Antitrust Law for the 21st CenturySeptember 13, 2001
World War 3.0: Microsoft and its Enemies. By Ken Auletta
Random House, New York, 2001, 436 + xxv pages, $27.95.
Ken Auletta was an ideal choice to chronicle the Microsoft trial, which some have called the most significant antitrust action since the breakup of Standard Oil in 1911. Auletta not only attends the World Economic Forum in Davos every January---where perhaps two thousand corporate, government, and media moguls gather under Swiss Army protection to meet and greet their new-economy peers---he chairs panel discussions there, and dines afterward with Bill and Melinda Gates. He was previously acquainted with presiding judge Thomas Penfield Jackson, and had frequent access to other key participants before, during, and after the trial.
As the book went to press, Judge Jackson's verdict was under review by a court of appeals, with further review by the Supreme Court deemed likely. Several noteworthy events have occurred since that time (see "Further Legal Maneuvering").
The trial probably became inevitable in July 1994, when Microsoft signed a consent decree in which it admitted no wrongdoing, but agreed to forego certain "coercive" business practices. Whatever else it did, the vaguely worded decree explicitly granted Microsoft leave to develop "integrated products." The case officially began in October 1997, when the Justice Department filed a motion in a federal district court charging Microsoft with violations of the 1994 decree, and asking that the court order the company to cease tying its "separate" browser to Windows on the ground that such "bundling" forces PC makers to choose the Microsoft browser over any alternative. Justice was joined in its suit by twenty states, some of which regarded Microsoft as the source of a potential cash windfall, second only to big tobacco.
Microsoft insisted that the 1994 decree entitled it to sell the products as a unit, because they were integrated rather than separate. Ultimately, the company was found to have violated both sections of the Sherman Antitrust Act of 1890, which reads in full:
Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal. (Section 1) Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize, any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony. (Section 2)
Subsequent acts have expanded the compass of antitrust legislation, but were of little consequence in the Microsoft case.
Legal scholars suspect that the authors of the Sherman Act purposely left the wording terse and ambiguous in the hope that---over a period of years---a body of case law would grow up around the act to clarify its meaning and scope. That hope has been realized in part, especially as it applies to the "rule of reason" invoked by the Supreme Court in the landmark Standard Oil Co. v. U.S. case of 1911. The rule has in effect amended the Sherman Act's blanket condemnation of "all combinations in restraint of trade" to mean all unreasonable combinations. Chief Justice White's opinion in the 1911 case traced the Sherman Act back to its roots in English Common Law, which prohibits monopolies and other "combinations in restraint of trade" on the ground that they serve no other purpose than to permit suppliers to boost earnings at consumers' expense by creating artificial shortages. Combinations that do serve another purpose have occasionally been granted exemptions.
An important part of the Microsoft defense was its contention that, by integrating its Internet Explorer with the Windows operating system---at no extra charge---it had made the products less expensive and easier to use. How could that harm consumers? And if consumers were unharmed, how could the firm be guilty? Call it the "no-harm, no-foul" defense, with which antitrust litigators have achieved some success in recent years. Judge Jackson's official Findings of Fact addressed the question by citing a mid-level internal document estimating that the company could afford to sell Windows for $49, but that $89 was the revenue-maximizing price. By choosing the latter, Microsoft had already harmed consumers to some extent, while husbanding the "market power" it would need to inflict more extensive harm in the future. All this is pertinent to the appeals process because, as a general rule of law, appeals courts typically defer to trial judges as to matters of fact. Since Jackson made every effort to establish a factual record that would survive scrutiny, the appeals court was expected to (and has since) let the record stand.
Perhaps the greatest handicap the defense lawyers were obliged to overcome was a pretrial (August 1999) videotaped deposition given by Gates himself. In it he came across as an evasive, uncooperative, and at times contemptuous witness, stating repeatedly that he "did not know," "did not remember," or "was never told" of events critical to Microsoft's most promising joint ventures. At one point, he even quibbled about the meaning of the word "concerned," as it occurs in the sentence "were you concerned about Netscape's early dominance of the market for Internet browsers?"
David Boies---whom Jackson later described to Auletta as the best lawyer he had "ever seen in a courtroom"---used the tape to great advantage by refusing to play it from beginning to end. Instead, he showed brief excerpts containing Gates's own answers to specific questions shortly before putting them to Microsoft witnesses during cross-examination, thereby enhancing the contrast between the pristine motives the company admitted to in court and the markedly different ones expressed in private. Performances like Gates's can be particularly damaging in trials that confront---as antitrust trials often do---technically naive judges with technically complex testimony. There is always a temptation to ignore the content of the testimony, and be guided by the "demeanor of the witnesses" alone.
Auletta quotes a variety of experts to the effect that Microsoft's defense team was at best hamstrung, and at worst doomed, by Gates's deposition. Had the firm been willing to confess to a few sins, and agree to cease and desist from a slightly more explicit list of forbidden practices than the one contained in the 1994 consent decree, the dispute could easily have been settled out of court. Auletta quotes Boies to the effect that Justice would willingly have settled at almost any time before or even during the trial.
Auletta pulls no punches in his depiction of Gates's character. In a chapter titled "The Real Bill Gates," he points out that the 45-year-old tycoon has "never had a boss, never been reprimanded or fired, . . . , never been poor, never served in the military, and never really endured business adversity." He notes that Gates left high school as a National Merit Scholar with a perfect 800 score on the math SAT, and describes him as "a classic nerd." He also quotes Thomas Cheatham, who ran Harvard's computer lab while Gates was a student there, and who remembers him as an outstanding programmer and a disagreeable young man who "put people down when it was not necessary." Other friends, subordinates, and acquaintances complain that Gates takes everything personally and seems "younger than his age," an impression he perpetuates by jumping over furniture unexpectedly, rocking nervously in his chair, and peppering his speech with adjectives like "great," "neat," and "super." He is also given to childish displays of petulance when challenged in public. Sources close to the firm maintain that the decision to pursue an uncompromising "stonewall" defense was Gates's alone, and that it was made on purely emotional grounds. If he didn't feel guilty, why should he plead guilty?
Auletta is quick to point out that all this stands in stark contrast to Gates's record as a philanthropist, which even his detractors admire. Early in his career, he concluded that because philanthropy requires time and effort to be done right, and because he could spare neither, he would postpone any major bequests. But that all changed when he took a wife who has the time, the energy, the discipline, and the inclination to distribute his funds according to a mutually concocted game plan. To date he has pledged $21.8 billion to the Bill and Melinda Gates Foundation, making it the world's wealthiest charitable trust, and dwarfing the collective largesse of Andrew Carnegie and John D. Rockefeller, whose hitherto unequaled bequests reportedly totaled---in Y2K dollars---a paltry $3 and $6 billion, respectively. To those who argue that trial-related image considerations may have dictated the timing and even the magnitude of certain gifts, Auletta replies that a slick and effective PR campaign could have been waged for a lot less.
Genuine "smoking guns" occasionally do come to light in antitrust litigation, as when the president of American Airlines was caught on tape conspiring with a rival firm to fix prices along certain routes. The condemnation of price fixing most find in the Sherman Act was made explicit by the Clayton Act of 1914. But Auletta detects nothing as blatant as price fixing in Judge Jackson's Findings of Fact. If Microsoft is indeed a monopoly, it is hardly a secure one. Its status could change overnight, and at almost any moment. If it tried to coerce, or did coerce, rival firms not to compete in certain markets, so did the competition. Government attempts to disprove the company's claim that its Internet Explorer is an integral part of the Windows operating system failed miserably. Indeed, one of the trial's most dramatic moments occurred when Microsoft lawyer Stephen L. Holley recalled a witness named Edward Felten---a professor of computer science at Princeton---to the stand.
Felten (currently in the news in connection with challenges to the 1998 Digital Millenium Copyright Act) had testified earlier that Microsoft's browser and operating system were distinct blocks of code that could be pulled apart and marketed separately. Indeed, he had designed a program to separate them. Holley placed a new Toshiba laptop on the stand beside Felten, and invited him to demonstrate his browser-removal program. When it finished running, the browser icon had indeed disappeared from the Windows desktop. Holley then directed Felten to access the "Windows Update" screen and press Control N. The icon promptly reappeared, permitting Holley to crow that the two were indeed inseparable, as the firm had claimed all along. But who knows what such theatrics really prove. Does Felten's inability to separate the two mean that Microsoft could not have done so?
The government enjoyed a few Perry Mason moments of its own. One occurred when Boies showed a portion of the Gates deposition relating to a meeting that took place on June 21, 1995. At the meeting, according to Netscape attendees, Microsoft executives (other than Gates, who did not attend) proposed to divide the traffic in such a way that Microsoft would serve the Windows portion of the browser market, while Netscape would attach only to older versions of the Windows operating system, and to non-Windows platforms. The Netscape contingent was underwhelmed by the generosity of Microsoft's offer.
Because territorial divisions of markets have been found by any number of courts to be illegal and anticompetitive, most antitrust experts presume that nonterritorial segmentations are equally illegal. After watching the uncooperative Gates deny any awareness of such a meeting, Boies proceeded to introduce into evidence a series of e-mails suggesting that his attention had focused on little else during the days and weeks leading up to the meeting. In one of those e-mails, Gates voiced the entirely realistic fear that software developers might begin to design applications for direct attachment to "middleware" like Netscape Navigator, rather than to the Windows platform.
Another dramatic moment occurred when a Microsoft vice president named Cameron Myhrvold (brother of the firm's chief technology officer, Nathan Myhrvold) confessed to Boies under cross-examination that the firm's leadership had for a time been afraid to offer consumers a choice between Internet Explorer and Netscape Navigator, for fear that too many would blindly select the then leading brand. For a time, Netscape Navigator commanded an 80% share of the browser market. Microsoft was (almost fatally) slow getting into the browser market. Needing to play some serious catch-up, the firm bundled Internet Explorer with Windows at no extra charge and threw development funds at the problem until Internet Explorer became the superior product. Jackson's Findings of Fact acknowledge extensive testimony to the effect that it soon equaled and later excelled Netscape Navigator.
As the trial progressed, the government's focus shifted from the bundling issue to Microsoft's strong-arm tactics, arguing that the law does not automatically permit a monopolist like Microsoft to avail itself of any and all tactics available to its weaker competitors. As a Reagan-appointed free-market conservative, Jackson was instinctively distrustful of government regulation. On the other hand, known among his friends as a stickler for rules and "fair play," he seemed likely to take offense at Microsoft's cavalier attitude toward the law prohibiting every "attempt to monopolize." Finally, as a human being, he was at times infuriated by Microsoft's often ill-concealed contempt for the government's complaint and his court.
By the time the last Microsoft witness finished his testimony, on June 24, 1999, the trial had occupied 78 court days, and generated 13,466 pages of trial transcript, 2695 trial exhibits from three million documents collected, and 1815 pages of written direct testimony. Each side was given until August 10 to prepare a brief explaining the incontrovertible facts of the case as it saw them. Each would then have an opportunity to review the other's briefs, and to revise its own accordingly. Finally, the judge would incorporate the results into his own official Findings of Fact, which would be followed some months later by his Conclusions of Law. The latter would stipulate, along with his determinations of guilt, any remedy he might see fit to impose.
On November 5, 1999, the judge issued his Findings of Fact. They proclaimed Microsoft to be a monopoly and rejected most of the firm's version of the facts. Soon afterward, he appointed Richard Posner---chief judge of the Seventh Circuit Court of Appeals in Chicago---to serve as a mediator. What followed may well have been the most interesting, and least known, phase of the trial.
Posner is a giant in the field of antitrust law. His writings provide the legal justification and theoretical background for the "no-harm, no-foul" defense Microsoft relied on so heavily. Accordingly, the defense team had high hopes that he would steer negotiations toward a settlement the firm could live with. But Posner sought only to find common ground---any common ground---on which the sides could agree. To that end, he never put them in the same room, choosing instead to meet with each in turn, seeking to narrow the differences between them iteratively. At one point, having persuaded Gates to sign off on a document purporting to contain a good-faith settlement offer from Justice, he thought he had succeeded. Only after a number of the state attorneys general reasserted their status as co-complainants by refusing to sign that or any similar document did Posner inform Jackson that further efforts to produce an out-of-court settlement would be futile.
Auletta blames the states for queering the deal engineered by Posner. The latter had proceeded from the first on the assumption that his contacts at Justice spoke for all complainants. Only after he thought an agreement had been reached---at least in principle---did he learn that the dispute was in fact three-sided. Publicly, Posner announced only that the mediation effort was over. Privately, he criticized the states' conduct in no uncertain terms.
James Case writes from Baltimore, Maryland.