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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
Plaintiff,
v.
MICROSOFT CORPORATION,
Respondent.
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Supplemental to
Civil Action No. 94-1564
Hon. Thomas Penfield Jackson
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MEMORANDUM OF THE UNITED STATES IN SUPPORT OF PETITION
FOR AN ORDER TO SHOW CAUSE WHY RESPONDENT
MICROSOFT CORPORATION SHOULD NOT BE FOUND IN CIVIL CONTEMPT
Joel I. Klein
Assistant Attorney General
A. Douglas Melamed
Principal Deputy Assistant Attorney General
Rebecca P. Dick
Director of Civil Non-Merger Enforcement
Christopher S Crook
Chief
Phillip R. Malone
Steven C. Holtzman
Pauline T. Wan
Karma M. Giulianelli
Michael C. Wilson
Sandy L. Roth
Attorneys
U.S. Department of Justice
Antitrust Division
450 Golden Gate Ave., Room 10-0101
San Francisco, CA 94102
(415) 436-6660
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TABLE OF CONTENTS
I. INTRODUCTION................................................................................................................ 1
II. JURISDICTION................................................................................................................... 4
III. STATEMENT OF FACTS.................................................................................................. 4
A. Microsoft's Operating System Monopoly................................................................ 4
B. The Prior Monopolization Case Against
Microsoft and the Resulting Final Judgment........................................................... 6
C. The Internet, the World Wide Web, and the Emergence of the Browser................ 7
D. Microsoft's Response and the Outbreak of the "Browser Wars"............................. 9
IV. MICROSOFT IS IN CONTEMPT OF THIS COURT'S FINAL JUDGMENT............... 11
A. Legal Standard....................................................................................................... 11
B. The Plain Language of the Final Judgment Expressly Prohibits
Microsoft from Conditioning an OEM's Windows 95 License
On the OEM Also Licensing and Distributing Internet Explorer.......................... 12
C. Microsoft Is Violating The Plain Language of the Final Judgment....................... 13
1. Microsoft Has Entered Into Windows 95
"License Agreements" with OEMs............................................................ 13
2. The Terms of Microsoft's Windows 95 OEM License
Agreements Are Conditioned Upon OEMs Licensing Internet
Explorer...................................................................................................... 14
a. Microsoft Has Required, and Is
Continuing to Require, OEMs to License
and Preinstall Internet Explorer 3.0
As a Condition of Their Windows 95 License............................... 14
b. Microsoft Currently Intends to Require OEMs to
License and Preinstall Internet Explorer
4.0 As a Condition of Their Windows 95 License......................... 18
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3. Internet Explorer Is an "Other Product" from Windows 95, and
Not an "Integrated Product," for Purposes of the Final Judgment............. 19
a. Substantial OEM and End-User Demand Exists for
Internet Explorer and Other Browser Products Separate
From Demand for Windows 95 or Other Operating Systems ....... 20
b. Microsoft's Actions Demonstrate That
It Recognizes and Responds to the
Separate Demand for Its Internet Explorer Product....................... 21
i. Microsoft Markets and Distributes
Internet Explorer As a Stand-Alone
Product Through Numerous Means
Independent of Its Windows 95 Product............................ 21
ii. Microsoft Has Developed and Distributes
Versions of Internet Explorer for
Non-Windows 95, and Indeed
Non-Microsoft, Operating Systems................................... 22
iii. Microsoft Regularly Describes Its
Internet Browser as a Separate
Product From Windows 95, and
Aggressively Markets It Under Its Own Name.................. 23
iv. Microsoft Regularly Tracks the
Status of Internet Explorer as a
Separate Product Competing In
What Microsoft Identifies As a
Distinct Browser "Space" or "Market".............................. 24
v. Microsoft's Pattern of Conduct with
Respect to Internet Explorer Is Different
from Its Treatment of Any True Windows
Operating System "Feature" or "Update"................................. 25
c. Licensing and Distributing Internet
Browser Products Separately from
Operating Systems Is the Commercial Norm................................. 26
d. Licensing and Distributing Internet Explorer
Separately from Windows 95 Is Physically Possible..................... 27
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e. Conditioning Windows 95 License Agreements
On OEMs Licensing And Distributing Internet
Explorer Is Not Necessary To Enable Microsoft To
"Develop" Any "Integrated Product" ............................................ 27
V. MICROSOFT'S CONDITIONING OF WINDOWS 95 LICENSES
ON OEMS LICENSING INTERNET EXPLORER IS PRECISELY
THE KIND OF ANTICOMPETITIVE CONDUCT THE
FINAL JUDGMENT WAS INTENDED TO PREVENT................................................. 28
A. The Express Purpose of Section IV (E) of the Final Judgment
Is to Prevent Microsoft from Trying to Protect or Extend Its
Windows Monopoly Through Requiring OEMs
to License or Distribute Other Products Such as Internet Explorer....................... 28
B. Browser Technology Is a Significant Threat
To Microsoft's Windows Operating System Monopoly........................................ 31
C. Microsoft Perceives Competing Browsers as
Serious Threats To Its Operating System Monopoly............................................. 33
D. The United States Seeks to Protect the Competitive
Process From Microsoft's Abuse of Its Monopoly Power..................................... 36
VI. MICROSOFT'S NON-DISCLOSURE AGREEMENTS MAY
HAMPER THE ABILITY OF THE COURT TO ENFORCE
THE FINAL JUDGMENT AND OF THE UNITED STATES
TO INVESTIGATE POSSIBLE VIOLATIONS OF IT.................................................... 36
VII. RELIEF REQUESTED...................................................................................................... 39
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TABLE OF AUTHORITIES
Cases
Leman v. Krentler-Arnold Hinge Last Co., 284 U.S. 448 (1932).................................................... 4
McComb v. Jacksonville Paper Co., 336 U.S. 187 (1949)......................................................... 4, 11
United States v. Armour & Co., 402 U.S. 673 (1971).............................................................. 11, 12
United States v. ITT Continental Baking Co., 420 U.S. 223 (1975)......................................... 11, 12
United States v. Greyhound, 508 F.2d 529 (7th Cir. 1974) .......................................................... 11
United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995)................................................... 4
United States v. Western Electric Co., 12 F.3d 225 (D.C. Cir. 1993)........................................... 12
United States v. Western Electric Co., 894 F.2d 1387 (D.C. Cir. 1990)....................................... 11
United States v. Young, 107 F.3d 903 (D.C. Cir. 1997)................................................................. 12
United States v. Greyhound Corp., 363 F. Supp. 525 (N.D. Ill.),
aff'd, 508 F.2d 529 (7th Cir. 1974)............................................................................................. 11
Washington-Baltimore Newspaper Guild v. Washington Post,
626 F.2d 1029 (D.C. Cir. 1980).................................................................................................. 11
Statute
18 U.S.C. &167; 401(3) (1988).......................................................................................................... 4
Page 1 .
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
Plaintiff,
v.
MICROSOFT CORPORATION,
Respondent.
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Supplemental to
Civil Action No. 94-1564
Hon. Thomas Penfield Jackson
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MEMORANDUM OF THE UNITED STATES IN SUPPORT OF PETITION
FOR AN ORDER TO SHOW CAUSE WHY RESPONDENT
MICROSOFT CORPORATION SHOULD NOT BE FOUND IN CIVIL CONTEMPT
I. INTRODUCTION
The United States has petitioned this Court for an Order to Show Cause why Respondent
Microsoft Corporation ("Microsoft") should not be found in civil contempt of Section IV(E)(i) of
the Final Judgment entered by this Court on August 21, 1995, in United States v. Microsoft,
1995-2 Trade Cas. . 71,096 (D.D.C. 1995) ("Final Judgment") (copy attached hereto in the
Appendix to this Memorandum (hereinafter "App."), Exhibit 1). This action is necessary to stop
Microsoft's ongoing violation and defiance of Section IV(E)(i) of the Final Judgment, which
forbids Microsoft from requiring personal computer ("PC") original equipment manufacturers
("OEMs") to license other Microsoft products in order to obtain a license to Microsoft's
monopoly PC operating system products. In violation of this provision, Microsoft has required
OEMs to license and distribute another Microsoft software product -- its "Internet Explorer"
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browser software -- as a condition of licensing Microsoft's current monopoly PC operating
system product known as "Windows 95."
The United States is particularly concerned about Microsoft's unlawful conduct because
of the significance of Internet browsers. Internet browser technology, as developed by
companies competing with Microsoft, may be an important element in the reintroduction of
competition to the PC operating system market. This potential is a result of the fact that
browsers and the technology they incorporate can serve as a platform to which applications can
be written and accessed without regard to the identity of the underlying operating system. The
development of application programs that are written to run on or through an Internet browser,
which can itself run on any operating system, is a serious threat to Microsoft's monopoly, which
stems from and is reinforced by the overwhelming base number of software application programs
that have been written specifically to work with Windows 95. Microsoft recognizes this threat
and is taking action to defeat it. Its efforts include using its PC operating system market power to
coerce OEMs to license and distribute Microsoft's Internet Explorer product in violation of the
Final Judgment. In filing the Petition, the United States seeks to ensure that Microsoft abides by
the terms of the Final Judgment, and that it does not misuse its monopoly power in operating
systems to gain an unlawful advantage that could protect or extend its monopoly and inhibit
competition.
The United States files its Petition to bring about an immediate end to the specific
Microsoft conduct described herein. At the same time, the United States is continuing to
investigate a variety of other licensing and distribution practices used by Microsoft in connection
with its Internet browser and other Internet software products to determine whether those
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practices violate the Final Judgment or the antitrust laws.
In both bringing this action and continuing to investigate, the United States is concerned
that the Court's ability to enforce the Final Judgment, and the government's ability to investigate
possible violations of it and the antitrust laws, may be hampered by restrictive non-disclosure
agreements that Microsoft insists its licensees and business partners sign. Many of these
agreements prohibit voluntary disclosure to anyone (by implication including the United States
Department of Justice or this Court) of information broadly deemed "confidential" by Microsoft.
In addition, in some cases these agreements actually require the parties to them to give notice in
advance to Microsoft before they produce "confidential" information to a court or the Department
of Justice, even if such production is in response to court order or compulsory process.
Microsoft has recently informed the Department of Justice that it does not interpret these
agreements as requiring signatories to give Microsoft notice of their discussions or dealings with
the Department. Nevertheless, the agreements continue to pose a particularly serious risk,
intended or not, of chilling the disclosure of information about possible Microsoft misconduct by
companies or individuals that are contemplating coming forward to volunteer information to the
government but that have no way of knowing about Microsoft's new interpretation. Moreover,
the risk remains that the agreements may inhibit the legitimate disclosure of information even
when third parties are approached by the United States and may reduce those third parties' ability
and willingness to provide the United States or the Court with full information relevant to
whether Microsoft is violating the Final Judgment. In so doing, the agreements may materially
interfere with the Court's ability to enforce the provisions of the Final Judgment. The Petition
accordingly requests that the Court order Microsoft to delete the restrictive provisions of the non-
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disclosure agreements, to notify all parties to those agreements that those provisions may not be
enforced with respect to communications with the Department of Justice, and to similarly modify
all future agreements.
The United States submits this Memorandum in support of the Petition and respectfully
requests that this Court order Microsoft to show cause why it should not be found in civil
contempt of this Court and thereafter adjudge Microsoft in civil contempt and enforce
compliance with the Final Judgment by ordering the relief requested in the Petition.
II. JURISDICTION
This Court has inherent power to enforce compliance with its orders. McComb v.
Jacksonville Paper Co., 336 U.S. 187, 193 (1949); see also 18 U.S.C. &167; 401(3) (1988). A court
whose order has been disobeyed has jurisdiction and venue to hear the contempt proceeding.
Leman v. Krentler-Arnold Hinge Last Co., 284 U.S. 448 (1932). Moreover, Section VII(B) of
the Final Judgment provides:
Jurisdiction is retained by this Court over this action and the parties thereto for the
purpose of enabling any of the parties thereto to apply to this Court at any time for
further orders and directions as may be necessary or appropriate to carry out or
construe this Final Judgment, to modify or terminate any of its provisions, to
enforce compliance, and to punish violations of its provisions.
III. STATEMENT OF FACTS
A. Microsoft's Operating System Monopoly
Microsoft, the world's largest producer of software for personal computers, has monopoly
power in the production, licensing, and sale of operating system software for Intel-compatible
PCs. See United States v. Microsoft Corp., 56 F.3d 1448, 1450-51 (D.C. Cir. 1995). As defined
in the Final Judgment, the operating system is the software that controls the operation of the PC
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and manages the interaction between the computer's memory and attached hardware devices
such as the keyboard, display screen, disk drives, and printer. See App. Exhibit 1, Final
Judgment, Section II(14). In addition to these functions, the operating system also enables
application software ("programs" such as word processing, spreadsheet, or Internet browser
products) to operate or "run" by serving as a "platform" to which they are written. 1
The source, significance, and durability of Microsoft's monopoly power in the licensing
and distribution of PC operating system software was set forth in the United States' Complaint
leading up to the Final Judgment. See App. Exhibit 2, Complaint, .. 9-20. Currently,
Microsoft's monopoly power is embodied in its most recent PC operating system release,
Windows 95. Windows 95 is the dominant PC operating system product at this time. In mid-
1996, for example, Microsoft estimated that 80 percent of the 23 million PCs projected to be sold
in the United States in the time period from mid-1996 to mid-1997 would have Microsoft
operating system products preinstalled on them by the OEMs, while only 6 percent would have
competing operating system products preinstalled. 2 Microsoft projected that its OEM-installed
operating system market share would be almost 86 percent by the end of mid-1997, while its
competitors' shares would be only 2 percent. See Confidential App. Exhibit 3 (at MS6 6001073-
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82); Confidential App. Exhibit 4 (at MS6 6006370, 6006377).
Because most purchasers of PCs demand that an operating system be preinstalled on the
PCs they buy, and because shipping PCs without operating systems is likely to cause customer
confusion and increase product support costs, OEMs routinely preinstall operating system
software on the hard disk drive memory of nearly all their PCs. As a result of Microsoft's
monopoly power in the operating system market, it is a commercial necessity for OEMs to
preinstall Windows 95 as the operating system product on the vast majority of the PCs they sell,
and virtually all OEMs do so. See, e.g., App. Exhibit 5, Declaration of E. Browning (hereinafter
"Browning Decl".), . 4; App. Exhibit 6, J. Kozel deposition transcript excerpts (hereinafter
"Kozel Dep."), p. 10, line 5 - p. 12, line 6; App. Exhibit 7, M. Ransom deposition transcript
excerpts (hereinafter "Ransom Dep."), p. 10, line 5 - p. 11, line 14; App. Exhibit 8, J. Von Holle
deposition transcript excerpts (hereinafter "Von Holle Dep."), p. 8, line 2 - p. 10, line 18, p. 12,
line 22 - p. 14, line 2; App. Exhibit 9, S. Decker deposition transcript excerpts (hereinafter
"Decker Dep."), p. 10, line 5 - p. 11, line 21.
B. The Prior Monopolization Case Against
Microsoft and the Resulting Final Judgment
On July 15, 1994, the United States sued Microsoft for unlawfully maintaining its
monopoly in the market for PC operating system software. The United States' complaint alleged,
among other things, that Microsoft had engaged in anticompetitive marketing practices directed
at PC manufacturers that distribute operating system software preinstalled on their PCs. Such
practices included entering into license agreements that imposed financial penalties on OEMs
that distributed or promoted any non-Microsoft operating system, covered excessively long
Page 7 .
terms, and required unreasonably large minimum commitments to the Microsoft product. The
result of these exclusionary license agreements was to foreclose competitors from using OEMs to
distribute competing operating system software.
Microsoft consented to the entry of judgment against it, and this Court entered the Final
Judgment on August 21, 1995. The Final Judgment remedied Microsoft's illegal conduct by
prohibiting Microsoft from entering into the above-described license agreement terms with
OEMs. Of more significance for this contempt action, the Final Judgment also prohibited
Microsoft from engaging in other conduct which could yield similar anticompetitive results. In
particular, the Final Judgment enjoined Microsoft from misusing its monopoly power by
conditioning licenses of its operating system software on OEMs either licensing any other
Microsoft product or not licensing or distributing any non-Microsoft products. See App. Exhibit
1, Final Judgment, Section IV(E). The purpose of Section IV(E) was to prevent Microsoft's use
of such conditioning to try to protect or extend its operating systems monopoly. See App. Exhibit
10, Competitive Impact Statement filed in connection with the Final Judgment (hereinafter
"CIS"), pp.10-11, 59 Fed. Reg. 42845, 42852 (1994); Section V.1, infra.
C. The Internet, the World Wide Web, and the Emergence of the Browser
The Internet is a huge global network which interconnects smaller networks of
computers, permitting users on one network to communicate with and transfer information to
users on many other separate networks. The computers connected to the Internet range from
Intel-compatible PCs and Apple Computer Corporation's Macintosh PCs, to high-powered
computer workstations and large mainframe computers. In order to transfer data across networks
of different kinds of computers, individuals must use a single format for data files that is
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recognizable by all of the interconnected (and different kinds of) computers. The need for a
common file format led to the development of a special language called hypertext markup
language ("HTML") for writing and displaying documents to users on the Internet. Moreover,
users needed a simple way to move from one HTML document to another, which led the
developers of HTML to adopt the hypertext transport protocol ("HTTP"). HTTP allows users to
click on highlighted parts of an HTML document in order to transfer to a related document. As
HTML documents proliferated on the Internet, they became known collectively as the World
Wide Web ("the Web"). Collections of HTML documents put out by a single source became
known as websites.
As the Web grew in size, users needed a convenient method of searching for, retrieving,
and viewing HTML documents on the Web. In response to this need, a group of software
engineers at the National Center for Supercomputer Applications developed a software
application that provided the interface for accessing and reviewing HTML documents. This
application, which is stored on the user's computer, became known as an Internet browser.
When a user wishes to view an HTML document, the browser transmits the request for the
particular HTML document to another computer on the network called a Web server. When the
browser receives the HTML document from the Web server, it processes the HTML codes in the
document and displays the resulting text, graphic images, and other content on the user's
computer screen.
A number of different browsers are now available to consumers for browsing the Web.
Currently, the most widely used browser is the "Navigator," produced by Netscape
Communications Corp. ("Netscape"). Netscape released its first version of Navigator in late
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1994. It has since produced three more releases. The latest of these, Navigator 4.0, was released
to consumers in final commercial form in June 1997, as part of a software suite called Netscape
"Communicator." 3 Other browsers include Mosaic and Sun Microsystems' ("Sun") "Hot Java"
software.
D. Microsoft's Response and the Outbreak of the "Browser Wars"
Microsoft responded by developing and launching its own competing browser product,
which it called Internet Explorer (or, as it is often referred to in the industry, "IE"). 4 The first
release of Internet Explorer arrived in August 1995. During the following year, Microsoft
quickly came out with two more releases -- Internet Explorer 2.0 and 3.0 -- and aggressively
promoted each as a substantial improvement over both the prior version and competing browser
products. Microsoft released its most recent browser product, Internet Explorer 4.0, on
September 30, 1997. As Netscape has done with Navigator, Microsoft has created versions of
its Internet Explorer product for use with operating systems other than Windows 95. In
particular, Microsoft has released Internet Explorer 3.0 for use on the Apple Macintosh operating
system and Windows 3.11. In addition, Microsoft has stated that it plans to release Internet
Explorer 4.0 for Windows 3.11, the Macintosh operating system, and Sun's Solaris operating
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system.
Microsoft aggressively marketed each version of its Internet Explorer, licensing and
distributing it free of charge to users as a stand-alone product through a wide variety of
distribution paths. For OEMs that wish to license and preinstall Windows 95, however,
Microsoft has gone beyond merely offering Internet Explorer and has instead forced them to
license versions 1.0, 2.0, and 3.0 (and soon version 4.0) of Internet Explorer as a condition of
licensing Windows 95. Microsoft has done so by requiring OEMs to license both Windows 95
and Internet Explorer under the same blanket license agreement. It is this forced licensing and
distribution of Internet Explorer by OEMs that is the subject of the United States' Petition. 5
Microsoft's Internet Explorer has steadily and rapidly gained a substantial share of
browser users. The resulting competition between the Microsoft and Netscape browser products
has been fierce, so much so that it has frequently been characterized in the industry as the
"browser wars." Each release of a new, improved version of one of the browser products has
been followed by an improved version of the other, and in all cases the two products are
marketed to and understood by the public to be browsers competing with each other.
To the extent that this competition brings substantial benefits to PC users, the United
States welcomes it. To the extent that it has the potential to continue to spur rapid
technological innovation and increase consumer choice of browsers and operating systems, the
United States wishes to see it continue. Microsoft, however, has gone beyond legitimate
competition and has sought to use, and is using, its Windows monopoly power to gain an
Page 11 . . . . . . . . .
advantage by coercing OEMs to license and distribute Internet Explorer.
IV. MICROSOFT IS IN CONTEMPT OF THIS COURT'S FINAL JUDGMENT
A. Legal Standard
Failure to comply with a court order or decree may be deemed contempt. In order for the
respondent to be found in civil contempt, the petitioner must show by clear and convincing
evidence that there was a lawful decree, that the respondent had knowledge of the decree, and
that the decree was violated. Washington-Baltimore Newspaper Guild v. Washington Post, 626
F.2d 1029, 1031 (D.C. Cir. 1980); United States v. Greyhound Corp., 363 F. Supp. 525, 570
(N.D. Ill.), aff'd, 508 F.2d 529 (7th Cir. 1974). Evidence of intent or willfulness on the part of
the defendant is not required for a finding of civil contempt. McComb v. Jacksonville Paper
Co., 336 U.S. 187, 191 (1949). In this case, there should be no dispute that the Final Judgment
was lawful and that Microsoft had knowledge of it. The only issue is whether Microsoft violated
the Final Judgment.
To determine whether Microsoft violated the Final Judgment, this Court must look to the
language of the Final Judgment. An antitrust consent decree is read as one would read a contract.
United States v. ITT Continental Baking Co., 420 U.S. 223, 236-37 (1975); United States v. Western Electric Co., 894 F.2d 1387, 1390 (D.C. Cir. 1990). In reading the Final Judgment, the
Court should look to its plain language, United States v. Armour & Co., 402 U.S. 673, 678
(1971), and may use certain aids to construction. ITT Continental, 420 U.S. at 239. These aids
include looking to the general usage of certain terms; common terms that are not defined in the
decree are to be construed in their "natural sense" and "normal meaning." ITT Continental, 420
U.S. at 235; Armour, 402 U.S. at 678; United States v. Greyhound, 508 F.2d 529, 532 (7th Cir.
Page 12 . . . . .
1974). The Court may also read decree terms by reference to the circumstances and purpose
surrounding the formation of the decree and by any technical meaning words used may have had
to the parties. United States v. Western Electric Co., 12 F.3d 225, 230 (D.C. Cir. 1993); United
States v. Young, 107 F.3d 903, 908 (D.C. Cir. 1997). The Court, however, should not look to the
purposes of one of the parties at the time of the contempt action, Armour, 402 U.S. at 681-82, but
rather should consider the contemporaneous expressions of the decree's purpose. ITT
Continental, 420 U.S. at 235, 239.
B. The Plain Language of the Final Judgment Expressly Prohibits
Microsoft from Conditioning an OEM's Windows 95 License
On the OEM Also Licensing and Distributing Internet Explorer
Section IV(E)(i) of the Final Judgment states:
(E) Microsoft shall not enter into any License Agreement in which the terms of
that agreement are expressly or impliedly conditioned upon:
(i) the licensing of any other Covered Product, Operating System
Software product or other product (provided, however, that this
provision in and of itself shall not be construed to prohibit
Microsoft from developing integrated products).
Consequently, demonstrating a violation of Section IV(E)(i) in this case requires proof of
the following three elements:
(1) Microsoft has entered into Windows 95 License Agreements with OEMs;
(2) The terms of these License Agreements are expressly or impliedly conditioned
upon OEMs licensing Internet Explorer; and
(3) Internet Explorer is an "other product" from Windows 95, and not part of an
"integrated product" within the meaning of the Final Judgment.
Each of these elements is satisfied in this case.
Page 13 . .
C. Microsoft Is Violating The Plain Language of the Final Judgment
1. Microsoft Has Entered Into Windows 95
"License Agreements" with OEMs
There should be no dispute in this case either that Microsoft has entered into license
agreements with OEMs for Windows 95 or that those agreements are covered by Section IV(E)(i)
of the Final Judgment. Section II(4) of the Final Judgment defines "License Agreement" to
include "any license, contract, agreement or understanding, or any amendment thereto, written or
oral, express or implied, pursuant to which Microsoft authorizes an OEM to license, sell or
distribute any Covered Product with its Personal Computer System(s)." Windows 95 is a
"Covered Product," as defined by the Final Judgment. 6
There is no question that Microsoft licenses Windows 95 to OEMs. In sworn
Interrogatory responses submitted to the United States, Microsot describes its OEM licensing
policy as follows:
Microsoft licenses its Windows operating system software products to OEMs
pursuant to written agreements with which the [Antitrust] Division is familiar.
These agreements typically bear a title such as "Microsoft OEM License
Agreement for Desktop Operating Systems."
App. Exhibit 11, Microsoft Response to Interrogatory 3(a) of the Visitation Letter dated August
21, 1997. These licenses for Windows 95 are "License Agreements" within the meaning of
Section IV(E)(i).
Page 14 . .
2. The Terms of Microsoft's Windows 95 OEM License Agreements
Are Conditioned Upon OEMs Licensing Internet Explorer
There also should be no dispute in this case that Microsoft licenses its Internet Explorer
product to OEMs under, and as a condition of receiving, their Windows 95 operating system
license. Microsoft has acknowledged as much. In its Interrogatory responses, Microsoft states:
Each of the major English language versions of Internet Explorer has been
licensed to OEMs as part of Windows operating system software products. . . . As
described above, the [Windows license] agreements include provisions
concerning the pre-installation and shipment of updates to Windows products,
such as updated versions of Internet Explorer and other features of Windows.
App. Exhibit 11, Microsoft Response to Interrogatory 3(a), pp. 8-9.
a. Microsoft Has Required, and Is Continuing to Require,
OEMs to License and Preinstall Internet Explorer 3.0
As a Condition of Their Windows 95 Licenses
Joachim Kempin, Vice-President of Microsoft's OEM Sales and Marketing Group and
the executive who directly oversees all of Microsoft's OEM sales activities worldwide,
confirmed in sworn deposition testimony that, when OEMs license Windows 95, they also must
license Internet Explorer as part of the "package":
Q. In your position with Microsoft, do you view or do you consider Internet Explorer
versions 1, 2, and 3 to be licensed to the OEMs when they place it on the PCs and
sell those PCs?
A. When they license Windows, they get it with the package.
Q. And so the Internet Explorer that's on that PC is covered by the Windows license?
A. That's correct.
App. Exhibit 12, J. Kempin deposition transcript excerpts (hereinafter "Kempin Dep."), p. 27,
line 22 - p. 28, line 5.
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Microsoft not only licenses Internet Explorer to OEMs as part of and along with the
Windows 95 licenses, but the Windows 95 license agreements in fact are conditioned on the
OEMs licensing and distributing Internet Explorer in this way. OEMs have no choice but to
license and preinstall Internet Explorer on PCs when they preinstall Windows 95. OEMs also
have no choice but to leave Internet Explorer on their PCs when they ship them, even if they
would prefer -- as some do -- to remove and not include the version of Internet Explorer that
Microsoft packages with Windows 95. In short, Microsoft coerces OEMs to license and
distribute its Internet Explorer browser product whether they want it or not, even though
removing the browser, as is discussed below (see infra, Section IV.C.3.d), will have no effect on
the functioning of the underlying Windows 95 operating system.
Microsoft's conditioning is demonstrated by the company's own admissions, the
language of its Windows license agreements with OEMs, and its history of enforcing those
agreements. Since the commercial release of Windows 95 in August 1995, Microsoft has
inserted various provisions into its OEM Windows 95 license agreements that consistently
prohibit OEMs from deleting any "features or functionality" -- as Microsoft defines them -- from
the package of software that Microsoft chooses to include and ship together labelled as
"Windows 95." For example, a provision in the OEM license agreement states: "[The OEM]
shall not modify the Product software, nor delete or remove any features or functionality without
the written approval of MS in each instance." See Confidential App. Exhibit 13, OEM Windows
95 License Agreement (at MSV 0000163). 7
Page 16
These provisions are not merely boilerplate. This fact is evident from a Microsoft
internal e-mail sent prior to the launch of Windows 95, "So far, no major objections to including
Internet Explorer. Some want to remove the icon from the desktop -- our response should be that
this is not allowed." App. Exhibit 15, E-mail from Chris Jones, Program Manager of Mail/News
Design in Microsoft's Internet Platform and Tools Division, to Brad Silverberg and John
Ludwig, dated July 21, 1995.
Moreover, when OEMs have in fact sought to delete Internet Explorer and/or its
accompanying desktop icon, 8 Microsoft has invoked the license agreement terms prohibiting
such actions, in each case refusing the requests. 9 See, e.g., App. Exhibit 5, Browning Decl., . 8;
App. Exhibit 16, Gateway 2000, Inc. 9/19/97 Answers to Interrogatories, p. 8. In the most
extreme case, Microsoft issued a formal notice that it intended to terminate the Windows 95
license agreement of one of the nation's largest OEMs, unless that OEM restored and thereafter
continued to preinstall the Internet Explorer (and the Microsoft Network) icons. See App. Exhibit
Page 17
17, Microsoft Letter dated June 6, 1996; App. Exhibit 9, Decker Dep. at p. 18, line 21 - p. 21,
line 6. The OEM capitulated and once again began distributing the Internet Explorer and MSN
icons as required by Microsoft in order to maintain its Windows 95 license. See App. Exhibit 18,
Microsoft Letter dated June 25, 1996; App. Exhibit 9, Decker Dep. p. 21, lines 7-14.
Recognizing Microsoft's operating system dominance, all OEMs have complied with
Microsoft's license agreement restrictions and have licensed and preinstalled each of the first
three versions of Internet Explorer on their PCs sold with Windows 95. See, e.g., App. Exhibit
5, Browning Decl. at .. 5, 8; App. Exhibit 16, Gateway 2000, Inc. 9/19/97 Answers to
Interrogatories, p. 8; App. Exhibit 7, Ransom Dep., p. 13, lines 10-19.
Finally, the deposition testimony of Microsoft's Kempin leaves no doubt that the terms of
Microsoft's Windows 95 license agreements are conditioned on OEMs licensing Internet
Explorer:
Q. Just so I'm clear, do OEMs with versions 1.0, 2.0, and 3.0, do OEMs have any
choice or have they had any choice about whether or not they load Internet
Explorer onto the machines that have Windows 95 on them?
A. I mean the way we write the license for Windows 95 is that the OEM loads the
total system so the answer is no.
Q. And so I take it from that answer that if an OEM wanted to then delete the Internet
Explorer code from machines on which they have loaded Windows 95, well, let
me ask, would they be allowed to do that or not under their license agreements?
A. Under their license agreement, they are not allowed to do so.
App. Exhibit 12, Kempin Dep., p. 16, lines 9-23.
Page 18 .
b. Microsoft Currently Intends to Require OEMs to
License and Preinstall Internet Explorer 4.0
As a Condition of Their Windows 95 License
Microsoft also licenses its latest Internet Explorer browser product, IE 4.0, to OEMs as
part of its Windows 95 license package. In Internet Explorer 4.0 marketing agreements signed
recently with a number of the largest PC OEMs, Microsoft has stated that Internet Explorer 4.0
"will be licensed to [the OEM] as a "Supplement" to Windows 95 pursuant to [the OEM's]
existing license agreement for Windows 95." See, e.g., Confidential App. Exhibit 19,
Memorandum of Understanding ("MOU") re: Internet Explorer 4.0 between Microsoft and an
OEM (at MSV 10034). Although Microsoft believes that its Windows 95 license agreements
currently give it the power to require OEMs to license and distribute in the box with their PCs a
separate compact disk ("CD-ROM") containing Internet Explorer, it has informed the Antitrust
Division that it is not requiring OEMs to do so at this time. See App. Exhibit 12, Kempin Dep., p.
79, line 15 - p. 80, line 21.
Beginning in February 1998, however, Microsoft intends to begin conditioning its
Windows 95 license agreements on OEMs actually licensing and preinstalling IE 4.0. See App.
Exhibit 12, Kempin Dep., p. 96, lines 1-5. Specifically, in licensing Internet Explorer 4.0 as a
"Supplement" to Windows 95, Microsoft intends to invoke terms of the Windows 95 license
agreement to require OEMs to license and include IE 4.0 with new PC models shipped after
February 1, 1998. At that time, unless restrained by the Court, the terms of Microsoft's
Windows 95 license agreement will be conditioned on OEM licensing and preinstallation of
Internet Explorer 4.0 (in addition to Internet Explorer 3.0, which will be required continuously
up to, and possibly beyond, that time).
Page 19 .
3. Internet Explorer Is an "Other Product" from Windows 95, and
Not an "Integrated Product," for Purposes of the Final Judgment
Internet Explorer possesses a distinct physical and commercial existence of its own,
separate and apart from Windows 95 or any other Microsoft operating system. Microsoft's
internal documents, public statements, and unambiguous actions in the marketplace demonstrate
that Internet Explorer is a separate or "other" product from the Windows 95 operating system,
and not "integrated" with it, for purposes of Section IV(E)(i) of the Final Judgment. As detailed
below, there is substantial demand for Internet Explorer as a separate product; Microsoft
recognizes and has responded directly and distinctively to that demand; Internet Explorer is and
can be commercially distributed separately from Windows 95; and Internet Explorer can
physically be removed from a PC on which it has been preinstalled along with Windows 95.
The United States anticipates that Microsoft may respond to this Petition by asserting that
Internet Explorer is just a component or feature of Windows 95. Regardless of how Microsoft
now attempts to label or package Internet Explorer for strategic or legal advantage, Microsoft's
business conduct in licensing, distributing, and tracking Internet Explorer in the marketplace tells
the true story. Internet Explorer is a separate product, and it does not become an "integrated
product" simply because Microsoft chooses to force OEMs to accept it as part of a "package" of
software including Windows 95, or chooses to call Internet Explorer a feature of Windows 95 for
some purposes, or chooses to include certain software files or APIs in Internet Explorer.
Page 20 .
a. Substantial OEM and End-User Demand Exists for
Internet Explorer and Other Browser Products Separate
From Demand for Windows 95 or Other Operating Systems
There is separate demand for Internet browser products (including Internet Explorer), on
the one hand, and Windows 95, on the other. As noted above, some OEMs have requested that
Microsoft permit them to remove the version of (or icon for) Internet Explorer packaged with
Windows 95. See supra, Section V.C.2.a. There are sound commercial reasons why an OEM
might prefer to select Internet browser software and operating system software separately. For
example, one OEM executive cites three benefits: first, the importance of avoiding customer
confusion that he believes may result from Microsoft's requirement that the OEM license
Internet Explorer as part of the Windows 95 package, second, the OEM's desire to choose among
browser products independently of the operating system, and third, the benefit to consumers of
being able to customize the browser selected to meet unique customer preferences and profiles.
See App. Exhibit 5, Browning Decl., .. 7, 9. At least one OEM for a time deleted the Internet
Explorer icon specifically in order to highlight -- over the Microsoft Internet Explorer -- a
competing browser product. See, e.g., App. Exhibit 9, Decker Dep., p. 18, lines 5-20. These
factors illustrate well the OEM demand for Internet browser products separate from Windows 95.
Moreover, as noted below, PC users commonly demand, and often in fact obtain, Internet
browsers as stand-alone products, entirely apart from Windows 95. Whether produced by
Microsoft or its competitors, Internet browser products are distributed in numerous ways
independent of operating system products, further illustrating the separate demand for the two
products.
Page 21 . .
b. Microsoft's Actions Demonstrate That It
Recognizes and Responds to the Separate
Demand for Its Internet Explorer Product
i.Microsoft Markets and Distributes Internet Explorer
As a Stand-Alone Product Through Numerous
Means Independent of Its Windows 95 Product
Microsoft distributes its Internet Explorer software to end users of PCs as a stand-alone
product through various means and channels of distribution that are separate from and
independent of Windows 95. Microsoft has made each version of Internet Explorer available for
PC users to "download" directly onto their computers over the Internet. It has signed
distribution agreements with major on-line service providers and numerous Internet Service
Providers (firms to which PC users subscribe for the service of connecting their computers to
the Internet), which distribute Internet Explorer to their subscribers as a browser product they
can use for their Internet access, regardless of which operating system they use. In addition,
Microsoft sells CD-ROMs and floppy disks containing Internet Explorer as stand-alone
products, in thier own box and labeled as "Internet Explorer," not as a mere feature of or
update to Windows 95, at retail software outlets. Microsoft also distributes Internet Explorer
in connection with a variety of other non-operating system software application products.
Finally, Microsoft even arranges with hardware manufacturers to distribute Internet Explorer
along with PC-related hardware devices such as printers. See App. Exhibit 12, Kempin Dep.,
p. 25, line 13 - p. 26, line 21.
Microsoft's OEM distribution plans for Internet Explorer 4.0 further highlight how
separate the Internet Explorer product is from Windows 95. Although Microsoft has strategically
chosen to license IE 4.0 to OEMs in conjunction with (as what Microsoft calls a "Supplement"
Page 22 .
to) Windows 95, it is not part of or integrated with the Windows 95 product. Instead, it is
currently distributed to OEMs on a separate CD-ROM -- a different CD-ROM than that
containing Windows 95 and its various features and updates -- which OEMs may put in the box
with their new PCs. See App. Exhibit 12, Kempin Dep., p. 80, lines 15-21.
When, in February 1998, OEMs lose the ability to choose whether or not to include the IE
4.0 CD-ROM in the box with their PCs, that loss of choice will be unaccompanied by any change
in the nature of either Windows 95 or IE 4.0. IE 4.0 and Windows 95, which are plainly separate
today, will not become any less separate or any more integrated in February 1998 just because of
a Microsoft marketing strategy decision to require OEMs to ship an IE 4.0 CD-ROM in the box
with their PCs, or later to preinstall IE 4.0. Microsoft's initial distribution of IE 4.0 and
Windows 95 physically separate from each other, like its ongoing distribution of IE 3.0 separate
from Windows 95, renders hollow any attempt to describe them as an "integrated product" for
purposes of the Final Judgment.
ii.Microsoft Has Developed and Distributes Versions
of Internet Explorer for Non-Windows 95,
and Indeed Non-Microsoft, Operating Systems
Microsoft has developed and distributed versions of its Internet Explorer 3.0 product
for a non-Microsoft operating system, Apple Computer's Macintosh, and has stated its
intention soon to offer versions of Internet Explorer 4.0 for Macintosh and Sun's Solaris
operating system. The fact that PC users have demanded Internet Explorer for operating
systems other than Windows 95, and that Microsoft's Internet browser offerings have
responded to this demand, is further evidence that Internet Explorer is a stand-alone product,
separate from and not integrated with Windows 95.
Page 23 .
iii.Microsoft Regularly Describes Its Internet Browser as A
Separate Product from Windows 95, and Aggressively Markets
It Under Its Own Name
Recognizing that there is substantial consumer demand for Internet Explorer separate
from any operating system product, Microsoft has chosen to advertise, distribute, and license
Internet Explorer as a separate product -- in many cases using the term "product" to describe it --
rather than as a feature of Windows 95. For example, the End User License Agreement for the
retail version of Internet Explorer 3.0, which is sold in a box as a stand-alone product, defines the
Internet Explorer as the software product. See App. Exhibit 20, Microsoft Internet Explorer
Retail End User License Agreement. Additionally, Microsoft's co-marketing and logo program
for the Internet Explorer does not mention Windows in its definition of "the product." Instead,
"The product name for Microsoft Internet Explorer should appear as Microsoft (R) Internet
Explorer' at the first and most prominent use in all materials . . . ." App. Exhibit 21, Microsoft
Internet Explorer Standard Logo Usage Guidelines (at MSV 0005703).
With the release of Internet Explorer 4.0, Microsoft continues to define the browser as a
"product." In its End User License Agreement for Internet Explorer 4.0, presented to PC users
when they begin to download IE 4.0 from the Web, Microsoft defines the browser as a "software
product," to be used "in conjunction with" Windows 95 -- not as an upgrade or integral part of
Windows 95. App. Exhibit 22, Microsoft Internet Explorer Downloading End User License
Agreement. Microsoft has also entered into a number of marketing relationships with OEMs
specifically to promote Internet Explorer 4.0. The documents memorializing these relationships
Page 24 .
discuss the OEM promoting the browser as a distinct product, not as a feature of Windows 95.
See, e.g., Confidential App. Exhibit 19, MOU between Microsoft and an OEM (at MSV 10034-
38).
iv.Microsoft Regularly Tracks the Status of
Internet Explorer as a Separate Product
Competing In What Microsoft Identifies
As a Distinct Browser "Space" or "Market"
In addition to frequently describing Internet Explorer as a separate product, Microsoft
also views the competition between Internet Explorer and competing browsers as occurring in
a distinct, well-recognized browser "space" or, as Microsoft sometimes calls it, "market."
Moreover, Microsoft closely tracks customer usage of both Internet Explorer and competing
Internet browser products. Its internal documents and public statements make clear that
obtaining a large number of Internet Explorer browser users is a critical goal for the company.
For example, as recently as three weeks ago in a speech heralding the rollout of
Microsoft's new Internet Explorer 4.0 browser, Microsoft Chairman and CEO Bill Gates
embraced the view both that Internet Explorer is a distinct product and that it is competing
with other, similar products in a "browser space":
"Certainly, we believe we've made a lot of progress in the browser space. One
thing we feel is that with this product, Internet Explorer 4.0, during its lifetime, we
will go to over 50 percent market share of browser users. So IE 4 is a major
event."
App. Exhibit 23, Bill Gates speech, September 30, 1997, downloaded from Microsoft Internet
Website, www .microsoft. com/BillGates/billgates_1/speeches/ie4launch.htm, p. 3.
Similarly, in an Internet audio interview with an industry publication at the time of IE
4.0's release, Yusuf Mehdi, Microsoft's IE 4.0 Product Manager, acknowledged that "[w]e
Page 25 .
definitely believe that IE 4 is a significant enough product that we're going to do two things.
We're going to bring millions of users to the Internet, and we're going to switch a lot of Netscape
users over to IE, so that we think in the long run it's going to be [inaudible] that gets us to the
leadership position in browser share." App. Exhibit 24, Excerpt of September 30, 1997 C/net
audio interview of Yusuf Mehdi, available on the World Wide Web at www . news. com/Radio
/Rams/1997/09/30/ns.ram (3:14 to 3:29 of 28:06 total).
These references recognize and admit that there is demand for Internet browser products
separate from demand for operating systems.
v.
Microsoft's Pattern of Conduct with Respect to
Internet Explorer Is Different from Its Treatment of Any
Other Operating System "Feature" or "Update"
Microsoft's distribution and licensing strategy with respect to Internet Explorer contrasts
starkly with its historical approach to introducing new features and functionality into its
operating system products. In general, when Microsoft has offered new features and updates to
users of its Windows operating systems, it has done so without significant advertising or
marketing, without referring to them as a product separate from Windows, without tracking them
in any separate "space" or "market," without making them separately available through a wide
variety of distribution channels, and without making them available for non-Microsoft operating
systems.
The fact that Microsoft has chosen not to follow the approach it has otherwise
consistently followed in integrating other features into its operating system products
demonstrates that Internet Explorer and Windows 95 are not an "integrated product." In nearly
Page 26 .
all other cases, Microsoft has highlighted its conclusion that new features and functionalities are
integrated into the operating system by specifically not advertising, marketing, distributing, and
tracking those features separately, but instead only doing so for the overall Windows operating
system product. 10 By not following that course here with Internet Explorer, Microsoft has
demonstrated through its actions its belief to the contrary, has tacitly admitted that Internet
Explorer is a separate product, and has undermined any claim it might otherwise have that
Internet Explorer and Windows 95 can be considered an "integrated product."
c. Licensing and Distributing Internet Browser Products
Separately from Operating Systems Is the Commercial Norm
Not only does Microsoft itself market and distribute a browser product separately from
Windows 95, but so does its closest competitor, in both cases for the very reason that
separating the browser from any particular operating system is commercially feasible. Without
attaching its browser product to any particular operating system, Netscape has progressively
introduced new versions of Navigator that offer users many or all of the same features offered
by Internet Explorer, including features providing an alternative user interface. Indeed,
Netscape recently announced a new product (code named "Aurora") that would provide much
the same features and functions to the PC user as are provided by IE 4.0, without necessarily
being linked to any particular operating system. The development and marketing of such
products shows, as does Microsoft's distribution of Internet Explorer separate from Windows
Page 27 . .
95, that it is commercially possible to offer Internet browsers and operating system products
separately. It naturally follows that it is commercially feasible not to require OEMs or PC
users to license any particular Internet browser as a condition of licensing any particular
operating system product.
d. Licensing and Distributing Internet Explorer
Separately from Windows 95 Is Physically Possible
As OEMs confirm, Internet Explorer 3.0 can be removed readily from PCs on which it
has been preinstalled by an OEM without affecting the performance or functioning of the
underlying Windows 95 operating system. See App. Exhibit 7, Ransom Dep., p. 13, line 20 - p.
14, line 8; App. Exhibit 5, Browning Decl., . 7. Moreover, particularly given Microsoft's short-
term plans for its newest Internet Explorer, IE 4.0 (see supra, Section IV.C.2.b), there is no
question that the Internet Explorer product and the Windows 95 product can and do exist
separately. PC users can currently choose whether or not to install IE 4.0 on a PC with Windows
95 and obtain the full function of it, just as they would if IE 4.0 were preinstalled by the OEM (as
IE 3.0 now is). That Microsoft is offering OEMs and consumers a choice until February 1998
demonstrates that it expects some consumers to operate Windows 95 without IE 4.0. This fact,
in turn, indicates both that it is physically possible to keep IE 4.0 and Windows 95 separate and
that the two products cannot be considered "integrated."
e. Conditioning Windows 95 License Agreements On OEMs
Licensing And Distributing Internet Explorer Is Not Necessary
To Enable Microsoft to "Develop" Any "Integrated Product"
Section IV(E)(i) of the Final Judgment states that nothing in the provision shall in and of
itself be construed "to prohibit Microsoft from developing integrated products." (emphasis
Page 28 . .
added). Holding Microsoft in contempt for conditioning the license to Windows 95 on OEMs'
licensing Internet Explorer in no way prohibits Microsoft from developing integrated products.
To the contrary, the Petition alleges that Microsoft has violated the Final Judgment by the way in
which it has marketed and distributed Internet Explorer through OEMs, not by anything
Microsoft has done to develop an "integrated product."
Indeed, the language of the proviso to Section IV(E)(i), which focuses on "developing
integrated products," makes clear that the proviso was never intended to exclude from the
prohibition of that Section forced, joint marketing of separate products, even complementary
products like Windows 95 and Internet Explorer, but rather was intended to ensure that the Final
Judgment does not prevent the legitimate development of new, single products into which new
features or functionality have been truly integrated. In other words, Microsoft can develop
whatever products it chooses, but it cannot leverage the monopoly power of Windows 95 to force
OEMs to take a non-integrated Internet Explorer if they do not want it.
Providing OEMs with the option not to take Internet Explorer is consistent with the
purpose of Section IV(E)(i) as expressed in the Competitive Impact Statement. As described in
the CIS, Section IV(E)(i) was intended to prevent Microsoft from extending or protecting its
monopoly in any Covered Product. See App. Exhibit 10, CIS, pp. 10-11, 59 Fed. Reg. at 42852.
To permit Microsoft to continue to force OEMs to license Internet Explorer would allow it both
to extend its Windows monopoly to Internet browsers and to protect that monopoly from the
threat, described below (see infra, Sections V.B & V.C), posed by competing browser products.
V. MICROSOFT'S CONDITIONING OF WINDOWS 95
LICENSES ON OEMS LICENSING INTERNET EXPLORER
IS PRECISELY THE KIND OF ANTICOMPETITIVE
Page 29
CONDUCT THE FINAL JUDGMENT WAS INTENDED TO PREVENT
A. The Express Purpose of Section IV(E) of the Final Judgment
Is to Prevent Microsoft from Trying to Protect or Extend Its
Windows Monopoly Through Requiring OEMs
to License or Distribute Other Products Such as Internet Explorer
The overall purpose of the complaint in the prior action, and of the consent decree that
became the Final Judgment, was to prevent Microsoft from maintaining its monopoly in the PC
operating system market by excluding competitors through unreasonable and anticompetitive
licensing practices and thereby deterring the development of competing operating system
software. See App. Exhibit 10, CIS at p. 1, 7-8 (59 Fed. Reg. at 42845, 42851). This was also
the specific purpose of Section IV(E) of the Final Judgment:
Without these provisions Microsoft could . . . attempt to extend or protect its
monopoly in [Windows] by conditioning its licenses on the licensing, purchase or
use of other products. . . .
See App. Exhibit 10, CIS at 10, 59 Fed. Reg. at 42852.
The overall purpose of the Final Judgment was confirmed and amplified upon by the
United States in its Memorandum of the United States In Support of Motion to Enter Final
Judgment and In Opposition To the Positions of I.D.E. Corporation and Amici, filed January 18,
1995 prior to (and urging) entry of the Final Judgment. After describing Microsoft's operating
system dominance, the brief continued:
It is important to note, however, that an alternative to Microsoft's operating system
might arise at some point, an operating system that either displaces Microsoft's or
attracts sufficient users to gain the benefits of increasing returns to the point where
the market is divided between the world of Microsoft and the world of this new
operating system. The proposed Consent Decree insures that this new operating
system, when developed, will have access to the market.
* * * * *
Page 30
We cannot say when, or indeed whether, such an operating system will
succeed in displacing Microsoft, but the rewards for that success are so large that we
expect to see continued attempts. We also can say that those who mount such
attempts should not have to face the additional artificial barriers created by
Microsoft's unlawful license provisions.
Memorandum of the United States In Support of Motion to Enter Final Judgment and In
Opposition To the Positions of I.D.E. Corporation and Amici, January 18, 1995, at pp. 24, 26-27
(see also fn. 14 at p. 27, omitted from the quote).
Microsoft's current conduct -- forcing OEMs to license and distribute Internet Explorer as
a condition of licensing Windows 95 -- is precisely the sort of anticompetitive behavior the Final
Judgment sought to preclude. As described below, Microsoft itself views this conduct as a
means of undermining the ability of other browsers to serve as platforms and thereby create
effective competition for Windows. Microsoft's coercive conditioning of OEM licenses for
Windows 95 on the licensing of Internet Explorer is unnecessary to bring the benefits of
browser technology to Windows 95 purchasers, which it could readily do through the non-
coercive means of offering OEMs and customers the option of licensing Internet Explorer. If
permitted to continue, Microsoft will be able to undermine the very rationale for the Final
Judgment, head off the competitive threat posed by competing browser products, and improperly
protect its operating system monopoly.
Of course, the United States is not required in this proceeding to prove or even present
evidence of Microsoft's intent or of the likelihood of any particular effect or impact from its
prohibited activity. All that is required is a showing that Microsoft has knowingly violated the
provisions of a lawful decree. See Section IV.A, supra. Nevertheless, the following discussion
of the threat that is posed to Microsoft's monopoly by competing browser products, and
Page 31 .
Microsoft's clear recognition of that threat, should help to put the Petition in context and to
demonstrate why Microsoft's conduct violates the purpose (as well as the letter) of the Final
Judgment.
B. Browser Technology Is a Significant Threat
To Microsoft's Windows Operating System Monopoly
Perhaps the greatest significance of Internet browser technology, as distinguished from
the legions of other software application products currently available, is its role in a new
competitive challenge to Microsoft's monopoly in the PC operating system software market. The
distribution and acceptance of competing browser products could threaten Microsoft's Windows
monopoly in a variety of ways, in each case by increasing the ability of users to substitute among
different operating system products. The threat that competing browsers present to Microsoft's
monopoly has two primary aspects: first, the degree to which browsers may become accepted as
an interface; and second, the extent to which they can serve as a platform to which applications
can be written that are independent of the underlying operating system.
Millions of computer users have embraced Internet browser technology as an intuitive,
user-friendly interface to access applications and information from the Internet, any other
computer network, or even the hard disk drives of their computers. They can accomplish all of
this without interacting with the underlying operating system on the PC (other than to access and
launch the browser), and in doing so they reduce their dependence on any particular operating
system. Whether a user chooses an Apple Macintosh computer, a PC with Windows 95, a PC
with IBM Corporation's OS/2 PC operating system, or some new operating system (which might
be less expensive or require less PC memory) developed especially for this purpose, that user is
Page 32
able to activate a browser and, through it, access information and applications from the Internet
or other network. The browser interface will be the key to this access, regardless of the
underlying operating system.
Browser products also facilitate the use of competing operating system products because
they incorporate technology that allows developers to write applications which do not depend on
the underlying operating system -- that is, are "platform-independent." As described earlier,
developers currently write applications to a specific operating system, such as Windows 95. In
order for the application to run on a different operating system, the developer must spend
valuable resources to rewrite or "port" the application to the other operating systems. Such
resources may be so great that the developer will be unwilling to port the application to other
operating systems, or will not do so quickly. Developers therefore end up developing
applications primarily for the dominant operating system platform that reaches the most users --
Windows 95. In turn, the availability of a wide range of compatible applications further
reinforces Windows 95's monopoly position. Adopting a platform-independent approach to
application writing through browsers allows the developer to save such resources, to the potential
benefit of operating systems that otherwise would not attract such applications.
In recent months, the computer industry has seen substantial steps toward the realization
of platform independence. For example, Sun Microsystems has developed and licensed the
"Java" programming language, designed to allow developers to write their applications to run on
a computer regardless of what underlying operating system resides on the computer so long as a
computer has certain Java-related software (a Java "virtual machine" and Java "class libraries").
IBM Corporation, among others, is currently developing a suite of Java applets that will deliver
Page 33 .
word processing, spreadsheet, and presentation and graphics functionality in an operating system-
independent manner. See generally App. Exhibit 25, R. Smith deposition transcript excerpts, p.
19, lines 10-23. Because Internet browsers incorporate the necessary Java-related software, their
success could contribute to the proliferation of platform-independent Java applications and as a
result weaken Microsoft's dominance of the operating system market. See, e.g., App. Exhibit 8,
Von Holle Dep., p. 31, line 22 - p. 35, line 13; App. Exhibit 12, Kempin Dep., p. 44, line 7 - p. 46,
line 24.
C. Microsoft Perceives Competing Browsers as
Serious Threats to Its Operating System Monopoly
It is clear that Microsoft is concerned about the threat that competing browsers pose to its
operating system monopoly. Microsoft's own internal business documents demonstrate that
Microsoft fears that the widespread distribution and use of competing browser products may
encourage applications software developers to write applications delivered over the Internet or
other networks and designed to run on a competing browser, utilizing either browser APIs or the
browser's Java Virtual Machine.
In May 1995, Bill Gates, CEO and Chairman of Microsoft, in a memo to his Executive
Staff entitled "The Internet Tidal Wave," described the Internet as "the most important single
development to come along since the IBM PC was introduced in 1981. It is even more important
than the arrival of graphical user interface (GUI)." App. Exhibit 26, Bill Gates, e-mail to the
Microsoft Executive Committee, May 26, 1995, p. 1 (at MS6 5004550). In the same memo, Gates
recognized the threat browser technology represents to Microsoft's dominance: "A new
competitor born' on the Internet is Netscape. Their browser is dominant, with 70% usage share,
Page 34
allowing them to determine which network extensions will catch on. They are pursuing a multi-
platform strategy where they move the key API into the client [browser] to commoditize the
underlying operating system." Id. at p. 4 (at MS6 5004553).
Gates' fear of the threat posed by Netscape and Navigator to Microsoft's operating
system monopoly has since been reflected in numerous other internal Microsoft documents. For
example, Brad Silverberg, Microsoft's Senior Vice President for the Internet Platform and Tools
Division ("IPTD"), characterized the competition between Netscape and Microsoft at an IPTD
meeting as follows: "The Internet Battle: This is not about browsers. Our competitors are trying
to create an alternative platform to Windows. . . ." App. Exhibit 27, IPTD Division Meeting
Presentation, dated April 25, 1996 (at MS6 6005550).
In a separate marketing plan, another Microsoft executive explained in detail the nature of
this "battle":
The rise of the Internet has been driven by the success of a series of "platforms"
that utilize [Internet protocols such as HTTP] at their core and provide a set of
APIs for ISVs [Independent Software Vendors] to develop on top of. By far the
most successful platform to date has been Netscape's, with Netscape Navigator on
the browser and Netscape Suite Spot on the server. The core threat for Microsoft
is the potential for this platform to abstract the Win32 API. For example, if
Netscape continues its success in getting ISVs [Independent Software Vendors]
and ICVs [Independent Content Vendors] to develop applications for Netscape's
client/server API's, these API's could be the most important API's in the future
putting Win32 and Microsoft's platform position in jeopardy.
Confidential App. Exhibit 28, Andrew Wright, Manager of Advanced Authoring Tools, Winning
@ Internet Content Marketing Plan, dated June 22, 1996 (at MS6 5005709).
Paul Maritz, Group Vice President of Microsoft's Platforms Group, described the issue
more simply as "The Problem: Browser Market Share," and explained why "the problem" should
Page 35
matter to Microsoft:
[Web p]ages become applications; Netscape/Java is using the browser to create a
"virtual operating system" [that is] no longer a browser, now an environment . . .
Windows will become devalued, eventually replaceable?
App. Exhibit 29, P. Maritz, Internet Browsers Presentation, dated February 22, 1996 (at MS6
6006231-32).
Brad Chase, Vice President of Developer Relations & Marketing in the Platforms Group,
in a memo exhorting Microsoft marketing managers to "Go for maximum browser share," noted
that although the browser is a
no revenue product, . . . you should worry about your browser share, as much as
BillG[ates] because: we will loose [sic] the Internet platform battle if we do not
have a significant user installed base. The industry would simply ignore our
standards. Few would write Windows apps without the Windows user base. [A]t
your level, if you let your customers deploy Netscape Navigator, you loose [sic]
the leadership on the desktop.
App. Exhibit 30, Memo from B. Chase to FY97 World Wide Marketing Managers Attendees,
dated April 4, 1996, Re: FY97 Planning Memo "Winning the Internet Platform Battle," p. 2 (at
MS6 5005719).
Finally, Microsoft's Joachim Kempin, in deposition testimony, left little doubt that
Microsoft, on the eve of this action, continues to view the success of competing browsers as a
threat to Microsoft's operating system. Kempin acknowledges that by adopting a non-Microsoft
browser interface, users
might not know if they are on a Unix machine, or a Macintosh, or a Windows
machine anymore. Because the next browser might have a totally different
interface, and it just can't be in our interest to promote that other interface. . . . I
mean if the user gets used to a totally different metaphor, he might not buy a
Windows machine anymore. He might just say, oh, now I can buy a Mac, I can
buy a Unix machine, I can buy a Nintendo machine.
Page 36 . .
App. Exhibit 12, Kempin Dep., p. 44, line 20 - p. 45, line 14.
D. The United States Seeks to Protect the Competitive
Process From Microsoft's Abuse of its Monopoly Power
The United States cannot predict whether browsers will succeed in "commoditizing"
operating systems and thereby diminishing Microsoft's market power. Moreover, the United
States is not interested in taking sides in the various battles between Microsoft and its
competitors. The market should make those decisions and determine those outcomes. This
action is intended only to ensure that the market remains able to choose between the competing
technologies on their merits and that Microsoft does not use the market power of Windows 95 to
distort market choice in its favor, and thereby reinforce its dominance, by requiring OEMs to
license its browser product as a condition of licensing Windows 95. What the United States said
in January 1995, in urging entry of the Consent Decree that became this Final Judgment, remains
true today:
What will happen in the market is anyone's guess: it is not our job to pick winners
or losers. It is our job, however, to level the playing field so that Microsoft and its
competitors can fight it out in the market, in the best American tradition, with no
artificial restraints imposed by anyone. That is what the proposed Consent Decree
does.
Memorandum of the United States In Support of Motion to Enter Final Judgment and In
Opposition To the Positions of I.D.E. Corporation and Amici, filed on January 18, 1995, at 19-
20.
VI. MICROSOFT'S NON-DISCLOSURE AGREEMENTS MAY
HAMPER THE ABILITY OF THE COURT TO ENFORCE
THE FINAL JUDGMENT AND OF THE UNITED STATES
TO INVESTIGATE POSSIBLE VIOLATIONS OF IT
Microsoft requires many of the companies and individuals with which it has business
Page 37
relationships, including OEMs, to sign various forms of non-disclosure agreements ("NDAs") or
to include non-disclosure provisions in their contracts or other agreements with Microsoft.
These NDAs restrict the companies' and individuals' abilities to disclose what Microsoft deems
"Confidential Information." Although there are numerous forms of these agreements and their
specific terms vary, some define "Confidential Information" quite broadly. In the most extreme
cases, "Confidential Information" is defined to include any nonpublic information that Microsoft
designates as confidential or that relates to the "marketing or promotion" of any Microsoft
product or any Microsoft "business policies or practices." See, e.g., App. Exhibit 31, Microsoft
Corporation Non-Disclosure Agreement (Reciprocal), dated March 27, 1997 (at MSV 0004339).
Many Microsoft NDAs include a blanket prohibition on any disclosure of confidential
information by signatories to the NDAs to anyone, without exception, such as: "Receiving Party
shall not disclose any Confidential Information or Confidential Materials to third parties for five
(5) years . . . ." App. Exhibit 31 (at MSV 0004339). In addition, these NDAs at times contain
additional language stating that signatories "may disclose Confidential Information or
Confidential Materials in accordance with judicial or other governmental order, provided
Receiving Party shall give Disclosing Party reasonable notice prior to such disclosure and an
opportunity to contest such order, . . ." App. Exhibit 31 (at MSV 0004339).
Microsoft's broad non-disclosure provisions, particularly those as restrictive as the above
examples, create the serious potential for hampering the ability of the Court adequately to
enforce, and of the United States fully to investigate whether Microsoft is complying with, the
Final Judgment. Companies and business-people with direct business dealings with Microsoft or
knowledge of its marketing and business practices are precisely the sources most likely to have
Page 38
information about potential Microsoft violations and perhaps to have a business interest in
bringing those potential violations to the attention of the authorities. At the same time, many if
not most such companies and individuals are likely to be signatories to and therefore bound by
Microsoft's restrictive NDAs.
After the United States expressed concern to Microsoft about its NDA provisions and
sought correction, Microsoft provided the Antitrust Division with a letter clarifying that it "does
not interpret its license agreements or non-disclosure agreements as requiring its licensees or
NDA signatories to inform [Microsoft] of any discussions or dealings with the Department of
Justice." See App. Exhibit 32, Microsoft letter to Kenneth W. Gaul, dated Sepember 8, 1997.
This concession, while a positive step, is not sufficient to counteract the inhibiting effects of the
Microsoft NDAs. First, it is an informal letter and presumably subject to change or withdrawal
by Microsoft at any time. Second, whatever usefulness the letter has, that usefulness is limited to
instances where the United States first approaches a company or individual and in the process
makes them aware of Microsoft's recently stated interpretation.
Third, and most troubling, the letter does not alter the substantial risk that some NDA
requirements have chilled, and unless terminated will continue to chill, disclosure of information
about possible unlawful Microsoft conduct by companies or individuals that have not been
contacted by the government, but are contemplating approaching the government to volunteer
information. Such companies will have no way of knowing ahead of time of the existence or
substance of Microsoft's waiver letter and thus may be likely to conclude that the blanket
prohibitions of their NDA do not permit voluntary disclosure at all. This conclusion would be a
natural one, in light of the fact that some NDAs expressly require advance notice to Microsoft of
Page 39 .
disclosure even in response to court order or compulsory government process. Signatories also
might well conclude that, if they wanted to volunteer information to the United States, they could
do so only if they in essence confessed to Microsoft, in advance, that they were preparing to
report Microsoft's potential misconduct to the Justice Department.
The Final Judgment grants the United States the responsibility and authority to monitor
and investigate whether Microsoft is complying with the Final Judgment; this is an inherent
purpose of the Judgment. Section V of the Final Judgment provides the United States with
various additional tools for conducting necessary investigations to "determine or secure
compliance with this Final Judgment."
Given the likely chilling effect of some NDAs and the threat they may pose to unfettered
review and enforcement of compliance with the Final Judgment, it is an appropriate and
warranted use of the Court's power to order that they not be enforced. The Final Judgment
grants the Court the authority to ensure that its Order is followed, and Section VII(A) of the Final
Judgment expressly empowers the Court to issue "further orders and directions" to carry out,
construe, or enforce compliance with the Judgment. Accordingly, the United States requests that
the Court impose relief that voids any existing requirement for NDA signatories to notify
Microsoft of any contacts or discussions with, or disclosure of information to, government
investigative agencies, that ensures Microsoft informs all NDA signatories that there is no such
requirement, and that bars any such requirement in future Microsoft NDAs or other contracts.
VII. RELIEF REQUESTED
The United States respectfully requests this Court to issue an Order to Show Cause why
Microsoft should not be held in civil contempt based on its violation of the Final Judgment. The
Page 40
United States further asks that the Court hold a hearing to determine if additional relief is
appropriate to remedy the effects of Microsoft's violation of the Final Judgment. Finally, the
United States requests that the Court thereafter grant the relief described in the Petition and enter
the proposed order.
Date:
Respectfully submitted,
JOEL I. KLEIN
Assistant Attorney General
A. DOUGLAS MELAMED
Principal Deputy Assistant Attorney General
REBECCA P. DICK
Director of Civil Non-Merger Enforcement
CHRISTOPHER S CROOK
Chief
PHILLIP R. MALONE
STEVEN C. HOLTZMAN
PAULINE T. WAN
KARMA M. GIULIANELLI
MICHAEL C. WILSON
SANDY L. ROTH
Attorneys
Attorneys for the United States
FOOTNOTES
1 Applications can operate on the PC only by communicating with the operating system's "applications programming interfaces" or "APIs"; thus, applications are said to work or run "on top of" the operating system. An application is generally developed for a particular operating system since each operating system's APIs are unique. An application can be "ported," that is modified, to run on another operating system, but generally only at substantial time and expense to the application developer.
2 The remainder of PCs are purchased without any operating system software licensed and preinstalled, with the end user (usually business customers) or systems integrators installing such software on the machine after purchase.
3 The first three major releases of Navigator (1.0, 2.0, and 3.0) have been developed to work on over 15 operating system platforms including Windows 95, Windows 3.11 (Microsoft's immediate predecessor to Windows 95), Apple Computer's Macintosh operating system, and IBM's PC operating system product OS/2. Navigator 4.0 is currently available only for Windows products, but Netscape has announced its intention to create versions for other operating systems.
4 Internet Explorer, like other competing browsers, contains not only the software code necessary to enable PC users to browse the World Wide Web, but also APIs (see supra, fn. 1) that application-writers can use, if they wish, to extend the functionality of their application products to Internet-oriented tasks.
5 The details of Microsoft's unlawful Internet Explorer licensing practices are set forth in Section IV.C of this Memorandum, infra.
6 "Covered Product" as used in the definition of "License Agreement" is defined to include the binary code of a variety of Microsoft operating systems, including "the product currently code-named Chicago.'" See Final Judgment, Section II(1). Windows 95 is the commercial implementation of the product previously code-named "Chicago" and is therefore a "Covered Product" subject to the Section IV(E)(i) restriction.
7 The same restriction is repeated in the OEM Preinstallation Kit ("OPK"), a manual incorporated by reference into the Windows 95 license agreement that describes the mandatory requirements governing the OEMs' installation of the Windows 95 software package or bundle: To comply with the terms of your OEM license agreement, you must conform to the following restrictions: . . . Do not modify in any way, or delete any aspect of the Product Software . . . . App. Exhibit 14, Microsoft Windows 95 OEM Preinstallation Kit (OPK) OEM Service Release 2 User's Guide, pp. 3, 6, August 1996. Kempin's deposition testimony confirms that the Microsoft OPK requires OEMs to load Internet Explorer when they are loading Windows 95. App. Exhibit 12, Kempin Dep., p. 16, lines 5-8.
8 The preinstalled Internet Explorer product is presented to and activated by the end user in part by means of an icon titled "Internet" on the Windows 95 "desktop," in the same manner as icons for other application programs.
9 Although Microsoft's Kempin testified he did not recall such requests, he made clear what his response would have been: "I would have said, Look in your contract, you can't remove it." App. Exhibit 12, Kempin Dep., p. 25, lines 1-12.
10 The United States noted in its response to comments received prior to entry of the Final Judgment that Microsoft historically had included new software features in its operating system products. The response concluded that "Activity of this sort requires case by case analysis . . . ." Response of the United States to Public Comments Concerning the Proposed Final Judgment and Notice of Hearing, 59 Fed. Reg. 59426, 59428 (1994).
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U.S. Department
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