IN THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

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:

UNITED STATES OF AMERICA, :

:

Plaintiff-Appellants, :

:

v. : No. 95-5037,

: et al.

MICROSOFT CORPORATION, :

:

Defendant-Appellants. :

:

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Monday, April 24, 1995

Washington, D.C.

The above-entitled matter came on for oral argument,

pursuant to notice, at 9:30 a.m.

BEFORE:

CHIEF JUDGE EDWARDS, CIRCUIT JUDGES SILBERMAN and

BUCKLEY.

APPEARANCES:

JOEL I. KLEIN, ESQ., Deputy Assistant Attorney

General, U.S. Department of Justice, 10th and

Pennsylvania Avenue, N.W., Washington, D.C.

20530; on behalf of Plaintiff-Appellant, United

States of America

RICHARD J. UROWSKY, ESQ., Sullivan & Cromwell,

125 Broad Street, New York, New York 10004; on

behalf of Defendant-Appellant, Microsoft

Corporation

JOHN H. CHAPMAN, ESQ., Gilbert, Segall & Young,

430 Park Avenue, New York, New York 10022-3592;

amicus curiae, on behalf of Computer and

Communications Industry Association

APPEARANCES (continued):

JEFFREY S. JACOBOVITZ, ESQ., The Jacobovitz Law

Firm, 1225 19th Street, N.W., Suite 850,

Washington, D.C. 20036; amicus curiae, on

behalf of I.D.E. Corporation

GARY L. REBACK, ESQ., Wilson, Sonsini, Goodrich &

Rosati, Professional Corporation, 650 Page Mill

Road, Palo Alto, California 94304-1050;

anonymous amici, on behalf of Amici Computer

Industry Companies

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C O N T E N T S

ORAL ARGUMENT OF:	PAGE

Joel I. Klein, Esq.,

on behalf of Plaintiff-Appellants	3

Richard J. Urowsky, Esq.,

on behalf of Defendant-Appellants	16

John H. Chapman, Esq.,

amicus curiae, on behalf of Computer and

Communications Industry Association	26

Jeffrey S. Jacobovitz, Esq.,

amicus curiae, on behalf of I.D.E. Corporation	36

Gary L. Reback, Esq.,

anonymous amici, on behalf of Amici Computer

Industry Companies	45

Richard J. Urowsky, Esq.,

on behalf of Plaintiff-Appellants -- Rebuttal	62

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P R O C E E D I N G S

THE CLERK: No. 95-5037, et al., United States of America v. Microsoft Corporation.

Joel I. Klein, Esq., for appellants, Department of Justice; Richard J. Urowsky, Esq., for appellants, Microsoft Corporation; John H. Chapman, Esq., amicus curiae, CCIA; Jeffrey S. Jacobovitz, Esq., amicus curiae, I.D.E. Corporation; and Gary L. Reback, Esq., anonymous amici.

THE COURT: You may proceed, counsel.

ORAL ARGUMENT OF JOEL I. KLEIN, ESQ.,

ON BEHALF OF PLAINTIFF-APPELLANTS

MR. KLEIN: Chief Judge Edwards, and may it please the Court:

The District Court rejected a consent decree between the United States and Microsoft, largely because of its concerns over certain Microsoft practices that the United States in its sole and uncompromised discretion chose not to challenge in this case.

We think the District Court exceeded its Tunney Act authority by looking into these other practices and, instead, it should have focused on the question of whether the consent decree was a reasonable remedy for the practices that the United States did challenge. Had it asked that question, we think it would have come to a simple and straightforward answer.

This decree put an immediate end to all of the practices that we challenged in the complaint and some of the licensing practices, as well, and the effect of that was significant, because it meant that if, in fact, in the personal computer operating system market, a competitor came forward with a better mousetrap, if you will, then that competitor would find a distribution market that was open and accessible and not blockaded by the licensing practices that we challenged.

Now, the only conceptually plausible objection we think to this decree is the objection that didn't seek to un-do prior effects of the challenged practices. The reason for that is the government's considered judgment based on careful market analysis and independently supported by Professor Kenneth Arrow that these practices, while in effect, had only a very small impact on Microsoft's market share.

We are entitled under this Court's decisions to deference with respect to that market judgment, and, indeed, under the standards for entering a consent degree, we need only show that it is within the reaches of the public interest. We think quite clearly this is in those reaches.

QUESTION: Mr. Klein, didn't we assiduously avoid flatly stating you are entitled to deference in the Triennial Review? Is that what you were referring to?

MR. KLEIN: I don't think that you did, Your Honor. I think you said quite clearly in the 1993 Triennial with respect to market predictions and market analyses we are entitled to deference. I think the question you left open was with respect to fact-finding, whether it is de novo or not. But I think the issue of deference is clear.

Let me then return to --

QUESTION: Wait a minute. As a prosecutor, we did discuss the -- are you talking about your judgments, or are you talking about the decree itself? Which are you talking about to which you believe deference is entitled?

MR. KLEIN: I think we are entitled to deference with respect to our judgments about the market, Your Honor. As to the decree, I think the Court has to apply simply effects --

QUESTION: You don't mean deference in the sense in which we would grant deference to an administrative agency in an adjudicatory or regulatory rulemaking process, do you?

MR. KLEIN: I think I do mean that, yes. In other words, the language used in 1993 is unless the court is quite certain that the market prediction of the department is wrong, then the court should defer to it, and I think with respect to this market prediction, there is no evidence and no reason to think that it is wrong. In any event --

QUESTION: I think in both opinions we came very close to talking about deference, but recognized we couldn't give flat deference to a prosecutor.

MR. KLEIN: Again, I think there is a dual role and I guess I think we don't need flat deference, but we need the kind of deference that one would give to the United States when it is charged with implementing the antitrust laws. Here I think it is somewhat different, as the Court points out, from traditional agency responsibility. Nevertheless, I think, as the Court said, we are the ones who study the market impact, we are the ones who made the analysis and that is entitled to deference.

In any event, I think it is quite clear that the standard is that you need to have a flexible approach, and that even if the District Court thought it could find a better remedy or a more demanding remedy, that the court should defer, as long as it is within the reaches of the public interest. Here we stopped all the offending practices flat in their tracks, so I think that quite clearly is adequate.

QUESTION: Can I ask another question concerning one matter, to make sure I understand it. In the District judge's decision, it seemed to me he said that the government was willing to accept certain suggestions the District judge made with respect to the implementation, and yet Microsoft was not. What is the present status of that?

MR. KLEIN: I think the status is, as you suggest, Your Honor, that the government said below that we would accept certain additional compliance requirements, and Microsoft rejected those, and the District Court, of course, rejected the decree on several other grounds, as well, so that did not become the decisive factor.

QUESTION: But your position is today you are willing to accept that?

MR. KLEIN: We are prepared to accept on compliance, yes, sir.

QUESTION: What is your view about Microsoft's unwillingness or supposed unwillingness to accept. Does Microsoft have any grounds to appeal on that issue, if you are willing to accept?

MR. KLEIN: I think if we were willing to accept, then Microsoft refused to accept, then I think we therefore did not appeal. If that were the sole basis, of course, of the hypothetical, then I think you would have to decide the issue of Microsoft's jurisdiction, which we take no position on, because we think, of course, our jurisdiction is clear.

QUESTION: Wait a minute. What about that issue? That is to say my understanding is you are willing to accept the modifications the judge wished to make, and Microsoft is not? Even assuming all other issues were decided in your favor, what do we do about that?

MR. KLEIN: Well, I think you issue an order entering the decree, and the reason --

QUESTION: You mean without the modifications?

MR. KLEIN: Exactly, and let me explain that, if I might, Judge Silberman. The reason is the decree need only be within the public interest. These compliance mechanisms are clearly traditional standard mechanisms that we have in all our decrees. We are prepared to take more. We are often prepared to take more in a case. We negotiated in good faith with Microsoft and came to this decree. The fact that we would take more doesn't mean this decree is not in the public interest.

QUESTION: But you have got to tell me what your position is on this is. Is this issue on which you are saying now at this point we will not accept it, it is gone, we made a deal with Microsoft and, therefore, they are not willing to take the modifications of the District judge, and Microsoft doesn't have any right to appeal that? Or the Congress has got to take one side or the other --

MR. KLEIN: Our position is that this decree without the modification should be entered and that we think as a matter of law we are entitled to have it entered. We don't think it needs any modification.

QUESTION: You dropped the concessions made by the District judge now?

MR. KLEIN: We are not pursuing it on appeal, yes, sir. We are not pursuing that concession on appeal. We are only --

QUESTION: You are not pursing the concessions. You have done enough having made the concessions. I don't know if --

MR. KLEIN: Well, we are not interested in that concession. We are simply seeking the entry of this decree as we negotiated it, that is all, and I think we are entitled to that.

QUESTION: That is a problem, because it seems to me that whatever the District judge's scope of authority under the Tunney Act, it seems to me we are have problems on the question of the methodology by which the decree was implemented, since the judge would be sitting there in the future. So we have a legitimate interest to be concerned about that, right?

MR. KLEIN: I think that's correct.

QUESTION: So if the District judge was right about that, it was certainly within his authority and discretion to do that and you were willing to buy it. How could we simply accept the decree as negotiated between you and Microsoft, and say, well, you know the District judge legitimately raised this point, even though the government was willing to accept it, nevertheless, we are going to ignore all of that on appeal?

MR. KLEIN: I think the reason, Judge Silberman, is the following: Let's look at the consequences of what you are saying, is Microsoft refuses to accept it. They negotiated with us in good faith. Obviously, they forewent their right for a trial in order to get this deal. Now the District Court says we would like to change the deal. The United States obviously didn't think we needed additional compliance, because we accepted less. Microsoft is unwilling, and we say that, rather than go to trial in this case, which is the consequence of Microsoft's unwillingness, then it seems to me entirely appropriate, and that is why we are appealing, that the decree as we negotiated should be entered.

I think it is quite clear from both the 900 F.2d and 93 F.2d that all these decrees could possibly be improved somewhat. Of course, we negotiated with Microsoft and they gave up their right to go to trial, to take the package that we insisted upon. We think we are entitled to that package and we think it is quite clear that this particular set of compliance -- remember, after all, we are talking about abandoning licensing practices -- we have open access to their books --

QUESTION: So you are basically taking the position that even if the District judge limited himself to seeking a modification of the decree or the refusing to enter the decree unless there were modifications with respect to implementation, the government has a right to appeal and you would have us reach a conclusion that, under the Tunney Act, the District judge does not have authority even to seek to refuse to enter the decree unless there is a change in implementation?

MR. KLEIN: I would say two things. I would say we have a right to an immediate appeal if it turns out to be in the terms of the case a deal-breaker, if in fact our alternative is to go to trial or pull the case. That I think we do have a right to immediate appeal, and I think on that appeal the question is not whether the compliance mechanism that we would accept is better. The question is whether the one we negotiated is reasonable, and the answer to that is yes.

QUESTION: I think you basically preempt the role of the District judge in the Tunney Act proceeding.

MR. KLEIN: I don't think so at all. I think the District judge has got to come forward with some good reason. If he could show that because of the compliance mechanism we have is just not adequate, if he could show that and he said, look, we --

QUESTION: Are you making the District judge a party to this proceeding, making him --

MR. KLEIN: No, he has got to write an opinion, Your Honor. He has got to say in his opinion there is something wrong with this particular decree. Now, mind you, his whole concern with the compliance mechanism goes to his view that Microsoft has the wrong view of "vaporware" and, therefore, they are not going to be a good citizen. I think that is wholly misguided.

QUESTION: What about the part of the compliance that you agreed to accept, which was I thought a mechanism whereby Microsoft would have more lawyers?

MR. KLEIN: The United States would always accept that, Your Honor. I mean we would always --

QUESTION: You are always in favor of lawyers?

[Laughter.]

MR. KLEIN: We would always be in favor of more compliance. We are in favor of fewer lawyers, but more compliance. That is inevitable. It would be inconceivable that we wouldn't accept -- if I could, Judge Silberman, in the limited time remaining, I just want to address what I think is at the core of the District Court's concerns, which is really a searching inquiry into the government's investigation and the government's conclusions with respect to practices that we didn't challenge.

Now, I think with respect to that, that is a very dangerous and, from our point of view, troubling proposition. I want to make clear, we have said it numerous times, there are no side agreements, there are no deals. What we didn't challenge we didn't challenge in our independent sole discretion. We made no deals with Microsoft with respect to "vaporware," monopoly leveraging, predatory activity or anything like that, or with anyone else.

QUESTION: Suppose the District judge thought the government was acting in bad faith. What would its appropriate role be under the Tunney Act? By bad faith, you were allowing factors such as political influence to direct the result in this case. Number one, how much evidence does a judge have to have before he proceeds, and how could he or she proceed?

MR. KLEIN: Again, he or she has to have some reason to think that. Here the court flatly said there was no political concern it had, and there isn't any. Second of all, there is no concern about any agreements or deals. We have said so. There is no contrary evidence.

If it were present, I guess the questions would be the following: What is the nature of the "political influence," did that lead to some kind of deal? I don't know exactly how the facts is. Obviously, if you get to a situation, let us say, where the Department of Defense says that because the defense related, not antitrust concerns, I think the concern can inquire into that. None of that is here, and I think the court's effort goes so far beyond that on facts that aren't present. People are trying to resurrect it to suggest that is what it is about, but there is absolutely nothing here.

QUESTION: Are you obliged to explain that which was expired as a matter of law?

MR. KLEIN: I think under the Tunney Act we are, and indeed we did. That is, it says any other remedies that we explored with the defendant.

QUESTION: No, any other possible complaints.

MR. KLEIN: I think if you are talking about complaints that we explored and unilaterally determined not to pursue, absolutely not.

QUESTION: You need not even reveal them?

MR. KLEIN: I think we need not reveal them, absolutely not. We never reveal what we are investigating, Chief Judge Edwards, and I think it would be very unfair to defendants. Indeed, we might still be in the middle of an investigation. For all the court knows or anybody else knows, we may still be looking at those matters, so our position is firm on that.

QUESTION: I assume your answer to what you thought was my question, I assume that was as given, you don't doubt the District Court can inquire as to the appropriateness of the relief of those matters that are cited in the complaint?

MR. KLEIN: Absolutely, I agree with that.

If I might reserve the balance of my time, I thank the Court.

THE COURT: Mr. Urowsky?

ORAL ARGUMENT OF RICHARD J. UROWSKY, ESQ.,

ON BEHALF OF DEFENDANT-APPELLANTS, MICROSOFT CORPORATION

MR. UROWSKY: May it please the Court: My name is Richard Urowsky, of Sullivan & Cromwell, and I represent the defendant Microsoft Corporation.

I would like to say at the outset that I would like to associate myself with the remarks of Mr. Klein concerning the standards and scope of review appropriate for the District Court under the Tunney Act. I don't intend to repeat his arguments. I would rather address the subject of the adequacy of relief which I think is central to this appeal.

This is an action by the United States under sections 1 and 2 of the Sherman Act primarily directed at a discrete set of licensing practices employed by Microsoft Corporation in making its MS-DOS and Windows operating system technology available to computer manufacturers who are customarily referred to as OEM's. These practices are, one, providing OEM's the option of entering into so-called per processor licenses --

QUESTION: Counsel, if I may, we have read the briefs and you need not go over the basic framework. One of the more interesting and perhaps puzzling issues is why does the decree -- and this is a question that can easily be answered -- why the degree does not reach all the product lines specifically covered within Microsoft's market share in the operating systems application formula?

MR. UROWSKY: Your Honor, those situations are actually quite different one from the other. As to applications, the government has never contended --

QUESTION: Stick with the operating systems first. The applications are quite different.

MR. UROWSKY: Yes, Your Honor, of course. There are a number of operating system products that Microsoft makes available to computer manufacturers. One such product is MS-DOS and Windows. Those are currently two separate products --

QUESTION: Particularly focusing on Windows NT.

MR. UROWSKY: Yes. Windows NT is not a product that competes for the same typical use as MS-DOS and Windows. It is a so-called high-end --

QUESTION: Yes, but is it inconceivable that that market will come together in some way, therefore, Windows NT will have at some point in the future the same dominance or migrate into some in-between market and won't be a successor of Windows, but it would develop into some kind of in- between market, whereby Microsoft would have the same kind of dominant market share?

MR. UROWSKY: I suppose anything is conceivable, but current --

QUESTION: So why shouldn't tbe legal practices be extended to that product?

MR. UROWSKY: Because currently the two NT products, one of which is a so-called server product which relates to connectivity technology, has a tiny, tiny fraction of sales for that purpose. The other application of --

QUESTION: Is it not legitimate for persons, including the District judge, to be concerned that, insofar as Microsoft is permitted to use the same four techniques it used with respect to DOS in the Windows NT, it might ultimately develop a monopoly or dominant share of the market with respect to --

MR. UROWSKY: I don't believe that is a legitimate concern, Judge Silberman, for two reasons. One, these products are outside the scope of the complaint, and I don't believe that the District Court has a proper concern to make the government charge offenses that (a) it does not wish to charge, and (b) would be patently unsustainable.

QUESTION: When you say they are outside the scope of the complaint, is that because they are outside the defined market?

MR. UROWSKY: That's correct, and because the United States couldn't conceivably allege any kind of competitive impact.

QUESTION: But it, nevertheless, alleges that the licensing procedures is per se anti-competitive, doesn't it?

MR. UROWSKY: No, it does not allege that they are per se anti-competitive. If you read the guidelines published by the Department of Justice, I believe it is just in the last month for the licensing of intellectual property, they made quite clear that it is a rule of reason test that applies here and that these techniques are accepted ways of introducing new products into a market as the technology developers attempt to emulate vertical integration.

QUESTION: Is there anything in the record to suggest that the marketing techniques for Windows NT and Advance Server are the same as they offered DOS and Windows?

MR. UROWSKY: I don't believe the record addresses that.

QUESTION: Intuitively, one would think that one would be pretty foolhardy to try it at this stage, since you don't have the same market. I don't know how you could demand it from NT. As you say, your market share is pretty small.

MR. UROWSKY: Kind of.

QUESTION: I don't know how you could go around waving at anybody and be threatened at this point.

MR. UROWSKY: Well, I think it is important for the Court to bear one thing in mind which relates -- sometimes you have to talk about fundamental things, even if it is unpleasant. What the Court has to bear in mind is that the entire theory of the government's case here was that a set of licensing practices were used in a way that simulated exclusive deal in contracts, even though they weren't exclusive deal in contracts.

You notice, if Your Honors read carefully the complaint --

QUESTION: Would it be more accurate to describe it as tie-ins?

MR. UROWSKY: Oh, no. Oh, no, the government never alleges tie-ins.

QUESTION: I know, but wouldn't that be more --

MR. UROWSKY: No. No.

QUESTION: You don't like that.

[Laughter.]

MR. UROWSKY: No, for the simple reason that there is no tied product, ergo no tie.

QUESTION: I understand. What about the relationship between, as Judge Edwards asked before, the relationship between the application market and the systems market? Do we have any indication as to what Microsoft's position is in the application market, or are they so different it is hard to measure?

MR. UROWSKY: Well, they are quite different markets in the sense that there are different competitors in those markets and they exhibit different economic characteristics.

QUESTION: That really isn't the thrust of the government's charges. I thought their complaint was, to the extent there is any validity to it, is that those in the applications market are limited in the decisions they can make because of what you allegedly do in the operating systems market, they are writing for Windows and DOS over and over again, because others can't break into that market. But I don't think you have a dominant share or anyone is alleging you have a dominant share in the software market.

MR. UROWSKY: That has not been alleged. The applications --

QUESTION: You do well, but you are not dominating.

QUESTION: You dominate in one share of the software market.

MR. UROWSKY: I don't know what Your Honor means by a "dominant" share.

QUESTION: I wasn't using the word "monopoly." Somebody else used the word "monopoly," and I assiduously avoided it. But I thought you would accept dominant share.

MR. UROWSKY: Microsoft concedes that its products are popular.

[Laughter.]

QUESTION: 70 percent.

[Laughter.]

MR. UROWSKY: If you think about it, that is really a service to the public, making good high-quality products available that people want to buy.

The point I was making before is that the government never alleges, and if you read the complaint carefully, you will see it, that Microsoft ever forced any of these OEM's into per processor contracts. It says we lured them into it by offering a small discount, and it may be that introducing products into a market for Server Software or for WorkSTATION software, which are the segments of the industry that NT is directed at, that we will offer discounts of the same kind to try to persuade people to introduce this product. It is the only way to break into a market where you haven't had a history of successful sales in the past, and that is all recognized as being quite legitimate in the guidelines.

QUESTION: If I understand correctly, the government has abandoned the concession that it made to the District judge on appeal, that is to say the concession that it would be willing to modify the decree to enhance its implementation. So I gather with respect to the main case, whether you have a party status, whether you are entitled to appeal or not is irrelevant, since you are piggybacking on the government entirely.

With respect to the supplementary or ancillary order of the District Court, what is the core notion that you have that you have a right to appeal under Cohen?

MR. UROWSKY: The orders were improper, that they are clearly interlocutor, they are clearly orders that are separate from the merits and cannot be effectively reviewed if this case is required to be tried and goes to final judgment, and that there are important issues because the participation of the so-called amici was completely disruptive of the proceedings in the District Court.

May I say a word, Your Honor, about the notion that the monitoring or enforcement provisions of the degree are not adequate. I think Your Honor is mistaken what the District Court was speaking about when it raised that issue. And it is not entirely clear from reading the hearing transcript, but it is tolerably clear.

The District Court was not talking about enforcement provisions necessary to insure compliance with this decree. That is easy. These are simple --

QUESTION: But if you read his order, his memorandum and order, it is couched in those terms, even though you are quite right that the transcript might be revealing of a slightly different --

MR. UROWSKY: And the government's concession, therefore, and Microsoft's refusal, which were based on what occurred at the hearings, were not for some tinkering of enforcement mechanisms with respect to this decree. It concerned the appointment of some kind of ethics czar of undefined responsibility to roam freely to rehabilitate a company that we respectfully submit doesn't require rehabilitation.

QUESTION: I understood. I wasn't really focusing so much on the merits of that as I was on the jurisdictional consequences that the government agrees to it. If the government agrees to that, it seems to me that your right to appeal is gone. Don't you agree?

MR. UROWSKY: No.

QUESTION: The government says, okay, judge, you are right, we should have the decree modified in that respect and we are prepared to go to trial in order to achieve it. You have no right to appeal of that.

MR. UROWSKY: I don't agree with that. I think we have --

QUESTION: You have a right of appeal of that?

MR. UROWSKY: -- independent appeal from the District Court's refusal to enter the decree under 1292.

QUESTION: On the main decree.

MR. UROWSKY: That's correct.

QUESTION: I think that is rather late claim, if the government says we want to go to trial.

MR. UROWSKY: The government moved in the District Court to enter the decree, and that motion was joined by Microsoft.

QUESTION: You are not suggesting, if the government changes its mind through the Tunney proceedings, you have made some very good points and we are not ready to go to trial in order to achieve them, that Microsoft has a right to appeal nevertheless?

MR. UROWSKY: I don't think that was the government's position below.

QUESTION: No, no, I am posing a hypothetical.

MR. UROWSKY: Oh, hypothetically.

QUESTION: What is your answer?

MR. UROWSKY: I think I would have to consider that point further before I had an answer, Your Honor. I hadn't considered that before.

QUESTION: For our next oral argument?

[Laughter.]

THE COURT: You are in your rebuttal time, so you can sit down and consider it.

MR. UROWSKY: May I reserve the remainder of my time?

THE COURT: Yes.

MR. UROWSKY: Thank you, Your Honor.

THE COURT: Mr. Chapman?

ORAL ARGUMENT OF JOHN H. CHAPMAN, ESQ.,

AMICUS CURIAE, ON BEHALF OF CCIA

MR. CHAPMAN: May it please the Court: John Chapman on behalf of the Computer and Communications Industry Association.

We are pleased to be here. This Court took notice of our participate in the Triennial Review and its Triennial Remand decision, as well as it took note of Professor Arrow's affidavit in support of the modification in that case.

This case is a different case. This case is one in which our presence is challenged. Microsoft makes an untenable argument that somehow 16(f)(3) is governed by 16(b), and there is no such limitation, that it is a matter of discretion of the District Court to allow us to participate as it did, as this Court allows CCIA to participate in this proceeding.

And Microsoft is clearly wrong in terms of its right to appeal, because under 1292(a)(1), it had no right to appeal, it has no right to avoid a trial in this case. And to the extent to which it intends to piggyback on the Justice Department, it really has an untenable right there, as well, since --

QUESTION: That is not particularly important, because even if it didn't have an independent right to appeal the main order, it comes in as amicus anyway. But what about his claim to appeal the ancillary order, particularly -- well, I won't ask you, I will wait and ask one of the other amicus, unless you want to direct yourself to that question -- Microsoft's right to appeal the ancillary ruling?

MR. CHAPMAN: I don't believe it has the right to appeal the ancillary order, either, Your Honor, because Microsoft at the very heart of it has abandoned its earlier practices, that it cannot suffer any serious irreparable consequences relative to this appeal. It can, as Your Honor notes, participate as amicus in this proceeding within the discretion of the Court.

QUESTION: Doesn't it have a rather strong argument that if it is illegal and improper for the District judge to have allowed any one of the amicus to come in as an anonymous amicus, that it would have a right to appeal that at least, because it would be irreparably injured by arguably accusations coming from an anonymous source?

MR. CHAPMAN: Your Honor, may Mr. Reback address that, because we have identified ourselves? We are fully before this court --

QUESTION: But they have a right to appeal only one point and everything else, that Microsoft is entitled to be here anyway.

MR. CHAPMAN: Another issue in which they are wrong, Your Honor, was rather amusing relative to this Court's standards of review, whether it be de novo and abuse of discretion. Microsoft says we cite cases that say there had been no abuse of discretion when it doesn't appear in the case. A careful reading of the case shows in United States v. Jones & Laughlin that indeed the abuse of discretion standard was spoken of, and that is the general rule, although in the Triennial Review this Court did say it would consider it a de novo review. But that is the choice of this Court, and CCIA would welcome that review, although it believes that the standard is abuse of discretion.

In fact, in Jones & Laughlin, the Court said this is the real issue. The real issue is review of a decree to assure that it is fair, adequate and reasonable, as well as consistent with the public interest. CCIA believes that this proposed decree is not within the reaches of the public interest, for the same reasons that Judge Sporkin in the District Court so found, lack of information in order to make that determination and, secondly, with respect to relief that the decree on its face on the basis of Judge Arrow's affidavit and within the competitive impact statement does not state adequate relief.

QUESTION: Mr. Chapman, didn't that lack of information part of the order deal with two factors, number one, whether or not there was a side deal, and, number two, whether or not there was "vaporware" abuse? Would you agree that both parties asserted that there was no side deal and, therefore, there is no evidence in the record to support a contrary conclusion?

MR. CHAPMAN: Your Honor, I have no problem with that. I used to be with the Justice Department and I believe the Justice Department was in good faith, but their judgment was not reasonable.

QUESTION: We are talking about information about right now. The other element of information, the lack of which seemed to bother the judge, had to do with allegations of misconduct other than the allegations charged. If we construe the Tunney Act as confining the court's consideration to the offenses charged, isn't the information that Judge Sporkin complained about not having irrelevant to the matter before him?

MR. CHAPMAN: I don't believe so, Your Honor. Even Mr. Carver --

QUESTION: Which don't you agree with, that the Tunney Act lifts up the interpretation that Judge Buckley has suggested, or what? What are you disagreeing with?

MR. CHAPMAN: I am disagreeing with the statement that the District Court cannot make inquiry relative to matters, so long as there is a nexus to the violations charged and the relief sought by the decree. The Justice Department is --

QUESTION: So then you disagree with the position taken by the District Court. The District Court is absolutely clear in its opinion -- to suggest otherwise is disingenuous -- absolutely clear that the District Court thinks that he has the authority to go to matters not charged and to consider matters.

He says the decree does not address a number of other anti-competitive practices that from time to time Microsoft has been accused of engaging in by others in the industry, and that is his concern. Then he completely rejects at the outset the claim by the government that he is limited. He states the proposition, the government says I am limited to the complaint and the relief afforded for the matters charged. He says that is wrong as a matter of law. Are you with him or not?

MR. CHAPMAN: Your Honor, so long as there is a nexus, I am with him. If there is a nexus relative to other conduct relative to maintaining monopoly power in the relevant market, he is correct.

QUESTION: Wait a minute, counsel. Counsel, you are not convincing me of anything until you hear my question. The District Court judge's opinion which is on review is not so limited as I read it. Now, are you saying if I read it the way I think I see it, he is wrong, or are you saying I am misreading it?

The District Court judge does not say anything about a nexus. He is saying the government's position that he is limited to the charges asserted and the relief therefor is wrong as a matter of law, that he can contest the complaint and look to see whether the complaint is adequate and should have been framed differently.

MR. CHAPMAN: Your Honor, as I read the decision as a whole, I interpreted that statement to mean there must be a nexus. That is how I read it and that is how I would argue it on behalf of any client.

QUESTION: So if I read it otherwise, you would agree that it is wrong as a matter of law?

MR. CHAPMAN: Yes, Your Honor.

QUESTION: Isn't the key dispute in this case whether or not the government should have charged a monopolization claim under section 2?

MR. CHAPMAN: Your Honor, I am not going to look back at what the Justice Department could or should have charged. The charge what they charged and they sought relief, Your Honor, in order to redress Microsoft's advantages attained through its anti-competitive practices.

QUESTION: All the pry-open-the-market language, which is replete in both in the District judge's opinion and in the briefs of amicus here, all assume that the government did or should have filed a monopolization claim under section 2.

MR. CHAPMAN: I don't believe so, Your Honor. I think it comes within the prayer for relief, as is stated the court can inquire as to relief that is to be accorded, given the practices charged and given what is addressed in the proposed consent decree.

QUESTION: Does that mean that any time the Antitrust Division brings a case alleging certain practices are illegal under the rule of reason and asks for general relief in the prayer, a District judge can inquire into the question, depending on the size of the market, as to whether the government should have brought a monopolization claim?

MR. CHAPMAN: No, Your Honor. But as counsel responded to Chief Judge Edwards' question, is it appropriate to look into relief for matters cited in the complaint, the answer was yes, and that is CCIA's position, Your Honor. There is a nexus between the application market and the operating systems market.

In fact, as we said in our brief, and as covered by the competitive impact statement and the complaint itself, there are substantial interrelated barriers to entry that are not addressed by the decree, not addressed at all, not even addressed by Judge Arrow in his affidavit, and that is important to this industry, where Microsoft controls a critical industry product.

Even though Judge Sporkin didn't rely on the Apple submission, there it is. There is a case, whether it is true or not, that presents substantial evidence and indicates evidence of Microsoft's monopoly power to leverage into the applications marketplace, where we require -- and Judge Arrow says in his affidavit we need open markets. There was the tipping, there was the tipping, but we don't want to address natural barriers to entry. Those natural barriers to entry are again artificial.

If we look at the charts in the competitive impact statement, Tables I and II, Table II, the percent -- if I may finish this point, Your Honor -- the percent of units covered by per processor licensing over a period of 6 years went from 20 to 60 percent. That tips the scales toward monopoly position and monopoly power. That must be corrected. That must be corrected.

QUESTION: In the applications market?

MR. CHAPMAN: Yes, but more directly within the decree.

QUESTION: In the applications market?

MR. CHAPMAN: We are saying that the nexus is there in terms of needing to relieve --

QUESTION: There is monopoly power in the applications market?

MR. CHAPMAN: No, I am not saying that. It is leveraging the power from the operating systems market.

QUESTION: Well, why did you say yes three times? I kept asking and you kept saying yes, there is a decided a decided --

MR. CHAPMAN: I am sorry, Your Honor. I am saying it is a leveraging of monopoly power from the operating systems marketplace. In the same way that Your Honor directed a question to counsel, that leverage will come from the NT. In a statement filed with the SEC signed by Microsoft's Chairman Gates, its Board of Directors, NT has a migration strategy. It is here in their SEC filing with NT, and I will simply conclude by reading that. It is the leverage of monopoly power from the operating systems marketplace.

QUESTION: Even assuming that may turn out to be true, there is nothing that stops the government or any of the private parties from bringing an action, right?

MR. CHAPMAN: That is not the point. The government has a duty in a public interest to make sure that this decree is adequate, given the record.

QUESTION: Adequate on its terms.

MR. CHAPMAN: An NT, Windows NT, here it says, provides for the automatic migration of information from previously installed versions of Windows. And where is that? Right here in a signed statement by the Board of Directors and the Chairman of Microsoft that is capable of running on Intel 386, 486 and Pendium systems.

That, Your Honors, is the relevant product market in this case and the decree fails to address that and, in fact, the decree fails to address any practical reasonable and adequate relief.

QUESTION: And did the complaint fail to address that?

MR. CHAPMAN: The complaint prays for relief, as well, that will redress the wrongs of Microsoft.

QUESTION: Within the confines of the identified relevant market?

MR. CHAPMAN: That is correct. There must be a nexus, the identifiable relevant market.

QUESTION: As the government defines it?

MR. CHAPMAN: The has defined it but has no rational basis for excluding NT from the consent decree. It fact, it tries to hedge and the --

QUESTION: Well, we do have case law and our case law does not suggest that a District Court judge has the authority to second-guess the prosecutor, so to speak, in deciding how to frame the complaint.

THE COURT: Your time is up, counsel.

MR. CHAPMAN: Thank you, Your Honor.

THE COURT: Mr. Jacobovitz?

ORAL ARGUMENT OF JEFFREY S. JACOBOVITZ, ESQ.,

AMICUS CURIAE, ON BEHALF OF I.D.E. CORPORATION

MR. JACOBOVITZ: May it please the Court: My name is Jeffrey Jacobovitz, and I represent I.D.E. Corporation, whose trade name is IDEA Associates. IDEA Associates is an original equipment manufacturer or an OEM located in Billerica, Massachusetts.

The issue we would like to address today is whether the court properly held that the consent decree was an ineffective remedy and not in the public interest. IDEA purchases operating systems from Microsoft and incorporates the systems into computers for sale to consumers.

We presented the following facts to the District Court: One, IDEA, as an OEM, entered into licensing agreements with Microsoft that contained minimum commitment and per processor licensing restrictions. The Department of Justice determined that these contracts were illegal under the Sherman Act and banned them prospectively in the consent decree.

Pursuant to the illegal requirements, in the past IDEA made minimum commitment payments or take-or-pay payments to Microsoft of over $2.5 million. Only a small portion were used. Microsoft still has prepaid royalties of ours of over $2 million and they refuse to return it. The consent decree did not provide for the refund of any of the OEM prepaid royalties.

However, there is more significant competitive issue involved than just the return of money and determining whether the consent decree was an effective remedy that cured the ill effects of the illegal behavior. A principal goal of the consent decree was to insure that OEM's purchasing decisions in the future would not be distorted by the existence of anti-competitive license terms.

In their competitive impact statement, the government notes that unused balances of minimum commitments extends the effective duration of the OEM contract, impeding access of PC operating system competitors to the OEM channel.

The consent decree provides a prospective ban on minimum commitments, but no retroactive relief. The government has completely overlooked --

QUESTION: Why isn't that within the government's discretion to determine not to seek relief in a situation covering your client? Why couldn't the government take the position that is a private litigation, if IDEA asserts that the practices that led to its second agreement or its settlement agreement were illegal, it can defend on those grounds against the $2 million claim?

MR. JACOBOVITZ: But these licensing restrictions were the very basis of the complaint that the government filed and their goal was to insure that operating system competitors of Microsoft --

QUESTION: Couldn't you have raised this issue in your own private litigation with Microsoft?

MR. JACOBOVITZ: We certainly could, Your Honor.

QUESTION: And what is your response to the footnote, I think it is in Microsoft's brief, maybe the government's also, to the effect that your claim doesn't raise antitrust injury in the Brunswick and I guess Manfred case since?

MR. JACOBOVITZ: Your Honor, in examining Brunswick, if you look at the causal connection between

the antitrust violation and the harm, here we are a direct purchaser. Damages are not speculative and there is no chance of duplicative recovery, which is a concern in standing cases. We have direct injury of --

QUESTION: The real key in Brunswick and Manfred, it seems to me, is those cases involve an injury, an Article III injury which is exactly the injury the antitrust laws wish to produce. Therefore, the court would not consider it as antitrust injury. It goes to the Article III injury, which is exactly what the antitrust laws are designed to encourage, which is competition. That is not your case, and I thought is what your response would be. In this respect, the OEM is much more in privity with the software applications figures.

MR. JACOBOVITZ: The OEM is the most immediate victim of these licensing restrictions.

QUESTION: Well, it is possible, but you have discarded their footnotes. Still the question is why do they have to bring your case in? As a matter of prosecutorial discretion, why can't they decide, look, we are not going to get into contract disputes, let IDEA raise that in their private litigation? Why can't the government make that decision?

MR. JACOBOVITZ: Your Honor, they could make that decision. But if you look at Judge Sporkin examining this consent decree and he is trying to examine whether in fact it creates an effective remedy to the competitive harms that are alleged, it does not, because IDEA, just like other OEM's, suffered from these restrictions and have unused minimum commitments, are forced to continue to use Microsoft. We have calculated that it would take approximately 20 years until we have recouped these royalties. That means for 20 years we have to use Microsoft.

QUESTION: Aren't you making in effect a jury kind of argument? You are saying the government should have included retroactive relief.

MR. JACOBOVITZ: Absolutely.

QUESTION: That is not getting you anywhere?

MR. JACOBOVITZ: Your Honor, they don't have to, but they should have, because if they wanted to remedy the competitive harm and create a level playing field, they should have included retroactive relief.

QUESTION: Well, doesn't that depend on who the Assistant Attorney General of Antitrust is? Is that a question for the court?

MR. JACOBOVITZ: That is a question for the court, if you are evaluating whether in fact Judge Sporkin properly held that this was an ineffective remedy, that this did not cure the ill effects of the harms that were alleged by the government, which we think is your standard. Whether in fact this antitrust remedy pried the market open to competition--

QUESTION: Pry the market open to competition, as I said before, seems to me is based on a notion that the government should have brought a monopolization claim under section 2.

MR. JACOBOVITZ: My understanding, Your Honor, is that they did bring a monopolization claim. There was a section 2 claim that was alleged and it was --

QUESTION: I read the record that the government never asserted that Microsoft's monopoly position came from illegal practices, but, rather, from a natural monopoly. Indeed, that is what Dr. Arrow previously described in his affidavit, and he has had more --

[Laughter.]

Dr. Arrow made very clear, it seems to me, in his statement that Microsoft's monopoly position was not achieved through illegal practices even under the rule of reason.

MR. JACOBOVITZ: Your Honor, first of all, we submit that you can bring a monopoly case, even in fact if the monopoly was naturally achieved, if in fact there is predatory or anti-competitive behavior to maintain that monopoly.

QUESTION: That is possible, true, you are absolutely right, such a case might be brought by a different Justice Department at a different time. Do you think it is up to the District judge to take that over?

MR. JACOBOVITZ: It is up to the District judge to determine whether in fact the remedy is effective, whether in fact the government --

QUESTION: Well, that is the tail wagging the dog, isn't it? But you are grabbing hold of a remedy and then you are interpreting to bring an entirely different case.

MR. JACOBOVITZ: But that is the judge's jurisdiction under the Tunney Act.

QUESTION: That would be unconstitutional, wouldn't it?

MR. JACOBOVITZ: Absolutely not. It is not a violation of separation of powers. It is what the Tunney Act mandates, and it mandates the judge to --

QUESTION: It doesn't necessarily follow.

[Laughter.]

QUESTION: It doesn't follow at all. That is the problem.

MR. JACOBOVITZ: But we don't concede that in fact it would be unconstitutional, and the Tunney Act does in fact mandate that action by the District Court.

QUESTION: How are you foreclosed in the future from taking competing operating systems as you see fit?

MR. JACOBOVITZ: Because we in fact have to recoup our royalties. We are a small company. We are out $2 million. If we use a competitor, for example, like IBM OS- 2, we have to pay IBM and we still have to pay Microsoft, because we are not recouping our royalties, so it creates an economic penalty or a tax for IDEA. Therefore, we have to keep using Microsoft.

QUESTION: You don't have to, but you have a strong--

MR. JACOBOVITZ: We have an economic incentive to. We don't have to. We can go out of business, also. I mean there are a number of --

QUESTION: You are saying your economic incentive is to continue to sell as much of the existing software of Microsoft that you have?

MR. JACOBOVITZ: Actually, the way it works, Your Honor, is Microsoft is still imposing the minimum commitment and we cannot recoup royalties until we use up $20,000 per quarter. In order to reach that goal, in order to reach that goal and then we could start recouping, if we don't reach that goal, we don't recoup.

QUESTION: Do you have any idea how many other people are even remotely in your circumstances?

MR. JACOBOVITZ: Your Honor, we have tried --

QUESTION: The record does not disclose that.

MR. JACOBOVITZ: We have tried to calculate that from Microsoft's public statements. They have not stated how much it is. We think it is approximately 25.6 million. I have had OEM's contact me about that. There are others out here watching afraid to come forward, but there are other OEM's who are in fact harmed by this.

QUESTION: Why is IDEA so courageous, in light of all the fear? Is it $2 million that concentrates the mind?

MR. JACOBOVITZ: My client is a man of principle.

QUESTION: I understand.

MR. JACOBOVITZ: Thank you, Your Honor.

In any event, this will enable Microsoft to maintain market dominance. The Department of Justice --

QUESTION: It causes you to think about another way to achieve the remedy you think you are due.

MR. JACOBOVITZ: Your Honor, Judge Sporkin came up with a perfect remedy to this. He offered for issue a mechanism whereby we would go to a special master and a special master or a neutral arbitrator would essentially help us litigate this issue. Microsoft and the government said no. We were perfectly willing to do this.

QUESTION: That is what I say, so you have to use other available remedies and there are other available remedies, right?

MR. JACOBOVITZ: That is correct, and Judge Sporkin was going to impose it and it was as matter of --

QUESTION: But that is the whole point. That is to say if the trial judge sniffs out anything that is troublesome in life can propose a remedy? That is not what this statute is about. Sure, there are lots of collateral issues of interest and maybe even of great interest, but that doesn't mean a trial judge has the authority to wander in and cure them all. That is not what this statute is about and that is what our case law makes absolutely clear. We have case law that control us.

MR. JACOBOVITZ: Your Honor, I would respectfully disagree, because the case law, at least my interpretation indicates that in fact that the judge has to look at whether this is an effective remedy.

I see my time is almost up and I would like to conclude --

THE COURT: Your time is up. Thank you, counsel.

MR. JACOBOVITZ: Thank you.

THE COURT: You may proceed, counsel.

ORAL ARGUMENT OF GARY L. REBACK, ESQ.,

AMICUS CURIAE, ANONYMOUS AMICI

MR. REBACK: Thank you. May it please the Court: My name is Gary Reback, appearing here on behalf of the Doe Amici.

We are not asking this Court, nor have we asked any court to charge Microsoft with anything. We are merely asking this Court not to require the lower court as a matter of law to enter a consent decree, when the lower court had problems and questions and the Justice Department wouldn't answer those questions. That is what we are here about. That is how we characterize this case.

QUESTION: There is no limit on the questions that may be asked?

MR. REBACK: There is virtually no limit on the questions that may be asked. There are certainly limits that the types suggested --

QUESTION: There are two questions that must be answered?

MR. REBACK: Yes, there are certainly very strong limits as to what basis the District Court can reject the decree. We are not asserting that the District Court can compel the Justice Department to fix something that Microsoft didn't break in the first place. So I want to make that clear from our position.

I understand your point about pries open market to competition, but it is the fact that all those cases say you have to cure the ill effects. The relief here is prospective only. When it came to the Court of Appeals --

QUESTION: Suppose 2 percent of Microsoft's market share in the operating systems market is attributable to the practices to which the government directs its complaint attack, then how would the government go about identifying a relief that would knock Microsoft down 2 percent?

MR. REBACK: I don't know how to answer that question, because I don't know --

QUESTION: Nor do I, nor do I think anybody does. Your answer is you knock them down to 20 percent.

MR. REBACK: No, sir. No, sir. I am not asserting that we have to have any change in Microsoft's market share. The gist of the complaint here was that these practices prevented competitors from getting installed base. And although the Justice Department has said here, they said in this Court that the effect of those practices were immaterial and unmeasurable, that is not what they told the District Court. They told the District Court exactly the opposite in their principal brief in the lower --

QUESTION: Counsel --

MR. REBACK: May I just make this point, and I don't mean to be disrespectful.

QUESTION: Please go ahead.

MR. REBACK: All of you are arguing it or approaching it from the proposition of what the government said in its reply brief. I agree, if --

QUESTION: I was focusing particularly on Dr. Arrow's statement.

MR. REBACK: I'm sorry, sir?

QUESTION: I was particularly focusing on Dr. Arrow's statement.

MR. REBACK: Let me get to that. But what they said to the lower court was "to be sure, the challenged practices had serious anti-competitive effects." That is what they said to the lower court. Up here they say the practices are immaterial --

QUESTION: Of course, you have serious anti- competitive effects, if it prevents somebody else from getting into the market. They could present a barrier for entry prospectively without having been responsible for Microsoft achieving market share in advance.

MR. REBACK: That is conceivable, but that was not the gist of the case.

QUESTION: That is the gist of Dr. Arrow's statement, is it not?

MR. REBACK: No, sir. I would like to make clear that the government files a complaint in the case based on the theory that these practices prevented other people from getting an installed base. We show up on the scene and we say it had that effect and it also had the effect of creating a large installed base for Microsoft. Professor Arrow takes exception to that, as do you, and my response is fine --

QUESTION: Well, I am asking questions, counsel. I haven't taken a position.

MR. REBACK: I'm sorry. My point is that Professor Arrow does take exception to that. He says this didn't contribute to Microsoft's installed base materially, because the tipping event already occurred. But he doesn't say, nor could he say that these practices didn't inhibit others from having an installed base and thereby providing competition.

I respectfully disagree, sir, on the notion of what the District Court was trying to do. What he was trying to do was put the market back to the way it would have been --

QUESTION: Counsel, when you respectfully disagree, I want you to know that I was quoting this court.

MR. REBACK: Yes, sir.

QUESTION: You respectfully disagree with the quote or this holding or what?

MR. REBACK: I may have misunderstood.

[Laughter.]

I may have misunderstood Your Honor's point. But my point is that the court was trying to put the market back to the way it would have been but for these anti-competitive practices, not solely in terms of Microsoft's installed base. I concede that Professor Arrow --

QUESTION: As Judge Silberman asked you, how can you possibly measure that?

MR. REBACK: How could you measure what they would have had?

QUESTION: When you had the original event of the installed base developing, without regards to the practices that are now in issue, so how do we know what percentage those later developed practices had on the market? The base occurred because early on DOS -- later Windows, but DOS principally -- was accepted as the operating system. Microsoft had it and people were willing to accept it. There were no competitors running around screaming anti- competitive effects at that time, is that right?

MR. REBACK: I'm sorry, sir?

QUESTION: Isn't that right? At the very beginning, DOS was accepted?

MR. REBACK: That is not alleged in the complaint, that there were anti-competitive practices.

QUESTION: That is why I say I don't know how you assert that these licensing practices and other practices that came later, how you can't comfortably tell us how much of an impact they had on the market dominance. Dominance clearly occurred in the first instance because DOS was the accepted system and Microsoft had that system.

MR. REBACK: There are two parts to the question, and I would like to address them both. There is the difference between DOS and Windows which i want to hold for just a second. That is an important difference and you alluded to it before.

Let me address the other part of the question, which is the tip. The tip occurred prior to the anti- competitive effects. It did occur and Microsoft thereby might have achieved market dominance. That is what Professor Arrow says. I am not quibbling with that. But the whole gist --

QUESTION: Wait a minute. Wait a minute. Let's finish it up. Indeed, with some of these practices, the reason they were able to leverage the way they did was because they had the dominance which came at a time when they didn't do anything that was unlawful. They got the market. The market was given to them. DOS was accepted, they had it and they got it. Later on, because they had it, they did use these leveraging techniques. They couldn't have used these leveraging techniques but for the fact that they had the market which they got lawfully, right?

MR. REBACK: I don't necessarily agree with that. Take the NT situation, for example.

QUESTION: Let's start with the beginning first and then come to Windows and NT.

MR. REBACK: Could they have engaged in these practices without DOS having 70 percent of the market?

QUESTION: Would anyone in their right mind have done it if they had 2 percent? Would you have gone in and said I want you to sign this contract?

MR. REBACK: It depends on what the rest of the market looked like. If the rest of the market was highly fragmented -- but let me assume that you are correct --

QUESTION: Well, let's assume they had 2 percent and OS-2 has 78 percent. Would they have gone to anyone with these licensing techniques?

MR. REBACK: I doubt people would have accepted it under those conditions.

QUESTION: Of course.

MR. REBACK: But there is an enormous difference between having 70 percent of a market of 20 million when most people haven't bought computers yet and having 79 percent of a market after most people have bought computers. There is a big difference between market share and real market power, as this Court has perceived in many cases. I don't think we should confuse the two things here.

QUESTION: Do we have any evidence establishing that Microsoft exercises market power besides the Dr. Arrow declaration?

MR. REBACK: I don't understand the question.

QUESTION: Do we have any evidence in this case? No, of course not.

MR. REBACK: There is a lot of information in our submission, but not --

QUESTION: No evidence, no court can make a judgment with confidence even that Microsoft exercises market power.

MR. REBACK: None beyond the charges in the complaint in the Arrow declaration.

QUESTION: That is not evidence. Let me get to that. It is your argument I think -- you are having a lot of difficulty in this Court, because we are terribly concerned about the District Court going beyond the allegations in the complaint.

MR. REBACK: I would like to address that.

QUESTION: I know, but I want to go to an even more perplexing question for me, which is it seems to me all the amicus take the position at minimum that the District judge must assume that the allegations of the complaint are made applicable.

MR. REBACK: No, sir.

QUESTION: You don't take that position? All of you argue at minimum, and the government doesn't even follow that in this case, that you measure the adequacy of the remedy based on the allegations in the complaint.

MR. REBACK: Yes.

QUESTION: So you naturally assume that the allegations are made out.

MR. REBACK: There is case law for the proposition that we should assume the government would win, if the case was --

QUESTION: There is one case on that. I am very troubled about that, counsel, and I will tell you why I am troubled. Suppose you were the Assistant Attorney General for Antitrust, a not inconceivable proposition, and your staff comes to you with a case against an emerging dominant company in a dominated industry somewhat analogous to this or perhaps an IBM case, any one of those kinds of cases, and the staff says we think we have the following case:

We have five different allegations we think we can make, and the economists and lawyers all get together and you ask them what are our chances of winning, and your best lawyers and economists altogether say, well, we think we have a 55 percent chance of winning in fact in the trial, the Court of Appeals and perhaps the Supreme Court of the United States, maybe close to 50/50.

And you ask the next question: How much would it cost to litigate this? Well, it will probably take 7, 8 or 9 years, maybe $25 million. Well, how many other antitrust cases will we be bringing in that period of time, if we take this case? Well, we are going to lose about half the cases we could otherwise bring.

Now, have you engaged in any preliminary discussions? And your staff says yes, I think we can settle this case for half of the -- they will agree to discontinue half the practices we are alleging. Now, if you are Assistant Attorney General, do you buy that deal?

MR. REBACK: If the deal cures the ill effects under the Gypsum case, the harm that occurred before I buy the deal. If it doesn't cure the harm --

QUESTION: Are you arguing with my hypothetical?

MR. REBACK: No, I am trying to address your hypothetical.

QUESTION: What is the answer to the hypothetical?

MR. REBACK: You have got to give me one more fact.

QUESTION: What is the other fact?

MR. REBACK: The other fact is does half the relief that I ask for un-do the harm that they did before? If it does, I take it.

QUESTION: Not totally?

MR. REBACK: Then I don't take it.

QUESTION: Then you don't take it.

MR. REBACK: The standard is as far as is practical. If it doesn't un-do the harm, it won't meet the minimum test. May I just explain: The way we read the Triennial cases, in response to Your Honor's question, is we are almost irrelevant. All the government has to do is make a substantial factual record based on recent analysis. They then make predictive judgments based on that and meet the minimum threshold of curing the harm, and if they do those things, the judge could only reject with exceptional confidence, and there is no record here.

QUESTION: You are saying in the hypothetical I gave you had to go through all six allegations and go for broke, because you can't settle this case, in which you had 50 percent chance of prevailing, because economic theories change, legal theories change, you only have a 50 percent chance at prevailing, you can't settle this case for 50 percent relief?

MR. REBACK: I don't want to mince words here, but if the remedy doesn't get over the hurdle of Gypsum --

QUESTION: There is no special hurdle. It is 50 percent of the relief.

MR. REBACK: No, I can't agree with that, Your Honor, even though it cures what was done so far as practical or it doesn't. And if it doesn't, I can't take it if it is 50 or 80 or 97. It has got to make it over that minimum hurdle. That is my point. There is a minimum. That is what those Supreme Court cases say, there is a minimum.

QUESTION: The Supreme Court cases say if there is a different Assistant Attorney General who goes the other way, that you or someone else has the right to say I want to know what else was going on, I want the investigatory file, I want to see whether a different complaint could be made out and I want to see whether this was 50 percent as opposed to 100 percent, and if it is only 50, the rest has to be put in, that is the public interest test. Is that it?

MR. REBACK: No. I understand Your Honor's concern and I want to address that, and I appreciate the opportunity to do so. We are not alleging that anybody can make the government bring charges beyond what they wanted to bring. Our whole case is tied to the point I was just making to Your Honor, the effectiveness of the remedy. These other practices like "vaporware," the reason he was concerned about them is that Microsoft was engaged in them and they had anti-competitive effects. They would eviscerate the remedy here.

In other words, that they would contribute to Microsoft's ability to maintain the monopoly in the market charges in the complaint with respect to the products charged in the complaints at the same time charged in the complaint. He can't go off and assert that he is going to deny the complaint because it didn't charge them with X or Y, unless it has a remedial effect on this market. That is the scope. Courts deal with remedies, not with charges, and I concede that point.

QUESTION: Mr. Reback, to get back to Judge Silberman's hypothetical, do I understand that if the settlement does not result in undoing past effects, then there is only two choices before the prosecutor, either to go forward to trial or to drop the case?

MR. REBACK: Yes, so far as practicable. In other words, I acknowledge the point that there are going to be these 2 percent factors and we are not here quibbling about 2 percent.

QUESTION: No, no, no, wait a minute. Judge Buckley is getting to the point I was trying, and that is my next question. You are creating, are you not, by your answer to my question? If we adopted your view of what the law is, we would create an enormous disincentive to the Assistant Attorney General in that case, because she then is faced with this enormous prospect or this enormous burden of resources and a 50 percent chance of victory, has one of two choices, as Judge Buckley says, one of which is, okay, let's drop this entire case, let's not dare raise a complaint because we will get ourselves in the hands of a District Court who will then say, well, you haven't reached your tipping point, as Mr. Reback described it, and the Court of Appeals put it in their opinion, and so we can't dare bring this action, so let's drop it and the government loses the 50 percent relief that it could otherwise have.

MR. REBACK: Yes, if the relief is ineffective --

QUESTION: Isn't that exactly what I said, the government could not bring that action combined with a consent decree that favored 50 percent of the relief that it thought initially it might want, because it either had to go for all or nothing?

MR. REBACK: The reason I am --

QUESTION: What you are missing is the uncertainties of litigation. People settle cases, but the government no less than non-government settles cases often based on uncertainties of litigation. And can they not abandon the case based on the uncertainties of litigation? And if one looks at, let us say, the IBM case, one has to conclude that there are great uncertainties in litigation in antitrust cases, aren't there?

MR. REBACK: Indeed, so there are. Congress factored in the consideration of the Tunney Act the cost that Your Honor is speaking of, but the court cannot and should not put its imprimatur on an ineffective settlement, and the cases say prospective only, that doesn't un-do the damage is ineffective.

What is confusing here is that we have come along below and said there are these installed base problems with respect to Microsoft. The government has argued about that and the court has responded to that. They are now retreating back to the complaint that they brought which says there are problems that inhibited others' ability to acquire and install base, and what the lower court respectfully said was you have got to make at least some attempt --

QUESTION: There is one other question I have to ask, counsel, in this case. I am very troubled at the notion of an anonymous amicus coming in as an accuser. It seems to me if Microsoft has a claim to appeal, it has a rather good claim for an appeal of the ancillary order allowing an anonymous amicus to come in.

Now, how can this be justified in this kind of case? For instance, isn't it quite possible that you represent people without standing under the antitrust laws?

MR. REBACK: It is possible.

QUESTION: Right, and wouldn't that be very troubling to allow somebody to cause this enormous bit of litigation who didn't even have standing?

MR. REBACK: No.

QUESTION: Why?

MR. REBACK: Because the Tunney Act specifically says that the normal rules of evidence that you are talking about don't apply.

QUESTION: That isn't standing. It is not evidence.

MR. REBACK: I believe that standing is not evidence, but my point is the Tunney Act specifically says that the judge could go to anyone and get information --

QUESTION: Suppose you represented somebody who wanted to blackmail Microsoft and didn't have any interest in the antitrust laws whatsoever in terms of economic competition.

MR. REBACK: Yes, sir.

QUESTION: Yes?

MR. REBACK: The judge can get information from whatever source he chooses. And whether we have some ulterior motive --

QUESTION: And it is equally good.

MR. REBACK: I beg your pardon?

QUESTION: It has to be equal credence, equally good.

MR. REBACK: No, no, no. Oh, he considers it --

QUESTION: I mean by definition, once you say I am from an anonymous source, to come at Judge Silberman's question another way, if we weigh that, it should always be valued at zero or less.

MR. REBACK: Well, if it were --

QUESTION: Always.

MR. REBACK: That may be Your Honor's --

QUESTION: That or less part is about equal in terms of difficulty in tackling the 2 percent.

[Laughter.]

MR. REBACK: Your Honor, that was not Judge Sporkin's view, because the parties wouldn't give him the information that he asked for. I again say we are relevant to this procedure, if the government supplies a record. Then you could give us less than zero and who cares what we say?

THE COURT: Your time is way over.

MR. REBACK: I beg your pardon, Your Honor. Thank you very much.

THE COURT: That is all right. You have been aggressive in getting more, so I can't complain.

Thank you, counsel.

Mr. Klein, you want rebuttal?

MR. KLEIN: We have nothing further, unless the Court has questions.

THE COURT: Mr. Urowsky, rebuttal?

ORAL ARGUMENT OF RICHARD J. UROWSKY, ESQ.,

ON BEHALF OF APPELLANTS, MICROSOFT CORPORATION -- REBUTTAL

MR. UROWSKY: Thank you, Your Honor.

QUESTION: Do you want to make an argument to support that footnote in your case?

MR. UROWSKY: If I may do that just in a moment, Your Honor, please.

I want to address just a very small number of points. On the issue of installed base, Dr. Arrow's affidavit I think makes quite plain that the installed base could not be a result of the licensing practices, because even in --

QUESTION: Is that your point?

MR. UROWSKY: I will move on to another point. Second, it should be clear to the Court at all times that per processor licenses were not imposed on OEM's by Microsoft. There were other license alternatives that many, many, many manufacturers elected to take, and the form --

QUESTION: Do we need to decide that?

MR. UROWSKY: No, Your Honor, but I make the point because the word "leverage" was used in connection with these licenses.

QUESTION: Lots of hypotheticals were raised.

MR. UROWSKY: My final point on Brunswick, Your Honor, I don't believe that the Brunswick analysis of antitrust injury has been limited to the specific circumstances of the Brunswick case where Your Honor was precisely correct --

QUESTION: Manfred, which is the second case or the latest case on antitrust also involving claimed that in a merger, the Court made clear that the reason why it is not antitrust injury is the Article III injury is precisely what the antitrust laws were to encourage. That is not this case. It seems to me that IDEA would have a damn good argument in court that the injury it suffered, if it was attributable to a practice which was a violation of the rule of reason, vis-a-vis the applications manufacturer, it would have privy or at least a certain same claim. I don't want to make the private litigation argument IDEA may raise against Microsoft, but it seemed to me you invited it when you put your foot up.

MR. UROWSKY: I beg respectfully to disagree with the Court's analysis. The Court is entirely correct that both in Brunswick and Manfred, the plaintiff was essentially claiming as injury the fact that it wasn't given some competitive advantage by using --

QUESTION: The injury it was claiming came from the merger and it would be under fiercer competition.

MR. UROWSKY: Precisely.

QUESTION: Unless there was predation, that would be exactly what the antitrust laws wished to encourage.

MR. UROWSKY: Precisely, but there are other cases. For example, when employees of a company that goes out of business allegedly for antitrust reasons sue, they are found not to have sustained antitrust injury --

QUESTION: Yes, but they are in privy with the employer and he obviously has no ground.

MR. UROWSKY: I don't think it's a question of privy.

QUESTION: Well, they are in the same injury category.

MR. UROWSKY: Their injury --

QUESTION: I think the OEM here is much closer to the application software manufacturer. Anyway, that is a good version, but you didn't cite in the other cases. You cited Brunswick.

MR. UROWSKY: The leading case.

THE COURT: Your time is up, counsel. I thank all the parties.

The case is submitted.

[Whereupon, at 11:00 o'clock a.m., the case in the above-entitled matter was submitted.]

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