Microsoft Anti-Trust Lawsuit

When the Department of Justice and 19 state Attorneys General filed antitrust suits against the Microsoft Corporation, the issue was not whether the company’s industry-dominating Windows software operating system constituted a monopoly. With Windows serving as the command-and-control system for approximately 90 percent of all new personal computers, monopoly power is assumed, and there is nothing illegal about that. The problem, according to Joel I.

Klein, the Justice Department’s antitrust chief, is that Microsoft is ”illegally leveraging its Windows monopoly” in an attempt to squash competition and extend that monopoly to the market for Internet browser software for viewing the World Wide Web. The antitrust laws do not outlaw monopoly or the profits that flow from market power. The various versions of Microsoft’s operating systems over the years, including the version, Windows 95, came to dominate the PC industry by legal means.

Not only has the company been a remarkably effective marketer, but also consumers tend to like having a single operating system because it guarantees that programs running on one person’s computer will also run on almost everyone else’s. Computer makers have catered to that customer preference by setting Windows’ standard. Since 1990, a battle has raged in United States courts between the United States government and the Microsoft Corporation out of Redmond, Washington, headed by Bill Gates.

The federal government maintains that Microsoft’s monopolistic practices are harmful to United States citizens, creating higher prices and potentially downgrading software quality, and should therefore be stopped, while Microsoft and its supporters claim that they are not breaking any laws, and are just doing good business. The suit marks the beginnings of what legal experts say could be a wave of private litigation against Microsoft. The prospect could put additional pressure on the company to settle the antitrust case and thereby lessen its financial risks by avoiding a final ruling with its findings of law.

The big software maker’s vulnerability to private suits increased sharply when Judge Thomas Penfield Jackson issued his findings of fact in the government’s antitrust case against Microsoft. Judge Jackson concluded that Microsoft is a monopoly whose anticompetitive acts have stifled innovation and harmed consumers. Judge Jackson’s findings agreed so strongly with the case presented by the Justice Department and 19 states that antitrust experts say his final verdict, expected early next year, will almost surely find that Microsoft is a monopoly that violated the law.

The big financial threat to Microsoft may come not from corporate suits, in fact, but from class actions on behalf of the millions of users of the company’s industry; standard Windows operating system. Such consumer suits have the potential to cost Microsoft hundreds of millions of dollars, perhaps even billions, in damage claims. “This is the start of the race to get to the courthouse,” observed Stephen Axinn, a partner in Axinn, Veltrop & Harkrider who is an antitrust litigator. “It could be like the tobacco litigation, in the sense that you have lots of plaintiffs’ lawyers in different states sharing information.

Microsoft’s antitrust problems began for them in the early months of 1990 when the Federal Trade Commission began investigating them for possible violations of the Sherman and Clayton Antitrust Acts, which are designed to stop the formation of monopolies. The investigation continued on for the next three years without resolve, until Novell, maker of DR-DOS, a competitor of Microsoft’s MS-DOS, filed a complaint with the Competition Directorate of the European Commission in June of 1993.

Doing this stalled the investigations even more, until finally in August of 1993, the Federal Trade Commission decided to hand the case over to the Department of Justice. The Department of Justice moved quickly, with Anne K. Bingaman, head of the Antitrust Division of the DOJ, leading the way. The case was finally ended on July 15, 1994, with Microsoft signing a consent settlement. The settlement focused on Microsoft’s selling practices with computer manufacturers.

Up until now, Microsoft would sell MS-DOS and Microsoft’s other operating systems to original equipment manufacturers (OEM’s) at a 60% discount if that OEM agreed to pay a royalty to Microsoft for every single computer that they sold regardless if it had a Microsoft operating system installed on it or not. After the settlement, Microsoft would be forced to sell their operating systems according to the number of computers shipped with a Microsoft operating system installed, and not for computers that ran other operating systems.

Another practice that the Justice Department accused Microsoft of was that Microsoft would specify a minimum number of operating systems that the retailer had to buy, thus eliminating any chance for another operating system vendor to get their system installed until the retailer had installed all of the Microsoft operating systems that it had installed. In addition to specifying a minimum number of operating systems that a vendor had to buy, Microsoft also would sign contracts with the vendors for long periods of time such as two or three years.

In order for a new operating system to gain popularity, it would have to do so quickly, in order to show potential buyers that it was worth something. With Microsoft signing long-term contracts, they eliminated the chance for a new operating system to gain the popularity needed, quickly. Another controversial issue, besides the per processor agreement, was Microsoft’s practice of tying. Tying was a practice in which Microsoft would use their leverage in one market area, such as graphical user interfaces, to gain leverage in another market, such as operating systems, where they may have competition.

In the preceding example, Microsoft would use their graphical user interface, Windows, to sell their operating system, DOS, by offering discounts to manufacturers that purchased both MS-DOS and Windows, and threatening to not sell Windows to companies who did not also purchase DOS. With Microsoft creating the standards for the rest of the computer industry, they are able to create better standards and build them much faster than if an outside organization or committee were to create them.

With these standards set, other companies are able to create their applications and other products that much faster, and better, and thus the customers receive that much better of a product. Jesse Berst, editorial director of Windows Watcher newsletter out of Redmond, Washington, and the executive director of the Windows Solutions Conference, says it best with this statement: “To use a railroad analogy, Microsoft builds the tracks on which the rest of the industry ships its products. ” On November 5, 1999, District Judge Thomas Penfield Jackson declared one of the leading software companies in the world, a monopoly.

The United States’ government has what are called, antitrust laws, which prevent a company from having a monopoly on a market. The US charged Microsoft with violations of these laws, stating that they were thwarting such competitors as, Netscape Navigator, and other web browsers. The US justice department has accused Microsoft of being “engaged in massive anticompetitive practices. ” Bill Gates, owner of Microsoft, believes that the practices of Microsoft are in no way that of a monopoly, and are just forms of very aggressive competition.

It is estimated that any sanctions that Microsoft faces will be appealed for years to come, prolonging this case. Judge Penfield has not ruled on whether Microsoft has broken the antitrust laws set forth by the government; and it will be years before the judge sets the penalties for these infractions. The decision of Jackson was announced after the closing of the stock market, and the market is closed for a week after this decision. This is good news, because many economists feared a large dive due to this recent decision.

The court evaluated thousands of pages of electronic mail, and 76 days of testimony, and came to the conclusion that Microsoft was partaking in anticompetitive practices. Jackson stated that “Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition. ” The government will continue this case against Microsoft and continue to push for the penalties to be presented to the corporate giant.

The ideas that the justice system has to punishing Microsoft range from, forcing the license of Windows to be distributed to other competitors, large fines, or breaking up Microsoft into smaller divisions. The process of serving the punishment will take a very long time, but one can ensure that the penalties will be great. The first thing that proponents of Microsoft being split up argue that although Microsoft has created all kinds of standards for the computer software industry, in today’s world, we don’t necessarily need standards.

Competing technologies can coexist in today’s society, without the need for standards set by an external body or by alone company such as Microsoft. A good analogy for this position is given in the paper, “A Case Against Microsoft: Myth Number 4. ” In this article, the author states that people who think that we need such standards, give the example of the home video cassette industry of the late 1970’s. He says that these people point out that in the battle between the VHS and Beta video formats, VHS won not because it was a superior product, but because it was more successfully marketed.

He then goes to point out that buying an operating system for a computer is nothing at all like purchasing a VCR, because the operating system of a computer defines that computer’s personality, whereas a VCR’s only function is to play movies, and both VHS and Beta do the job equally. The Bush transition officials would not comment on the case. A well-informed Bush adviser said the Bush Justice Department was likely to carry the suit forward through the present Court of Appeals case.

But if the Court of Appeals rules in Microsoft’s favor, as this adviser and many Microsoft supporters expect, then the Justice Department would not be likely to appeal that loss to the Supreme Court, the adviser added. ”This is not a case George W. Bush would have brought in the first place,” he said. When asked about the Microsoft case in that news conference last spring, Mr. Bush said: ”I am not sympathetic to lawsuits. Write that down. I worry about lawsuits on job creation. If you are looking for the kind of president I will be, I will be slow to litigate.

If the Bush administration backed off of the case, Microsoft would not walk away free and clear. Nineteen state attorneys general are partners in the litigation, and they say they will pursue their case — including the breakup order — no matter what the federal government may do. ”If they were to settle the case on terms that were weaker than we believe should be accepted, we would not agree to that settlement,” said Tom Miller, the attorney general of Iowa and the leader of the 19 state attorneys general pursuing the case.

He added that he and the other attorneys general believe the judge’s breakup order is ”the right remedy. ” Nonetheless, the problem for Microsoft is that two suits were filed against the company in May 1998. One was filed by the Justice Department, the other by the states. Since they are quite similar, the two suits were consolidated for trial, and the Court of Appeals is hearing them together — though all appellate court communications list them separately. If the Justice Department dropped its case, the states’ case would still be alive with full legal standing.

Mr. Miller said he had sensed no equivocation or back-pedaling in his 19-state coalition. If the federal government settles the case but the states do not, he added, ”then they are no longer in the case but we are. ” The states would probably appeal a loss in the appellate court, he added. Even before those decisions must be made, the Bush administration, whatever its enthusiasm for the case, will have to argue it before the Court of Appeals. Yet the Bush administration adopted a narrower reading of the appeals court decision — more in line with the position of the Microsoft legal team and some legal experts.

The appeals court decision did express a reluctance for having the judiciary meddle in software design decisions, though it also found that Microsoft had illegally ”commingled” code when it bundled its browser with Windows. The Justice Department took to heart the court’s cautionary words on product design. ”This settlement seems to closely track the appeals court ruling,” said George L. Priest, a professor at the Yale law school, who has consulted for Microsoft occasionally. ”The approach is, ‘Let’s not impair innovation, but let’s stop the harsh practices that have nothing to do with innovation. ‘ ”

The tentative settlement would prohibit Microsoft from entering into pricing deals and contracts with personal computer makers that effectively force them to favor Microsoft products over rival offerings. The settlement would also allow PC makers to remove the desktop icons that link to Microsoft products like its Internet Explorer browser, media player and instant messaging software. But industry rivals say that as long as Microsoft can bundle these products into Windows, PC makers are unlikely to remove the link to Microsoft’s products and feature competing software instead — unless the non-Microsoft offering is vastly superior.

With all the information that has been presented for both sides of the issue, you are probably left in a daze, not knowing what to think. Is Microsoft good? Or is Microsoft bad? Well, the answer is a little bit of both. Even though the Justice Department found that Microsoft might be practicing some techniques that are less than ethical, they did not find that Microsoft was breaking any anti-trust laws, nor did Microsoft actually admit to the accusations when they signed the agreement. If anything, them signing the agreement was more of a sorry than an full-fledged admission of guilt.

Other people might disagree with me, and there might be a lot of allegations floating around from different companies, but the fact of the matter is plain and simple. Microsoft has not been formerly charged and found guilty of any illegal practices pertaining to them being a monopoly. When considering whether a monopoly should persist or not the factors must be examined closely. Whether or not the consumers are being exploited is something that is essential when contemplating the break-up of a monopolistic firm. Often times, and in the case of Microsoft, the consumers benefit from the monopoly.

After more than three years of litigation, repeated courtroom setbacks and failed settlement talks, Microsoft is apparently on the verge of emerging largely successful from its long antitrust battle. Microsoft’s tentative agreement with the Justice Department would not require it to alter the design or development of its products and would not change its strategy of aggressively moving into new markets. To be sure, uncertainties remain for Microsoft. The 18 states that joined the Justice Department in the suit may bolt from the settlement.

The European Commission has a broad investigation of the big software maker under way, and Brussels may well prove less malleable than the Bush administration. While Microsoft may be limiting its competition, it is aiding the consumer. For it is able to charge a lower price and produce more efficiently because of smaller costs than if it existed in a purely competitive industry. Moreover, Microsoft is not the stereotypical monopoly, in that it continues to innovate — how else are upgrades to its present software explained.

Thus, by rule of reason it would not be right to break-up this firm, for its existence is beneficial to the public. Slight regulatory action may be needed though in order to provide its competitors with more of a fighting chance. Competition still exists though and in the unpredictable industry of technology a firm can plummet and rise swiftly (IBM, for example, replaced Apple Computers in the early 1980s, but was soon ousted by the income bent Microsoft). I think the lawsuit should have not been brought, because breaking up Microsoft into smaller companies would just create confusion in the marketplace.

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