Brief Of Appellee United States Of America : Microsoft Corp. V. U.S.

The United States commenced this action to enforce a court order. That order, a consent decree, was entered as a Final Judgment in a suit brought by the United States to enjoin Microsoft from employing certain terms in its licensing agreements with original equipment manufacturers ("OEMs") that unlawfully maintained Microsoft's monopoly in personal computer ("PC") operating systems ("OSs") in violation of Sections 1 and 2 of the Sherman Act, 15 U.S.C. 1-2. See United States v. Microsoft Corp., 1995-2 Trade Cas. (CCH) ¶ 71,096 (D.D.C 1995).

The Final Judgment terminated those licensing practices. It also prohibited practices beyond those charged in the Complaint. Such additional restrictions are common in antitrust judgments; without them the enjoined party might achieve its anticompetitive goals by using a different device. See International Salt Co. v. United States, 332 U.S. 392, 400 (1947).

As the Internet's World Wide Web ("web") grew increasingly popular, companies developed Internet web browsers, which permit users to find and retrieve documents located on the web. Netscape released its Navigator web browsing product in late 1994 (JA 359). Microsoft responded to the new demand by releasing its own web browser, Internet Explorer, in the summer of 1995 (JA 1276), the same period during which Microsoft released Windows 95.

In response to Microsoft's announcement that it would soon require OEMs to ship the Internet Explorer 4 CD-ROM in the box with new PCs, the United States filed its Petition seeking to hold Microsoft in civil contempt. The United States explained that Section IV(E)(i) of the Final Judgment prohibits Microsoft from conditioning a Windows 95 license on OEMs' licensing what in an ordinary antitrust sense is, and Microsoft itself treats as, a separate product. The United States attached documents, affidavits, and deposition transcripts demonstrating that Internet Explorer and Windows 95 are separate products and, therefore, that Microsoft's plans with respect to Internet Explorer 4, and its ongoing forced licensing to OEMs of Internet Explorer 3, violated Section IV(E)(i) (JA 85-99).

In addition to a judgment of civil contempt, the United States requested permanent injunctive relief. The United States asked the court, inter alia, to order Microsoft to "cease and desist" from requiring OEMs "to license any version of Internet Explorer as an express or implied condition of licensing Windows 95 or any [other] product" covered by the Final Judgment (JA 41). The United States further requested "such orders as the nature of the case may require and as the court may deem just and proper to compel obedience and compliance with the orders and decrees of this Court" (JA 43).

Microsoft responded by filing a lengthy Opposition with several hundred pages of exhibits, including several third-party declarations. Going well beyond the question whether the Court should issue an Order to Show Cause, Microsoft fully addressed the merits (JA 458-76). Recognizing that the United States requested a permanent injunction, which could issue only following a traditional balancing of the equities, see, e.g., Amoco Prod. Co. v. Gambell, 480 U.S. 531, 546 n.12 (1987), Microsoft also addressed in substance whether the requested relief was equitable. Pointing to its several hundred pages of supporting exhibits, Microsoft asserted, among other things, that permitting OEMs the option of shipping Windows 95 without Internet Explorer would "degrade" the OS (JA 449-50, 472-73).

Because the proper reading of Section IV(E)(i) presented the only disputed issue on the merits (JA 982, 1002), the United States, to expedite the dispute's resolution, agreed not to contest pertinent facts concerning the Final Judgment's negotiating history contained in Microsoft affidavits (JA 983). This concession, the United States explained in its Reply Brief, eliminated any genuine issue of material fact and permitted the court to rule on the merits "as a matter of law" (JA 1003). The United States further urged the court to "rule expeditiously" on the legality of Microsoft's impending forced licensing of Internet Explorer 4 because OEMs would "immediately" need to take steps to comply with it (JA 983, 996). Because Microsoft distributed Internet Explorer 4 "only as a separate, stand-alone product," the United States proposed that the court simply prohibit Microsoft from requiring OEMs to license that product (JA 995-96).

At the subsequent hearing, both parties addressed whether Microsoft's conduct violated the decree (JA 1236). While Microsoft requested an evidentiary hearing to explore the decree's negotiating history (JA 1257), it acknowledged that the United States had agreed to treat the pertinent facts of that history asserted by Microsoft as true (JA 1241). Microsoft pointed to no other facts that it believed were both disputed and relevant to determining whether its forced licensing of Internet Explorer to OEMs transgressed the Final Judgment.

The district court issued a ruling on December 11, 1997. The court declined to hold Microsoft in civil contempt, finding Section IV(E)(i)'s application ambiguous (JA 1289-90); but it recognized that it did "not necessarily follow that Microsoft's licensing practices are, in fact, in compliance with the terms of the Final Judgment" (JA 1290). The court accordingly treated the Petition as a request for declaratory and injunctive relief, ordered further proceedings, and referred the matter to a special master to "propose findings of fact and conclusions of law" to be "consider[ed] by the Court" (JA 1301).

Invoking its inherent power to enforce its orders, the court also entered a preliminary injunction. Observing that Microsoft's reading rendered Section IV(E)(i) "essentially meaningless," the court tentatively agreed with the United States that Section IV(E)(i) prohibits Microsoft's forced licensing with Windows of what in an antitrust sense is a separate product (JA 1293). Because the uncontested evidence demonstrated that Internet Explorer and Windows 95 are separate products, the court reasoned that the United States had a substantial probability of success on the merits (JA 1296). The court found that preliminary relief would impose no significant burden on Microsoft (JA 1296-97), and that it would advance the public interest because it appropriately preserved the competitive status quo and the court's ability "to fashion the least disruptive remedy if the evidence warrants" (JA 1295). The court explained that Microsoft's forced licensing of Internet Explorer was of particular concern because rival browsers might develop into a threat to Microsoft's monopoly (JA 1297-98). Because Microsoft's licensing practices might impede the development of such competition and garner for Microsoft "yet another monopoly in the Internet browser market," the court concluded, "[t]hose practices should be abated until it is conclusively determined that they are benign" (JA 1298).

The court accordingly enjoined Microsoft from licensing "any Microsoft personal computer operating system software . . . on the condition, express or implied, that the licensee also license and preinstall any Microsoft Internet browser software" (JA 1300). Reflecting the court's careful refusal to intrude into product design, the Order by its terms does not require Microsoft to terminate the forbidden conditioning in any particular way. Rather, when read in light of the court's objective of ensuring that competition on the merits determine how OEMs meet their separate demand for a web browser (JA 1297-98), the injunction plainly required Microsoft to grant OEMs the option of licensing a commercially viable version of Windows 95 absent that which satisfies that separate demand for a web browser: the ability to browse the web (browser functionality) (JA 1424-29).

The preliminary injunction thus effected no "radical[] alter[ation] of the status quo" (Br. at 13). When the United States brought suit, Microsoft offered Internet Explorer 4 to OEMs only on a separate CD-ROM; Microsoft could (and ultimately did) comply with the court's Order by not effectively requiring OEMs to license that separate disk (or a subsequent version of Windows 95 that placed Internet Explorer 4 on the same OEM installation disk). With respect to Internet Explorer 3, the preliminary injunction did not, as Microsoft asserts, require it to remove every shared program library Microsoft includes with Windows 95 and labels "Internet Explorer 3.0 technologies" (Br. at 13). Rather, Microsoft could have offered OEMs the option of a version of Windows 95 that did not include browser functionality, and could thereby have complied with the preliminary injunction, simply by permitting OEMs to "uninstall" Internet Explorer 3 from OSR 2 using procedures Microsoft built into Windows 95 and advertises to end users (JA 1365, 1422-31).

Although it easily could have complied with the preliminary injunction, Microsoft chose not to do so. Instead, Microsoft read the preliminary injunction to require it to offer OEMs an inoperable version of Windows 95 (JA 1320-22). Because, as Microsoft knew, no OEM would license this commercially worthless product (JA 1280), Microsoft's purported compliance with the preliminary injunction effectively required OEMs wishing to license Windows 95 also to license Microsoft's web browser. In other words, Microsoft read the preliminary injunction to command the very conditioning the court expressly declared must "abat[e]" (JA 1298).

Microsoft seeks to avoid this simple legal principle by arguing that the United States at the December 5 hearing abandoned any request for relief not predicated on a finding of civil contempt (Br. at 25-26). But the district court found no waiver; and that determination is not clearly erroneous. Indeed, when the court asked whether it should read the Petition as a request for "specific enforcement," government counsel responded, "that is exactly how the Court should read it" (JA at 1236). As Microsoft points out, counsel added that the United States "believ[ed] the Court can find Microsoft in contempt and can impose th[e] specific relief to remedy the contempt" (JA at 1236). While that statement confirmed that the United States did not abandon its contempt argument, the colloquy as a whole makes clear that the United States also did not intend to abandon other avenues to terminating Microsoft's unlawful conduct. As counsel for the United States put it in a passage Microsoft omits, "appropriate action by the court would be to find Microsoft's behavior . . . to be a violation of the decree" and to impose injunctive relief (JA 1237-38).

A preliminary injunction's resolution of issues "is designed to be tentative." Aoude v. Mobile Oil Corp., 862 F.2d 890, 894 (1st Cir. 1988). For this reason "an evidentiary hearing is not an indispensable requirement when a court allows . . . a preliminary injunction." Id. at 893. Rather, "in certain settings a matter can adequately be 'heard' on the papers." Id. at 894; see also Ross-Whitney Corp. v. Smith-Kline & French Labs., 207 F.2d 190, 198 (9th Cir. 1953).

Contrary to what Microsoft contends (Br. at 18-19), this is true even when "the written evidence reveals a dispute as to material facts." When disputed issues do not turn on the credibility of affiants or declarants, such as when knowledge and intent are at issue, see, e.g., SEC v. Frank, 388 F.2d 486, 491 (2d Cir. 1968); Sims v. Greene, 161 F.2d 87, 88 (3d Cir. 1947), "the documentary evidence [before the court may be] sufficient to permit an informed, albeit preliminary, conclusion that injunctive relief [is] warranted." Campbell Soup Co. v. Giles, 47 F.3d 467, 472 (1st Cir. 1995); see also e.g., Schultz v. Williams, 38 F.3d 657, 658 (2d Cir.1994) (per curiam); Herbert Rosenthal Jewelry Corp. v. Grossbardt, 428 F.2d 551, 554 (2d Cir. 1970). In light of these principles, the district court did not abuse its discretion in declining to hold an evidentiary hearing here.

Microsoft's argument (Br. at 17-18) based on the district court's failure to notify the parties that it intended to issue a preliminary injunction is without merit. Microsoft relies on Rule 65(a). The Rule's purpose, however, is to permit a party "to marshall the evidence and present arguments against the issuance of the injunction." 11A Charles A. Wright, et al., Federal Practice and Procedure § 2949, at 213 (2d ed. 1995). Microsoft did just that.

Although Microsoft now argues that only a request for an Order to Show Cause was before the district court (Br. at 17), Microsoft did not treat the proceeding as so limited. Instead, it filed a voluminous response replete with assertedly relevant evidence, and joined issue on both the merits of the United States' Petition and the request for permanent injunctive relief. Because the "standard for a preliminary injunction is essentially the same as for a permanent injunction with the exception that the plaintiff must show a likelihood of success on the merits rather than actual success," Amoco Prod. Co. v. Gambell, 480 U.S. 531, 546 n.12 (1987), Microsoft's response to the United States' request for permanent relief effectively addressed the factors that govern the issuance of a preliminary injunction. The request for injunctive relief gave Microsoft notice, and the scope of its response demonstrated that such notice was adequate.

Microsoft argues that it had "no reason to anticipate" that the court might issue a preliminary injunction because "a final judgment ha[d] already been entered in this action" (Br. at 17). It is not "unorthodox" (id.), however, for a court to enter a preliminary injunction to enforce a consent judgment. See, e.g., International Brotherhood of Teamsters v. Teamsters Local Union 714, 109 F.3d 846 (2d Cir. 1997) (per curiam); Xerox Fin. Servs. Life Ins. Co. v. High Plains Ltd. Partnership, 44 F.3d 1033 (1st Cir. 1995); cf. Firefighters Local Union No. 1784 v. Stotts, 467 U.S. 561, 587 (1984) (O'Connor, J., concurring). Nor is it "inappropriate" (Br. at 17) for a court to enforce an outstanding court order, including a consent judgment, on its own motion when the circumstances so warrant. See, e.g., Alberti v. Klevenhagen, 46 F.3d 1347, 1365-66 (5th Cir. 1995) (holding that a court has the discretion "regardless of the parties' silence or inertia, to modify a decree," that is, to act "sua sponte," "when the court sees that the factual circumstances or the law underlying that decree has changed").

Microsoft is also wrong that the "District Court entered [the] preliminary injunction without making any findings of fact" (Br. at 22). "The purpose of Rule 52(a), pertinent to injunctions, is to provide the appellate court with a clear understanding of the decision." Wynn Oil Co. v. Purolator Chem. Corp., 536 F.2d 84, 85 (5th Cir. 1976). Accordingly, contrary to what Microsoft implies (Br. at 22), there is "fair compliance with Rule 52(a)," Mayo v. Lakeland Highlands Canning Co., 309 U.S. 310, 316 (1940), when a "court's opinion, read in conjunction with the record of the proceedings below" provides a "sufficient basis for the court to consider the merits." McCawley v. Ozeanosun Compania Maritime, S.A., 505 F.2d 26, 30 n.4 (5th Cir. 1974); see also Wynn Oil, 566 F.2d at 85-86. See generally 9A Charles A. Wright, et al., Federal Practice and Procedure § 2580, at 549-50 (2d ed. 1995).

Here, the court's Memorandum Opinion more than adequately discloses the "underlying rationale," Inverness Corp. v. Whitehall Labs., 819 F.2d 48, 51 (2d Cir. 1987) (per curiam), for entering the preliminary injunction. The district court addressed each of the four pertinent factors; the court succinctly explained its reasons for finding that each factor pointed toward the injunction's entry; and (as discussed throughout this Brief) the facts supporting the district court's findings are readily apparent from the record. No more was required. See Applewood Landscape & Nursery Co. v. Hollingsworth, 884 F.2d 1502, 1503 (1st Cir. 1989) ("[T]he judge need only make brief, definite, pertinent findings and conclusions upon contested matters; there is no necessity for over-elaboration of detail or particularization of facts." (internal quotations omitted)).

The district court properly entered the preliminary injunction. But even if the court had committed reversible error, this Court should not, as Microsoft insists (Br. at 14), vacate the preliminary injunction. This Court has equitable discretion to keep the injunction intact during the district court's reconsideration of its issuance. See Rosen v. Siegel, 106 F.3d 28, 33 (2d Cir. 1997) (injunction held in place despite district court's "failure to give notice and opportunity to be heard" or to include "specific findings"); see also United States v. Marine Shale Processors, 81 F.3d 1329, 1360 (5th Cir. 1996) (insufficient findings); Inverness Corp. v. Whitehall Labs., 819 F.2d 48, 51 (2d Cir. 1987) (per curiam) (same). This power is appropriately exercised when traditional equitable criteria support the injunction's issuance or it is otherwise inequitable to vacate the injunction. See Rosen, 106 F.3d at 33; Inverness, 819 F.2d at 49.

Here, there are compelling reasons to uphold the injunction. "On the record developed to date, there are sufficiently serious questions going to the merits to be a fair ground for litigation and the balance of hardships tip[s] decidedly" in favor of issuing the injunction. Inverness, 819 F.2d at 51. The district court correctly determined that the United States has a substantial probability of success on the merits. See infra pp.34-40. Compliance with the preliminary injunction imposes on Microsoft no significant burden, see supra pp.23-25, and Microsoft did not even seek a stay. The preliminary injunction also serves the public interest by ensuring that competition on the merits determines which web browsers OEMs license. There is little reason to vacate the preliminary injunction when the district court, based on these considerations, will in all probability reinstate it.

Microsoft, moreover, does not come to this Court with clean hands. Although Microsoft inveighs that the preliminary injunction suffers from numerous procedural defects and "radically alter[ed] the status quo" (Br. at 24), Microsoft neither sought a stay of the district court's order nor asked the court for clarification. Nor did Microsoft bring its objections to the district court through a motion for reconsideration. Rather, "mak[ing] its own determination of what the [injunction] meant," McComb v. Jacksonville Paper Co., 336 U.S. 187, 192 (1949), Microsoft read the Order to require it to offer a product that would not work (JA 1729-30); and Microsoft knew that this would effectively require OEMs wishing to license Windows 95 also to license Internet Explorer web browsing functionality, thereby turning the preliminary injunction on its head and "for all practical purposes[] render[ing it] a nullity," United States v. Greyhound Corp., 508 F.2d 529, 533 (7th Cir. 1974). Having caused the very mischief for which it now blames the district court (Br. at 21), Microsoft should remain subject to the preliminary injunction if the district court is required to reconsider it.

Microsoft further errs in asserting that the district court misapplied tying law principles in finding that Internet Explorer and Windows 95 comprise separate products. Microsoft does not contest the district court's finding that there is separate demand for browsers (including Internet Explorer) apart from OSs (including Windows 95) --------------- and for good reason. The United States adduced ample evidence demonstrating the existence of such demand. Web browsing software, including Internet Explorer, is independently marketed directly to end users through a variety of channels. See supra p.4; see also e.g., JA 378. This is evidence from which antitrust courts commonly find separate demand. See generally 10 Phillip E. Areeda et al., Antitrust Law ¶¶ 1744-45, at 194-224 (1996).

Rather, Microsoft quarrels with the district court's finding of "separate demand for OSs that do not provide web browsing functionality" (Br. at 34). But Microsoft's own documents showed that it designed Internet Explorer 3 to be "uninstalled" from Windows 95, a procedure which eliminates the end-user's ability to browse the web. That Microsoft, a monopolist, voluntarily created this option is particularly telling evidence of separate demand for a browserless OS. See 10 Areeda, supra, ¶ 1744g, at 206. Confirming this, Microsoft's own witness explained at the contempt hearing that Microsoft developed the "uninstall" feature for Internet Explorer 3 precisely because consumers demanded Windows 95 without the ability to browse the web (JA 1685-87, 1691).

In support of its contrary contention, Microsoft points to a declaration asserting that "all modern computer operating systems include Web 'browsing' functionality" (JA 596). But the existence of substantial demand for OSs with web browsing functionality obviously does not preclude the existence of sufficient demand for OSs without such functionality, to which a competitor's product might be added. See In re Data General Corp. Antitrust Litig., 490 F. Supp. 1089, 1104 (N.D. Cal. 1980) ("[T]he relevant inquiry is not whether the two items must be used together but whether the two items must come from the same seller."). To the contrary, consumers commonly use web browsers other than those preinstalled on their PCs (JA 374, 1088; CJA 353, 372, 396). This, along with Microsoft's development of the "uninstall" option, readily evidences the requisite separate demand. See Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 22-23 (1984); In re Data General, 490 F. Supp. at 1108-09 (CPU and memory boards found distinct products, among other reasons, because consumers replaced memory boards with those obtained from competitors).

To the extent Microsoft implies that, even if separate end-user demand for an OS without the ability to browse the web exists, there is no such separate demand by OEMs (Br. at 19, 34-35), Microsoft is wrong. The United States' evidence demonstrated that OEMs have expressed interest in obtaining from Microsoft a version of Windows 95 without operational Internet Explorer web browsing functionality so that OEMs could highlight competing web browsers (JA 156-57, 215-18). This is plainly evidence of OEM demand for a browserless OS. See Jefferson Parish, 466 U.S. at 22-23; In re Data General, 490 F. Supp. at 1108-09.

Indeed, what animates this action is precisely the concern that competition on the merits should determine which web browsers OEMs license. This case does not, as Microsoft contends, involve an attempt "to turn Microsoft into a regulated company" or to impede Microsoft's ability to "innovate" (Br. at 35-36). Microsoft is free to offer any combination of products it chooses; it simply must, as the decree requires, provide meaningful options to ensure that consumer demand --------------- rather than Microsoft's OS monopoly --------------- determines whether those products are purchased. Thus, far from serving "[n]o procompetitive purpose" (Br. at 21 n.3), the United States' present action strives to hold Microsoft to the promise it made not to distort competition by compelling OEMs to license what Microsoft itself treats as a separate product.