Jackson also ruled that Microsoft illegally suppressed Netscape's threat to Windows. The Appellate Court upheld these findings and said that Microsoft is liable for the lower court's monopolization findings.

The term "monopoly" is widely misunderstood. A monopoly is not, by itself, illegal, and possessing monopolistic power doesn't mean the company owns a particular market percentage. According to the Supreme Court, a monopolist is any firm that "can profitably raise prices substantially above the competitive level." The Appellate Court noted that this condition is rarely obvious, so courts must examine circumstantial evidence. Monopoly power can be "inferred from a firm's possession of a dominant share of a relevant market that is protected by entry barriers." Microsoft argued that no barrier to entry exists in the PC OS market. Both the District Court and the Appellate Court rejected this argument.

The Appellate Court also tackled the matter of whether Microsoft acted like a monopolist. Microsoft argued that its behavior proves that it didn't act like a monopolist, but the Appellate Court disagreed. "Tellingly, the District Court found that some aspects of Microsoft's behavior are hard to explain unless Windows is a monopoly product," the decision reads. "For example, the company set the price of Windows without considering rivals' prices, something a firm without a monopoly would be unable to do." The ruling cited more examples, but the end result is that the Appellate Court ruled that Microsoft does indeed own a monopoly.

Anticompetitive Conduct
Having proven that Microsoft is a monopolist, the Appellate Court turned its attention to anticompetitive behavior that let the company illegally maintain and extend its market power. Originally, the District Court ruled that Microsoft had violated the Sherman Antitrust Act by "engaging in a variety of exclusionary acts to maintain its monopoly by preventing the effective distribution and use of products that might threaten that monopoly." Examples of these acts include Microsoft's liability for its dealings with PC makers and their Windows licenses; the integration of Internet Explorer (IE) and Windows; agreements with ISPs, Internet content providers, and Independent Software Vendors (ISVs); and Microsoft's licensing of Sun Microsystems' Java programming language.

The Appellate Court found Microsoft liable in almost every case, with one major exception: The Appellate Court decided that Microsoft wasn't liable for its integration of IE with Windows. Even this ruling isn't a slam-dunk win for Microsoft, and the decision doesn't give Microsoft the green light to bundle other applications in Windows. The Appellate Court actually rejected Microsoft's request to throw out a broader finding related to commingled code. And, the Appellate Court ruled that Microsoft's decision to exclude IE from the Add/Remove Programs applet was in violation of the Sherman Antitrust Act. Whether the bundling of IE and Windows is illegal product tying, as Judge Jackson ruled, is still up in the air. The Appellate Court requested that the DOJ attempt to prove this accusation in the upcoming hearings.

The Appellate Court uniformly rebuked Microsoft for other anticompetitive issues (e.g., Java, dealings with partners and competitors), and stated that the company routinely acted in an anticompetitive manner. The Court found Microsoft's Java implementation deceptive to developers and noted at least one case in which a Microsoft developer knowingly deceived an industry reporter about the company's rationale for including Windows-specific features in that release.

Attempted Monopolization
The Appellate Court then turned to the issue of whether Microsoft had "attempted to monopolize . . . any part of the trade or commerce among several States." The District Court originally found that Microsoft's "predatory conduct" was designed to ensure that the company would attain monopolistic power in a second market—Web browsers. Because of the unclear definition of the Web browser market, the Appellate Court reversed the decision that Microsoft violated the Sherman Antitrust Act by attempting to extend its Windows monopoly into Web browsers—a small but interesting victory for Microsoft.

Trial Proceedings and Remedy
Microsoft argued that the expedited schedule that Judge Jackson imposed during the original trial compromised the company's right to a fair trial, but the Appellate Court found the schedule acceptable. However, the Appellate Court did agree with Microsoft that the remedy (a breakup of the company) should be vacated because of the following three factors:

The Appellate Court ruled that the District Court must hear both parties and that a new judge must fashion an appropriate remedy for Microsoft's behavior. The revised remedy could be a breakup, although that possibility has been drastically reduced.

Judicial Misconduct
The Appellate Court remanded the case to the District Court, and Microsoft can present evidence that might affect the remedy. But the Appellate Court took time to rebuke Judge Jackson for his behavior during and after the trial, accusing him of holding secret meetings with the press and behavior that didn't appear impartial. The Appellate Court's animosity toward Jackson played a role in its decision to throw out the breakup order.

So what happens now? Well, the case will go to a random District Court judge—not Jackson—for further proceedings. The new judge must consider as fact Judge Jackson's findings of fact, gather new evidence, and determine a suitable remedy. This remedy might result in a Microsoft breakup, but a more likely outcome would include some sort of conduct remedy, and an even more likely outcome is that Microsoft will simply settle this case before the District Court proposes a new remedy. The company was very close to a settlement during the original trial, and with the balance somewhat shifted in the company's favor, Microsoft should be able to reach common ground with the DOJ. But the most important thing to take away from this decision is that the Appellate Court didn't hand Microsoft a victory. The company still has a tough row to hoe to put this ugly matter behind it.