_____________________________________ UNITED STATES OF AMERICA,                   Plaintiff,                   v. MICROSOFT CORPORATION,                   Defendant. _____________________________________	| | | | | | | | |      |	Civil Action No. 98-1232 (TPJ)
STATE OF NEW YORK, ex rel. Attorney General DENNIS C. VACCO, et al.,                   Plaintiffs,                   v. MICROSOFT CORPORATION,                   Defendant. _____________________________________	| | | | | | | | |	PUBLICLY FILED VERSION Civil Action No. 98-1233 (TPJ)

PLAINTIFFS' JOINT RESPONSE TO MICROSOFT'S
MOTION FOR SUMMARY JUDGMENT AND REPLY IN
SUPPORT OF MOTIONS FOR PRELIMINARY INJUNCTION




                        DATED: August 31, 1998

              IN THE UNITED STATES DISTRICT COURT
               FOR THE DISTRICT OF COLUMBIA

         PLAINTIFFS' JOINT RESPONSE TO MICROSOFT'S
          MOTION FOR SUMMARY JUDGMENT AND REPLY IN
        SUPPORT OF MOTIONS FOR PRELIMINARY INJUNCTION

I.  INTRODUCTION

   Microsoft's motion for summary judgment misstates plaintiffs' claims, the evidence
concerning them, and the applicable law. When there is a claim that Microsoft does not want to
deal with, it simply ignores it. When there is evidence contrary to Microsoft's factual assertions,
it ignores that too, even when it is contained in the same document or deposition on which

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Microsoft seeks to rely. When controlling precedent is at odds with Microsoft's arguments, it

either ignores the authority or treats it as having been overruled sub silentio by lower court
rulings.
   For purposes of its summary judgment motion, Microsoft does not, and could not,
dispute that it has monopoly power in the market for PC operating systems. And on summary
judgment, Microsoft does not, and could not, dispute the existence of a pattern of
anticompetitive conduct that has preserved its dominance of the PC operating system market and
which threatens to extend that dominance to other markets. In essence, Microsoft's summary
judgment motion thus invites this Court to rule, as a matter of law, that because of supposedly
unique characteristics of the computer software business, the antitrust laws do not (and cannot)
prohibit an entrenched software monopolist like Microsoft from engaging in the broad series of
anticompetitive acts at the core of this case.
   Microsoft enjoys the most important and perhaps the most durable monopoly in the
economy today. Microsoft has been the dominant supplier of personal computer desktop
operating systems for more than 15 years, with market shares (depending on how they are
measured) ranging from 80 percent to 95 percent.
   PC manufacturers have, and recognize they have, no realistic alternative to Microsoft's
Windows operating systems. Microsoft prices its Windows operating systems virtually without
regard for the prices of other operating systems. Microsoft's monopoly power is illustrated by
its ability to secure agreements from competitors and potential competitors (including companies
as powerful as Intel) to reduce or eliminate their competition with Microsoft.

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   Successful entry or expansion of new operating systems competitors has proven
impossible, in significant part because of the applications programming barrier to entry.
Computer users want PCs that will run the widest range, and largest number, of programs.
Because of Microsoft's market share and sustained dominance, many more PC applications have
been developed for its operating systems than for those of any other manufacturer. Windows'
high market share begets more applications, which in turn preserve and increase its high market
share, which in turn begets still more applications, and so on. Unless and until the success of a
particular operating system comes to depend less on the number of applications written
specifically for it and more on the merits of that operating system, Microsoft's power is likely to
remain self-perpetuating.
   In the past few years, two related industry developments have occurred that have the
potential to erode the applications programming barrier to entry, and thereby ultimately to
threaten Microsoft's PC operating system monopoly.
   One development was Java, software sponsored by Sun Microsystems that is designed in
part to enable programmers to write applications that can be used "cross platform" (i.e., on
multiple operating systems) without substantial modification.

         (As used herein, "SJ Ex" refers to exhibits which accompany this Joint
Response.)
   Another development was the explosion in popularity of the World Wide Web, and of
Internet browser applications (primarily Netscape's Navigator browser) used to access and view

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material on the Web. Because of the explosive growth of the Internet, and the ease with which
Netscape's browser enabled computer users to access the Internet, Netscape's browser quickly
came to be widely distributed and used.
   The widespread distribution and use of Netscape's browser was significant in two ways.
First, the browser itself was a platform to which applications could be written -- and thereafter
run on any of the many operating systems with which that browser was usable.
  By May 1995 Microsoft's CEO recognized Netscape as a competitive threat

                            United States' Memorandum in Support of
   Motion for Preliminary Injunction, filed May 18, 1998, ("PI Brief"), Exhibit (hereinafter
   "PI Ex.") 2.

   Second, Netscape's Navigator browser became a primary method by which the Java
components necessary for computer users to utilize and benefit from Java programs were
distributed. Indeed, in July 1997,

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                   SJ Ex. 61, p.1. The more applications that were written to the
"Java Virtual Machine" component shipped with Netscape's browser, the more applications that
could be used on non-Microsoft operating systems -- and the more the applications programming
barrier to entry would erode.
   Microsoft immediately set out to eliminate the potential threats posed by Netscape and
Java. At the specific and pointed direction of Microsoft CEO Bill Gates, Microsoft set out to

                                                     In
support of this effort, Microsoft entered into a series of anticompetitive agreements with
customers and competitors to restrict the use of Java and to substitute the use of Microsoft's
version of Java, known as "J/Direct."

    PI Ex. 101.
   At the same time, Microsoft (again at the specific direction of CEO Bill Gates) set out to
eliminate Netscape as a viable browser supplier -- and thereby to eliminate both Netscape's
distribution of Java and Netscape's evolution into a platform that could erode the applications
programming barrier to entry. Microsoft first attempted to monopolize the browser market by a
patently illegal proposal to Netscape that the two companies divide the market and restrict or

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eliminate competition (with Netscape agreeing not to compete in offering its browser for
Windows 95). When Netscape rejected Microsoft's illegal proposal, Microsoft undertook to
eliminate Netscape's ability to compete effectively as a browser supplier, and to preserve and
increase barriers to entry in the PC operating system market by a series of predatory and
anticompetitive acts and agreements. Among other things, Microsoft:
  Set out to "cut off Netscape's air supply" by giving Microsoft's browser away for free
   (and thereby eliminating Netscape's ability to charge for its browser) and entering into
   agreements with Internet Content Providers which required those ICPs to agree not to
   pay Netscape;
  Discouraged customers, suppliers, and others from doing business with Netscape by
   announcing publicly (and telling customers privately) that Microsoft would make its
   browser "forever free" and that Netscape therefore had no viable business;
  Entered into agreements with PC manufacturers and Internet Service Providers that
   effectively foreclosed Netscape from the most important channels of distribution and
   substantially increased Netscape's costs;
  Entered into agreements with ISPs, ICPs, and others to eliminate or reduce those firms'
   promotion and/or distribution of Netscape's browser;
  Used its monopoly power to induce major computer industry firms, including Apple and
   Intel, to limit or reduce their use of and support for Netscape's browser;
   and

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  Tied Microsoft's Internet Explorer browser to its monopoly Windows PC operating
   system and prohibited PC makers from removing that browser.
   Although Microsoft also set out to improve its browser (which was initially so poor in
quality and function that it would have received virtually no distribution if not for Microsoft's
restrictive agreements and the tie to Windows), Microsoft recognized that
                                        PI Ex. 23. Because
Microsoft believed that it could not win what it repeatedly described as "the browser war"
legitimately and on the merits, it resorted to the predatory and anticompetitive agreements and
conduct described above; and it is those agreements and conduct that unlawfully maintain
Microsoft's operating systems monopoly and threaten to extend that monopoly to the browser
market.
   The cumulative effect of Microsoft's anticompetitive and illegal conduct has been, and
continues to be, to increase Microsoft's share of Internet browser usage; to reduce the revenues
and increase the costs of rival browser manufacturers; to deter innovation by other browser
manufacturers and, more generally, by others in the industry that would otherwise seek to
develop new software products in competition with Microsoft; and to further entrench
Microsoft's operating system monopoly.
   Microsoft's conduct with respect to Java and browsers is part of a broad pattern of
antitcompetitive conduct designed to eliminate competition, to maintain and strengthen
Microsoft's core monopoly over PC operating sytems, and to monopolize key applications
markets.

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   For example, Microsoft's proposal to Netscape to divide the market and restrict or
eliminate competition is part of a pattern that includes similar discussions with Intel (concerning
Intel not continuing software development), Apple (concerning Apple agreeing to stop
marketing QuickTime for use with Windows), and a small company called Real Networks
(concerning a Real Networks assurance that it would get out of the base streaming media
platform business and not share its technology with Microsoft's competitors). Microsoft's
response to Netscape's rejection of its proposed market division is part of a pattern that includes
Microsoft's response to Apple when Apple refused to withdraw its "QuickTime" software from
competition with Microsoft's "NetShow" software.
                                          SJ Ex. 60,
p.0104683, is part of a pattern of using its control over the monopoly operating system to make
competing products operate, or appear to operate, less effectively, a pattern that began at least as
early as the Microsoft code designed to disrupt the use of DR-DOS. And Microsoft's tying of its
browser to Windows is part of a pattern of tying applications to the operating system -- a pattern
that will have no limit if Microsoft prevails in its view that it is free to combine any product it
wishes with the operating system.
   The extraordinary potential costs to consumers and the economy of Microsoft's conduct
are particularly clear with respect to Java and the browser. First, Microsoft preserves its
operating systems monopoly as both a rich and powerful monopoly in itself and as the engine for
dominating related markets. Second, Microsoft extends its monopoly to browsers -- and thereby
puts itself in a position to wield tremendous influence in directing computer users to particular
products, services, and sites on the Web.

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   Because Microsoft's unlawful practices are continuing and are imposing ongoing harm to
competition, plaintiffs filed with their Complaints motions for a preliminary injunction.
Microsoft has opposed those motions and has itself moved for summary judgment. Microsoft's
summary judgment motion (and its opposition to plaintiffs' motion for preliminary injunction)
asks this Court to create a virtual exemption from the antitrust laws for Microsoft (and the entire
computer software industry) and to permit a software monopolist such as Microsoft to use
anticompetitive means to entrench and extend its monopoly without fear of judicial intervention.
Microsoft further urges the Court to exempt from Section 1 of the Sherman Act any Microsoft decision to coercively tie together two separate products, so long as Microsoft can merely
suggest a plausible claim of benefit from the tie. Such an exemption would be virtually
complete, since the very nature of computer software makes it easy for software developers to
join together separate products in ways that create some "plausible" benefit and that introduce
some "plausible" technical interdependencies that may appear difficult to disentangle.
Microsoft's extraordinary propositions go far beyond the rules previously adopted by any court,
and are directly contrary to controlling Supreme Court precedent.
   In addition to seeking wholesale exclusion from the reach of antitrust scrutiny for its
anticompetitive activities, Microsoft's motion also tries to justify summary judgment by distorting
and mischaracterizing the extensive factual record in this case.
  Contrary to Microsoft's representation, MS Memo at 75-80, there is substantial evidence
   that Microsoft, with its entrenched monopoly in the market for PC operating system
   software, engaged in a series of predatory acts to maintain that monopoly and extend it to
   the market for internet browser software.

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  Contrary to Microsoft's representation, id., there is substantial (indeed, overwhelming)
   evidence that its predatory and exclusionary conduct was undertaken for the purpose of
   impeding competition.
  Contrary to Microsoft's representation, MS Memo at 59-74, there is substantial evidence
   that Microsoft's exclusionary agreements with PC manufacturers and Internet Service
   Providers and Internet Content Providers have raised barriers to competition and
   effectively foreclosed competitors from significant distribution channels.
  Contrary to Microsoft's representation, id., there is substantial evidence that the
   anticompetitive effects of these restrictive agreements far outweigh any purported business
   justifications.
  Contrary to Microsoft's representation, MS Memo at 38-49, there is substantial evidence
   of separate demand in the marketplace that proves Microsoft's Internet browser is a
   separate product from the operating system.
  And contrary to Microsoft's representation, MS Memo at 51-59, there is substantial
   evidence that the bootup and screen restrictions in Microsoft's contracts with PC
   manufacturers are far more onerous than is necessary to protect Microsoft's rights under
   federal copyright laws.
   As this Court recognized at the August 6 hearing, the presence of even a single material
factual dispute, without more, would require denial of Microsoft's motion. Transcript, Aug. 6,
1998 at 11:9-13. In fact, on every material issue the plaintiffs' evidence, even at this stage while
discovery is still ongoing, is either uncontroverted or directly counters Microsoft's assertions.

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Given the strength and breadth of the plaintiffs' proof, Microsoft's claim that there are no genuine
issues of fact is frivolous.¹
   Much of the evidence that Microsoft ignores comes from its own files. Microsoft's
approach in depositions and in its motion for summary judgment is to deny what its
contemporaneous documents plainly say -- and to claim an astonishing lack of recall.
Executives who are stated to be the author of documents claim not to remember writing them.
Executives who are the stated recipients of documents claim not to remember receiving them.
And both authors and recipients claim not to know what the documents mean.
   Microsoft's CEO Bill Gates, who is placed at the center of key events by numerous
documents, displayed a particular failure of recollection at his deposition. Compare, e.g., SJ Ex.
63 with Gates Dep., 89-92; SJ Ex.18 with Gates Dep. 94-95; SJ Ex. 64 with Gates Dep.,
95,100,102,104,107-108; SJ Ex. 65 with Gates Dep., 160-62; SJ Ex. 354, p.6012956 with Gates
Dep., 128-29, 207-08, 215-17; SJ Ex. 67 with Gates Dep., 132-33,135-36,163-64,165-66; SJ Ex.
68 with Gates Dep., 153,155,156-57; and SJ Ex. 69 with Gates Dep., 173-74,177,181-82,189-
91,194-95.
   As discussed below, Microsoft's attempt to get Netscape to divide markets is well
established by sworn testimony of participants and by contemporaneous notes.

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                     By contrast, contemporaneous documents show that

   Mr. Gates further testified that

   (a)

                                                     SJ
        Ex.

   (b)
                                                SJ Ex. 70

   Mr. Gates' testimony appears to be part of a pattern of Microsoft attempting to rewrite
history. For example,

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                                         Microsoft in its recent
papers (and in the testimony of its deponents -- except when they slip) studiously avoids the term
"browser." Although browser is a term used throughout Microsoft's documents and licenses, the
industry literature, and even in the dictionary Microsoft publishes for software professionals, in
the interest of Microsoft's litigation arguments it becomes a non-word. Witnesses claim they
don't know what a browser is. What used to be browsers are now simply "bits" of "browsing
technologies." Microsoft's refusal to recognize the existence of a browser extends not only to
the "integrated" browser but to the stand-alone products Microsoft offers.
   At the trial the trier of fact will undoubtedly give Microsoft's current positions the
weight they deserve. There is, of course, no way that Microsoft can back away from its
contemporaneous documents and statements in a summary judgment motion.
II.   MICROSOFT IS NOT ENTITLED TO SUMMARY JUDGMENT
   In order to obtain summary judgment, the moving party must demonstrate "that there is
no genuine issue as to any material fact and that the moving party is entitled to judgment as a
matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986);
Beatty v. WMATA, 860 F.2d 1117, 1120-21 (D.C. Cir. 1988). The party seeking summary
judgment carries the initial burden of demonstrating the absence of any genuinely disputed issue
of material fact. SeeBeatty, 860 F.2d at 1122. Only then must the nonmoving party, through
"‘depositions, answers to interrogatories, . . . admissions on file'" and other appropriate
evidence demonstrate that there is a genuine issue for trial. Celotex, 477 U.S. at 324. "The
evidence must be viewed in a light most favorable to the nonmoving party, giving that party the

Page 14      

benefit of all reasonable inferences." Startmore v. Goodbody, 866 F.2d 189, 191 (6th Cir. 1989)
(citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 487 (1986)).
   "It is axiomatic that Rule 56 must be used carefully so as not improperly to foreclose
trial." Thompson Everett, Inc. v. National Cable Advertising, L.P., 57 F.3d 1317, 1323 (4th Cir.
1995). Courts should be especially cautious before entering summary judgment where, as here,
liability is likely to turn on factual questions about the purpose and effects of conduct whose
existence is not disputed. See, e.g., Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S.
451, 482-86 (1992).²
   Microsoft's motion for summary judgment falls far short of meeting these standards.
   With respect to plaintiffs' Section 2 claims, Microsoft limits its discussion to its bundling
of Internet Explorer with Windows and certain restrictive agreements with OEMs, ISPs, and
ICPs. Microsoft's motion (which seeks dismissal of plaintiffs' claims in their entirety) is
insufficient on its face because it does not even address either Microsoft'sattempt to induce
Netscape not to compete, which in itself constitutes an unlawful attempt to monopolize, see
United States v. American Airlines, Inc., 743 F.2d 1114,1120-21 (5th Cir. 1984), or the other
elements of Microsoft's predatory maintenance of its monopoly and attempted monopolization
(seeinfra, Section II.A).
   Moreover, even with respect to the aspects of its conduct that it does address, Microsoft
fails to remotely satisfy the summary judgment standard. Microsoft mounts essentially three

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attacks on the factual basis for plaintiffs' claims, asserting that: (1) there is no genuine issue that
its agreements with OEMs, ISPs, and ICPs have not had sufficient anticompetitive effects to
unreasonably restrain trade;(2) its bundling of Internet Explorer with Windows is not an
unlawful tying arrangement because the two are not separate products; and (3) its restrictive
agreements with OEMs are immunized from antitrust scrutiny by the copyright laws (and
subsidiary justifications). These arguments are neither supported by substantial evidence, let
alone the uncontested evidence that would be required to justify summary judgment, nor are they
correct as a matter of law.
   Microsoft's motion for summary judgment on the Section 1 tying claim fails both as a
matter of law (because it rests on an erroneous intepretation of tying law standards set forth by
the Supreme Court and the lower courts) and as a matter of fact (because it is plainly disputed
whether Microsoft's conduct amounts to "conditioning" of Windows licenses on OEMs'
acceptance of Internet Explorer, whether Windows and Internet Explorer are a single product or
two separate products, and whether Microsoft's conduct has a "not insignificant" effect on
interstate commerce).
   We discuss below the types of anticompetitive conduct in which Microsoft has engaged.
Much of Microsoft's conduct constitutes an independent violation of Section 1 of the Sherman
Act; such conduct also necessarily violates Section 2 of the Sherman Act if Microsoft is found to
possess monopoly power. United States v. Griffith, 334 U.S. 100, 106 (1948); Barry Wright
Corp. v. ITT Grinnell Corp., 724 F.2d. 227, 239 (1st Cir. 1983). In addition, conduct that does
not violate Section 1 violates Section 2 if Microsoft is demonstrated to possess monopoly power
and if the conduct has a significant exclusionary effect and was not reasonably necessary to

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achieve a legitmate business objective or "impaired competition in an unnecessarily restrictive
way." Aspen Sking Co. v. Aspen Highlands Sking Corp., 472 U.S. 585, 605 (1985); Lorain
Journal v. United States, 342 U.S. 143, 149 (1951). As Justice Scalia has observed: "Where a
defendant maintains substantial market power, his activities are examined through a special lens:
Behavior that might otherwise not be of concern to the antitrust laws -- or that might even be
viewed as procompetitive -- can take on exclusionary connotations when practiced by a
monopolist." Eastman Kodak, 504 U.S. at 488 (Scalia, J., dissenting).
   A.  Microsoft's Motion Ignores Its Predatory Conduct
   Microsoft's motion virtually ignores the pattern of predatory conduct directed at raising
the costs of Netscape and other Microsoft rivals, raising barriers to entry, depriving Netscape
and other competitors of revenue and resources (even at the cost of Microsoft itself foregoing
revenue), below-cost pricing, and intimidating and inducing both customers and distributors of
Netscape's browser not to consider that browser on the merits.
   First, Microsoft decided it would give its Internet browser away for free even though it
was costing Microsoft hundreds of millions of dollars to develop, test, promote, and distribute
Internet Explorer; even though Microsoft would not recoup except through the maintenance and
expansion of monopoly power; and even though Netscape was charging OEMs, ISPs, and others
for its Navigator browser.

as a browser supplier: "We are going to cut off their air supply. Everything they're selling,
we're going to give away for free,"
                        PI Ex. 4.

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                                               Moreover,
Microsoft set out to undercut Netscape's perceived viability -- and thereby discourage
customers, suppliers, distributors, and others from dealing with Netscape -- by publicly warning
Netscape (and those considering dealing with Netscape) in June and July 1996 that: "Our
business model works even if all Internet software is free . . . . We are still selling operating
systems. What does Netscape's business model look like? Not very good." SJ Ex. 69, p.4; see
also SJ Ex. 67, pp.3-4 and Ex. 68, p.2. Microsoft went on to announce that its browser would
be distributed free not only for an introductory period but would be "forever free."³

   Second, Microsoft did not stop at giving its browser away for free. Instead, Microsoft set
out to do whatever it took to induce significant market participants to distribute and use its
Internet Explorer browser instead of Netscape's browser -- including paying some customers to
take the already free Internet Explorer and providing others with valuable concessions if they did
so.

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   Ultimately, Microsoft succeeded in getting Intuit to agree not to support Netscape, but
only after tying Intuit's access to valuable placement on the Windows desktop to Intuit's
agreement to abandon Netscape. In Microsoft's April 1997 agreement with Intuit, Microsoft
required Intuit to agree that it would, among other things:
   (a)

   (b)

   (c)

   (d)

SJ Ex. 72.
   Third, Microsoft set out to further deprive Netscape of revenues by securing agreements
from Internet Content Providers not to pay Netscape for participation in any competing Netscape
"channel" or other browser service. PI Ex. 36-40.
   Fourth, Microsoft undertook to raise Netscape's costs by closing off the most effective
and profitable (and least costly) distribution channels for its browsers and thereby forcing
Netscape to resort to less effective and more expensive distribution methods. See infra, Section
II.B.1.
   Fifth, Microsoft used its power to intimidate both customers and distributors not to adopt
or support Netscape's browser (as well as non-Microsoft Java technology). Microsoft's dealings

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with Apple are illustrative of how far Microsoft was willing to go to limit Netscape's
opportunities and to stifle Java.

Page 20      

  On August 21, 1997,

  On January 22, 1998,

  On February 13, 1998

   Microsoft's determination to restrict the support and distribution of Netscape's browser
by Apple is particularly telling since Apple represents the main alternative to desktop PCs
running Microsoft's Windows. Whatever the relevance of Microsoft's arguments about why it
wanted Windows users also to use Internet Explorer, those arguments cannot apply to Internet

Explorer use by Apple users.

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               In addition, there is no legitimate justification for Microsoft and
Apple
   B.  Microsoft's Exclusionary Agreements With ISPs, ICPs and OEMs Are Unlawful
   Microsoft's agreements with ISPs,⁴ OEMs, and ICPs are exclusionary in that they make
it more difficult and costly for Microsoft's rivals to develop and distribute their Internet
browsers and thus tend to exclude those rivals from the market. Exclusionary agreements of this
nature are judged for antitrust purposes under the rule of reason, and they are unlawful if the
exclusionary provisions are on balance anticompetitive -- if, in other words, they injure
Microsoft's rivals by restricting their output more than they further Microsoft's legitimate
objectives, National Society of Prof. Eng'rs v. United States, 435 U.S. 679, 691 (1978);
American Ad Mgmt., Inc. v. GTECorp., 92 F.3d 781, 791 (9th Cir. 1996), or if their harmful
effects on Microsoft's rivals are not necessary in order to achieve Microsoft's legitimate
objectives. Sullivan v. NFL, 34 F.3d1091, 1103 (1st Cir. 1994), cert. denied, 513 U.S. 1190
(1995). There is substantial evidence that Microsoft's ISP, ICP and OEM agreements are
unlawful. See, e.g., Sibley Dec., ¶¶ 61-65; Fisher Dec., ¶ III.D.; Warren-Boulton Dec., ¶¶ 52-
54.

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   Although Microsoft argues principally that its agreements do not materially harm its
browser rivals, it also suggests that the agreements can be justified on the ground that they were
entered into for "valid business reasons." MS Memo at 59, 61-62. But Microsoft cannot show
substantial, let alone undisputed, evidence, as to either the exclusionary effect of the agreements
or their purported justifications. Microsoft is therefore not entitled to summary judgment on
these issues.
        1.  Microsoft's Agreements Have Substantially Excluded Its Browser Rivals
             From The Most Important Browser Distribution Channels

   The law condemns the impairment of competition on the merits, even if that impairment
does not constitute complete exclusion of a rival or foreclosure of its opportunities. Even under
the most exacting legal standard, the United States need not prove that every possible avenue of
distribution has been effectively foreclosed to a rival. See, e.g., Aspen Skiing Co. v. Aspen
Highlands Skiing Corp., 472 U.S. 585 (1985) (denial of a necessary input merely impeded
competitor's ability to market its product; competitor never contended that the joint marketing
program at issue was essential to its survival). Rather, the exclusionary provisions in
Microsoft's agreements are unlawful under Section 1 of the Sherman Act (and therefore under
Section 2 as well) if on balance they impair competition and thus unreasonably restrain trade.
See, e.g., Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327-28 (1961).
   The rule of reason inquiry under Section 1 is practical and fact-based and focuses
"directly on the challenged restraint's impact on competitive conditions." National Society of
Prof. Eng'rs, 435 U.S. at 688. And, because Microsoft must, for purposes of its summary
judgment motion, be deemed to be a monopolist, its agreements also should be condemned

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under Section 2 of the Sherman Act upon proof that they have had some exclusionary effect and
were not reasonably necessary to achieving a legitimate business objective. Aspen Skiing Co.,
472 U.S., at 605; see also 3 P.E. Areeda & H. Hovenkamp, Antitrust Law ¶ 651a, at 78 (conduct
that "reasonably appear[s] capable of making a significant contribution to creating or
maintaining monopoly power" violates Section 2 and raises a presumption of harm).
   Perhaps even more important, the exclusionary effect of each of Microsoft's restrictions
must be determined in the context of all of Microsoft's other restrictions and pertinent market
factors. First, the cumulative effect of all of Microsoft's restrictive agreements combined, rather
than of any one individually, must be evaluated. Second, whatever the exclusionary impact on
Microsoft's browser rivals of any one of Microsoft's agreements viewed in isolation, each such
agreement is also plainly unlawful when, in light of all the other exclusionary factors and
agreements affecting the market, its exclusionary impact is significant. See, e.g., Continental
Ore. Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962). Thus, as the Supreme
Court has made clear, instead of examining individual pieces of evidence in a vacuum as
Microsoft would have this Court do, "plaintiffs should be given the full benefit of their proof,
without tightly compartmentalizing the various factual components and wiping the slate clean
after scrutiny of each." Id. at 699; see alsoCity of Anaheim v. Southern California Co., 955
F.2d 1373, 1376 (9th Cir. 1992) (inquiring into the overall combined effect of specific
individual acts); Litton Sys. Inc. v. American Tel. & Tel. Co., 700 F.2d 785, 816 (2d Cir. 1983);
City of Mishawaka, Ind. v. American Elec. Power Co. Inc., 616 F.2d 976, 986 (7th Cir. 1980).
   Microsoft's motion fails to address either the substantial evidence of foreclosure in the
context of the other restrictions or the cumulative foreclosure as a whole. Instead, Microsoft

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seeks to obscure the issue by "tightly compartmentalizing" its few facts in exactly the way
rejected by the Supreme Court. Plaintiffs' ample (often uncontroverted) evidence of substantial
anticompetitive effects both in each of the most important browser distribution channels and as a
cumulative whole requires denial of Microsoft's motion.
             a.   Microsoft's Browser Rivals Have Been Substantially Foreclosed
                From The ISP and OEM Channels

   Plaintiffs' evidence, including unequivocal statements in Microsoft's business
documents, leave no doubt that the two leading ways in which PC users obtain their browsers are
from the Internet Service Providers ("ISPs") that connect them to the Internet, and from OEMs,
installed on new PCs. Microsoft's restrictive agreements with ISPs and OEMs effectively
foreclose Microsoft's browser competitors from these most-important distribution channels.
                (1) The ISP Agreements Foreclose Microsoft's Rivals

   By their express terms, Microsoft's agreements with ISPs and OLSs significantly restrict
Netscape and other competitors from access to this critical channel. Among the restrictions
(detailed at PI Brief at 30-36) are the following:
           ISPs must market, promote, and distribute Internet Explorer as the
             "exclusive" or "primary" browser, and cannot distribute a non-Microsoft
             browser unless it is specifically requested by the customer;
           ISPs may not "express or imply" to a customer that another browser is
             available;
           Even if a customer specifically requests a competing browser, Microsoft
             requires that ISPs ship Internet Explorer as the only browser a large

Page 25      

             majority of the time, usually for at least 75 to 85 percent of all browser
             shipments. The providers whose names appear in the Windows Online
             Services folder must ship Internet Explorer, and no other browser, at least
             85% of the time; and
           ISPs, with minor exceptions, cannot advertise or promote any non-
             Microsoft browsers.
   There is concrete evidence of the market effects of these agreements. Microsoft's own
documents track the degree of foreclosure they cause in the ISP channel. For example, in June
1996

                                       Microsoft had entered into
restrictive referral server agreements with all of the largest ISPs and OLSs.
   Major ISPs and OLSs would have preferred to have maintained flexibility in the
browsers they distribute and promote.
Because of Microsoft's agreements, however, many no longer distribute or promote Netscape
Navigator at all.
   Conspicuously omitting the huge OLSs, Microsoft argues that it has referral server
agreements with only eleven out of thousands of U.S. ISPs. But, even putting OLSs aside, those

Page 26      

eleven ISPs account for a substantial amount of the total U.S. Internet access provider subscriber

base, see, e.g., SJ Ex. 26,
⁵ Once the OLSs, including AOL,
CompuServe, and Prodigy -- all of which had and continue to have restrictive agreements with
Microsoft -- are added to the picture, the significance of Microsoft's agreements becomes far
more dramatic. In 1997, AOL alone accounted for

                    Plainly, the restrictive ISP agreements interfere with the
distribution of non-Microsoft browsers.⁶
   Microsoft (again neglecting the huge and therefore critical OLSs) cites statistics
suggesting that usage of Internet Explorer by customers of the ISPs that had entered into its
exclusionary agreements is roughly equal to usage of Internet Explorer by customers of other
ISPs. MS Memo at 12. These statistics are misleading and immaterial because they do not say
anything about the impact of the restrictive agreements on the rate of browser acquisition over
time. Microsoft appears to have aggregated Internet Explorer usage across all ISPs currently in
the Windows Internet referral server -- even those such as Sprint, Concentric, and GTE, that

Page 27      

entered into referral server agreements as late as September 1997 and were distributing large
numbers of Navigator to their customers before that date -- without controlling for the date on
which subscribers of these services acquired their browser. Indeed, Microsoft's own documents
show that Internet Explorer's share of browser usage is

              The available evidence establishes that Microsoft's ISP restrictions have
been quite effective at foreclosing competitors' browser distribution.
                (2) The OEM Agreements Foreclose Microsoft's Rivals

   Microsoft's agreements with OEMs have the practical effect of significantly restricting
Netscape and other competitors from access to, by Microsoft's own admissions, one of the two
most important channels of browser distribution. Microsoft's Windows 95 and 98 license
agreements with OEMs require that the OEMs license and install Internet Explorer in order to
receive a license to Windows. PI Brief at23-24. Microsoft's OEM agreements also prohibit the
OEMs from removing the Internet Explorer icon, other means of access, or any of its code from
Windows. Id.
   Microsoft does not even attempt to refute the evidence that major OEMs, contractually
prohibited from removing Internet Explorer from, or otherwise modifying the initial bootup
sequence or Windows desktop screen of, the PCs they sell, are less likely to preinstall another
browser, see PI Brief at 24-25; or even to consider other browser

Page 28      

products on the merits. ⁷ This effect is explained by practical OEM
concerns -- including the likelihood of customer confusion, costly product testing, and increased
support costs -- about preinstalling multiple browsers. See PI Brief at 24-25. In fact,
Microsoft's own Senior Vice President of OEM Sales has testified that,

⁸ More recently,
Netscape's former Vice President of Sales and Marketing testified that

⁹
   Microsoft's only rejoinder to this evidence is that, under the letter of their Windows

license agreements, OEMs are permitted to add icons and other browsers, MS Memo at 11-12.

Page 29      

The marketplace realities OEMs confront render such formalistic freedom meaningless because
Microsoft's bootup and desktop screen restrictions deprive them of the ability to take the steps --
even modest steps to minimize confusion, testing, and support costs -- necessary to make adding
other browsers commercially palatable.
   Microsoft seeks to belittle the evidence of foreclosure in the OEM channel by
contradicting its own internal documents and arguing that the OEM channel is insignificant as a
channel for consumer browser distribution. Microsoft's only support for this assertion is

                    What Microsoft does not mention, however, is that it failed to

               Given Microsoft's conduct in the OEM channel, it is dramatic
evidence of competitive harm that Netscape has determined that it receives only

                     * * * * *
 In the aggregate, the restrictive terms of Microsoft's agreements with ISPs and OEMs have
left Microsoft's browser rivals with significantly reduced access to distribution, and
therefore

Page 30      

with a Hobson's choice: suffer reductions in market share or increase reliance on far less efficient
and more costly distribution channels.
   In addition to the above points, Microsoft makes one other argument about both the ISP
and OEM channels. As a general matter, Microsoft suggests there is no evidence of foreclosure
because Netscape Navigator currently has an installed MS Memo at
9.¹⁰ To be sure, there is little doubt that Netscape was the first to recognize and respond to the
tremendous commercial opportunity for Internet browsers and that it built up a large installed
base in the mid-'90s. But the relevant question is not whether the user base includes many who
got their browsers before Microsoft began its exclusionary practices, but whether Microsoft's
agreements have since impaired the ability of Netscape and other rivals to continue to distribute
their browsers.
                                      Thus, Microsoft fails to
establish the absence of a genuine dispute that there has been a substantial foreclosure of browser
competition in the ISP and OEM channels.
             b.   Microsoft's ICP Agreements Materially Injure Its Browser Rivals

   Microsoft argues that it has contracts with only 24 U.S. ICPs, and that the ICP channel is
not a significant browser distribution channel. But the ICP agreements injure Microsoft's browser

Page 31      

distribution. Foreclosure is not limited to browser distribution. An ICP's endorsement of a
particular browser and its accompanying standards has a real effect on browser adoption,
especially in a market characterized by network effects and heavily influenced byindustry
perception.
                                             Indeed, Microsoft
itself has recognized the importance of content providers, particularly in their standard-setting
capacity, to its Internet mission.

   Microsoft's ICP restrictions have, in addition, had significant impact on the browser usage
and distribution practices of important ICPs. For instance, one of the largest

                                                Microsoft also
prevented
                             Absent these prohibitions, Intuit would have
continued the promotion and distribution of Navigator, not only from its websites, but also in its
capacity as a leading ISV.
   These exclusionary effects must of course be considered in the context of Microsoft's other
exclusionary practices. And they should be considered also in light of the importance and
prominence of Microsoft's ICP partners (including Disney, Time Warner, and Intuit), which are
among the most popular and visible of all content providers.

Page 32      

             c.   Relegating Its Rivals To Reliance On Other, Less Efficient And
                More Costly Distribution Channels Cannot Compensate For The
                Foreclosure Microsoft Has Created In The ISP, ICP and OEM
                Channels

   Microsoft's summary judgment argument is largely premised on the fact that, putting the
ISP, OEM, and ICP channels aside, other distribution channels remain available to Microsoft's
rivals. But the alternatives are decidedly and demonstrably inferior. Most significantly, Microsoft
itself has repeatedly recognized that ISPs and OEMs are the most important browser distribution
channels.

   Recent depositions of Netscape executives -- on which Microsoft misleadingly relies to
support its assertions -- in fact unequivocably confirm the importance of the OEM and ISP
channels to browser distribution.

Page 33      

   The record further shows that other methods of distribution, such as mailing physical CDs
or disks to individual homes, are more costly and much less effective than distribution through
ISPs and OEMs. In particular, as
browsers have expanded in size the downloading of browsers has become more cumbersome, less
effective, and a far less successful means of distributing browsers.
                                          clearly establish
the serious limitations of downloading.

¹¹
   In light of this evidence, it is plain that numerous issues of fact remain disputed about the
extent and significance of the exclusionary effects of Microsoft's ISP, OEM and ICP restrictions.
Summary judgment is therefore unwarranted.
        2.  The Exclusionary Provisions In Microsoft's ISP, ICP And OEM
             Agreements Are Not Necessary To Further Legitimate Interests

   Microsoft's summary judgment motion should be denied because plaintiffs have adduced
strong proof of the significant exclusionary effects of Microsoft's practices. Microsoft's motion
also must fail because Microsoft cannot show that there are no disputed material facts concerning

Page 34      

the other half of the rule of reason analysis: Microsoft's assertion that its contractual restrictions
were implemented for "valid business reasons." MS Memo at 59, 61-62.¹² On this point too the
plaintiffs' evidence overwhelms Microsoft's unsubstantiated claims.
   In addition to ignoring numerous disputed facts, Microsoft's argument on this point
misstates the applicable legal standard. As discussed above, see supra, Section II.B, it is well-
settled that an anticompetitive contractual restriction may be justified only if the restraint's
anticompetitive effects are both outweighed by, and reasonably necessary to further, a legitimate
business justification.¹³
   Microsoft is thus simply wrong when it argues that the mere existence of "legitimate
business reasons" is sufficient to justify its exclusionary contract provisions. To prevail, it must
demonstrate more -- that the asserted business reason is truly valid, that it could not be achieved
by a means less restrictive of competition, and that its benefits outweigh the harm to competition
resulting from the exclusionary provisions.

Page 35      

   When measured against this standard, the evidence demonstrates not only that Microsoft's
motion must be denied, but also that Microsoft's purported justifications for its exclusionary
conduct are plainly insubstantial.
             a.   Microsoft's Anticompetitive Restrictions On ISPs Are Not Justified

   Microsoft seeks to justify the restrictive provisions in its ISP agreements by arguing that
the contracts are "nothing more than commonplace cross-marketing arrangements." MS Memo at
63. This simply repeats Microsoft's mantra that its conduct merely reflects "ordinary business
practice[s] typical of those used in a competitive market" and therefore cannot "constitute anti-
competitive conduct." MS Memo at 76 (internal quotations omitted). As noted above, that
argument is incorrect as a matter of law in light of Microsoft's monopoly power. It is also
factually infirm.
   For example, Microsoft cites provisions in Netscape's browser distribution agreements

                                   In addition, unlike the Microsoft
agreements, Netscape's licenses contain

               and (also unlike the Microsoft agreements) they do not

Page 36      

   Microsoft argues that "consumers benefitted" from its ISP agreements because "they were
part of an overall effort to make it easier for Windows 95 users to gain access to the Internet." MS
Memo at 63, 67. This argument is both misleading and disingenuous. On their face, the
exclusionary provisions harm consumers by making it more difficult for them to obtain non-
Microsoft browsers, and Microsoft has not explained how those exclusions might benefit
consumers. Moreover, even were Microsoft to offer proof that some part of the agreements
benefit consumers, the relevant question is not that, but instead whether the exclusionary
provisions in the agreements are necessary to achieve those benefits. They are not, and Microsoft
cannot show any connection between making Internet Explorer available to more PC users, and
restricting ISPs ability to distribute and promote competing browsers.
   Microsoft suggests that the restrictions compensated Microsoft both for maintaining the
ISP referral server and for permitting ISPs in it to enjoy the ICW's favorable desktop placement,
MS Memo at 63, but there is no reason why Microsoft had to receive compensation in the form of
exclusionary restrictions. To the contrary,

    demonstrates that Microsoft could be compensated in ways that do not exclude rivals.
   The evidence shows that any interest Microsoft might assert in receiving compensation for
"renting" its desktop real-estate is pretextual. SeeEastman Kodak, 504 U.S. at 484. According to
Microsoft executives,

Page 37      

                                        Indeed, Microsoft recently
made the decision to permit major OEMs to place the ISPs of the OEM's choice in the Internet
Connection Wizard for Windows 98 and to

                                          thereby confirming
that Microsoft has little interest in charging for its desktop real-estate.
   Far from trying to benefit consumers, Microsoft imposed its ISP restrictions to choke off
distributional avenues for competing browsers and thereby choke off consumer choice. See

             b.   Microsoft's Anticompetitive Restrictions On OLSs
                Are Not Justified

   Microsoft defends its contractual restrictions on the ability of OLSs to promote and
distribute non-Microsoft browsers with the refrain that the restrictions are necessary to prevent
"free riding." See generally Sylvania, 433 U.S. at 55 (explaining that preventing free riding may
justify certain vertical restraints). As Microsoft explains, the OLSs are given preferred placement
on the Windows desktop and assistance in developing a proprietary client (or browser "shell")

Page 38      

based on Internet Explorer in exchange for the OLSs' agreement to curtail their distribution and
promotion of non-Microsoft browsers. See MS Memo at 71. Having granted OLSs these benefits,
the argument runs, Microsoft is entitled to "some assurance that the OLSs will not take advantage
of that assistance and then turn around and adopt competing technologies." Id. at 72.
   As Judge Easterbrook has explained, however, "[w]hen payment is possible, free-riding is
not a problem because the ‘ride' is not free." SeeChicago Professional Sports Ltd. Partnership v.
NBA, 961 F.2d 667, 675 (7th Cir. 1992) (Easterbrook, J.). If Microsoft wishes to be paid for
benefits it confers on Online Service Providers, then -- as with its ISP agreements -- it can charge
OLSs a fee rather than receive compensation in the form of exclusionary rights.¹⁴ Microsoft
similarly cannot show that restricting OLSs' distribution and promotion of competing browsers is
reasonably necessary to ensure that competitors do not free ride on Microsoft's technological
assistance. Any such assistance Microsoft provides to an OLS would be useful only in developing
a customized OLS browser based on Internet Explorer, and could not readily be used to assist the
OLS in working with Netscape or another browser producer. Thus, there is negligible danger of
free riding. Because Microsoft cites no evidence, let alone a lack of genuinely disputed evidence,
to the contrary, its argument therefore cannot meet its summary judgment burden.
             b.   Microsoft's Anticompetitive Restrictions On ICPs Are Not Justified

   Microsoft offers the same justifications for the exclusionary provisions in its ICP
agreements; and, for the same reasons, those asserted justifications are insufficient. Even if
Microsoft's creation of its "channel bar" might have "facilitated the use of innovative technologies

Page 39      

and provided consumers with easy access to high quality content on the Internet," see MS Memo
at 69-70, Microsoft makes no attempt to explain why restricting ICPs' relationships with
competing web browsers and requiring ICPs to implement Internet Explorer-specific technologies
is reasonably necessary to provide ICPs placement on the channel bar. Moreover, the restrictions
apply only to ICPs' relationships with the top two "Other Browsers,"
               a fact that supports the inference that Microsoft imposed the restriction
not for any procompetitive purpose but rather to impede the commercial opportunities of its
leading competitors.
   In any event, there simply is no justification for Microsoft's restrictions on ICP's ability to
compensate Netscape, and Microsoft asserts none. At a minimum, there certainly is no undisputed
justification, and therefore no basis for summary judgment.
             c.   Microsoft's Restrictive OEM LicensesAre Not Justified
   Microsoft's principal defense of the exclusionary provisions in its OEM agreements is an
argument of antitrust immunity based on the copyright laws. That argument is addressed
separately in Section II.D, below. We address here Microsoft's effort to defend the exclusionary
OEM agreements on economic grounds.
   Microsoft first asserts that its OEM restrictions "preserve[] the operating system as a stable
and consistent platform that supports a broad range of compatible software applications software."
MS Memo at 57. The platform issue, however, has to do with the APIs to which ISVs write. Those APIs are unaffected by alterations to the Windows boot-up sequence, modifications to the
contents of desktop folders, or creation of icons of different shapes and sizes. To the contrary,
Microsoft has promoted Internet Explorer to end-users on the basis that the icon

Page 40      

could be easily removed, see Gaspar Dec. ¶ 19 (Consent Decree Case); Sibley Dec. ¶ 43 n.48
(citing sources); Cole 50:2 - 51:24, while using its screen restrictions to prohibit the OEMs from
removing the Internet Explorer icon themselves. Thus, lifting the prohibition on OEMs removing
access to web browsing via Internet Explorer would not "undermine the consistency of the
[Windows] platform in any meaningful way." Sibley Dec. ¶ 43.
   Microsoft provides no evidentiary support for its platform argument. Even if it did, factual
questions concerning the degree to which the restriction furthers the asserted justification, and
whether the justification outweighs the anticompetitive effects it causes, plainly would preclude
summary judgment. See, e.g.,id. ¶ 43 & n.47 (questioning Microsoft's argument because ISVs
commonly distribute shared program libraries with applications to ensure that their software runs
on the large installed base of machines that lack the latest version of Windows).
   Microsoft also argues that its restrictions on altering the initial boot-up process "promote a
consistent user experience," MS Memo at 47, but the record makes clear that there are disputed
questions of material fact as to whether Microsoft's restrictions are reasonably tailored to that
end. As an initial matter, Microsoft's contention that the challenged restrictions are justified in
order to provide customers the benefit of "the same initial user experience" across brands, MS
Memo at 58 (emphasis added), is belied by Microsoft's own conduct. See Sibley Dec.¶ 47.
Among other things, Microsoft permits (1) all OEMs to ship Windows 98 with the "active
desktop" either on or off; (2) all OEMs to add items of varying sizes to the active desktop (but not
to the traditional Windows desktop),

Page 41      

                (4) some OEMs to replace the list of ISPs included in the Internet
Referral Server with their own lists; and (5) all OEMs to preload the software of the OEM's
choice, subject to Microsoft's license restrictions.
   These exceptions create considerable variation in the initial experience a PC user will have
depending on the OEM from which he or she buys their PC. This level of variation makes clear
that, at most, Microsoft's restrictions might help preserve some very general "look and feel" of the
Windows operating system. The challenged restrictions, however, cannot be shown to be
reasonably necessary to achieve that objective. Removal by OEMs of the Internet Explorer icon
and other means of using Internet Explorer to browse the Web (which Microsoft prohibits) would
not affect the overall "look and feel" of Windows any more than when OEMs add various
software (which Microsoft readily permits). Nor is the "look and feel" of Windows impaired by
permitting OEMs to install icons of different sizes; Microsoft permits precisely that in those
instances when an OEM ships the active desktop enabled (which, because it provides additional
ways of launching Internet Explorer, also increases the likelihood that the user will use Internet
Explorer).
   Even with respect to the Windows initial boot process, where Microsoft at least can
plausibly argue some legitimate interest in ensuring that users supply and receive certain
information, the exclusionary provisions in its OEM agreements are far broader than necessary.

Page 42      

As noted above, Microsoft prevents OEMs from

¹⁵
   Microsoft also argues that "substantial consumer confusion and disappointment would
result if new personal computers arrived with various advertised features of Windows altered or
deleted in various ways unintended by Microsoft." MS Memo at 58. For two reasons, this
argument does not justify the exclusionary restrictions in the OEM agreements.
   Significant factual issues exist as to whether the restrictions challenged by the plaintiffs
were designed to advance Microsoft's asserted interest. Internal Microsoft documents show that
Microsoft began serious efforts to enforce and augment its exclusionary provisions only

Page 43      

¹⁶
   Second, Microsoft could have achieved the objective of preventing consumer confusion
through substantially less anticompetitive means. For instance, Microsoft has permitted certain
OEMs to
¹⁷                                         There is no reason why
Microsoft could not similarly permit OEMs to insert additional screens in the start-up sequence
that permit end users to select the browser of their choice, pursuant to guidelines designed to
ensure the process' smooth operation and preserve the general "uniformity" of the first-boot
process.
   Moreover, that OEMs -- who have an unquestioned interest in meeting consumer demand -
-  have sought at various times to remove the Internet Explorer icon from the Windows 95 and
Windows 98 desktops,
                                   or urged Microsoft to ship Windows
98 with Internet Explorer uninstalled,
 supports the conclusion that permitting OEMs to remove the Internet Explorer icon and
associated means of browsing the web would meet, rather than disappoint, consumer
expectations. Any legitimate interest in avoiding "consumer confusion and disappointment," see
MS Memo at 58, could be met by requiring disclosure when OEMs remove the means of using

Page 44      

Internet Explorer to browse the Web. OEMs vigorously compete against one another by
advertising to end users the particular features of the machines they sell; many OEMs allow end-
users to choose the precise components of their PCs, including the preinstalled software;¹⁸ and

because the OEM market is competitive, OEMs that cause user "confusion and disappointment"
would be punished by fewer sales,
                                         There is every reason,
therefore, to believe that a labeling requirement can prevent customer disappointment without
inflicting the competitive harm caused by Microsoft's exclusionary license provisions.
   For similar reasons, Microsoft's restrictions cannot be sustained on the theory that they
"preserve[] Microsoft's reputation as a supplier of quality operating system software." MS
Memo at 58-59. OEMs have no incentive to engage in conduct that will cause consumer
confusion or otherwise impair Microsoft's goodwill. OEMs not only bear their own support costs
and face vigorous competition, but also bear the costs of customer support calls directed to
Microsoft, as Microsoft refers customer calls to the pertinent OEM.
        Thus, Microsoft's contention, MS Memo at 58, that its reputation, not the
OEMs', would "suffer if Windows did not perform as represented" by Microsoft misses the point;
the very structure Microsoft has created (quite aside from its contractual restrictions) is designed
to ensure that OEMs take actions consistent with preserving Microsoft's reputation.
   Moreover, the facts simply do not support Microsoft's contention that lifting the

Page 45      

challenged restrictions threatens to tarnish the Windows brand. Permitting OEMs to promote
browsers and to provide browser choice in the boot-up sequence no more threatens Microsoft's
reputation than Microsoft's decision to permit OEMs to provide in that sequence their own ISP
sign-up software. Nor does permitting OEMs to vary the size of shapes and icons, which
Microsoft permits when the OEM ships the "active desktop" enabled (but with respect to the
"classic" desktop screen). Of course, even if Microsoft's conduct were consistent with respect to
the claimed justification, a labeling requirement, as discussed above, would (along with ordinary
OEM incentives to minimize costs and seek to meet consumer demand) suffice to prevent any
reputational injury to Microsoft from OEM removal of the means of using Internet Explorer to
browse the web, removal of the On-Line Services Folder, or addition of a choice of user interface
in the initial boot-up sequence.
   Finally, Microsoft cannot argue that its screen restrictions are justified because they simply
reflect ordinary business practice typical of those used in a competitive market. First, as already
noted, this argument simply does not apply here because of Microsoft's uncontested monopoly
power. Second, the factual reality is that, far from using practices similar to Microsoft, other
operating system vendors commonly allow significantly more customization than Microsoft. For
instance,                 permits OEMs to choose among alternative
interfaces and to decide whether or not to install the browser that ships with its operating system
products; and does not believe that permitting OEMs these options will impair its goodwill,

fragment its operating system as a platform, cause end-user confusion or disappointment.

Page 46      

¹⁹
        3.  Microsoft's Sudden Revision Of Some Of Its Exclusionary Agreements              The Eve Of Litigation Provides No Basis For Summary Judgment

   Microsoft argues that certain exclusionary provisions in its ISP and ICP agreements
challenged by the plaintiffs are "effectively moot," MS Memo at 13, on the ground that Microsoft
has "unilaterally waived" those provisions. Seeid. at 65, 68. (Microsoft makes no such argument
about its OEM or OLS restrictions.)
   Microsoft's courthouse conversion suggests, at the very least, both that Microsoft has no
legitimate need for those provisions and that it recognizes their doubtful legality.²⁰ But it does not
provide a legal defense in these cases. To the contrary, "[i]t is the duty of the courts to beware of
efforts to defeat injunctive relief by protestations of repentance and reform." United States v.
Oregon State Med. Soc'y, 343 U.S. 326, 333 (1952).
   There are several flaws in Microsoft's mootness argument. In the first place, Microsoft has
not waived all of its exclusionary agreements. While it announced last March -- the night before
Mr. Gates testified before Congress about the agreements -- that it was waiving the restrictive
provisions, it in fact waived some provisions, modified but did not entirely abandon others, and

Page 47      

left some agreements -- including the exclusionary provisions in its agreement with AOL, which is
by far the largest and most important ISP -- entirely unchanged.
   In any event, it is plain that this Court retains jurisdiction to pass on the legality of even the
"waived" practices because those practices caused anticompetitive effects that are within the
court's power to remedy. SeeNorthwestern Environmental Defense Center v. Gordon, 849 F.2d
1241, 1245 (9th Cir. 1988) ("The fact that the alleged violation has itself ceased is not sufficient to
render a case moot. As long as effective relief may still be available to counteract the effects of
the violation, the controversy remains live and present.").
   Moreover, regardless of the effects of Microsoft's abandoned or modified conduct, it is
settled that "voluntary cessation of allegedly illegal conduct" does "not make the case moot."
United States v. W.T. Grant Co., 345 U.S. 629, 632 (1953). In such circumstances -- when the
"defendant is free to return to his old ways," id. -- the defendant must demonstrate that it is
"‘absolutely clear'" that "‘the allegedly wrongful behavior could not reasonably be expected to
recur.'" Vitek v. Jones, 445 U.S. 480, 487 (1980) (quoting United States v. Phosphate Export
Ass'n, 393 U.S. 199, 203 (1968)). Microsoft has not met this "heavy" burden. County of Los
Angeles v. Davis, 440 U.S. 625, 631 (1979). With respect to both its ISP and ICP restrictions,
Microsoft merely abandoned some of the challenged practices when threatened with government
enforcement action. It has not even "disclaimed any intention to revive them." W.T. Grant,
345 U.S. at 633. And, even if it had made such a disclaimer, "[s]uch a profession does not suffice
to make a case moot." Id.²¹

Page 48      

   C.  Microsoft's Requirement That OEMs Distribute Internet Explorer As A Condition
        Of Licensing Windows Is An Unlawful Tying Arrangement

        1.  Microsoft's Forced Licensing of Internet Explorer to OEMs Violates
             Section 1 Of The Sherman Act

   There are four elements to a Section 1 perse tying claim: (1) two separate products or
services exist; (2) the sale of one product (the tying product) is conditioned on the purchase of the
other (the tied product); (3) the seller has "appreciable economic power" in the tying market; and
(4) the tying arrangement affects a not insubstantial volume of interstate commerce in the tied
product. See Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 1, 9-18 (1984); Eastman
Kodak, 504 U.S. at 462. For the purposes of summary judgment, on which all disputed issues
must be resolved against the moving party, Microsoft does not contest the third and fourth
elements. Its arguments on the first and second are both factually and legally inadequate to
warrant summary judgment. Indeed, its coercive bundling of Internet Explorer with Windows is
per se illegal.²²
             a.   Microsoft Conditions The License Of Windows On OEM
                Distribution Of Internet Explorer

   Microsoft devotes a single page to the "conditioning" element of the plaintiffs' tying
claims, arguing that its refusal to allow OEMs to license Windows without Internet Explorer does

Page 49      

not amount to "conditioning" because it has charged OEMs only a single royalty for both
Windows and Internet Explorer and "has never charged OEMs a separate royalty" for Internet
Explorer alone. MS Memo at 49. This formalism fails to address the evidence that, despite the
fact that Internet Explorer and Windows are not separately priced, Microsoft's coercive bundling
and refusals to permit unbundling have constituted, and continue to constitute, a powerful
anticompetitive mechanism.
   Microsoft correctly states that "conditioning the availability of one product on the purchase
of another is a necessary element of a tying claim under Section 1 of the Sherman Act." MS
Memo at 49. However, Microsoft misinterprets the "purchase" (or "conditioning") requirement to
mean that a separate charge must be assessed for Internet Explorer. To the contrary, as Professors
Areeda and Hovenkamp explain:
        A tying arrangement is the sale or lease of one item ("tying
        product") only on condition that the buyer or lessee take a second
        item ("tied product") from the same source. . . . And the tie may be
        obvious as in the classic form, or somewhat more subtle, as when a
        machine is sold or leased at a price that covers "free" servicing.

3A P.E. Areeda & H. Hovenkamp, Antitrust Law, ¶ 760b6 (1996). Whether the market price of
the tied product is zero or something higher is thus immaterial to the potential for anticompetitive
harm, and accordingly should be immaterial to analysis of whether there is a tying arrangement.²³

Page 50      

   Even though no separate price is charged for Internet Explorer, and even though it is
licensed under the same licensing agreement as Windows, the evidence plainly indicates that
Microsoft's insistence that OEMs accept and preinstall it constitutes anticompetitive conditioning
because it has materially affected OEMs' judgment as to the browser software they preinstall on
their PCs. See supra, Section II.B.1.a(2). The competitive harm which the per se rule against
tying is designed to prevent includes the denial of "free access to the market for the tied product"
and the forcing of consumers to "forego their free choice between competing products." Northern
Pac. Ry., 356 U.S. 1, 6 (1958). Microsoft's tying of Internet Explorer to Windows produces these
precise evils, and thus imposes real costs on OEMs. Microsoft's argument -- the mere formalism
that there is no separately priced purchase of Internet Explorer -- cannot entitle it to summary
judgment.
             b.   Under The Clear Standards Set Forth By The Supreme Court And
                In Subsequent Caselaw, Windows and Internet Explorer Are
                Separate Products For Purposes Of Tying Analysis

   Microsoft's real attack on the plaintiffs' per se tying claim challenges the first element of
the tying offense, whether Internet Explorer and Windows operating systems are separate
products. Instead of coming to grips in any serious way with Jefferson Parish and Eastman
Kodak, the controlling decisions on the separate product issue, Microsoft relies on prior and/or
distinguishable lower court decisions, and on the D.C. Circuit's decision in the consent decree

Page 51      

action brought last year by the United States, United States v. Microsoft, 1998 WL 327855 (D.C.
Cir. June 23, 1998) (hereinafter, "the consent decree case").
   The Supreme Court held in Jefferson Parish, and reiterated in Eastman Kodak, that
whether something that is sold by the defendant as a single package or bundle consists of one or
more "products" for tying purposes depends on whether there is demand for each of the bundled
products separately, apart from the package, and whether, in light of this separate demand, it is
efficient for the defendant to sell the different components or products separately.²⁴ The antitrust
issue raised by tying doctrine is thus whether the defendant is required also to offer an unbundled
alternative (i.e., offer the tying product without the particular tied product required as a condition
of that offer), based on whether there is demand for the products separately.
   Jefferson Parish makes clear that the test is based in economics, not technology. Under
Jefferson Parish, "the answer to the question whether one or two products are involved turns not
on the functional relation between them, but rather on the character of the demand for the two
items." 466 U.S. at 19; see alsoMultistate Legal Studies, 63 F.3d at 1547; Klamath-Lake
Pharmaceutical Assn. v. Klamath Medical Service Bureau, 701 F.2d 1276, 1289 (9th Cir.), cert.
denied, 464 U.S. 822 (1983) ("Products that function together and are sold in combination may
still be ‘separate' if consumers would prefer to buy them individually at the price necessary to

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market them separately . . . . It is the relationship of the producer's selling decision to market
demand, not the physical characteristics of the products alone, that determines the existence of
legally separable products.")

                (1) There Is Separate Demand For
                     Internet Explorer And Windows

   Microsoft concedes that there is demand for Internet Explorer without or separate from
Windows operating systems. For example, the evidence shows that Microsoft has for years
offered Internet Explorer separate from Windows, both for Windows users and for users of
operating systems other than Windows, and even Microsoft's brief argues that many users obtain
their browsers separately. See MS Memo at 9-17. Customers who acquire either Microsoft's
browser or another browser in these various ways, whether from ISPs (in most cases), through
retail purchase, or otherwise, obviously do so independently of the acquisition of their operating
system. Microsoft offers Internet Explorer separately, and users obtain it separately, in order to
satisfy consumer demand for web browsers.
   Microsoft argues that there is no separate demand for the alleged tying products
(Windows 95 and Windows 98) without the tied product (Internet Explorer) on the ground that the
plaintiffs "cannot show that there is separate demand for operating system software products
that do not provide web browsing functionality." MS Memo at 45. This argument is both wrong
on the facts and rests on a misunderstanding of the applicable legal test. The issue is not whether
there is demand for operating system (tying) products without any browser (tied) products
whatsoever, but rather whether there is demand for the particular tying product (Windows)
without the particular tied product (Internet Explorer) required by the defendant.

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   The facts presented in Jefferson Parish itself are a clear example of this point. The
Supreme Court fully recognized that there was, and could be, no suggestion that anyone wanted
surgery (the tying product) without any anesthesia (the tied product); but it nonetheless asked
whether there was demand for surgery without the particular anesthesiologists required by the
defendant, and cited numerous earlier cases in which tying arrangements had been found despite
the uselessness of the tying product without some product in the tied product market. See
Jefferson Parish, 466 U.S. at 19, n.30, 22-23.
   In any event, there is abundant, uncontroverted evidence both of demand (and a separate
market) for Windows without any browser product at all, and of demand for Windows without
Internet Explorer in particular. This evidence includes the following.
   (1)  OEMs have repeatedly sought to effectively remove Internet Explorer by removing
icons and other means of access to Internet Explorer, and they have sought both to sell computers
both without Internet browsing capability at all and with browsers other than Internet Explorer.

   Microsoft argues that "[r]emoving `icons and other means of access' is not the same as
removing Internet Explorer, and thus does not establish separate consumer demand for Windows
without those technologies." MS Memo at 47. But as discussed below, it is immaterial whether
OEMs have sought to remove all "technologies" that Microsoft chooses to associate with Internet
Explorer. The issue for tying purposes is the economic question whether OEMs have sought,
whether by removing icons, other means of access, or otherwise, to serve demand for Windows
without Internet Explorer from the perspective of the end user. The evidence shows exactly that.

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   (2)  Some users prefer Windows operating systems with a browser other than Internet
Explorer; other users, particularly corporate customers, prefer Windows operating systems with no
browser at all. Microsoft ignores the evidence both that some corporate users do not want to
license any browser along with Windows, and that other users wish to select from among
competing browsers on the merits and across operating system platforms, and therefore do not
want to have Internet Explorer forced upon them.
         This evidence too shows separate demand for Windows without Internet
Explorer.²⁵
   (3)  Microsoft and others in the industry recognize that browsers and operating
systems are separate products. As detailed in the plaintiffs' PI Briefs, Microsoft has recognized it
is in a "browser war" with Netscape, has made obtaining ever higher "browser share" a top
corporate goal in order to win that war, and has meticulously tracked that browser share wholly
apart from its share of Windows or any other product. See U.S. PI Memo at 19-22, 60-64, and
cites therein. Moreover, Microsoft's strategy of making its Internet Explorer browser "cross-

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platform" (i.e., available to run on multiple operating systems) itself demonstrates that the browser
is a separate product. The cross-platform versions of Internet Explorer are designed to
satisfy consumer demand for browsers as products in their own right, not as components of
particular operating systems. Indeed, Microsoft recognizes that numerous users do not wish to
have their choice of browser linked to their choice (or lack thereof) of operating system.²⁶
Microsoft does not dispute that it has developed versions of Internet Explorer 3.0 and 4.0 for the
Macintosh, Windows 3.1, and Solaris, or that it will continue to develop future versions of Internet
Explorer to be a cross-platform product.

   (4)  The practices of vendors of other operating systems demonstrate that there is
separate demand for operating systems. Microsoft argues that Windows and Internet Explorer
should not be considered separate products on the ground that "every modern operating system for
personal computers includes a variety of technologies that facilitate access to information on
the Internet, including web browsing functionality." MS Memo at 45. The evidence shows just
the opposite.²⁷ Other operating system vendors approach the bundling, if any, of browser
products with their operating systems in a way fundamentally different from Microsoft.

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Microsoft has not identified a single operating system vendor which requires licensees to install
and not to remove a particular browser as a condition of licensing the operating system. Rather,
other vendors either do not bundle a browser at all, see, e.g., Wack Dec., ¶¶
23-26, or permit OEM licensees not to install a browser offered with the operating system (or to
remove it after installation) if they wish. See, e.g.,

   Microsoft does not really contest the evidence that both it and other industry participants
treat browsers as separate products or that some OEMs and computer users would like to obtain
Windows operating systems without the Internet browsing functionality provided by Internet
Explorer. It argues, instead, that this evidence is insufficient because there must be evidence of
"widespread sales of the tying item in unbundled form." MS Memo at 45, quoting 10 P.E.
Areeda, H. Hovenkamp, E. Elhauge, Antitrust Law ¶ 1745d2 at 211. But Microsoft is creating a
legal "Catch-22." There obviously cannot be widespread sales of Windows without Internet
Explorer because Microsoft, with its dominance of the desktop PC operating system market, has
consistently required OEMs to take Internet Explorer as a condition of obtaining Windows. For
this very reason, the available (and substantial) evidence of separate demand for Windows and
Internet Explorer may well understate the actual extent of such demand. OEMs, having long

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since recognized that they have no choice, have simply acquiesced with Microsoft's required
bundling.
                (2) It Would Be Efficient To Offer OEMs
                     The Option Of Windows Without Internet Explorer

   The efficiency question in tying cases is whether, in light of the demand for an unbundled
option, it is efficient for the defendant to provide such an option. Eastman Kodak, 504 U.S. at
462. Thus, in this case the question is whether it is efficient for Microsoft to satisfy the demand
for separate or standalone browsing functionality provided by Internet Explorer, and the demand
for Windows operating system functionality without the web browsing functionality provided by
Internet Explorer.
   There is no dispute that Microsoft can efficiently satisfy end users' demand for separate or
standalone web browsing functionality. Microsoft does so by offering the standalone versions of
its Internet Explorer web browser product, both to users of Windows and to users of various non-
Windows operating systems.
   Similarly, if Microsoft wanted to satisfy the demand of OEMs and computer users for
operating systems without the web browsing functionality provided by Internet Explorer, rather
than wanting just to exclude its browser rivals, it could efficiently offer those OEMs or users the
alternative of Windows without that particular web browsing functionality.²⁸ In the case of
Windows 95, Microsoft concededly provided the means, through the Add/Remove utility, for

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users to remove Internet Explorer. It could have offered OEMs a similarly unbundled version of
Windows 95,²⁹ but chose not to do so and, instead, prohibited the OEMs from themselves utilizing
the Add/Remove utility or otherwise removing IE.
   With regard to Windows 98, where Microsoft has chosen not to offer anyone the ready
means of removing Internet Explorer using the Add/Remove utility or otherwise, it would
nonetheless be efficient for Microsoft to offer an unbundled alternative. Felten Dec., ¶¶ 7-10.³⁰
Of course, under Jefferson Parish, Microsoft need not necessarily offer a version of Windows 98
without utilization of any browsing functionality, but rather without that functionality necessarily
belonging to a particular browser -- Internet Explorer. This is precisely what other operating
system vendors universally, and efficiently, do in providing their operating system products.
Plaintiffs' evidence will establish that it is readily possible and efficient for Microsoft to offer
Windows 98 in a way that satisfies the demand of OEMs and users who desire either an operating
system without web browsing functionality or an operating system on which it is easier or more
economical to install a different web browser product.
   Microsoft argues that the removal of what it calls "Internet Explorer technologies" from
Windows 98 will "severely degrad[e] the operating systems." MS Memo at 42. This argument --
the linchpin of Microsoft's entire defense to the tying claims -- rests on a semantic sleight of hand
and is insufficient for summary judgment both as a matter of law and as a matter of fact. This

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sleight of hand is Microsoft's equation of "Internet Explorer technologies" with every bit of
software code used to browse the Internet using Internet Explorer. This gambit, identical to the
one Microsoft attempted and the Court rejected last winter, is inconsistent with the economic
inquiry made in Jefferson Parish.³¹
   The efficiency of providing an unbundled alternative is fundamentally an economic
question, not a technical one. As OEMs have recognized, removing access to Web browser
functionality from Windows or another software product effectively removes the web browser,
eliminating the ability of the remaining Windows product to satisfy the separate demand for such
functionality (even if shared files are left behind). Moreover, removing such functionality or
access to such functionality from Windows leaves a fully functioning operating system that
satisfies the demand of OEMs and users who desire either an operating system without web
browsing functionality or on which it is easier or more economical to install a different browser.
Microsoft can efficiently remove or permit OEMs to remove the specific Internet Explorer Web
browser functionality from its bundled Windows products and, if desired, to substitute the Web
browsing functionality provided by competing browsers.
             c.   Cases Involving Product Design Do Not Create Any Exemption
                From The Antitrust Laws
   Microsoft argues that the "integration" of "Internet Explorer technologies" with Windows
98 is a "technological" tie-in and is, therefore, subject to "a specific body of case law" that

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prevents any inquiry into the nature of the tie, the facts bearing on its adoption and
implementation, or its competitive effects. MS Memo at 20. Indeed, Microsoft argues that
"technically interconnected products" are essentially "immune" from tying claims -- that the
court's inquiry is at an end once a defendant has made a plausible showing that there is "some"
technological benefit from the challenged combination and that the tie was not carried out "solely
for the purpose of tying two separate products." MS Memo 20, 24 (emphasis added). In
substance, Microsoft argues that, even though it may be a monopolist, its bundling of Internet
Explorer with Windows is not subject to antitrust scrutiny so long as it can show some plausible
benefit from the conduct, regardless of whether the conduct is anticompetitive regardless of
whether the conduct is on balance beneficial or harmful to consumers.
   As discussed in Section II.C.2, infra, Microsoft's arguments do not and cannot justify its
conduct under Section 2 of the Sherman Act if (as is clear here) the conduct serves to maintain
monopoly power by raising barriers to entry, increasing rivals' costs, or foreclosing competition
on the merits.
   Microsoft rests its argument on a few lower court cases that, for two reasons, are inapposite
here, even as to plaintiffs' Section 1 claims. First, Microsoft's interpretation of these cases
conflicts with the Supreme Court's later, seminal pronouncements on tying law in Jefferson Parish
and Eastman Kodak. Second, Microsoft has not properly understood even the cases on which it
relies.
   Both the Supreme Court and the lower courts have relied on the demand-based analysis
mandated by Jefferson Parish to evaluate separate product claims in "technological" tie-ins under
Section l of the Sherman Act. See Eastman Kodak, 504 U.S. at 461-63 (in context of what the

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Court characterized as a "high-technology" service industry, relied on Jefferson Parish and other
established tying cases, without any suggestion that any different, more relaxed "body of law"
should apply in technology-related cases); Data General v. Grumman Systems Support, 36 F.3d
1147, 1178-81 (lst Cir. 1994) (alleged tie of ADEX software and services); Service & Training,
963 F.2d at 683-85 (reversing grant of summary judgment to defendant on claim of tie between
ADEX and repair services); Allen-Myland v. IBM Corp., 33 F.3d 194, 200-16 (3d Cir. 1994)
(reversing judgment for defendant on alleged tie of large-scale mainframe computers and the
labor to install upgrades to mainframes); Digidyne Corp. v. Data General Corp., 734 F.2d 1336,
1339 (9th Cir. 1984) (holding tie of NOVA computer system to NOVA operating system
unlawful).
   Similarly, the cases on which Microsoft relies in fact look to standard tie-in criteria to
evaluate the lawfulness of "technological" ties and rest on facts materially different from those
alleged (and not disputed by Microsoft) here.
   In Telex Corp. v. IBM Corp., 367 F. Supp. 258 (N.D. Okla. 1973), rev'd other grounds,
510 F.2d 894 (10th Cir. 1975), for example, which appears to be the origin of the "technological"
tie-in language, the court held that, unlike the circumstances here, there was no forced tie of
memory and control functions in a central controller. Telex, 367 F. Supp. at 347 ("the integrated
control in the System 370 is wholly optional. IBM continues to offer central processing units
without integrated controllers.")
   Similarly, in Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307 (5th Cir.
1976), the court applied traditional tie-in law to hold that plaintiff's failure to prove coercion in the
alleged tie (of computer hardware to a computer time-sharing software franchise known as

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"Response I") was fatal to its claim. Id. at 1327-30. After discussing the absence of coercion in
great detail and at great length, the court suggested in a sentence of dicta that a tie of two different
products accomplished by product design would be unlawful only if "the technological factor
tying the hardware to the software has been designed for the purpose of tying the products, rather
than to achieve some technologically beneficial result." Id. at 1330 (citing Telex).³² Here, of
course, there is substantial evidence of anticompetitive purpose, see U.S. Memorandum in Support
of Motion for Preliminary Injunction at 60-64; and Microsoft enforced its tie, not just by product
design, but also by contractual prohibitions on OEM efforts to delete the browser.
   In Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534, 539-42 (9th Cir. 1983), the
plaintiff alleged an "implicit" tie of Kodak's new 110 camera to the film and processing supplies
needed to use it. Foremost is readily distinguishable from the present case because it involved not
the bundling of products, but rather the development of new technological formats that rendered
competitors' complements incompatible. The court explained there that the "so-called
technological tie" of a new product that could not be used with old complements, and thus
required the purchase of new ones, did not "standing alone" (without any contractual requirement
that users take the two together) establish a per se unlawful tying arrangement. Id. at 542. Here,
of course, the tying claim is premised not on the creation of any incompatibility, but rather on the
clearly demonstrated contractual coercion lacking in Foremost.

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   Microsoft describes Innovation Data Processing, Inc. v. IBM Corp., 585 F. Supp. 1470
(D.N.J. 1984), as a case "squarely on point" for the superficial reason that it "involved the
integration of new features into an operating system." MS Memo at 28. But the court there held
that there was no unlawful tie of MVS operating system software and DFDSS software because,
unlike Microsoft in this case, defendant licensed them separately as well as together, at the user's
option. Id. at 1474-75.³³
   Finally, in ILC I, the court used traditional tie-in criteria to conclude that a disk drive that
integrated a drive unit and head/disk assembly was not an unlawful tie-in. The court found that
the drive unit and the head/drive assembly were designed to be and would be used as a unit; that
the aggregation offered dramatically larger online storage capacity previously unavailable; that the
aggregation satisfied a recognized customer need; that the aggregation resulted in cost savings that
were passed on, at least in part, to end users; that the drive unit and head/drive assembly were
normally used by customers in fixed proportions; and that the practice of other industry
participants, including the plaintiff, was to sell integrated disks and the drive on which they
operated for a single price. 448 F. Supp. at 232-34. The court's analysis, based on these factors,
is flatly inconsistent with Microsoft's argument that, once the defendant makes a plausible
showing of some technological benefit, the court should look no further. Moreover, the facts that
led the ILC I court to find a single product are conspicuously different than those in this case.

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Operating systems and browsers are not used in fixed proportions;³⁴ not all sellers bundle the
products together; no consumer savings have been shown to result from the bundling of Windows
and Internet Explorer; and not even Microsoft claims that the benefits from bundling Internet
Explorer (as opposed to any other browser) are "dramatic." See 448 F.Supp. at 233.
   Thus, even if the cases on which Microsoft relies were good law -- and, to the extent they
precede and conflict with Jefferson Parish and Eastman Kodak and their progeny, they are not --
they would not provide a basis for summary judgment. Those cases ultimately turned on
traditional tie-in law, not some special laissez faire rules for product design cases, and that law
requires an inquiry into the economic facts relevant to each element of the tie-in standard. For
example, in In re IBM Peripheral EDP Devices, 481 F. Supp. 965 (N.D. Cal. 1979), aff'd, 698
F.2d 1377 (9th Cir. 1983), the court refused to defer to product design choices whenever they are
"justified" or "reasonable" because that would "ignore[] the possibility that a superior product
might be used as a vehicle for tying sales of other products, and would pronounce products
superior even where the predominant evidence indicated they were not." 481 F. Supp. at 1003.
Instead, the existing generalized standard, one applicable to all types of otherwise legal conduct by
a monopolist, must be applied to the technological design activity at issue here:
        [I]f the design choice is unreasonably restrictive of competition,
        the monopolist's conduct violates the Sherman Act. This standard
        will allow the fact finder to consider the effects of the design on
        competitors; the effects of the design on consumers; the degree to
        which the design was the product of desirable technological

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        creativity; and the monopolist's intent, since a contemporaneous
        evaluation by the actor should be helpful to the fact finder in
        determining the effects of a technological change. Id.

   There is no basis in the cases or sound antitrust policy for courts to grant to monopolists
the kind of deference Microsoft seeks. Product design questions can be complex, but they are not
beyond the competence of courts; courts deal with those and similar questions in product liability,
environmental, medical or engineering malpractice, and similar cases.³⁵
   Microsoft would have the court believe that showing any plausible benefit from product
design is the same as showing that consumers benefit from the design. That is plainly wrong. A
new product design, particularly one that bundles what would be deemed under ordinary tying
standards to be two separate products, can never be said unambiguously to benefit consumers
unless consumers are given the choice whether to take the bundle. Such a bundled design does not
just reduce cost or improve the functioning of one of the products, but rather changes the products'
various attributes. Invariably, a bundled product design will have some pluses (e.g., the kind of

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one-stop shopping benefits present with any tie-in) and some minuses (e.g., in the case of
Windows and Internet Explorer, increased size and impairment of user access to other browsers);
and, as with Microsoft's Windows and Internet Explorer products, some purchasers will prefer the
bundle and others will prefer to buy the products separately. As both the Supreme Court and
lower courts have repeatedly recognized, it is for the market, not the self-serving assertions of the
defendant, to determine whether products are good or bad.³⁶
   It is for these reasons that the Supreme Court made clear in Jefferson Parish, and reiterated
in Eastman Kodak, that tie-ins are to be assessed on the basis of consumer demand. Indeed, the
defendants in Jefferson Parish, like Microsoft here, argued that the "package" of facilities and
services including anesthesiology "d[id] not involve a tying arrangement at all -- that they [were]
merely providing a functionally integrated package of services." 466 U.S. at 18-19 (emphasis
added). The Supreme Court rejected the argument, recognizing that companies, whether in low or
high technology industries, would always be able to show some plausible synergies. See id. at 25,
n.41 ("[W]e reject the view of the District Court that the legality of an arrangement of this kind
turns on whether it was adopted for the purpose of improving patient care."); seealsoMultistate
Legal Studies, 63 F.3d 1540, 1547 (10th Cir. 1995) (bun