MICROSOFT RULING ISSUED Page 2

II. SECTION ONE OF THE SHERMAN ACT

Section 1 of the Sherman Act prohibits "every contract, combination . . . , or conspiracy, in restraint of trade or commerce . . . ." 15 U.S.C. § 1. Pursuant to this statute, courts have condemned commercial stratagems that constitute unreasonable restraints on competition. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977); Chicago Board of Trade v. United States, 246 U.S. 231, 238-39 (1918), among them "tying arrangements" and "exclusive dealing" contracts. Tying arrangements have been found unlawful where sellers exploit their market power over one product to force unwilling buyers into acquiring another. See Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 12 (1984); Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 6 (1958); Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 605 (1953). Where agreements have been challenged as unlawful exclusive dealing, the courts have condemned only those contractual arrangements that substantially foreclose competition in a relevant market by significantly reducing the number of outlets available to a competitor to reach prospective consumers of the competitor's product. See Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961); Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 393 (7th Cir. 1984).

A. Tying

Liability for tying under § 1 exists where (1) two separate "products" are involved; (2) the defendant affords its customers no choice but to take the tied product in order to obtain the tying product; (3) the arrangement affects a substantial volume of interstate commerce; and (4) the defendant has "market power" in the tying product market. Jefferson Parish, 466 U.S. at 12-18. The Supreme Court has since reaffirmed this test in Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461-62 (1992). All four elements are required, whether the arrangement is subjected to a per se or Rule of Reason analysis.

The plaintiffs allege that Microsoft's combination of Windows and Internet Explorer by contractual and technological artifices constitute unlawful tying to the extent that those actions forced Microsoft's customers and consumers to take Internet Explorer as a condition of obtaining Windows. While the Court agrees with plaintiffs, and thus holds that Microsoft is liable for illegal tying under § 1, this conclusion is arguably at variance with a decision of the U.S. Court of Appeals for the D.C. Circuit in a closely related case, and must therefore be explained in some detail. Whether the decisions are indeed inconsistent is not for this Court to say.

The decision of the D.C. Circuit in question is United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998) ("Microsoft II") which is itself related to an earlier decision of the same Circuit, United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995) ("Microsoft I"). The history of the controversy is sufficiently set forth in the appellate opinions and need not be recapitulated here, except to state that those decisions anticipated the instant case, and that Microsoft II sought to guide this Court, insofar as practicable, in the further proceedings it fully expected to ensue on the tying issue. Nevertheless, upon reflection this Court does not believe the D.C. Circuit intended Microsoft II to state a controlling rule of law for purposes of this case. As the Microsoft II court itself acknowledged, the issue before it was the construction to be placed upon a single provision of a consent decree that, although animated by antitrust considerations, was nevertheless still primarily a matter of determining contractual intent. The court of appeals' observations on the extent to which software product design decisions may be subject to judicial scrutiny in the course of § 1 tying cases are in the strictest sense obiter dicta, and are thus not formally binding. Nevertheless, both prudence and the deference this Court owes to pronouncements of its own Circuit oblige that it follow in the direction it is pointed until the trail falters.

The majority opinion in Microsoft II evinces both an extraordinary degree of respect for changes (including "integration") instigated by designers of technological products, such as software, in the name of product "improvement," and a corresponding lack of confidence in the ability of the courts to distinguish between improvements in fact and improvements in name only, made for anticompetitive purposes. Read literally, the D.C. Circuit's opinion appears to immunize any product design (or, at least, software product design) from antitrust scrutiny, irrespective of its effect upon competition, if the software developer can postulate any "plausible claim" of advantage to its arrangement of code. 147 F.3d at 950.

This undemanding test appears to this Court to be inconsistent with the pertinent Supreme Court precedents in at least three respects. First, it views the market from the defendant's perspective, or, more precisely, as the defendant would like to have the market viewed. Second, it ignores reality: The claim of advantage need only be plausible; it need not be proved. Third, it dispenses with any balancing of the hypothetical advantages against any anticompetitive effects.

The two most recent Supreme Court cases to have addressed the issue of product and market definition in the context of Sherman Act tying claims are Jefferson Parish, supra, and Eastman Kodak, supra. In Jefferson Parish, the Supreme Court held that a hospital offering hospital services and anesthesiology services as a package could not be found to have violated the anti-tying rules unless the evidence established that patients, i.e. consumers, perceived the services as separate products for which they desired a choice, and that the package had the effect of forcing the patients to purchase an unwanted product. 466 U.S. at 21-24, 28-29. In Eastman Kodak the Supreme Court held that a manufacturer of photocopying and micrographic equipment, in agreeing to sell replacement parts for its machines only to those customers who also agreed to purchase repair services from it as well, would be guilty of tying if the evidence at trial established the existence of consumer demand for parts and services separately. 504 U.S. at 463.

Both defendants asserted, as Microsoft does here, that the tied and tying products were in reality only a single product, or that every item was traded in a single market.(3) In Jefferson Parish, the defendant contended that it offered a "functionally integrated package of services" - a single product - but the Supreme Court concluded that the "character of the demand" for the constituent components, not their functional relationship, determined whether separate "products" were actually involved. 466 U.S. at 19. In Eastman Kodak, the defendant postulated that effective competition in the equipment market precluded the possibility of the use of market power anticompetitively in any after-markets for parts or services: Sales of machines, parts, and services were all responsive to the discipline of the larger equipment market. The Supreme Court declined to accept this premise in the absence of evidence of "actual market realities," 504 U.S. at 466-67, ultimately holding that "the proper market definition in this case can be determined only after a factual inquiry into the 'commercial realities' faced by consumers." Id. at 482 (quoting United States v. Grinnell Corp., 384 U.S. 563, 572 (1966)).(4)

In both Jefferson Parish and Eastman Kodak, the Supreme Court also gave consideration to certain theoretical "valid business reasons" proffered by the defendants as to why the arrangements should be deemed benign. In Jefferson Parish, the hospital asserted that the combination of hospital and anesthesia services eliminated multiple problems of scheduling, supply, performance standards, and equipment maintenance. 466 U.S. at 43-44. The manufacturer in Eastman Kodak contended that quality control, inventory management, and the prevention of free riding justified its decision to sell parts only in conjunction with service. 504 U.S. at 483. In neither case did the Supreme Court find those justifications sufficient if anticompetitive effects were proved. Id. at 483-86; Jefferson Parish, 466 U.S. at 25 n.42. Thus, at a minimum, the admonition of the D.C. Circuit in Microsoft II to refrain from any product design assessment as to whether the "integration" of Windows and Internet Explorer is a "net plus," deferring to Microsoft's "plausible claim" that it is of "some advantage" to consumers, is at odds with the Supreme Court's own approach.

The significance of those cases, for this Court's purposes, is to teach that resolution of product and market definitional problems must depend upon proof of commercial reality, as opposed to what might appear to be reasonable. In both cases the Supreme Court instructed that product and market definitions were to be ascertained by reference to evidence of consumers' perception of the nature of the products and the markets for them, rather than to abstract or metaphysical assumptions as to the configuration of the "product" and the "market." Jefferson Parish, 466 U.S. at 18; Eastman Kodak, 504 U.S. at 481-82. In the instant case, the commercial reality is that consumers today perceive operating systems and browsers as separate "products," for which there is separate demand. Findings ¶¶ 149-54. This is true notwithstanding the fact that the software code supplying their discrete functionalities can be commingled in virtually infinite combinations, rendering each indistinguishable from the whole in terms of files of code or any other taxonomy. Id. ¶¶ 149-50, 162-63, 187-91.

Proceeding in line with the Supreme Court cases, which are indisputably controlling, this Court first concludes that Microsoft possessed "appreciable economic power in the tying market," Eastman Kodak, 504 U.S. at 464, which in this case is the market for Intel-compatible PC operating systems. See Jefferson Parish, 466 U.S. at 14 (defining market power as ability to force purchaser to do something that he would not do in competitive market); see also Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 504 (1969) (ability to raise prices or to impose tie-ins on any appreciable number of buyers within the tying product market is sufficient). While courts typically have not specified a percentage of the market that creates the presumption of "market power," no court has ever found that the requisite degree of power exceeds the amount necessary for a finding of monopoly power. See Eastman Kodak, 504 U.S. at 481. Because this Court has already found that Microsoft possesses monopoly power in the worldwide market for Intel-compatible PC operating systems (i.e., the tying product market), Findings ¶¶ 18-67, the threshold element of "appreciable economic power" is a fortiori met.

Similarly, the Court's Findings strongly support a conclusion that a "not insubstantial" amount of commerce was foreclosed to competitors as a result of Microsoft's decision to bundle Internet Explorer with Windows. The controlling consideration under this element is "simply whether a total amount of business" that is "substantial enough in terms of dollar-volume so as not to be merely de minimis" is foreclosed. Fortner, 394 U.S. at 501; cf. International Salt Co. v. United States, 332 U.S. 392, 396 (1947) (unreasonable per se to foreclose competitors from any substantial market by a tying arrangement).

Although the Court's Findings do not specify a dollar amount of business that has been foreclosed to any particular present or potential competitor of Microsoft in the relevant market,(5) including Netscape, the Court did find that Microsoft's bundling practices caused Navigator's usage share to drop substantially from 1995 to 1998, and that as a direct result Netscape suffered a severe drop in revenues from lost advertisers, Web traffic and purchases of server products. It is thus obvious that the foreclosure achieved by Microsoft's refusal to offer Internet Explorer separately from Windows exceeds the Supreme Court's de minimis threshold. See Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1341 (9th Cir. 1984) (citing Fortner).

The facts of this case also prove the elements of the forced bundling requirement. Indeed, the Supreme Court has stated that the "essential characteristic" of an illegal tying arrangement is a seller's decision to exploit its market power over the tying product "to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms." Jefferson Parish, 466 U.S. at 12. In that regard, the Court has found that, beginning with the early agreements for Windows 95, Microsoft has conditioned the provision of a license to distribute Windows on the OEMs' purchase of Internet Explorer. Findings ¶¶ 158-65. The agreements prohibited the licensees from ever modifying or deleting any part of Windows, despite the OEMs' expressed desire to be allowed to do so. Id. ¶¶ 158, 164. As a result, OEMs were generally not permitted, with only one brief exception, to satisfy consumer demand for a browserless version of Windows 95 without Internet Explorer. Id. ¶¶ 158, 202. Similarly, Microsoft refused to license Windows 98 to OEMs unless they also agreed to abstain from removing the icons for Internet Explorer from the desktop. Id. ¶ 213. Consumers were also effectively compelled to purchase Internet Explorer along with Windows 98 by Microsoft's decision to stop including Internet Explorer on the list of programs subject to the Add/Remove function and by its decision not to respect their selection of another browser as their default. Id. ¶¶ 170-72.

The fact that Microsoft ostensibly priced Internet Explorer at zero does not detract from the conclusion that consumers were forced to pay, one way or another, for the browser along with Windows. Despite Microsoft's assertion that the Internet Explorer technologies are not "purchased" since they are included in a single royalty price paid by OEMs for Windows 98, see Microsoft's Proposed Conclusions of Law at 12-13, it is nevertheless clear that licensees, including consumers, are forced to take, and pay for, the entire package of software and that any value to be ascribed to Internet Explorer is built into this single price. See United States v. Microsoft Corp., Nos. CIV. A. 98-1232, 98-1233, 1998 WL 614485, *12 (D.D.C., Sept. 14, 1998); IIIA Philip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 760b6, at 51 (1996) ("[T]he 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."). Moreover, the purpose of the Supreme Court's "forcing" inquiry is to expose those product bundles that raise the cost or difficulty of doing business for would-be competitors to prohibitively high levels, thereby depriving consumers of the opportunity to evaluate a competing product on its relative merits. It is not, as Microsoft suggests, simply to punish firms on the basis of an increment in price attributable to the tied product. See Fortner, 394 U.S. at 512-14 (1969); Jefferson Parish, 466 U.S. at 12-13.

As for the crucial requirement that Windows and Internet Explorer be deemed "separate products" for a finding of technological tying liability, this Court's Findings mandate such a conclusion. Considering the "character of demand" for the two products, as opposed to their "functional relation," id. at 19, Web browsers and operating systems are "distinguishable in the eyes of buyers." Id.; Findings ¶¶ 149-54. Consumers often base their choice of which browser should reside on their operating system on their individual demand for the specific functionalities or characteristics of a particular browser, separate and apart from the functionalities afforded by the operating system itself. Id. ¶¶ 149-51. Moreover, the behavior of other, lesser software vendors confirms that it is certainly efficient to provide an operating system and a browser separately, or at least in separable form. Id. ¶ 153. Microsoft is the only firm to refuse to license its operating system without a browser. Id.; seeBerkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 287 (2d Cir. 1979). This Court concludes that Microsoft's decision to offer only the bundled - "integrated" - version of Windows and Internet Explorer derived not from technical necessity or business efficiencies; rather, it was the result of a deliberate and purposeful choice to quell incipient competition before it reached truly minatory proportions.

The Court is fully mindful of the reasons for the admonition of the D.C. Circuit in Microsoft II of the perils associated with a rigid application of the traditional "separate products" test to computer software design. Given the virtually infinite malleability of software code, software upgrades and new application features, such as Web browsers, could virtually always be configured so as to be capable of separate and subsequent installation by an immediate licensee or end user. A court mechanically applying a strict "separate demand" test could improvidently wind up condemning "integrations" that represent genuine improvements to software that are benign from the standpoint of consumer welfare and a competitive market. Clearly, this is not a desirable outcome. Similar concerns have motivated other courts, as well as the D.C. Circuit, to resist a strict application of the "separate products" tests to similar questions of "technological tying." See, e.g., Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 542-43 (9th Cir. 1983); Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307, 1330 (5th Cir. 1976); Telex Corp. v. IBM Corp., 367 F. Supp. 258, 347 (N.D. Okla. 1973).

To the extent that the Supreme Court has spoken authoritatively on these issues, however, this Court is bound to follow its guidance and is not at liberty to extrapolate a new rule governing the tying of software products. Nevertheless, the Court is confident that its conclusion, limited by the unique circumstances of this case, is consistent with the Supreme Court's teaching to date.(6)

B. Exclusive Dealing Arrangements

Microsoft's various contractual agreements with some OLSs, ICPs, ISVs, Compaq and Apple are also called into question by plaintiffs as exclusive dealing arrangements under the language in § 1 prohibiting "contract[s] . . . in restraint of trade or commerce . . . ." 15 U.S.C. § 1. As detailed in §I.A.2, supra, each of these agreements with Microsoft required the other party to promote and distribute Internet Explorer to the partial or complete exclusion of Navigator. In exchange, Microsoft offered, to some or all of these parties, promotional patronage, substantial financial subsidies, technical support, and other valuable consideration. Under the clear standards established by the Supreme Court, these types of "vertical restrictions" are subject to a Rule of Reason analysis. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977); Jefferson Parish, 466 U.S. at 44-45 (O'Connor, J., concurring); cf. Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 724-26 (1988) (holding that Rule of Reason analysis presumptively applies to cases brought under § 1 of the Sherman Act).

Acknowledging that some exclusive dealing arrangements may have benign objectives and may create significant economic benefits, see Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 333-35 (1961), courts have tended to condemn under the § 1 Rule of Reason test only those agreements that have the effect of foreclosing a competing manufacturer's brands from the relevant market. More specifically, courts are concerned with those exclusive dealing arrangements that work to place so much of a market's available distribution outlets in the hands of a single firm as to make it difficult for other firms to continue to compete effectively, or even to exist, in the relevant market. See U.S. Healthcare Inc. v. Healthsource, Inc., 986 F.2d 589, 595 (1st Cir. 1993); Interface Group, Inc. v. Massachusetts Port Authority, 816 F.2d 9, 11 (1st Cir. 1987) (relying upon III Phillip E. Areeda & Donald F. Turner, Antitrust Law ¶ 732 (1978), Tampa Electric, 365 U.S. at 327-29, and Standard Oil Co. v. United States, 337 U.S. 293 (1949)).

To evaluate an agreement's likely anticompetitive effects, courts have consistently looked at a variety of factors, including: (1) the degree of exclusivity and the relevant line of commerce implicated by the agreements' terms; (2) whether the percentage of the market foreclosed by the contracts is substantial enough to import that rivals will be largely excluded from competition; (3) the agreements' actual anticompetitive effect in the relevant line of commerce; (4) the existence of any legitimate, procompetitive business justifications offered by the defendant; (5) the length and irrevocability of the agreements; and (6) the availability of any less restrictive means for achieving the same benefits. See, e.g., Tampa Electric, 365 U.S. at 326-35; Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 392-95 (7th Cir. 1984); see also XI Herbert Hovenkamp, Antitrust Law ¶ 1820 (1998).

Where courts have found that the agreements in question failed to foreclose absolutely outlets that together accounted for a substantial percentage of the total distribution of the relevant products, they have consistently declined to assign liability. See, e.g., id. ¶ 1821; U.S. Healthcare, 986 F.2d at 596-97; Roland Mach. Co., 749 F.2d at 394 (failure of plaintiff to meet threshold burden of proving that exclusive dealing arrangement is likely to keep at least one significant competitor from doing business in relevant market dictates no liability under § 1). This Court has previously observed that the case law suggests that, unless the evidence demonstrates that Microsoft's agreements excluded Netscape altogether from access to roughly forty percent of the browser market, the Court should decline to find such agreements in violation of § 1. See United States v. Microsoft Corp., Nos. CIV. A. 98-1232, 98-1233, 1998 WL 614485, at *19 (D.D.C. Sept. 14, 1998) (citing cases that tended to converge upon forty percent foreclosure rate for finding of § 1 liability).

The only agreements revealed by the evidence which could be termed so "exclusive" as to merit scrutiny under the § 1 Rule of Reason test are the agreements Microsoft signed with Compaq, AOL and several other OLSs, the top ICPs, the leading ISVs, and Apple. The Findings of Fact also establish that, among the OEMs discussed supra, Compaq was the only one to fully commit itself to Microsoft's terms for distributing and promoting Internet Explorer to the exclusion of Navigator. Beginning with its decisions in 1996 and 1997 to promote Internet Explorer exclusively for its PC products, Compaq essentially ceased to distribute or pre-install Navigator at all in exchange for significant financial remuneration from Microsoft. Findings ¶¶ 230-34. AOL's March 12 and October 28, 1996 agreements with Microsoft also guaranteed that, for all practical purposes, Internet Explorer would be AOL's browser of choice, to be distributed and promoted through AOL's dominant, flagship online service, thus leaving Navigator to fend for itself. Id. ¶¶ 287-90, 293-97. In light of the severe shipment quotas and promotional restrictions for third-party browsers imposed by the agreements, the fact that Microsoft still permitted AOL to offer Navigator through a few subsidiary channels does not negate this conclusion. The same conclusion as to exclusionary effect can be drawn with respect to Microsoft's agreements with AT&T WorldNet, Prodigy and CompuServe, since those contract terms were almost identical to the ones contained in AOL's March 1996 agreement. Id. ¶¶ 305-06.

Microsoft also successfully induced some of the most popular ICPs and ISVs to commit to promote, distribute and utilize Internet Explorer technologies exclusively in their Web content in exchange for valuable placement on the Windows desktop and technical support. Specifically, the "Top Tier" and "Platinum" agreements that Microsoft formed with thirty-four of the most popular ICPs on the Web ensured that Navigator was effectively shut out of these distribution outlets for a significant period of time. Id. ¶¶ 317-22, 325-26, 332. In the same way, Microsoft's "First Wave" contracts provided crucial technical information to dozens of leading ISVs that agreed to make their Web-centric applications completely reliant on technology specific to Internet Explorer. Id. ¶¶ 337, 339-40. Finally, Apple's 1997 Technology Agreement with Microsoft prohibited Apple from actively promoting any non-Microsoft browsing software in any way or from pre-installing a browser other than Internet Explorer. Id. ¶¶ 350-52. This arrangement eliminated all meaningful avenues of distribution of Navigator through Apple. Id.

Notwithstanding the extent to which these "exclusive" distribution agreements preempted the most efficient channels for Navigator to achieve browser usage share, however, the Court concludes that Microsoft's multiple agreements with distributors did not ultimately deprive Netscape of the ability to have access to every PC user worldwide to offer an opportunity to install Navigator. Navigator can be downloaded from the Internet. It is available through myriad retail channels. It can (and has been) mailed directly to an unlimited number of households. How precisely it managed to do so is not shown by the evidence, but in 1998 alone, for example, Netscape was able to distribute 160 million copies of Navigator, contributing to an increase in its installed base from 15 million in 1996 to 33 million in December 1998. Id. ¶ 378. As such, the evidence does not support a finding that these agreements completely excluded Netscape from any constituent portion of the worldwide browser market, the relevant line of commerce.

The fact that Microsoft's arrangements with various firms did not foreclose enough of the relevant market to constitute a § 1 violation in no way detracts from the Court's assignment of liability for the same arrangements under § 2. As noted above, all of Microsoft's agreements, including the non-exclusive ones, severely restricted Netscape's access to those distribution channels leading most efficiently to the acquisition of browser usage share. They thus rendered Netscape harmless as a platform threat and preserved Microsoft's operating system monopoly, in violation of § 2. But virtually all the leading case authority dictates that liability under § 1 must hinge upon whether Netscape was actually shut out of the Web browser market, or at least whether it was forced to reduce output below a subsistence level. The fact that Netscape was not allowed access to the most direct, efficient ways to cause the greatest number of consumers to use Navigator is legally irrelevant to a final determination of plaintiffs' § 1 claims.

Other courts in similar contexts have declined to find liability where alternative channels of distribution are available to the competitor, even if those channels are not as efficient or reliable as the channels foreclosed by the defendant. In Omega Environmental, Inc. v. Gilbarco, Inc., 127 F.3d 1157 (9th Cir. 1997), for example, the Ninth Circuit found that a manufacturer of petroleum dispensing equipment "foreclosed roughly 38% of the relevant market for sales." 127 F.3d at 1162. Nonetheless, the Court refused to find the defendant liable for exclusive dealing because "potential alternative sources of distribution" existed for its competitors. Id. at 1163. Rejecting plaintiff's argument (similar to the one made in this case) that these alternatives were "inadequate substitutes for the existing distributors," the Court stated that "[c]ompetitors are free to sell directly, to develop alternative distributors, or to compete for the services of existing distributors. Antitrust laws require no more." Id.; accord Seagood Trading Corp. v. Jerrico, Inc., 924 F.2d 1555, 1572-73 (11th Cir. 1991).

III. THE STATE LAW CLAIMS

In their amended complaint, the plaintiff states assert that the same facts establishing liability under §§ 1 and 2 of the Sherman Act mandate a finding of liability under analogous provisions in their own laws. The Court agrees. The facts proving that Microsoft unlawfully maintained its monopoly power in violation of § 2 of the Sherman Act are sufficient to meet analogous elements of causes of action arising under the laws of each plaintiff state.(7) The Court reaches the same conclusion with respect to the facts establishing that Microsoft attempted to monopolize the browser market in violation of § 2,(8) and with respect to those facts establishing that Microsoft instituted an improper tying arrangement in violation of § 1.(9)

The plaintiff states concede that their laws do not condemn any act proved in this case that fails to warrant liability under the Sherman Act. States' Reply in Support of their Proposed Conclusions of Law at 1. Accordingly, the Court concludes that, for reasons identical to those stated in § II.B, supra, the evidence in this record does not warrant finding Microsoft liable for exclusive dealing under the laws of any of the plaintiff states.

Microsoft contends that a plaintiff cannot succeed in an antitrust claim under the laws of California, Louisiana, Maryland, New York, Ohio, or Wisconsin without proving an element that is not required under the Sherman Act, namely, intrastate impact. Assuming that each of those states has, indeed, expressly limited the application of its antitrust laws to activity that has a significant, adverse effect on competition within the state or is otherwise contrary to state interests, that element is manifestly proven by the facts presented here. The Court has found that Microsoft is the leading supplier of operating systems for PCs and that it transacts business in all fifty of the United States. Findings ¶ 9.(10) It is common and universal knowledge that millions of citizens of, and hundreds, if not thousands, of enterprises in each of the United States and the District of Columbia utilize PCs running on Microsoft software. It is equally clear that certain companies that have been adversely affected by Microsoft's anticompetitive campaign - a list that includes IBM, Hewlett-Packard, Intel, Netscape, Sun, and many others - transact business in, and employ citizens of, each of the plaintiff states. These facts compel the conclusion that, in each of the plaintiff states, Microsoft's anticompetitive conduct has significantly hampered competition.

Microsoft once again invokes the federal Copyright Act in defending against state claims seeking to vindicate the rights of OEMs and others to make certain modifications to Windows 95 and Windows 98. The Court concludes that these claims do not encroach on Microsoft's federally protected copyrights and, thus, that they are not pre-empted under the Supremacy Clause. The Court already concluded in § I.A.2.a.i, supra, that Microsoft's decision to bundle its browser and impose first-boot and start-up screen restrictions constitute independent violations of § 2 of the Sherman Act. It follows as a matter of course that the same actions merit liability under the plaintiff states' antitrust and unfair competition laws. Indeed, the parties agree that the standards for liability under the several plaintiff states' antitrust and unfair competition laws are, for the purposes of this case, identical to those expressed in the federal statute. States' Reply in Support of their Proposed Conclusions of Law at 1; Microsoft's Sur-Reply in Response to the States' Reply at 2 n.1. Thus, these state laws cannot "stand[] as an obstacle to" the goals of the federal copyright law to any greater extent than do the federal antitrust laws, for they target exactly the same type of anticompetitive behavior. Hines v. Davidowitz, 312 U.S. 52, 67 (1941). The Copyright Act's own preemption clause provides that "[n]othing in this title annuls or limits any rights or remedies under the common law or statutes of any State with respect to . . . activities violating legal or equitable rights that are not equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 . . . ." 17 U.S.C. § 301(b)(3). Moreover, the Supreme Court has recognized that there is "nothing either in the language of the copyright laws or in the history of their enactment to indicate any congressional purpose to deprive the states, either in whole or in part, of their long-recognized power to regulate combinations in restraint of trade." Watson v. Buck, 313 U.S. 387, 404 (1941). See also Allied Artists Pictures Corp. v. Rhodes, 496 F. Supp. 408, 445 (S.D. Ohio 1980), aff'd in relevant part, 679 F.2d 656 (6th Cir. 1982) (drawing upon similarities between federal and state antitrust laws in support of notion that authority of states to regulate market practices dealing with copyrighted subject matter is well-established); cf. Hines, 312 U.S. at 67 (holding state laws preempted when they "stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress").

The Court turns finally to the counterclaim that Microsoft brings against the attorneys general of the plaintiff states under 42 U.S.C. § 1983. In support of its claim, Microsoft argues that the attorneys general are seeking relief on the basis of state laws, repeats its assertion that the imposition of this relief would deprive it of rights granted to it by the Copyright Act, and concludes with the contention that the attorneys general are, "under color of" state law, seeking to deprive Microsoft of rights secured by federal law - a classic violation of 42 U.S.C. § 1983.

Having already addressed the issue of whether granting the relief sought by the attorneys general would entail conflict with the Copyright Act, the Court rejects Microsoft's counterclaim on yet more fundamental grounds as well: It is inconceivable that their resort to this Court could represent an effort on the part of the attorneys general to deprive Microsoft of rights guaranteed it under federal law, because this Court does not possess the power to act in contravention of federal law. Therefore, since the conduct it complains of is the pursuit of relief in federal court, Microsoft fails to state a claim under 42 U.S.C. § 1983. Consequently, Microsoft's request for a declaratory judgment against the states under 28 U.S.C. §§ 2201 and 2202 is denied, and the counterclaim is dismissed.

Thomas Penfield Jackson U.S. District Judge

1. Proof that the defendant's conduct was motivated by a desire to prevent other firms from competing on the merits can contribute to a finding that the conduct has had, or will have, the intended, exclusionary effect. See United States v. United States Gypsum Co., 438 U.S. 422, 436 n.13 (1978) ("consideration of intent may play an important role in divining the actual nature and effect of the alleged anticompetitive conduct").

2. While Microsoft is correct that some courts have also recognized the right of a copyright holder to preserve the "integrity" of artistic works in addition to those rights enumerated in the Copyright Act, the Court nevertheless concludes that those cases, being actions for infringement without antitrust implications, are inapposite to the one currently before it. See, e.g., WGN Continental Broadcasting Co. v. United Video, Inc., 693 F.2d 622 (7th Cir. 1982); Gilliam v. ABC, Inc., 538 F.2d 14 (2d Cir. 1976).

3. Microsoft contends that Windows and Internet Explorer represent a single "integrated product," and that the relevant market is a unitary market of "platforms for software applications." Microsoft's Proposed Conclusions of Law at 49 n.28.

4. In Microsoft II the D.C. Circuit acknowledged it was without benefit of a complete factual record which might alter its conclusion that the "Windows 95/IE package is a genuine integration." 147 F.3d at 952.

5. Most of the quantitative evidence was presented in units other than monetary, but numbered the units in millions, whatever their nature.

6. Amicus curiae Lawrence Lessig has suggested that a corollary concept relating to the bundling of "partial substitutes" in the context of software design may be apposite as a limiting principle for courts called upon to assess the compliance of these products with antitrust law. This Court has been at pains to point out that the true source of the threat posed to the competitive process by Microsoft's bundling decisions stems from the fact that a competitor to the tied product bore the potential, but had not yet matured sufficiently, to open up the tying product market to competition. Under these conditions, the anticompetitive harm from a software bundle is much more substantial and pernicious than the typical tie. See X Phillip E. Areeda, Einer Elhauge & Herbert Hovenkamp, Antitrust Law ¶1747 (1996). A company able to leverage its substantial power in the tying product market in order to force consumers to accept a tie of partial substitutes is thus able to spread inefficiency from one market to the next, id. at 232, and thereby "sabotage a nascent technology that might compete with the tying product but for its foreclosure from the market." III Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1746.1d at 495 (Supp. 1999).

7. See Cal. Bus. & Prof. Code §§ 16720, 16726, 17200 (West 1999); Conn. Gen. Stat. § 35-27 (1999); D.C. Code § 28-4503 (1996); Fla. Stat. chs. 501.204(1), 542.19 (1999); 740 Ill. Comp. Stat. 10/3 (West 1999); Iowa Code § 553.5 (1997); Kan. Stat. §§ 50-101 et seq. (1994); Ky. Rev. Stat. §§ 367.170, 367.175 (Michie 1996); La. Rev. Stat. §§ 51:123, 51:1405 (West 1986); Md. Com. Law II Code Ann. § 11-204 (1990); Mass. Gen. Laws ch. 93A, § 2; Mich. Comp. Laws § 445.773 (1989); Minn. Stat. § 325D.52 (1998); N.M. Stat. § 57-1-2 (Michie 1995); N.Y. Gen. Bus. Law § 340 (McKinney 1998); N.C. Gen. Stat. §§ 75-1.1, 75-2.1 (1999); Ohio Rev. Code §§ 1331.01, 1331.02 (Anderson 1993); Utah Code § 76-10-914 (1999); W.Va. Code § 47-18-4 (1999); Wis. Stat. § 133.03(2) (West 1989 & Supp. 1998).

8. See Cal. Bus. & Prof. Code § 17200 (West 1999); Conn. Gen. Stat. § 35-27 (1999); D.C. Code § 28-4503 (1996); Fla. Stat. chs. 501.204(1), 542.19 (1999); 740 Ill. Comp. Stat. 10/3(3) (West 1999); Iowa Code § 553.5 (1997); Kan. Stat. §§ 50-101 et seq. (1994); Ky. Rev. Stat. §§ 367.170, 367.175 (Michie 1996); La. Rev. Stat. §§ 51:123, 51:1405 (West 1986); Md. Com. Law II Code Ann. § 11-204(a)(2) (1990); Mass. Gen. Laws ch. 93A, § 2; Mich. Comp. Laws § 445.773 (1989); Minn. Stat. § 325D.52 (1998); N.M. Stat. § 57-1-2 (Michie 1995); N.Y. Gen. Bus. Law § 340 (McKinney 1988); N.C. Gen. Stat. §§ 75-1.1, 75-2.1 (1999); Ohio Rev. Code §§ 1331.01, 1331.02 (Anderson 1993); Utah Code § 76-10-914 (1999); W.Va. Code § 47-18-4 (1999); Wis. Stat. § 133.03(2) (West 1989 & Supp. 1998).

9. See Cal. Bus. & Prof. Code §§ 16727, 17200 (West 1999); Conn. Gen. Stat. §§ 35-26, 35-29 (1999); D.C. Code § 28-4502 (1996); Fla. Stat. chs. 501.204(1), 542.18 (1999); 740 Ill. Comp. Stat. 10/3(4) (West 1999); Iowa Code § 553.4 (1997); Kan. Stat. §§ 50-101 et seq. (1994); Ky. Rev. Stat. §§ 367.170, 367.175 (Michie 1996); La. Rev. Stat. §§ 51:122, 51:1405 (West 1986); Md. Com. Law II Code Ann. § 11-204(a)(1) (1990); Mass. Gen. Laws ch. 93A, § 2; Mich. Comp. Laws § 445.772 (1989); Minn. Stat. § 325D.52 (1998); N.M. Stat. § 57-1-1 (Michie 1995); N.Y. Gen. Bus. Law § 340 (McKinney 1988); N.C. Gen. Stat. §§ 75-1.1, 75-2.1 (1999); Ohio Rev. Code §§ 1331.01, 1331.02 (Anderson 1993); Utah Code § 76-10-914 (1999); W.Va. Code § 47-18-3 (1999); Wis. Stat. § 133.03(1) (West 1989 & Supp. 1998).

10. The omission of the District of Columbia from this finding was an oversight on the part of the Court; Microsoft obviously conducts business in the District of Columbia as well.

Copyright © 1995 - 2007 ICB. Inc. All rights reserved. "ICB Toll Free News" is a trademark of ICB Inc. ICB Inc. assumes no responsibility for use or misuse of information contained herein and / or accessible via this site. ICB Inc. cannot and does not vouch for the accuracy and / or usability of any of the contained or linked-to information, and assumes no responsibility for any errors or omissions.