Microsoft Tunney Act Comment : U.S. Senate

PATRICK J. LEAHY, VERMONT, CHAIRMAN		United States Senate COMMITTEE ON THE JUDICIARY WASHINGTON, DC 20510-6275
EDWARD M. KENNEDY, MASSACHUSETTS JOSEPH R BIDEN. JR., DELAWARE HERBERT KOHL WISCONSIN DIANNE FEINSTEIN, CALIFORNIA RUSSELL D FEINGOLD, WISCONSIN CHARLES E. SCHUMER. NEW YORK RICHARD J. DURBIN ILLINOIS MARIA CANTWELL. WASHINGTON JOHN EDWARDS. NORTH CAROLINA	ORRIN G. HATCH, UTAH STROM THURMOND, SOUTH CAROLINA CHARLES E. GRASSLEY, IOWA ARLEN SPECTER, PENNSYLVANIA JON KYL, ARIZONA MIKE DEWINE, OHIO JEFF SESSIONS, ALABAMA SAM BROWNBACK, KANSAS MITCH McCONNELL, KENTUCKY

Ms. Renata Hesse
Trial Attorney
U.S. Department of Justice - Antitrust Division
325 7^th Street NW Suite 500
Washington, D.C. 20530

We enclose the hearing record from the Judiciary Committee's December 12, 2001 hearing, "The Microsoft Settlement: A Look to the Future," as a public comment pursuant to the Tunney Act's public comment provision, 15 U.S.C § 16(d), for the Department's or the Court's use as it deems appropriate.

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PATRICK J. LEAHY
Chairman

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ORRIN G. HATCH
Ranking Republican Member

Witness List
Senate Committee on the Judiciary
"The Microsoft Settlement: A Look to the Future"
Wednesday, December 12, 2001
10:00 a.m.
106 Dirksen Senate Office Building

PANEL I

The Honorable Charles A. James
Assistant Attorney General for the Antitrust Division
United States Department of Justice
Washington, DC

PANEL II

Jay Himes
Chief, Antitrust Bureau
Office of the New York State Attorney General
New York, NY

Charles F. Rule
Fried, Frank, Harris, Shriver & Jacobson
Counsel to Microsoft Corporation
Washington, DC

PANEL III

Professor Lawrence Lessig, Esq.
Stanford Law School
Stanford, CA

Mark N. Cooper, Ph.D.
Director of Research
Consumer Federation of America
Washington, DC

Jonathan Zuck
President
Association of Competitive Technology
Washington, DC

Matthew J. Szulik
President and Chief Executive Officer
Red Hat, Inc.
Durham, NC

Mitchell E. Kertzman
President and CEO
Liberate Technologies
San Carlos, CA

TRANSCRIPT OF PROCEEDINGS

UNITED STATES SENATE

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COMMITTEE ON THE JUDICIARY

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MICROSOFT SETTLEMENT: A LOOK TO THE FUTURE

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Washington, D.C.

December 12, 2001

MILLER REPORTING COMPANY, INC.
735 8th Street, S.E.
Washington, D.C. 20003
(202) 546-6666

Hon Charles A. James, Assistant Attorney General,
Antitrust Division, United States Department of
Justice, Washington, D.C.

The committee met, pursuant to notice, at 10:08 a.m., in room SD-106, Dirksen Senate Office Building, Hon. Patrick J. Leahy, chairman of the committee, presiding.

Present: Senators Leahy, Kohl, Cantwell, Hatch, Kyl, DeWine, Sessions, and McConnell.

The Chairman. Good morning. I just want to do a little housekeeping here. I want to make sure the chairman and ranking member of the Antitrust Subcommittee are here, Senator Kohl and Senator DeWine, both of whom have done a superb job for years in handling antitrust matters.

I told Senator DeWine earlier, and this will probably cause a recall petition from the Republican Party in Ohio, what a terrific job he did as chairman and then what a terrific job Senator Kohl has done as chairman on antitrust matters, and pointing out that they are issues of great complexity and great importance to everybody here in the Senate.

I have looked at the proposed settlement the Department of Justice and nine States have transmitted to the district court that is a plan for the conclusion of what has been really landmark antitrust litigation. But now it has got to pass the legal test set out in the Tunney Act if it is going to gain court approval, and that test is both simple and broad. It requires an evaluation of whether the proposed settlement is in the public interest.

As the courts wrangle with the technical and complex legal issues at stake in this case, this committee is conducting hearings to educate ourselves, but also to educate the public about what this proposed settlement really means for our high-tech industry and for all of us who use computers at work and at school and at home.

Scrutiny of the proposed settlement by this committee during the course of the Tunney Act proceeding is particularly important. The focus of our hearing today is to examine whether the proposed settlement is good public policy and not to go into the legal technicalities. The questions raised here and views expressed may help inform the court. I plan, with Senator Hatch, to forward to the court the record of this hearing for consideration as the courts goes about the difficult task of completing the Tunney Act proceedings and the remedy sought by the non- settling States.

I am especially concerned that the district court take the opportunity seriously to consider the remedy proposal of the non-settling States, and to consider it before she makes her final determination on the other parties' proposed settlement. The insights of the other participants in this complicated and hard-fought case are going to be valuable additions to the comments received in the Tunney Act proceeding. I would hope they would help inform the evaluation whether the settlement is in the public interest, a matter which for many people is still an open question.

This creativity is not limited just to Silicon Valley. I think of my own home area, Burlington, Vermont. It ranks seventh in the Nation in terms of patent filings. Burlington is 38,000 people and it is in a county of about 130,000 people. This is not per-capita; this is actual filings--seventh in the Nation.

Whether the settlement proposal will help or hinder this process and whether the high-tech industries will play the important role they should in our Nation's economy is a larger issue behind the immediate effects of this proposal.

Now, these are all high standards, but they are reasonable ones and people have dealt with them for years. In this case, the D.C. Circuit, sitting en banc and writing unanimously, found that Microsoft had engaged in serious exclusionary practices, to the detriment of their competitors, and thus to all consumers. So we have to satisfy ourselves that these matters have been addressed and redressed, or if they have not, why not.

I have noted my concern that the procedural posture of this case not jeopardize the opportunity of the non-settling States to have their day in court, and not deprive the district court of the value of their views on appropriate remedies in a timely fashion.

In addition, I have two basic areas of concern about the proposed settlement. First, I find many of the terms of the settlement to be either confusingly vague, subject to manipulation, or, worse, both. Mr. Rule raised an important and memorable point when he last testified before this committee in 1997 during the very important series of hearings that were convened by Senator Hatch on competition in the digital age, hearings that helped shape a lot of thinking in the Senate.

Testifying about the first Microsoft-Justice Department consent decree, Mr. Rule said, "Ambiguities in decrees are typically resolved against the Government. In addition, the Government's case must rise or fall on the language of the decree; the Government cannot fall back on some purported `spirit' or `purpose' of the decree to justify an interpretation that is not clearly supported by the language." So we take seriously such counsel. We would worry if ambiguity in the proposed settlement would jeopardize its enforcement.

Second, I am concerned that the enforcement mechanism described in the proposed decree lacks the power and the timeliness necessary to inspire confidence in its effectiveness. Particularly in light of the absence of any requirement that the decree be read in broad remedial terms, it is especially important that we inquire into the likely operation of the proposed enforcement scheme and its effectiveness.

Any lawyer who has litigated cases--and, Mr. James, that would certainly include you--and any business person knows how distracting litigation of this magnitude can be. We all appreciate the value that reaching an appropriate settlement can have not only for the parties, but also for consumers who are harmed by anticompetitive conduct, and the economy.

I am the first one to say we would like some finality so that everybody involved, all parties, can know what the standards are and all consumers can know what they are. Because of that, I don't come to this hearing pre-judging the merits of this proposed settlement, but instead as one who is ready to embrace a good settlement that puts an end to the merry-go-round of Microsoft litigation over consent decrees.

The serious questions that have been raised about the scope, enforceability and effectiveness of this proposed settlement leave me concerned that if it is approved in its current form, it may simply be an invitation for the next chapter of litigation.

I want an end to this thing. I think everybody wants an end to it, but we want an end to it where we know what the rules are going to be. If we don't know what the rules are going to be, as sure as the sun rising in the east we are going to face these issues again. On this point, I share the concern of Judge Robert Bork, who warns in his written submission that the proposed settlement "contains so many ambiguities and loopholes as to make it unenforceable and likely to guarantee years of additional litigation.

So I look forward to hearing from the Department of Justice and the other witnesses here. I will put into the record a series of letters: one, a letter to myself and Senator Hatch from James Barksdale; another, a letter to Assistant Attorney General James from Senator Hatch; a letter from Senator Hatch from Assistant Attorney General James; letters to myself and Senator Hatch from Robert Bork; a letter to myself from Ralph Nader, with two enclosures; written testimony of Catfish Software, Inc; and written testimony of Mark Havlicek of Digital Data Resources, Inc.

The Chairman. I yield to Senator Hatch, who did such superb hearings on this whole issue earlier.

Senator Hatch. Well, thank you, Mr. Chairman. As you know, We conducted a series of hearings, as you have mentioned, in this committee in 1997 and 1998 to examine the policy implications of the competitive landscape of the then burgeoning high-tech economy and industry, which was about to explode with the advent of the Internet.

Those hearings focused on competition in the industry, in general, and more specifically complaints that Microsoft had been engaged in anticompetitive behavior that threatened competition and innovation, to the detriment of consumers. Our goal was, and I believe today is to determine how best to preserve competition and foster innovation in the high- technology industry.

Although the committee and I as its chairman was then criticized by some, I strongly believed then and continue to believe now that in a robust economy involving new technologies, effective antitrust enforcement today would prevent the need for heavy-handed Government regulation of business tomorrow.

My interest in the competitive marketplace in the high- technology industry was animated by my strong opposition to regulation of the industry, whether by government or by one or few companies. As we may remember, the hearings before the Judiciary Committee developed an extensive record of Microsoft's conduct and evidenced various efforts by the company to maintain and extend its operating system monopoly. These findings, I would note, were reaffirmed by a unanimous and ideologically diverse Court of Appeals. The Microsoft case and its ultimate resolution present one of the most important developments in antitrust law in recent history, certainly in my memory.

As I have emphasized before, having a monopoly is not illegal under our laws. In fact, in a successful capitalistic system, striving to be one should be encouraged, as a matter of fact. However, anticompetitive conduct intended to maintain or extend this monopoly would harm competition and could possibly be violatire of our laws.

I believe no one would disagree that the D.C. Circuit Court's decision reaffirmed the fundamental principle that a monopolist, even a monopolist in a high-tech industry like software, must compete on the merits to maintain its monopoly, which brings us to today's hearing. We are here to examine the policy implications of the proposed settlement in the Government's antitrust litigation against Microsoft.

The proposed settlement between Microsoft and the Justice Department and nine of the plaintiff State attorneys general is highly technical. We have all been studying it and its impact with great interest. Each of us has heard from some, including some of our witnesses here today, that the agreement contains much that is very good. Not surprisingly, we have also heard and read much criticism of the settlement. These are complex issues, and I would hope today's hearing will illuminate the many questions that we have.

I should note that about two weeks ago I sent a set of detailed and extensive questions about the scope, interpretation, and intended effects of the proposed settlement to the Justice Department, naturally seeking further information on my part.

First, I want to commend the Department for getting the responses to these questions to me promptly. We received them yesterday. I think the questions, which were made public, and the Department's responses could be helpful to each member in forming an independent and fair analysis of the proposed settlement.

To that end, and for the benefit of the committee, Mr. Chairman, I would like to make both the questions and the Department's answers part of the record for this hearing. So I would ask unanimous consent that they be made part of the record.

As I noted in my November 29th letter to the Department, I have kept an open mind regarding this settlement and continue to do so. I have had questions regarding the practical enforceability of the proposed settlement and whether it will effectively remedy the unlawful practices identified by the D.C. Circuit and restore competition in the software marketplace.

I am also cognizant of both the limitation of the claims contained in the original Justice Department complaint by the D.C. Circuit, as well as the standards for enforcement under settled antitrust law. I believe that further information regarding precisely how the proposed settlement will be interpreted, given D.C. Circuit case law, is necessary to any full and objective analysis of the remedies proposed therein. I hope that this hearing will result in the development of such information that would supplement the questions that I have put forth to the Department.

Mr. Chairman, one important and critical policy issue that I would hope we can address today and that I would like all of our witnesses to consider as they wait to be empaneled so that they can discuss is the difficult issue of the temporal relation of antitrust enforcement in new high- technology markets.

It cannot be overemphasized that timing is a critical issue in examining conduct in the so-called "new economy." Indeed, the most significant lesson the Microsoft case has taught us is this fact. The D.C. Circuit found this issue noteworthy enough to discuss in the first few pages of its opinion, and I will quote from the unanimous court:

"[w]hat is somewhat problematic...is that just over six years have passed since Microsoft engaged in the first conduct plaintiffs allege to be anticompetitive. As the record in this case indicates, six years seems like an eternity in the computer industry. By the time a court can assess liability, firms, products, and the marketplace are likely to have changed dramatically. This, in turn, threatens enormous practical difficulties for courts considering the appropriate measure of relief in equitable enforcement actions." The court goes on to say, "Innovation to a large degree has already rendered the anticompetitive conduct obsolete (although by no means harmless)."

Now, this issue is one that is relevant for this committee to consider as a larger policy matter, as well as how it relates to this case and the proposed settlement we are examining today.

Let me just say that one of the things that worries me is what are the enforcement capabilities of this settlement agreement? It was only a few years before these matters arose that Microsoft had agreed to a consent, a conduct decree that many feel they did not live up to, and I think it is a legitimate issue to raise as to how will the agreement that the Justice Department has worked out with Microsoft and nine of the plaintiffs be enforced if anticompetitive conduct continues.

In that regard, let me just raise Mr. Barksdale's letter, which I believe you put into the record.

Senator Hatch. Well, let me just raise it because he does make some interesting comments in his letter and I can read them, I think they might be at least part of opening up the questions in this matter. I will just quote a few paragraphs.

He says, "These developments have stiffened my resolve to do all I can to ensure that competition and consumer choice are reintroduced to the industry. It is vitally important that no company can do to a future Netscape what Microsoft did to Netscape from 1995 to 1999. It is universally recognized that the 1995 consent decree was ineffective, I respectfully submit that the Proposed Final Judgment, PFJ, which is the subject of the hearing, will be even less effective, if possible, than the 1995 decree in restoring competition and stopping anticompetitive behavior. Accordingly, Senator Leahy, I am going to follow your suggestion that I help the committee answer one of the central questions. If the PFJ had been in effect all along, how would it have affected Netscape? More important, how will it affect future Netscapes?"

He describes the impact on future Netscapes as follows, and let me just read a couple of paragraphs in this regard. "As discussed in the attached document, the unambiguous conclusion is that if the PFJ agreed upon last month by Microsoft and the Department of Justice had been in existence in 1994, Netscape would have never been able to obtain the necessary venture capital financing. In fact, the company would not have come into being in the first place. The work of Mark Andreesen's team at the University of Illinois in developing the Mosaic browser would likely have remained an academic exercise. An innovative, independent browser company simply could not survive under the PFJ, and such would be the effect on any company developing in the future technologies as innovative as the Microsoft did to Netscape from 1995 to 1999. It is universally recognized that the 1995 consent decree was ineffective, I respectfully submit that the Proposed Final Judgment, PFJ, which is the subject of the hearing, will be even less effective, if possible, than the 1995 decree in restoring competition and stopping anticompetitive behavior. Accordingly, Senator Leahy, I am going to follow your suggestion that I help the committee answer one of the central questions. If the PFJ had been in effect all along, how would it have affected Netscape? More important, how will it affect future Netscapes?"

"If the PFJ provisions are allowed to go into effect, it is unrealistic to think that anybody would ever secure venture capital financing to compete against Microsoft. This would be a tragedy for our Nation. It makes a mockery of the notion that the PFJ is 'good for the economy' unquote. If the PFJ goes into effect, it will subject an entire industry to dominance by an unconstrained monopolist, thus snuffing out competition, consumer choice, and innovation in perhaps our Nation's most important industry. And, worse, it will allow them to extend their dominance to more businesses such as financial services, entertainment, telecommunications, and perhaps many others. Four years ago, I appeared before the committee and was able to demonstrate, with the help of the audience, that Microsoft undoubtedly had a monopoly. Now, it has been proven in the courts that Microsoft not only has a monopoly, but they have illegally maintained that monopoly through a series of abusive and predatory actions. I submit to the committee that Microsoft is infinitely stronger in each of their core businesses than they were four years ago, despite the fact that their principal arguments have been repudiated 8-0 by the Federal courts. I hope you will keep these thoughts in mind during your hearings." Then he said, "A more detailed analysis of my views follows."

Well, the importance of that letter is basically Barksdale was one of the original complainants against Microsoft and was one of the very important witnesses before this committee in those years when we were trying to figure what we are doing here. I don't think you can ignore that, and so these questions have to be answered that he raises, plus the questions that I have given as well.

The Chairman. I have, and also I understood you wanted those letters that you had to Mr. James. Those are also part of the record.

Let me just say, Mr. Chairman, I am grateful that you are continuing the committee's important role in high- technology policy matters, as I would expect you to do because I know that you take a great interest in these matters, as does, I think, every individual person on the committee.

I certainly look forward to hearing our witnesses today, and I am going to keep an open mind on where we are going here and hopefully we can resolve these matters in a way that is beneficial to everybody, including those who are against Microsoft and Microsoft itself.

This is a crucial time for competition in the high-tech sector of our economy. After spending more than three years pursuing its groundbreaking antitrust case against Microsoft, the Government has announced a settlement. But the critical question remains, will this settlement break Microsoft's stranglehold over the computer software industry and restore competition in this vital sector of our economy? I have serious doubts that it will.

An independent Federal court, both the trial court and the Court of Appeals, found that Microsoft broke the law and that its violation should be fixed. This antitrust case was as big as they come. Microsoft crushed a competitor, illegally tried to maintain its monopoly, and stifled innovation in this market.

Now, after all these years of litigation, of charges and counter-charges, this settlement leaves us wondering, did we really accomplish anything. Or in the words of the old song, "is that all there is?" Does this settlement obey the Supreme Court mandate that it must deny the antitrust violator the fruits of its illegal conduct?

It seems to me and to many, including nine of the States that joined the Federal Government in suing Microsoft, that this settlement agreement is not strong enough to do the job, to restore competition to the computer software industry. It contains so many loopholes, qualifications, and exceptions that many worry that Microsoft will easily be able to evade its provisions.

Today, for the vast majority of computer users, the first thing they see when they turn on their machine is the now familiar Microsoft logo, placed on the Microsoft start menu, and all of their computer operations take place through the filter of Microsoft's Windows operating system. Microsoft's control over the market is so strong that today more than 95 percent of all personal computers run on the Windows operating system, a market share high enough to constitute a monopoly under antitrust law.

Its share of the Internet browsing market is now over 85 percent, and it reported a profit margin of 25 percent in the most recent quarter, a very high number in challenging economic times. Microsoft has the power to dictate terms to manufacturers who wish to gain access to the Windows operating system and the ability to leverage its dominance into other forms of computer software. And Microsoft has never been shy about using its market power.

Are we here today really confident that in five years this settlement will have had any appreciable impact on these facts of life in the computer industry? I am not.

We stand today on the threshold of writing the rules of competition in the digital age. We have two options. One option involves one dominant company controlling the computer desktop facing minor restraints that expire in five years, but acting as a gatekeeper to 95 percent of all personal computer users. The other model is the flowering of innovation and new products that resulted from the breakup of the AT&T telephone monopoly nearly 20 years ago. From cell phones to faxes, from long-distance price wars to the development of the Internet itself, the end of the telephone monopoly brought an explosion of new technologies and services that benefit millions of consumers everyday. We should insist on nothing less in this case.

In sum, any settlement in this case should make the market for computer software as competitive as the market for computer hardware is today. While there is nothing wrong with settling, of course, we should insist on a settlement that has an immediate, substantial and permanent impact on restoring competition in this industry.

I thank our witnesses for testifying today and we look forward to hearing your views.

Senator DeWine. Mr. Chairman, thank you very much for holding this very important hearing concerning the Department of Justice's Proposed Final Judgment in its case against Microsoft.

Mr. Chairman, as we examine this judgment and attempt to imagine what it will mean for the future of competition in this market, we must keep in mind the serious nature of this case. According to the D.C. Circuit Court, Microsoft did, in fact, violate our antitrust laws. Their behavior hurt the competitive marketplace. This is something that we must keep in mind as we examine the Proposed Final Judgment.

This hearing is particularly important at this time because Federal law does require the district court to examine the proposed settlement and determine if it is, in fact, in the public interest. Federal law clearly allows the public to be heard on such matters. I believe that this forum today will further that process of public discussion.

The Court of Appeals in this case, relying on established Supreme Court case law, explained what an appropriate remedy in an antitrust case such as this one must seek to accomplish. It should unfetter the market from anticompetitive conduct, terminate the illegal monopoly, and deny the defendant the fruits of its violations. It is important, Mr. Chairman, that we examine whether the decree would, in fact, accomplish these goals.

There seems to be a great deal of disagreement about what the competitive impact of the decree will be. While the proposed settlement correctly, I believe, focuses primarily on the market for middleware, there has been a great deal of concern raised about the mechanism for enforcing such a settlement. Specifically, I think we need to discuss further whether the public interest would be better served with a so-called special master or some sort of other administrative mechanism, or whether the Justice Department could be more effective enforcing the decree on its own.

In addition to the Department of Justice's Proposed Final Judgment, we also have the benefit of another remedies proposal that has been submitted to the court by nine States that did not join with the Antitrust Division's proposal. I would like to hear from our witnesses about the role they believe this alternative proposal should play in the ongoing Tunney Act proceedings.

As I mentioned earlier, Mr. Chairman, the Court of Appeals directed that any remedy should seek to deny Microsoft the fruits of its illegal activities. One clear benefit Microsoft derived from its violations was the effective destruction of Netscape as a serious competitor and a decrease in Java's market presence. It is obviously impossible to go back in time and resurrect the exact market structure that existed, but it is important to discuss how the proposed settlement deals with this problem.

I would also like to note for the record that Microsoft will be represented today by one of their outside counsel, Rick Rule, rather than an actual employee of the company. Mr. Rule is an outstanding antitrust lawyer. He is well qualified to testify on this issue and we certainly look forward to hearing his testimony today.

However, Mr. Chairman, I must say that I am disappointed that Microsoft chose not to send an actual officer of the company because it does not appear to represent, frankly, the fresh start that I think we were all hoping to begin today.

Finally, I would like to thank you, Mr. Chairman, Ranking Member Hatch, and Antitrust Subcommittee Chairman Kohl for all of your hard work in putting this hearing together and all of your work on this issue generally over the last few years.

I look forward to the testimony of our witnesses today and to the committee's continuing oversight of this very important issue.

The Chairman. Mr. James, there is a vote on the floor. I think there are two or three minutes left in the roll call vote. We are going to suspend while we go to vote, but I think--

Senator McConnell. Mr. Chairman, I have a really brief statement. Could I make that before you adjourn?

Senator McConnell. Let me just say that this hearing and the accompanying media spectacle indicate the Microsoft case is the subject of significant public interest and debate. Some argue that the case itself should never have been filed to begin with, and now after nearly four years of litigation, Microsoft, the Department of Justice and nine States have reached a settlement.

I just want to commend the parties for their tireless effort and countless hours spent in reaching the compromise. Settlement is nearly always preferable to litigation, and regulation by the market is nearly always better than regulation by litigation, or the Government for that matter.

As far as what the public thinks, just this week a nationwide survey indicated that the U.S. Government and Microsoft agreed to settle the antitrust case. However, nine State AGs argued that the antitrust case against Microsoft should continue. Which statement do you agree with?

The U.S. economy and consumers would be better off if the issue Were settled as soon as possible: 70 percent. The court should continue to investigate whether Microsoft should be punished for its business activities: 24 percent. Not that the public is always determinative, but I thought that would be an interesting observation to add.

The Chairman. Mr. James, I think you would note from the comments that they sort of go across the board here. The majority of people favor a settlement, but I must say that I don't think the majority of people favor any settlement; they favor a good settlement, and that is what the questions will be directed at and that is why nine attorneys general have expressed concern. Nine agreed with the settlement, nine disagreed with the settlement. These are all very good, very talented people. So in your testimony when we come back, you have heard a number of the questions that have been raised and we look forward to you responding to them.

The Chairman. I should note for the record that Mr. James has served as the Assistant Attorney General for the Antitrust Division since June 2001. He previously served as Deputy Assistant Attorney General for the Antitrust Division for the first Bush administration from 1989 to 1992. He served as Acting Assistant Attorney General for several months in 1992, then was head of the antitrust practice at Jones, Day, Reavis and Pogue, in Washington.

Not knowing what the Senate schedule might be, Mr. James, we will put your whole statement in the record, of course. I wonder if you might summarize it, but also with some reference to the charge made in the letter to Senator Hatch and myself by Mr. Barksdale, who said had these been the ground rules, he never would have been able to get Netscape off the ground. Had these been the ground rules at the time they started Netscape, they never would have been able to create Netscape. If that is accurate, of course, then we have got a real problem.

Mr. James. Thank you, Senator Leahy, and good morning to you and members of the committee. I am pleased to appear before you today to discuss the proposed settlement of our still pending case against Microsoft Corporation.
With me today are Deborah Majoris, my deputy, and Phil Malone, who has been the lead staff lawyer on the Microsoft case from the very beginning. I note their presence here because they were the ones who responded to the judge's order that we negotiate around the clock and I think they have recovered now.

As you know, on November 2 the Department and nine States entered into the proposed settlement. We are in the midst of the Tunney Act period, as you know, and that will end at the end of January, at which point the district court will determine whether the settlement is in the public interest. We think that it is.

I am somewhat limited in what I can say about the case because of the pendency of the Tunney Act proceeding. But, of course, I am happy to discuss this with the committee for the purpose of public explication.

When thinking about the Microsoft case, from my perspective it is always important to distinguish between Microsoft, the public spectacle, and Microsoft, the actual legal dispute. We look, in particular, to what the Department alleged in its complaint and how the court ruled on those allegations.

The Antitrust Division's complaint had four counts: attempted monopolization of the browser market, in violation of Section 2; individual anticompetitive acts and a course of conduct to maintain the operating system monopoly, in violation of Section 2 of the Sherman Act; tying its own browser to the operating system, in violation of Section 1; and exclusive dealing, in violation of Section 1.

I would note that a separate monopoly leveraging claim brought by the States was thrown out prior to trial, and that the States at one time had alleged in their complaint monopolization of the Microsoft office market, and that was eliminated by the States through an amendment.

There was, of course, a trial before Judge Jackson, at the conclusion of which Judge Jackson found for the Government on everything but exclusive dealing and ordered Microsoft to be split into separate operating system and applications businesses after a one-year transitional period under interim conduct remedies.

On appeal, however, only the monopoly maintenance claim survived unscathed. The attempted monopoly claim was dismissed. The tying claim was reversed and remanded for further proceedings under a much more rigorous standard. And the remedy was vacated, with the court ordering remedial hearings before a new judge to address the fact that the liability findings had been, in their words, "drastically curtailed."

Even the monopoly maintenance claim was cut back in the Court of Appeals decision. The Court of Appeals found for Microsoft on some of the specific practices and ruled against the Government on the so-called course of conduct theory of liability.

I recount all of this history to make two basic points that I think are important as we discuss the settlement. First, the case, even as initially framed by the Department of Justice, was a fairly narrow challenge. It was never a direct assault on the acquisition of the operating system monopoly itself.

Second, and perhaps much more important, the case that emerged from the Court of Appeals was much narrower still, focusing exclusively on the middleware threat to the operating system monopoly and specific practices, not a course of conduct found to be anticompetitive.

The Court of Appeals decision determined the reality of the case as we found it in the Department when I first arrived there in June, as you noted. The conduct found to be unlawful by the court was the sole basis for relief.

It is probably worth talking just briefly about the monopoly maintenance claim. The complaint alleges that Microsoft engaged in various anticompetitive practices to impede the development of rival Web browsers and Java. These products came to be known as middleware and were thought to pose a threat to the operating system monopoly because they had the potential to become platforms for other software applications. The court noted that the middleware threat was nascent; that is to say that no one could predict when, if ever, enough applications would be written to middleware for it to significantly displace the operating system monopoly.

A few comments about the settlement itself. In general terms, our settlement has several important points that we think fully and demonstrably remedy the middleware issues that were at the heart of the monopoly maintenance claim.

In particular, our decree contains a very broad definition of middleware that specifically includes the forms of platform software that have been identified as potential operating system threats today and likely to emerge as operating system threats in the future. It prohibits in the broadest terms the types of contractual restrictions and exclusionary arrangements the Court of Appeals found to be unlawful. It fences in those prohibitions with appropriate non-discrimination and non- retaliation provisions, and it creates an environment in which middleware developers can create programs that compete with Microsoft on a function-by-function basis through a regime of mandatory API documentation and disclosure.

In the most simple terms, we believe our remedy will permit the development and deployment of middleware product without fear of retaliation or economic disadvantage. That is what we believe and what the court found that consumers actually lost through Microsoft's unlawful conduct, and that is what we think consumers will gain through our remedy.

With specific reference to what Mr. Barksdale said, if I may, I have not reviewed Mr. Barksdale's letter. I know that in this particular situation, with so much at stake in this particular settlement, I have seen lots of hyperbolic statements. I certainly wouldn't necessarily characterize his in that vein without having read it in some detail.

The Chairman. Mr. James, we are going to give you an opportunity to do that because I want you to look at it. You can feel free to call it hyperbolic or however, but I would ask that you and your staff look at his letter, which does raise some serious questions, and I would like to see what response you have for the record.

Mr. James. I would be happy to do so. And with that, I would be happy to answer your questions.

The Chairman. The Department of Justice has been involved in litigation against Microsoft for more than 11 years. I am one of those who had hoped throughout that that the parties might come to some conclusion. I think that if you can have a fair conclusion, it is in the best interests of the consumers, the Government, Microsoft, competitors, and everybody else. I have no problem with that, but that presupposes the right kind of settlement.

Over the course of those 11 years, the parties entered into one consent decree that just ended up with a whole lot more litigation over the terms of that consent decree. I mention that because you take this settlement and it is already being criticized by some for the vagueness of its terms and its loopholes. Judge Robert Bork warned, and I think I am quoting him correctly, "It is likely to guarantee years of additional litigation."

Now, what kind of assurances can you give or what kind of predictions can you give that if this settlement is agreed to by the court that we are going to see an end to this litigation and we are going to have a stop to this kind of merry-go-round of Microsoft litigation concerning compliance or even the meanings of the consent decree?

I notice a lot of people in this room on both sides of the issue. I have a feeling that they are here solely because of their interest in Government and not because the meter is running. A lot of us would like to see this thing end, but why do you feel that this settlement is so good that that is going to end?

Mr. James. Well, Senator, that is certainly a legitimate question and I understand the spirit in which it is asked. One of, I think, the facts of life is that one of the reasons that we have so many antitrust lawyers, and perhaps why there are so many of them in this room, is that firms with substantial market positions very often are the subject of appropriate antitrust scrutiny, and so it is with Microsoft and so it should be.

Our settlement here is a settlement that resolves a fairly complex piece of litigation. It by its terms is going to be a complex settlement, inasmuch as it does cover a broad range of activities and has to look into the future prospectively in a manner that benefits consumers. And some of that consumer benefit certainly will come from the development of competing products. Some of that consumer benefit, however, will come from competition from Microsoft as it moves into other middleware products, et cetera.

We think that the terms of the decree are certainly enforceable. I think so much of what has been called a loophole are things that are carve-outs necessary to facilitate pro-competitive behavior, and we certainly think that the enforcement power embodied in this decree--I would say an unprecedented level of enforcement power, three tiers of enforcement power--is sufficiently to let the Department of Justice do its job.

The Chairman. But keep in mind that usually in these kinds of decrees, if it is not specifically laid out, the courts tend to decide the vague questions against the Government, not for the Government. Fortune Magazine said even the loopholes have loopholes--a pretty strong statement from a very pro-business magazine. The settlement limits the types of retaliation Microsoft can take against PC manufacturers that want to carry or promote non-Microsoft software, but some would say that it gives a green light to other types of retaliation.

Now, why doesn't the settlement ban all types of retaliation? The Court of Appeals said twice that if you commingle the browser and operating system code, you violate Section 2 of the Sherman Act. The proposed settlement contains no prohibition on commingling code. There is no provision barring the commingling of browser code and the operating code. So you have got areas where they can retaliate. You don't have the barring of this commingling of code.

I mean, are Fortune Magazine, Judge Bork and others justified in thinking there are a few too many loopholes here, notwithstanding the levels of enforcement?

Mr. James. Let me take your points in order. First, on the subject of retaliation, retaliation is a defined term in this decree. It is a term that we are using to define a sort of conduct that Microsoft can engage in when it engages in ordinary commercial transactions.

I don't think that there is any scope in the bounds of this case to prohibit Microsoft from engaging in any form of collaborative conduct with anyone in the computer industry, and certainly the types of collaborative conduct that are permitted, the so-called loopholes, are the type of conduct that is permitted under standard Supreme Court law embodied in decisions like Broadcast Music v. NCAA, and also embodied in the Federal Trade Commission-Department of Justice joint venture guidelines as sanctioned forms of conduct. So we think that antitrust lawyers certainly can understand these types of issues and we think the courts can understand these types of issues.

Secondly, with regard to your more particular point about commingling code, it is certainly the case that the Court of Appeals, following upon the district court decision, found that Microsoft had engaged in an act of monopolization in that it commingled code for the purpose of preventing the Microsoft browser from being removed from the desktop. That is certainly the finding of the Court of Appeals.

Now, in the process of going through my preparation for this hearing, I went back and looked at the Department of Justice's position with regard to this. Throughout the course of the case, and even in the contempt proceeding involving the former tying claims, it has always and consistently been the Department of Justice's contention that it did not want to force Microsoft to remove code from the operating system. They have said that over and over again in every brief that has been filed in this case.

What the Department of Justice wanted was an appropriate functionality that would give consumers the choice between middleware functionalities. That is exactly the remedy that we have here and we think it is an effective remedy. We have gone beyond that particular aspect of this by including into our decree a specific provision that deals with the questions of defaults; in other words, the extent to which a non-Microsoft middleware product can take over and be invoked automatically in place of a Microsoft middleware product. That is something that was not in the earlier decrees. It is a step beyond what was included in Judge Jackson's order.

We think that we have addressed the product integration aspects of the Microsoft monopoly maintenance claim in exactly the terms that the Department has always pursued with regard to that particular issue, and we are completely satisfied with that aspect of the relief.

The Chairman. Well, I have a follow-up on that, as you probably expect, but my time is up and I want to yield to Senator DeWine. Actually, I have a follow-up on the retaliation, also, but I do appreciate your answer.

Mr. James, this case has been certainly very controversial and inspired a great deal of discussion regarding the effectiveness of the antitrust laws, especially within the high-tech industry.

Netscape, for example, vocally opposed Microsoft during this litigation. Many of Netscape's complaints really were validated by the courts, and yet Netscape ended up losing the battle. This sort of result has led some to question whether our antitrust laws can be effective in this particular industry.

I personally believe that the antitrust laws are essential to promoting competition within the industry and throughout the country, but I would like to hear what your views are on this subject. What lessons do you think this case teaches us in regard to that and what do we say to people like Netscape?

Mr. James. Well, it is certainly the case that our judicial system very often can provide a crude tool for redressing particular issues quickly. I would note that this particular case was litigated on a very fast track and the people at the Department of Justice are to be really commended for pushing this case along at even the speed that it is has taken, considering the comparable speed of other cases.

I think, however, that the case stands for an important proposition, and that is that the Department of Justice is up to meeting the challenge, that it has the tools at its disposal to investigate unlawful conduct, to understand and appreciate the implications of what complex technical matters involve, to bring the resources to bear in order to litigate these cases to a successful conclusion, and, where appropriate, to teach a settlement that is in the public interest.

One of the things that I think is an important issue to note here is that there is certainly a time difference between litigating a matter of original liability and litigating a matter involving compliance with a term of a decree.

We think that the enforcement powers that are involved here are appropriate ones. We think that enforcement by the Department of Justice is the appropriate way to proceed in these matters, and we are confident that this provides the sort of best mechanism for dealing with a complex matter in complex circumstances.

Senator DeWine. One provision of the Proposed Final Judgment requires Microsoft to allow computer manufacturers to enable access to competing products. However, for a product to qualify for these protections, it must have had a million copies distributed in the United States within the previous year. This would seem to me to run contrary to the traditional antitrust philosophy of promoting new competition.

Mr. James. I am actually glad you asked that question, Senator, because that is one of the prevailing, I think, misconceptions of the decree. The provisions of the decree that require Microsoft to allow an OEM to place a middleware product on the desktop apply without regard to whether or not that product has been distributed by one million people. That is absolute requirement.

The million-copy distribution provision relates solely to the question of when Microsoft must undertake these affirmative obligations to create defaults, for example, for a middleware product to provide other types of assistance to someone who has developed that product.

The fact of the matter is that this is something that requires a great deal of work, particularly these complex matters of setting defaults which is very important to the competitive circumstances here. And it would be very difficult to impose upon Microsoft the responsibility for making these alterations to the operating system and making them for every subsequent release of the operating system to be automatic in the case of any software company that just shows up and says I have a product that competes.

But I want to be very clear here, Senator. Every qualifying middleware product, without regard to how many. copies it has distributed--an OEM can place that product on the desktop immediately, without regard to this one-million threshold.

Quite frankly, in today's world, one million copies distributed is not a substantial matter. I think in the last year I might have gotten a million copies of AOL 5.0 in the mail. So I don't think that that is really a very large impediment.

Senator DeWine. Let me ask one last question. You have mentioned that a number of provisions in the settlement go beyond the four corners of the case, but Microsoft agreed to these conditions anyway.

Mr. James. Well, I think one of the most important ones is the default provision. As of the time of our original case, these middleware products were operated in a fairly simple way. You clicked on to that product, you invoked that product, and then you used it in whatever way was appropriate.

In today's world, software has changed. We see what they call a more seamless user interface, user experience, and it is necessary for people to operate deeply within the operating system on an integrated basis. There were allegations that Microsoft overrode consumer choice in these default mechanisms in the case.

With regard to each and every one of those instances alleged by the Justice Department, the Justice Department lost. The court found for Microsoft. Notwithstanding that, as a matter of fencing in and improving the nature of this decree, we have included into this issue the subject of defaults.

Another important area, I think, is the question of server interoperability, and that is a very, very important issue as we see going forward. I think if you go back and read the complaint in this case, you will find that the word "server" almost virtually never appears. There are no sort of very specific allegations that go to this. We thought this was an important alternative platform issue. We thought it was important to stretch for relief in this case, and we did so and got, I think, relief that is very effective in preserving this as people go into an environment of more distributed Web processing. So we think that that is a very powerful thing.

I think these are two issues that the Department of Justice would have had a very, very difficult time sustaining in court, to the extent the court was inclined to limit us to the proof that we put forward. So I think that these are very positive manifestations of the settlement.

The Chairman. We are checking one thing, and I mention this to Senator Kohl, Senator Sessions, and Senator Cantwell, who have been here waiting to ask questions. We are finding out from the floor. We have been notified that there may have been a move, as any Senator has a right to do under our Senate rules, to object to committees meeting more than two hours after the Senate goes in session.

We are on the farm bill and appropriations and other essential matters, so that I have been told that a Senator has objected, as every Senator has a right to do, to us continuing. As a result, because the Senators say they want us to concentrate on what is going on on the Senate floor, we have to respect the rules of the Senate. I do, and I am going to have to recess this hearing at this time.

I am going to put into the record the statements of all those who have come here to testify.

[The prepared statements of Messrs. Himes, Rule, Lessig, Cooper, Zuck, Szulik, and Kertzman follow:]

The Chairman. Senator Hatch and I will try to find a time we might reconvene this hearing, because both Senator Hatch and I feel this is a very important hearing.

The record will be open for questions that might be submitted. I apologize to everybody. We did not anticipate this. But with 100 Senators, every so often somebody exercises that rule. I would emphasize Senators have the right to exercise that rule, especially when we are in the last three weeks of the session. I think we are going to break for Christmas Day, but we are in the last three weeks of the session, and I think the Senator invoking the rule wants to make sure all Senators pay attention to the work on the floor.

Mr. Chairman, we are out of time. Any Senator can invoke the two-hour rule and a Senator has done that. Fortunately, I think it was against the Finance Committee markup today, but we reported out the bill anyway right within the time constraint. That is where I went.

Both Senator Leahy and I apologize to the witnesses who have put such an effort into being here today because this is an important hearing. These are important matters to both sides--to all sides, I should say; there are not just two sides here. These matters have a great bearing on just how positively impactful the United States is going to be in these areas.

So I hope that we can reconvene within a relatively short period of time and continue this hearing because it is a very, very important hearing. We apologize to you that this has happened, but as Senator Leahy has said, a Senator can do that.

The Chairman. Well, it is out of our hands, but I would note that normally I would have recessed it until tomorrow, but tomorrow we are using this time for an executive committee meeting of the Judiciary Committee to do, as we have done many times already, to vote out a large number of judges.

So with that, we stand in--Jeff, I am sorry. Senator Sessions. Just, Mr. Chairman, a matter of procedure. I am troubled by what I understand to be a decision to send this transcript to the court as an official document from Congress in the middle of a litigation that is ongoing.

I would think that anybody's statement that they gave could be sent to the court. Any Senator can write a letter to the court. I haven't studied it fully, but just as a practitioner, it troubles me to have a meddling--

The Chairman. That record is open to anybody who wants to send anything in. Senator Hatch and I have made that decision and that will be the decision of the committee.

The proposed settlement that the Department of Justice and nine States have transmitted to the District Court offers a plan for the conclusion of this landmark antitrust litigation. It must now pass the legal test set out in the Tunney Act to gain court approval. That test is both simple and broad, and requires an evaluation of whether the proposed settlement is in the public interest.

There is significant difference of opinion over how well the proposed settlement passes this legal test. In fact, the States participating in the litigation against Microsoft are evenly split, with nine States joining in the proposed settlement and nine non-settling States presenting the court with an alternative remedy. As the courts wrangle with the technical and complex legal issues at stake in the case, this committee is conducting hearings to educate ourselves and the public about what this proposed settlement really means for our high-tech industry and for all of us who use computers at work, at school, and at home.

Scrutiny of the proposed settlement by this committee during the course of the Tunney Act proceeding is particularly important. The focus of our hearing today is to examine whether the proposed settlement is good public policy and not on the legal technicalities. The questions raised here and views expressed may help inform the court. I plan with Senator Hatch to forward to the court the record of this hearing for consideration as the court goes about the difficult task of completing the Tunney Act proceedings and the remedy action by the non-settling States.

I am especially concerned that the District Court take the opportunity seriously to consider the remedy proposal of the non-settling States before making her final determination on the other parties' proposed settlement. The insights of the other participants in this complicated and hard- fought case will surely be valuable additions to the comments received in the Tunney Act proceeding and help inform the evaluation whether the settlement is in the public interest.

The effects of this case extend beyond simply the choices available in the software marketplace. The United States has long been the world leader in bringing innovative solutions to software problems, in creating new tools and applications for use on computers and the Web, and in driving forward the flow of capital into these new and rapidly growing sectors of the economy. This creativity is not limited to Silicon Valley. The Burlington, Vermont, area ranks seventh in the nation in terms of patent filings. Whether the settlement proposal will help or hinder this process, and whether the high tech industries will play the important role that they should in our Nation's economy, is a larger issue behind the immediate impact of this proposal.

With that in mind, I intend to ask the representatives of the settling parties how their resolution of this conflict will serve the ends that the antitrust laws require. Our courts have developed a test for determining the effectiveness of a remedy in a Sherman Act case: The remedy must end the anticompetitive practices, it must deprive the wrongdoer of the fruits of the wrongdoing, and it must ensure that the illegality does not recur. The Tunney Act also requires that any settlement of such a case serve the public interest. These are all high standards, but they are reasonable ones. In this case, the D.C. Circuit, sitting en banc and writing unanimously, found that Microsoft had engaged in serious exclusionary practices, to the detriment of their competitors and, thus, to all consumers. Today, we must satisfy ourselves that these matters have been addressed and redressed, or find out why not.

I have noted my concern that the procedural posture of this case not jeopardize the opportunity of the non-settling States to have their "day in court" and not deprive the District Court of the value of their views on appropriate remedies in a timely fashion. In addition, I have two basic areas of concern about the proposed settlement. Fist, I find many of the terms of the settlement to be either confusingly vague, subject to manipulation, or both. Mr. Rule raised an important and memorable point when he last testified before this Committee in 1997 during the important series of hearings convened by Senator Hatch on competition in the digital age. Testifying about the first Microsoft-Justice Department consent decree, Mr. Rule said: "Ambiguities in decrees are typically resolved against the Government. In addition, the Government's case must rise or fall on the language of the decree; the Government cannot fall back on some purported 'spirit' or 'purpose' of the decree to justify an interpretation that is not clearly supported by the language." We take seriously such counsel, and would won-y if ambiguity in the proposed settlement would jeopardize its enforcement.

Any lawyer who has litigated cases and any business person knows how distracting litigation of this magnitude can be and appreciates the value that reaching an appropriate settlement can have not only for the parties but also for consumers, who are harmed by anticompetitive conduct, and the economy. I do not come to this hearing prejudging the merits of this proposed settlement but instead as one ready to embrace a good settlement that puts an end to the merry-go-round of Microsoft litigation over consent decrees. But the serious questions that have been raised about the scope, enforceability and effectiveness of this proposed settlement leave me concerned that, if approved in its current form, it may simply be an invitation for the next chapter of litigation. On this point, I share the concern of Judge Robert Bork, who warns, in his written submission, that the proposed settlement "contains so many ambiguities and loopholes as to make it unenforceable, and likely to guarantee years of additional litigation." I look forward to hearing from the Department of Justice and other distinguished witnesses today on the merits of this warning.

December 12, 2001 Contact: Margarita Tapia, 202/224-5225
STATEMENT OF SENATOR ORRIN G. HATCH
RANKING REPUBLICAN MEMBER
Before the
SENATE JUDICIARY COMMITTEE
Hearing On

"The Microsoft Settlement: A Look to the Future"

Mr. Chairman, as you know, we conducted a series of hearings in this Committee in 1997 and 1998 to examine the policy implications of the competitive landscape of the then burgeoning high-tech industry, which was about to explode with the advent of the Internet. Those hearings focused on competition in the industry, in general, and, more specifically, complaints that Microsoft had been engaged in anti-competitive behavior that threatened competition and innovation to the detriment of consumers. Our goal was, and I believe today is, to determine how best to preserve competition and foster innovation in the high-technology industry.

Although the Committee, and I, as its Chairman, was criticized by some, I strongly believed then, and continue to believe now, that in a robust economy involving new technologies, effective antitrust enforcement today would prevent the need for heavy-handed government regulation of business tomorrow. My interest in the competitive marketplace in the high-technology industry was animated by my strong opposition to regulation of the industry, whether by the government, or by one or few companies. As we may remember, the hearings before the Judiciary Committee developed an extensive record of Microsoft's conduct, and evidenced various efforts by the company to maintain and extend its operating system monopoly. Those findings, I would note, were reaffirmed by a unanimous, and ideologically diverse Court of Appeals. The Microsoft case - and its ultimate resolution - present one of the most important developments in antitrust law in recent memory.

As I have emphasized before, having a monopoly is not illegal under our laws. In fact, in a successful capitalist system, striving to be one should be encouraged. However, anticompetitive conduct intended to maintain or extend this monopoly would harm competition and could violate our laws. I believe no one would disagree that the D.C. Circuit's decision reaffirmed the fundamental principle that a monopolist - - even a monopolist in a high-tech industry like software - - must compete on the merits to maintain its monopoly.

Which brings us to today's hearing. We are here to examine the policy implications of the proposed settlement in the government's antitrust litigation against Microsoft.

Mr. Chairman, rather than closing the book on the Microsoft inquiry, the proposed settlement appears to be only the end of the latest chapter. The settling parties are currently in the middle of the so-called Tunney Act process before the court. And, the non-settling parties have chosen to further litigate this matter and last week filed their own proposed settlement. This has been a complex case with significant consequences for Microsoft, high-tech entrepreneurs and the American public. The proposed settlement between Microsoft and the Justice Department and nine of the plaintiff State attorneys general is highly technical. We have all been studying it, and its impact, with great interest. Each of us has heard from some, including some of our witnesses here today, that the agreement contains much that is very good. Not surprisingly, we have also heard and read much criticism of the settlement. These are complex issues, and I would hope today's hearing will illuminate the many questions we have.

I should note that about two weeks ago, I sent a set of detailed and extensive questions about the scope, interpretation, and intended effects of the proposed settlement to the Justice Department, seeking further information. First, I want to commend the Department for getting the responses to me promptly. We received them yesterday. I think the questions, which were made public, and the Department's responses could be helpful to each member in forming an independent and fair analysis of the proposed settlement. To that end, and for the benefit of the Committee, Mr. Chairman, I would like to make both the questions and the Department's answers part of the record for this hearing, if you wouldn't have any objections.

As I noted in my November 29 letter to the Department, I have kept an open mind regarding this settlement, and continue to do so. I have had questions regarding the practical enforceability of the proposed settlement and whether it will effectively remedy the unlawful practices identified by the D.C. Circuit, and restore competition in the software market.

I am also cognizant of both the limitation of the claims contained in the original Justice Department complaint by the D.C. Circuit, as well as the standards for enforcement under settled antitrust law. I believe that further information regarding precisely how the proposed settlement will be interpreted, given D.C. Circuit case law, is necessary to any full and objective analysis of the remedies proposed therein. I hope that this hearing will result in the development of such information, that would supplement the questions I put forth to the Department.

Mr. Chairman, one important and critical policy issue that I would hope we can address today, and that I would like all of our witness to consider as they wait to be empaneled so that they can discuss, is the difficult issue of the temporal relation of antitrust enforcement in new high-technology markets. It cannot be overemphasized that timing is a critical issue in examining conduct in the so-called "new economy." Indeed, the most significant lesson the Microsoft case has taught us is this fact. The D.C. Circuit found this issue noteworthy enough to discuss in the first few pages of its opinion. And I will quote from the unanimous court:

"[w]hat is somewhat problematic.., is that just over six years have passed since Microsoft engaged in the first conduct plaintiffs allege to be anticompetitive. As the record in this case indicates, six years seems like an eternity in the computer industry. By the time a court can assess liability, firms, products, and the marketplace are likely to have changed dramatically. This, in turn, threatens enormous practical difficulties for courts considering the appropriate measure of relief in equitable enforcement actions .... [I]nnovation to a large degree has already rendered the anticompetitive conduct obsolete (although by no means harmless)."

This issue is one that is relevant for this Committee to consider as a larger policy matter, as well as how it relates to this case and the proposed settlement we are examining today.

Again, I want to thank you Mr. Chairman for continuing the Committee's important role in high-technology policy matters, and I look forward to hearing from our witnesses today.

STATEMENT

OF
CHARLES A. JAMES
ASSISTANT ATTORNEY GENERAL
ANTITRUST DIVISION
BEFORE THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE

CONCERNING
THE MICROSOFT SETTLEMENT:
A LOOK TO THE FUTURE
PRESENTED ON

DECEMBER 12, 2001

Mr. Chairman and members of the Subcommittee, I am pleased to appear before you today to discuss the Department's still-pending antitrust enforcement action against Microsoft Corporation.

On November 2, 2001, the Department stipulated to entry of a proposed consent decree that would resolve the case. Nine states joined in the proposed settlement. ¹ We are in the midst of the 60-day public comment period under the Tunney Act, after which we will file a response to the comments, and the district court will rule on whether the proposed consent decree is in the public interest. Nine other states, and the District of Columbia, have not signed the proposed consent decree.

The Department's position regarding the proposed settlement is set forth in documents filed in the pending Tunney Act proceeding. Because of the pendency of the proceeding, and the somewhat remote possibility that the case will return to litigation, I am somewhat limited in what I can say about the case and settlement. Nonetheless, I am happy to appear before you today to discuss in general terms how the settlement promotes the public interest by resolving the allegations sustained by the court of appeals.

When we in the Department address the Microsoft case, it is important for us to ignore the media spectacle and clash-of-the-titans imagery, and focus instead on the actual legal dispute presented to the court. In discussing the case and the proposed consent decree, it is important to keep in mind not only ,,','hat the Department alleged in our complaint, but how the courts -- in particular, the D.C. Circuit -- ruled. As a result of the appeals court's ruling, the case is in many important respects considerably narrower than the one the Department originally brought in the spring of 1998 and narrower still than Judge Jackson's ruling in June of 2000.

I would like to take a few minutes to refocus attention on the legal allegations charged in the complaint, how those allegations were resolved in the courts, and the remedies in the proposed consent decree presently undergoing Tunney Act review. I believe these proposed remedies fully and demonstrably resolve the monopoly maintenance finding that the D.C. Circuit affirmed.

The complaints flied by the Department, the states, and the District of Columbia alleged: (1) that Microsoft had engaged in a series of specific anticompetitive acts, and a course of anticompetitive conduct, to maintain its monopoly position in the market for operating systems designed to run on Intel- compatible personal computers, in violation of Section 2 of the Sherman Act; (2) that Microsoft had attempted to monopolize the web browser market, also in violation of Section 2; (3) that Microsoft had illegally tied its web browser, Internet Explorer, to its operating system, in violation of Section 1; and (4) that Microsoft had entered into exclusive dealing arrangements that also violated Section 1. A separate monopoly leveragin