IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Petitioner,

v.

MICROSOFT CORPORATION,

Respondent.

Supplemental to

Civil Action No. 94-1564

Hon. Thomas Penfield Jackson

REPLY BRIEF OF PETITIONER UNITED STATES OF AMERICA

Joel I. Klein

Assistant Attorney General

A. Douglas Melamed

Principal Deputy Assistant Attorney General

Rebecca P. Dick

Director of Civil Non-Merger Enforcement

Christopher S Crook

Chief

Phillip R. Malone

Steven C. Holtzman

Pauline T. Wan

Karma M. Giulianelli

Michael C. Wilson

Sandy L. Roth

John F. Cove, Jr.

Attorneys

U.S. Department of Justice

Antitrust Division

450 Golden Gate Ave., Room 10-0101

San Francisco, CA 94102

(415) 436-6660

TABLE OF CONTENTS

INTRODUCTION	1

MICROSOFT'S REQUIREMENT THAT PC OEMS LICENSE ITS SEPARATE INTERNET EXPLORER PRODUCT AS A CONDITION OF RECEIVING WINDOWS 95 VIOLATES SECTION IV(E)(i) OF THE FINAL JUDGMENT	3

MICROSOFT'S FORCED DISTRIBUTION OF INTERNET EXPLORER IS NOT MADE LAWFUL BY SECTION IV(E)(i)'S PROVISO REGARDING THE DEVELOPMENT OF INTEGRATED PRODUCTS	5

The Plain Meaning of "Developing Integrated Products"	6

The Facts Alleged by Microsoft Regarding the

Background To and Negotiation of the Consent

Decree Are Consistent With the Government's Position	7

The Negotiation of the Decree	7

Microsoft's Argument that the Government Was

"On Notice" of Its Plans Regarding Windows 95 and

IE is Legally and Factually Wrong	9

Microsoft's Analogies to Other So-Called

"Integrated" Features of Windows Are Immaterial	13

THE RELIEF REQUESTED BY THE UNITED STATES IS SIMPLE, STRAIGHTFORWARD, AND IN THE PUBLIC INTEREST	15

IE 4.0	15

IE 3.0	16

MICROSOFT'S NON-DISCLOSURE AGREEMENTS	18

OTHER ISSUES	20

The United States' Petition is Not Barred By Equitable Estoppel	20

Microsoft's Request for Extensive Proceedings and Discovery	22

The Confidentiality of Microsoft Documents	23

CONCLUSION	25

TABLE OF AUTHORITIES

Cases

Hecht Co. v. Bowles, 321 U.S. 321 (1944)	19, 20

Heckler v. Community Health Services, 467 U.S. 51 (1984)	20, 21

Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984)	5

McComb v. Jacksonville Paper Co., 336 U.S. 187 (1949)	19

United States v. Armour & Co., 402 U.S. 673 (1971)	22

United States v. ITT Continental Baking Co., 420 U.S. 223 (1975)	22

Utah Power & Light Co. v. United States, 243 U.S. 389 (1916)	21

ATC Petroleum, Inc. v. Sanders, 860 F.2d 1104 (D.C. Cir. 1988)	21

Cia Petrolera Caribe, Inc. v. Arco Caribbean, Inc.,

754 F.2d 404 (1st Cir. 1985)	20

Clayman v. Goodman Properties, 518 F.2d 1026 (D.C. Cir. 1974)	22

Digidyne Corp. v. Data General Corp., 734 F.2d 1336 (9th Cir. 1983)	5

EEOC v. National Children's Center, 98 F.3d 1406 (D.C. Cir. 1996)	24, 25

Food Lion, Inc. v. United Food and Commercial Workers Union,

103 F.3d 1007 (D.C. Cir. 1997)	22

GAO v. GAO Personnel Appeals Board, 698 F.2d 516 (D.C. Cir. 1983)	21

Grumman Ohio Corp. v. Dole, 776 F.2d 338 (D.C. Cir. 1985)	21

Hospital Corp. of America v. FTC, 807 F.2d 1381 (7th Cir. 1986),

cert. denied, 481 U.S. 1038 (1987) (emphasis added)	20

Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich

Legal & Professional Publications Inc., 63 F.3d 1540 (10th Cir. 1995)	5

Papago Trial Utility Authority v. Federal Energy Regulatory Comm'n,

723 F.2d 950 (D.C. Cir. 1983)	22

United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995)	6, 23

Williams v. Edwards, 87 F.3d 126 (5th Cir. 1996)	20

Dixon v. Barry, 967 F. Supp. 535 (D.D.C. 1997)	20

In re Data General Corporation Antitrust Litigation,

490 F. Supp. 1089 (N.D. Ca. 1980)	5

Martin Marietta Corp. v. Dalton, 974 F. Supp. 37 (D.D.C. 1997)	24

Statutes

15 U.S.C. § 16(b)-(h) (1994)	23

15 U.S.C. § 1313(c)(3)	24

15 U.S.C. § 1313(d)(1)	24

Legislative History

The Antitrust Procedures and Penalties Act: Hearings on S. 782 and S. 1088

before the Subcommittee on Antitrust and Monopoly of the Committee

on the Judiciary, 93rd Cong., 1st Sess. (1973)	23

Antitrust Procedures and Penalties Act, H.R. No. 93-1463, at 6539 (1974),

reprinted in 1974 U.S.C.C.A.N. 6535	23

INTRODUCTION

. . . . [A]t the moment a lot of external people are asking if we will be shipping internet apps [applications]. The position we have taken so far is that Chicago [Windows 95] contains all the plumbing you need to hook up to the net -- but cool apps like Mosaic [the Internet browser] are stuff you need to obtain from 3rd parties.

E-mail from Alec Saunders of Microsoft to Steven Sinofsky, April 20, 1994.

[T]here are no plans to ship the Mosaic software in the Windows 95 box when it ships in August of this year. Our plan is to deliver this capability shortly after Windows 95 ships.

Draft Q & As for Bill Gates' January 11, 1995 announcement that Microsoft was licensing Mosaic Internet browser technology from Spyglass.

Microsoft's Internet Explorer browser was developed as, and in every significant way continues to be, a separate product from Microsoft's Windows 95 operating system. Microsoft has named, packaged, and positioned Internet Explorer as a separate product; it aggressively advertises and markets it as a separate product; and it is currently in the midst of an all-out "browser war" to gain users and browser share in what it sees and closely tracks as a separate browser market. Indeed, as recently as December 1996, four months after IE 3.0 was released, Microsoft internal documents continued to describe IE as a separate product -- "just an add-on to Windows which is cross-platform" See Confidential Declaration of Mark C. Gaspar (hereinafter "Gaspar Conf. Decl."), ¶ 17, Exh. 14.

Now, however, following the commencement of the United States' investigation and the filing of this contempt action, Microsoft seeks to rewrite this history -- to disavow everything it has told millions of consumers -- by attempting to characterize Internet Explorer as an "integrated" component of Windows 95, rather than a separate product.

Section IV(E)(i) of the Final Judgment expressly prohibits Microsoft from requiring PC OEMs, as a condition of licensing Windows 95, also to license another product such as Internet Explorer. Microsoft does not dispute most of the elements of the United States case against it: that Windows 95 is a "Covered Product" under the Final Judgment; that Windows 95 is "licensed" to OEMs; that this license is "conditioned" on OEMs licensing Internet Explorer; and that Internet Explorer is essentially a separate or "other product."

In fact, rhetoric aside, Microsoft's Memorandum in Opposition (hereinafter "MS Opp.") disputes only one element of the United States' case -- specifically, the legal issue whether, notwithstanding the express prohibition in Section IV(E)(i), Microsoft is permitted to require OEMs to license Internet Explorer, as a condition of licensing Windows 95, because of the proviso regarding "integrated products." Although Microsoft concedes that "the proviso does not have some specialized meaning" (MS Opp. at 3), and presumably therefore that discovery is not necessary to understand it, Microsoft's interpretation of the proviso would rob the main clause of Section IV(E)(i) -- the prohibition on coercive marketing of separate products -- of any practical meaning. In essence, Microsoft asserts that "integrated" means whatever Microsoft says it means and that the proviso enables it to put any separate product into a package with Windows 95, whenever doing so will suit its strategic objectives. That interpretation of the proviso would of course render Section IV(E)(i) meaningless. Not surprisingly, it finds no support in the language of the Final Judgment or the circumstances that led to the Court's decision to enter it.

The basic fallacy in Microsoft's position is that it confuses the Final Judgment's prohibition on coercive marketing practices with the assurance of the proviso that Microsoft will be free to develop new, integrated products. Internet Explorer 4.0 is the perfect example of this fallacy. Even under Microsoft's own definition of "integrated" (i.e., "combined," "united," or "incorporated into"), IE 4.0 cannot be said to be integrated with Windows 95. The two products are not now, and have never been, combined, united, or incorporated with each other in any way, except after an OEM or an end user independently chooses to combine them by purchasing or downloading and installing Internet Explorer 4.0 separately, on a PC running Windows 95. In February 1998, when Microsoft has said it will require OEMs to license and distribute Internet Explorer 4.0 as a condition of licensing Windows 95, nothing will change about the nature or characteristics of either product or the technical relationship between them. To the contrary, the only thing that will change, unless prevented by the Court, is Microsoft's use of its market power to force OEMs to license both products, rather than allowing them to choose between IE 4.0 and other browsers. This kind of exercise of Microsoft's contracting power has nothing to do with "developing integrated products."

Even as it admits that this case is straightforward, Microsoft nevertheless seeks to turn it into a prolonged antitrust proceeding and thereby ensure extensive delay -- which will render the critical issues moot and work to Microsoft's commercial advantage and harm consumers by denying them the choices to which they are entitled. The Court should reject this effort and instead rule on the present record that Microsoft is violating the Final Judgment. As will be seen, Microsoft has not raised any genuine dispute about any fact necessary in order for the Court to so rule.

It is especially important that the Court rule expeditiously regarding the intended forced bundling of IE 4.0. Microsoft introduced that product on September 30, 1997, and the United States was informed during a deposition of a Microsoft executive on October 2 that Microsoft intended to require OEMs to license and preinstall it beginning in February 1998. After learning of Microsoft's intent in this regard, and almost immediately after IE 4.0's introduction, the United States filed its Contempt Petition, in the belief that the Court should order Microsoft to comply with the Final Judgment in time to prevent that new, intended violation. Because OEMs need substantial lead time -- often 60 to 90 days -- to decide what software, including browsers, to install on new PC products, the Court should act quickly to enjoin Microsoft's imminent violation and to maintain the status quo with regard to IE 4.0.

MICROSOFT'S REQUIREMENT THAT PC OEMS LICENSE ITS SEPARATE INTERNET EXPLORER PRODUCT AS A CONDITION OF RECEIVING WINDOWS 95 VIOLATES SECTION IV(E)(i) OF THE FINAL JUDGMENT

As set forth in the United States' Petition and supporting Memorandum, Section IV(E)(i) of the Final Judgment expressly provides that Microsoft may not require OEMs to license any "other product" in order to license Windows 95. Microsoft concedes that it requires OEMs to license IE in order to license Windows 95.

Microsoft does not genuinely dispute the mass of evidence that Internet Explorer is treated by Microsoft, and regarded by the market and the industry, as a product separate and apart from Windows 95. This evidence, detailed in the United States' Memorandum in Support of Contempt Petition and supplemented here, shows, among other things, that

Regardless of what it could have called it (see MS Opp. at 29), Microsoft pervasively markets, distributes, and describes Internet Explorer as a product of its own, and not as an operating system update, see Gaspar Conf. Decl., ¶¶ 5, 8, 10, 16, Exh. 2, 5, 7, 13; Declaration of Mark C. Gaspar (hereinafter "Gaspar Decl."), ¶¶ 11-20, Exh. 8-9;

Microsoft tracks consumer usage of each version of Internet Explorer in a separate "space" or "market" from Windows 95; see Gaspar Conf. Decl. ¶¶ 4-8, 11-13, 15-16, Exh. 1-5, 8-10, 12-13;

Microsoft describes Internet Explorer as a product or an "application" that works well with or on top of -- not as part of -- Windows 95, see U.S. Memorandum in Support of Petition at 23, App. Exhibit 22; Gaspar Conf. Decl. ¶ 7, Exh. 4;

Microsoft actively makes Internet Explorer available for non-Microsoft operating systems, markets those versions of Internet Explorer in an identical way as, and often even in the same box with, the version of Internet Explorer for Windows 95, and counts usage of all versions when measuring its Internet Explorer market share; see Gaspar Conf. Decl. ¶¶ 5, 9, 11, 15, Exh. 2, 6, 8, 12; and

There are separate and very different demands for Internet Explorer browsers, on the one hand, and Windows 95, on the other hand. See U.S. Memorandum in Support of Petition, p. 20.

These undisputed facts are precisely the kinds of facts that are ordinarily used in antitrust proceedings to determine whether items sold or packaged together are one product or, as here, two separate products. These facts make clear that Internet Explorer is an "other product" under Section IV(E)(i). Microsoft's requirement that OEMs take Internet Explorer as a condition of licensing Windows 95 thus violates Section IV(E)(i) of the Final Judgment.

MICROSOFT'S FORCED DISTRIBUTION OF INTERNET EXPLORER IS NOT MADE LAWFUL BY SECTION IV(E)(i)'S PROVISO REGARDING THE DEVELOPMENT OF INTEGRATED PRODUCTS

Microsoft ignores the prohibition in the main clause of Section IV(E)(i) and focuses, instead, on the "develop[] integrated products" proviso to that Section. The problem is that, by ignoring the prohibition in the main clause, Microsoft has proposed an arid, senseless reading of "developing integrated products" that would render Section IV(E)(i) meaningless. According to Microsoft, the proviso gives it "unfettered freedom" to create whatever "packages" of products it chooses (MS Opp. at 17) and to require OEMs to take the whole package without violating the Final Judgment; indeed, in its discussions with the government before the Petition was filed, Microsoft flatly stated that its interpretation of the Final Judgment would enable it to require OEMs to put "orange juice" or "a ham sandwich" in the box with a PC preinstalled with Windows 95.

Microsoft's position defies common sense, and violates elementary principles of interpretation, because it makes Section IV(E)(i) meaningless. Microsoft's reliance, elsewhere in its Opposition, on a dictionary definition of the single word "integrated" -- "'combined,' 'united,' or 'incorporated into'" (MS Opp. at 21) -- cannot save its position because those terms, read without any contextual limit, as Microsoft proposes to read them, could encompass complements like a lamp and a lightbulb, and even unrelated products like PCs and ham sandwiches, so long as they are "combined" in a package selected by Microsoft. What is required here, as in all consent decree cases -- and what the government offers -- is a straightforward reading of Section IV(E)(i) as a whole that gives meaning to all its provisions. See id. at 20.

The Plain Meaning of "Developing Integrated Products"

Microsoft concedes that the Final Judgment is "straightforward" and that the term "integrated products" has a plain and unambiguous meaning. In the United States' view, on the undisputed facts of this case, that meaning is this: Microsoft may not condition an OEM's license to Windows 95 on the OEM's acceptance of what, in the ordinary commercial and antitrust sense, Microsoft distributes, markets, or otherwise treats as an "other" or separate product. Microsoft is free, however, to develop new, integrated products and to offer those products to OEMs and others.

Under this straightforward reading of Section IV(E)(i), all three operative words -- "other product," "developing," and "integrated product" -- remain operative. Microsoft is prevented from engaging in certain marketing conduct, such as requiring OEMs to license Internet Explorer or other separate software products as a condition of their Windows 95 licenses. At the same time, the proviso ensures that Microsoft may develop new products, such as Windows 95 itself, and may innovate in product development without restriction.

The Facts Alleged by Microsoft Regarding the

Background To and Negotiation of the Consent

Decree Are Consistent With the Government's Position

The facts alleged by Microsoft, far from refuting the government's position, support it. Those allegations thus do not raise a genuine dispute of material fact that would prevent this Court from ruling on the present record that Microsoft is violating the Final Judgment.

The Negotiation of the Decree

According to Microsoft, Section IV(E)(i) was added to the decree because of allegations that it was providing incentives to OEMs to take its version of DOS in order to license its Windows 3.1 product. (MS Opp. at 12-13; Urowsky Decl. ¶ 17). Section (IV)(E)(i) was thus intended to prevent Microsoft from bundling two separate products in that way and thereby protecting or extending its monopoly power. See, e.g.,Competitive Impact Statement filed in connection with the Final Judgment (hereinafter "CIS"), pp.10-11, 59 Fed. Reg. 42845, 42852 (1994).

According to Microsoft, the proviso to Section IV(E)(i), though not the original prohibition, was drafted by it and added to ensure that Microsoft "reserved its right to continue to develop integrated products like Chicago. . . ." See MS Opp. at 13 (emphasis added). It was the development of "Chicago," now called Windows 95, that occasioned Microsoft's concern and that was discussed in the decree negotiations. Windows 95 was a next-generation operating system that began with parts of the existing MS-DOS and Windows 3.1 products but went far beyond them to become a fundamentally new system -- one that Microsoft has never claimed to be, and that it could not plausibly claim to be, simply a package of MS-DOS and Windows 3.1. See Gaspar Decl. ¶ 22, Exh. 10. Windows 95 was precisely the type of "integrated product" whose development, Microsoft argues, was intended to be permitted by the proviso. See MS Opp. at 13.

The effect of Microsoft's argument, however, is to prove the United States' point. The story of the development of a wholly new Windows 95 is fundamentally different from the story of the mere packaging or bundling together of the existing, separate Internet Explorer and Windows 95 products:

First, Microsoft's fundamental plan in developing what ultimately became Windows 95 was to fully integrate the kinds of functions provided by Windows 3.1 and MS-DOS with many new functions into a complete new architecture. By contrast, as will be seen, Microsoft's own documents make clear that Internet Explorer was developed not as an integral part of Windows 95, but rather as a freestanding technology. Microsoft chose to "bundle" Internet Explorer with Windows 95 at a later time; it was not even shipped along with the initial retail version of the Windows 95 operating system.

Second, Windows 95 was not developed as, and is not, just an amalgamation of DOS and Windows 3.1. Rather, it is a fundamentally new and different product, which began with those precursors but resulted in something much larger and greater than the two of them combined. See Gaspar Decl. ¶22, Exh. 10; McCarthy Conf. Decl. ¶¶ 10-12, Exh.'s 6-8. By contrast, Internet Explorer has been and continues to be offered as a separate, stand- alone product which, like all such separate software products, performs certain functions when used in conjunction with Windows 95. See Gaspar Decl., ¶¶ 3-10, Exh. 2-7. It perform the same functions whether it is obtained and installed by the user or preinstalled by the OEM.

Third, IE 4.0 was developed separately from the Windows 95 development efforts. See, e.g., Gaspar Conf. Decl, ¶ 14, Exh. 11 (April 1997 e-mail titled "RE: IE 4," stating in pertinent part that "it's important to realize that IE [4] is not an OS development effort and does not have the same programs and resources.") IE 4.0 was, moreover, released to the market independent of any new release or version of Windows 95, and Microsoft does not now require it to be shipped with Windows 95.

Fourth, neither DOS 6.2 nor Windows 3.1 is designed to or can be installed or run on top of Windows 95. Internet Explorer, by contrast, was developed to do exactly that and is often described by Microsoft as an "application" or "product" that works "with" -- not as part of -- Windows 95. See Section II, supra.

Fifth, Microsoft claims it has never required OEMs to license either Windows 3.1 or DOS 6.2 as a condition of licensing the other, or to license either of them as a condition of licensing Windows 95. By contrast, Microsoft requires OEMs to take Internet Explorer as a condition of licensing Windows 95.

In short, the negotiating history, even as described by Microsoft, supports the government's position. The purpose of the decree was to prevent forced bundling in the marketplace of separate products like MS-DOS and Windows 3.1 -- and similarly, the United States submits, like Windows 95 and Internet Explorer. The limited proviso was intended to ensure that Microsoft would remain able to develop new products that combined together new or additional functions. Thus, under the proviso, Microsoft is permitted to develop new, single products, as it did with Windows 95, and to offer them to the market. What Microsoft cannot do under Section IV(E)(i) of the Final Judgment, however, is require OEMs to take a separate product like MS-DOS, Windows 3.1, or Internet Explorer in order to license Windows 95.

Microsoft's Argument that the Government Was "On Notice" of Its Plans Regarding Windows 95 and IE is Legally and Factually Wrong

Microsoft argues that the United States was on notice that Windows 95 "would include . . . Web browsing functionality" when the consent decree was negotiated. See MS Opp. at 18. For several reasons, this argument is way wide of the mark -- both as a matter of law and as a matter of fact.

First, Microsoft does not even allege that browsers or anything related to browsers were ever discussed in the consent decree negotiations. Instead, Microsoft relies entirely on five documents that it has culled from among hundreds of thousands that Microsoft submitted to the government in 1994 and 1995, in the course of investigations that were focused on other issues. Under these circumstances, it cannot be said that the government is charged with knowledge of anything about browsers, much less that the parties had an understanding that Microsoft would be permitted under the consent decree to bundle Windows 95 and a separate browser product.

Second, at most, Microsoft's selected documents show only that some people at Microsoft thought about including basic Internet connectivity, and possibly rudimentary browsing functionality (called, well after those documents were written, "O'Hare") in Windows 95 (then called "Chicago"). But none of those documents suggests that Microsoft at that point intended to do what it ultimately did -- put browsing functionality in a separate product, Internet Explorer; treat it as separate in all the ways detailed above; and require OEMs to take it as a condition of licensing Windows 95. In other words, even if the government could be charged with knowledge that some people at Microsoft thought about putting O'Hare in Chicago, Microsoft did not in fact do that. Instead, it put the airport in St. Louis. That is, it created two separate products, not one integrated product. By now requiring OEMs to take both of these separate products, Microsoft runs afoul of the restrictions of Section IV(E)(i) in the Final Judgment.

Third, Microsoft's description of its intention to include browsing functionality in Windows 95 "in late 1993 and early 1994" -- i.e., during the time when the consent decree was being negotiated -- is simply false. Microsoft relies on the declaration of its executive Steven Sinofsky and five attached Microsoft documents dating from December 1993 to April 1994 (Exh's A-D, G). According to the Sinofsky declaration, Microsoft adopted, at an April 6, 1994, retreat, "concrete plans" for including "Internet-related technologies" in Windows 95 and that Bill Gates discussed those plans in two speeches, on April 7 and April 19, 1994, that were publicized in newspaper articles. Sinofsky Decl. at ¶¶ 8 & 9, Exh.'s E & F. As a result, Microsoft alleges, "the DOJ has known about the inclusion of Internet-related technologies in Windows 95 for more than three years." MS Opp. at 35.

Microsoft's own documents -- documents that Microsoft did not provide to this Court and Mr. Sinofsky did not attach to his declaration -- belie this story. These documents, many of which were authored by Mr. Sinofsky himself, include the following:

April 17, 1994 -- In a cover e-mail distributing the Internet "retreat memo" (Sinofsky Exh. D), Mr. Sinofsky described the outcome of the retreat, not as "concrete plans," but as "suggestions from the groups that are not yet the definitive strategic directions." McCarthy Conf. Decl. ¶ 5, Exh.1 at MS 5022492. (emphasis added)

April 20, 1994 -- Mr. Sinofsky explained in an e-mail what Bill Gates meant in his publicized April 19 speech (Sinofsky Exh. F):

"Chicago will have all the pieces necessary to connect to the internet in the box." Taken litterally [sic], this just means TCP/IP and PPP. Never talks about front ends, etc. . . . there is no answer to the question "Does Microsoft support Mosaic," since Mosaic is just a tcp/ip winsocket app, "yes, but that doesn't imply we ship it, etc."

McCarthy Conf. Decl. ¶ 6, Exh. 2 (emphasis added). "Mosaic" was the only widely used Internet browser at the time and, as will be seen, was the product that Microsoft ultimately licensed, some nine months later, to use in developing its Internet Explorer.

April 20, 1994 -- Replies to Mr. Sinofsky's e-mail confirm:

at the moment a lot of external people are asking if we will be shipping internet apps [applications]. The position we have taken so far is that Chicago contains all the plumbing you need to hook up to the net -- but cool apps like Mosaic are stuff you need to obtain from 3rd parties.

* * * * *

"yes, only talk about plumbing, because we may not deliver the other pieces."

McCarthy Decl. ¶ 6, Exh. 2 (emphasis added).

June 10, 1994 -- Another Sinofsky e-mail makes this point even more strongly:

We do not currently plan on any other client software, especially something like Mosaic . . . . [Rather,] [w]hat we should be doing is getting as many third parties writing as many internet things on top of WinSock as possible, including as many WWW [world-wide web], gopher, TN3270, etc clients as they can afford to do.

McCarthy Conf. Decl. ¶ 7, Exh. 3 (emphasis added).

January 11, 1995 -- Microsoft announces that it has just licensed the Mosaic technology from Spyglass. The accompanying draft press questions and answers make clear that it was this technology, first acquired some six months after the consent decree was signed, and not some long-standing Microsoft development work, that was to be used to create Internet Explorer. "The Mosaic software will be the basis for WWW browser capability in a variety of ways in our product lines." This document also shows that Microsoft's browser development and shipment plans were separate from Windows 95:

Q.	So this means that Windows 95 will ship with Mosaic built-in?

A.	At the present time there are no plans to ship . . . the Mosaic software in the Windows 95 box when it ships in August of this year. . . . Our plan is to deliver this capability shortly after Windows 95 ships.

McCarthy Conf. Decl. ¶ 9, Exh. 5 (emphasis added, redline and strikeout omitted). See also McCarthy Conf. Decl. ¶ 8, Exh. 4.

This sequence of documents demonstrates not only that the United States was not on notice of the alleged "integration" of Internet Explorer, but that in fact Internet Explorer was not designed or "developed" to be an integrated product with Windows 95. Instead, it was independently created out of a separate existing product, Mosaic, which Microsoft only licensed in January 1995. Internet Explorer was designed and intended to be released as a separate application product, after the release of Windows 95, to work along with or in conjunction with Windows 95. Consistent with this plan, Microsoft did not distribute Internet Explorer with the version of Windows 95 initially released for retail purchase.

Indeed, nearly two years later -- and four months after IE 3.0 was released to the market and some three months after Windows 95 version OSR 2 was released -- Jim Allchin, a top Microsoft executive, made clear both that IE 3.0 is a separate product and that Microsoft intended to "leverage" its Windows 95 market power in order to help IE 3.0 "win" the browser war. Mr. Allchin's document, titled "concerns for our future," states:

1. Ensuring that we leverage Windows. I don't understand how IE is going to win. The current path is simply to copy everything that Netscape does packaging and product wise. . . . My conclusion is that we must leverage Windows more. Treating IE as just an add-on to Windows which is cross-platform [is] losing our biggest advantage -- Windows marketshare. We should dedicate a cross group team to come up with ways to leverage Windows technically more. . . . . We should think first about an integrated solution -- that is our strength.

Gaspar Conf. Decl. ¶ 17, Exh. 14 (December 20, 1996 e-mail from Jim Allchin to Paul Maritz). IE 3.0 had been released four months before this document was written. Clearly, Mr. Allchin regarded IE 3.0 not as integrated into Windows, but rather as "just an add-on to Windows." For IE 4.0, of course, there is no basis for considering it to be integrated, in light of its wholly separate existence from Windows 95.

Mr. Allchin's memorandum also makes clear the true reason Microsoft chooses to require OEMs to install and distribute Internet Explorer on all PCs with Windows 95. That reason has nothing to do with updating Microsoft's operating system or developing an integrated product. Rather, it has everything to do with Microsoft using the "leverage" of its "Windows marketshare" in order to increase distribution of Internet Explorer and thus to "win" the browser war. This is precisely what Section IV(E)(i) is designed to prevent.

Microsoft's Analogies to Other So-Called

"Integrated" Features of Windows Are Immaterial

Microsoft relies heavily on various analogies to other products and other functions of Windows 95. As has often been said, the problem with relying on analogies is that it requires determining both that the two situations are really analogous and that the analogous case was correctly decided. Microsoft's analogies show, at most, that different facts may support different conclusions.

Microsoft misperceives the United States to contend that "if a particular feature has ever had what might be characterized as a separate existence, it cannot be an element of an 'integrated product' under Section IV(E)(i)" See MS Opp. at 20 (emphasis added). This is not the United States' position. Rather, the United States contends simply that a product is an "other product" if Microsoft simultaneously treats it as a separate product for purposes of distribution, marketing, and tracking. See Petition, ¶¶ 22, 24; U.S. Memorandum in Support of Petition, pp. 21, 23-26.

Thus, Microsoft's reference to the presence of utilities that at one time were available separately is irrelevant. None of its examples -- whether a disk compression utility, a defragmentation utility, or any other function that was once provided in a separate product -- is analogous to Internet Explorer. None is offered as a separate product by Microsoft; and none is marketed, advertised, or tracked separately from Windows 95. By contrast, Microsoft distributes, markets, and tracks Internet Explorer in a host of ways separate from Windows 95.

Microsoft's suggestion that "other elements of Windows 95 also have names and are promoted to some extent separately from the remainder of the operating system" (MS Opp. at 7) is similarly inapposite. Indeed, Microsoft's brief cites only one example, Microsoft Exchange, and makes no attempt to show how Exchange is analogous to Internet Explorer as an "other product." In fact, Exchange has virtually no presence as a separate product in the market and Microsoft has replaced Exchange with another product, Outlook Express, which represents its current market offering outside Windows 95. Moreover -- in sharp contrast to the circumstances that have caused the government to bring this proceeding, and that have given rise to so much industry concern about Internet Explorer -- Microsoft is not attempting to bundle Exchange in order to entrench its Windows 95 monopoly.

THE RELIEF REQUESTED BY THE UNITED STATES IS SIMPLE, STRAIGHTFORWARD, AND IN THE PUBLIC INTEREST

The basic relief requested by the United States in this case is an order requiring Microsoft to comply with the Final Judgment, stop compelling OEMs to license Internet Explorer 3.0, and not compel OEMs to license Internet Explorer 4.0 as a condition of licensing Windows 95. The relief sought is straightforward and, in two basic respects, is in the public interest. First, the relief will maintain the integrity of, and secure compliance with, this Court's order. Second, by requiring Microsoft to cease using its market power to force OEMs to take IE, the requested relief will serve the purpose of the Final Judgment and the antitrust laws, protecting OEMs and consumers by enabling them to choose which browser, if any, they want, without that choice being burdened by the compulsion to accept or install Internet Explorer.

Microsoft repeatedly suggests that this relief is not workable. It says that it cannot discern what relief the United States is seeking in referring generically to "Internet Explorer" (see MS Opp. at 5), and that the requested relief will cause Windows 95 to "break" (see id. at 8-9). These arguments do not raise serious concerns and present no reason why the Court should not rule in the government's favor on the present record.

IE 4.0

As explained above, IE 4.0 is presently offered only as a separate, stand-alone product. OEMs are not required to license it, to include IE 4.0 disks in their computer boxes, or to install it, as a condition of licensing Windows 95. Consumers currently therefore have the choice whether to acquire or install IE 4.0. Under these circumstances, fashioning an appropriate remedy is simple. The United States believes the Court should order Microsoft not to require OEMs to take IE 4.0 as a condition of licensing Windows 95. Such an order will not prevent Microsoft from developing new products. Moreover, Microsoft will remain free to market and promote IE 4.0 however it sees fit, so long as it continues to give the OEMs, and through them consumers, the ability to choose whether to take the product or not.

As noted above, this is a matter of considerable urgency. Microsoft has stated that it intends to require OEMs to license and preinstall IE 4.0 beginning in February 1998 for new PC product lines, and most OEMs must begin to take significant steps to prepare for such preinstallation 60 to 90 days in advance -- which means almost immediately. The United States thus requests that the Court grant relief regarding IE 4.0 quickly, in order for OEMs to have a meaningful and timely opportunity to make the marketplace choices to which they are entitled in devising their plans for their new 1998 product lines.

IE 3.0

Microsoft's Opposition repeatedly suggests that the United States is seeking to require it or OEMs to delete IE 3.0 from PCs on which it has already been installed. That is not the case. The United States seeks with regard to OEMs only prospective relief, regarding PCs not yet sold.

The requested relief is a simple order that would prohibit Microsoft from forcing OEMs to accept and preinstall the software code Microsoft separately distributes at retail as "Internet Explorer 3.0." Microsoft should have no difficulty complying with that order. Indeed, its own Internet website states that "IE uninstalls easily if you want to use a newer version or simply get rid of it (and so does Navigator!)." Gaspar Decl. ¶ 19, Exh. 9.

Microsoft asserts that removing IE 3.0 from a PC with the OEM version of Windows 95 installed will (1) cause certain Windows 95 features to "break" (MS Opp. at 8-9) and (2) cause certain applications not to run properly on Windows 95 because those applications need certain codes that are included in IE 3.0. With respect to the impact on the functioning of Windows 95 itself, however, the only purported operating system feature that Microsoft specifically identifies as being affected is certain access software for connecting to online services and Internet Service Providers. See Cole Decl. ¶¶ 51, 62, 65, 72, 77, 80, 84, 90. And, Microsoft concedes that users can easily obtain the access software directly from the service providers or from other sources. For example, America On Line distributes disks containing its access software widely. Similarly, although Microsoft suggests that Windows 95 itself will not operate without a particular system file from IE 3.0 called COMCTL32, Cole Decl. ¶¶ 83-84, it does not claim that the OEM release of Windows 95 must use the version of COMCTL32 that is included in IE 3.0. In fact, Microsoft makes COMCTL32 available to third parties to redistribute with their applications on a routine basis, and could do so for OEMs.

According to Microsoft, if developers of applications for the Windows 95 platform lose the certainty of knowing that all OEMs will ship the same version of Windows 95 with the same set of system services, those developers will lose the ability to write their applications to a single platform. This policy argument provides no defense to a consent decree violation. Moreover, it rests on factual assertions that are refuted by Microsoft's own papers.

David Cole, the Microsoft executive in charge of development of Internet Explorer, admitted in his declaration that tens of millions of PCs do not include the version of Windows 95 that comes bundled with Internet Explorer 3.0 and that, because of this existing fragmentation among users of the Windows 95 platform, applications developers typically include in their own software products the necessary Microsoft system services on which their products depend. In other words, the applications developers themselves ensure that all users can successfully run their applications no matter which version of Windows 95 they have and regardless of whether or not they have Internet Explorer preinstalled. See Cole Decl., ¶ 61. See also Department of Justice Declaration of Jesse Boudreau (Pictorius) (hereinafter "DOJ Boudreau Decl."), ¶ 3; Declaration of John Gailey (Novell, Inc.), ¶ 4; Department of Justice Declaration of Joseph J. Allaire (Allaire Corp.) (hereinafter "DOJ Allaire Decl."), ¶¶ 2-3. Indeed, all the declarations Microsoft has submitted from applications developers state that their products include the necessary services provided by Internet Explorer 3.0 or 4.0 to ensure that the products will run whether or not Internet Explorer is installed on any particular user's computer. See Allaire Decl., ¶ 8; Boudreau Decl., ¶ 6; Devlin Decl., ¶ 5; Ramadan Decl., ¶ 7. Thus, if this Court orders Microsoft to give OEMs the choice whether or not to preinstall Internet Explorer on future machines they ship with Windows 95, none of these applications will break when an OEM chooses not to preinstall IE.. DOJ Boudreau Decl. ¶ 2-3; DOJ Allaire Decl. ¶¶ 2-3.

Accordingly, the relief the United States seeks is measured, reasonable, and will not harm third parties. The Court safely can, and should, grant the requested relief.

MICROSOFT'S NON-DISCLOSURE AGREEMENTS

The issues regarding Microsoft's non-disclosure agreements ("NDAs") are likewise straightforward. Microsoft has in place a vast network of NDAs that by their terms prohibit other parties from disclosing to anyone anything about Microsoft and, in many instances, expressly require those parties to give Microsoft advance notice of even compelled communications with government enforcement agencies. While these broad agreements may not be entirely unique, they are certainly unusual. Moreover, in the context of this industry, it is reasonable to think that the NDAs might be deterring persons with relevant information from voluntarily coming forward to the government.

Microsoft is surely entitled to take reasonable precautions to protect its business confidences. Those precautions do not, however, include actions which may have the effect of interfering with legitimate government investigations. Microsoft has thus appropriately recognized that the NDAs should not be construed to prevent other parties from speaking to the government or to require them to notify Microsoft if they do so and has authorized the United States to so inform those that it seeks out.

The only remaining issue, which Microsoft for some reasons vigorously resists, is whether Microsoft should be required to notify the other parties to the NDA agreements that they should not be so construed. The United States clearly is not asking the Court for "wholesale abrogation" or "voiding" of any Microsoft contracts or NDAs. See MS Opp. at 37-38. Instead, it requests only that Microsoft make clear to its many NDA partners, some of whom may have relevant information they would like to volunteer to the government, that which Microsoft seems perfectly willing to have the government advise companies that the government has already decided to seek out.

There should be no misunderstanding: The United States is not seeking contempt sanctions for Microsoft's NDAs, and it does not allege that the NDAs are illegal. It seeks only an order from the Court ensuring that these NDAs do not have the effect, intended or otherwise, of impeding the Court's review, and the United States' investigation, of Microsoft's compliance with the decree. The Court has this authority under the general supervisory powers set forth in Section VII(B) of the Final Judgment, which provides that:

Jurisdiction is retained by this Court over this action and the parties thereto for the purpose of enabling any of the parties thereto to apply to this Court at any time for further orders and directions as may be necessary to carry out or construe this Final Judgment, to modify or terminate any of its provisions, to enforce compliance, and to punish violations of its provisions.

In addition, the cases make clear that a consent decree court may order such ancillary relief in aid of decree enforcement especially where, as here, the defendant has violated the decree.

The Court should wide-ranging discretion in fashioning mechanisms to monitor compliance with its orders. See, e.g., McComb v. Jacksonville Paper Co., 336 U.S. 187, 193 (1949) ("We are dealing here with the power of a court to grant the relief that is necessary to effect compliance with its decree. The measure of the court's power in civil contempt proceedings is determined by the requirements of full remedial relief.") (emphasis added). This discretion stems from the flexibility inherent in its equitable jurisdiction: "The essence of equity jurisdiction has been the power of the Chancellor to do equity and to mold each decree to the necessities of the particular case. Flexibility rather than rigidity has distinguished it." Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944). The power of a federal court to take broad remedial action to effectuate compliance with its orders has been repeatedly invoked by this Circuit. See, e.g., Dixon v. Barry, 967 F. Supp. 535, 540 (D.D.C. 1997) (appointing a receiver to monitor and enforce compliance with a court order, and noting that "the past is a prologue to the future"). See also Williams v. Edwards, 87 F.3d 126, 130-31 (5th Cir. 1996) (a district court retains jurisdiction to issue orders necessary for relief and supervision of a consent decree).

The Court should consider the public interest in determining the appropriate method by which to ensure effective monitoring of, and continued compliance with, its Final Judgment. See, e.g., Hecht, 321 U.S. at 329. This is exactly why the potentially silencing NDA provisions should be stricken -- they offend the strong public policy of maintaining unrestrained citizen access to governmental agencies and they tend to undermine the effectiveness of the Final Judgment, explicitly found to be in the "public interest."

OTHER ISSUES

The United States' Petition is Not Barred By Equitable Estoppel

Microsoft contends that the doctrine of equitable estoppel precludes the United States from proceeding with this case because the United States "has known about Microsoft's inclusion of Internet-related technologies" since at least July 1994. See MS Opp. at 35. As discussed above (see supra, section III(B)(2)), this contention is factually incorrect. Moreover, even if true, it would be of no legal significance.

Equitable estoppel applies as a defense against an enforcement action by the United States only in the narrowest of circumstances, if at all. See, e.g., Heckler v. Community Health Services, 467 U.S. 51, 60 (1984); Utah Power & Light Co. v. United States, 243 U.S. 389, 409 (1916). As this Circuit has explained:

[Equitable estoppel's] application to the government must be rigid and sparing. The case for estoppel against the government must be compelling, and will certainly include proof of each of the traditional elements of the doctrine -- "false representation, a purpose to invite action by the party to whom the representation was made, ignorance of the true facts by that party, and reliance" as well as ". . . a showing of an injustice . . . and lack of undue damage to the public interest."

ATC Petroleum, Inc. v. Sanders, 860 F.2d 1104, 1111 (D.C. Cir. 1988) (citations omitted). The complaining party must show misconduct on the part of the United States that rises to the level of "actual misrepresentation or concealment." Grumman Ohio Corp. v. Dole, 776 F.2d 338, 347 (D.C. Cir. 1985); see also GAO v. GAO Personnel Appeals Board, 698 F.2d 516, 526 (D.C. Cir. 1983). Additionally, as the Supreme Court made clear in Heckler, in order for a defendant to succeed with a defense of equitable estoppel against the United States, any reliance on the government's alleged misrepresentation must be "reasonable." Such reasonableness is measured by the following:

If, at the time when [defendant] acted, such party had knowledge of the truth, or had the means by which with reasonable diligence [defendant] could acquire the knowledge so that it would be negligence on [defendant's] part to remain ignorant by not using those means, [defendant] cannot claim to have been misled by relying upon the representation or concealment.

Heckler, 467 U.S. at 59 n. 10.

None of those requirements is met here. Microsoft has known since the summer of 1996 that the United States was and is concerned about the conditioning of OEM Windows 95 licenses on acceptance of Internet Explorer; it discussed that issue with the government in detail in November 1996; and it has known ever since that the United States has been gathering facts on that issue in order to make an informed enforcement decision. Microsoft could not reasonably have relied since then on any expectation that the United States was unconcerned about these issues.

In any event, Microsoft began offering IE 4.0 only on September 30, 1997, and informed the government only shortly before then that it intends to require OEMs to license it in February 1998. The government moved promptly, gave Microsoft additional opportunities to express its views, and filed the Petition on October 20, less than 3 weeks later. This is not the stuff of equitable estoppel.

Microsoft's Request for Extensive Proceedings and Discovery

Microsoft's request for a full evidentiary hearing should be denied. Microsoft is entitled to an evidentiary hearing only if it raises a genuine issue of material fact. Food Lion, Inc. v. United Food and Commercial Workers Union, 103 F.3d 1007, 1019-20 (D.C. Cir. 1997). Here, Microsoft does not dispute the facts that warrant concluding that Microsoft is violating the Final Judgment. There is no dispute at all regarding: (1) Windows 95 constituting a "Covered Product," (2) Microsoft licensing Windows 95 to OEMs, or (3) Microsoft requiring OEMs to license Internet Explorer as a condition of licensing Windows 95.

The only dispute is the legal issue whether the proviso to Section IV(E)(i) relating to "developing integrated products" authorizes Microsoft to require OEMs to take IE in order to license Windows 95. No discovery or evidentiary hearing is needed to resolve that issue.	As noted, Microsoft concedes that the Final Judgment is straightforward and that the proviso has no specialized meaning. The court should thus discern the meaning of Section (IV)(E)(i) from within the four corners of the Final Judgment. See, e.g., United States v. Armour & Co., 402 U.S. 673, 681-62 (1971); Papago Trial Utility Authority v. Federal Energy Regulatory Comm'n, 723 F.2d 950, 954 (D.C. Cir. 1983) ("in the absence of an ambiguity the intent of the parties to a contract must be ascertained from the language thereof without resort to parol evidence or extrinsic circumstances"); Clayman v. Goodman Properties, 518 F.2d 1026, 1033 (D.C. Cir. 1974) (refusing to apply parol evidence of antecedent understandings and negotiations for the purpose of varying or contradicting the clear meaning of the terms used). If the Court determines that it needs to look beyond the Final Judgment itself, it should look only to contemporaneously produced public records. In United States v. ITT Continental Baking Co., 420 U.S. 223 (1975), for example, the Court examined the documents in the public record -- the complaint filed in the original case, and other written documents expressly incorporated by reference within the decree.

A narrow, focused review is especially appropriate here because the Final Judgment was entered by the Court pursuant to the Tunney Act, 15 U.S.C. § 16(b)-(h) (1994). The Tunney Act was designed to ensure that the process underlying an antitrust consent decree is transparent to the public; in the words of Senator Tunney, "it will assure that the courtroom rather than the backroom becomes the final arbiter in antitrust enforcement." The Antitrust Procedures and Penalties Act: Hearings on S. 782 and S. 1088 before the Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary, 93rd Cong., 1st Sess. (1973). As this Court knows, the Tunney Act proceedings were especially substantial and visible in this case. The Court of Appeals spoke of the need to consider the "purpose, meaning and efficacy of the decree" as well as its "clarity." Microsoft, 56 F.3d at 1461-62. The Court had before it, not only a Competitive Impact Statement expressing the broad purpose of the decree and numerous memoranda from the United States urging entry of the decree, but also a Memorandum by Microsoft Corporation in Support of the Proposed Final Judgment. Microsoft had ample opportunity to comment on the meaning of Section IV(E)(i). Indeed, an express legislative intent underlying the Tunney Act was "to foreclose future disputes following entry of the proposal as a consent judgment concerning decree language or the intentions of the parties." Antitrust Procedures and Penalties Act, H.R. No. 93-1463, at 6539 (1974), reprinted in 1974 U.S.C.C.A.N. 6535.

Microsoft nevertheless asks the Court to permit far-reaching discovery and to hold an evidentiary hearing on unspecified issues -- with all the delay and costs and confusion that would entail. There is no need for such prolonged proceedings. The Court should resolve the one disputed issue on the present record as a matter of law.

The Confidentiality of Microsoft Documents

As previously ordered by the Court, the United States has filed each Microsoft document cited in this Reply under seal. (See accompanying Notice of Filing Under Seal.) But for the Court's order, however, the United States had no legal obligation to do so. The United States' statutory right to use information in a "legal proceeding" is obtained through a Civil Investigative Demand, issued pursuant to 15 U.S.C. § 1313. There is no statutory limitation on the ability of the United States to file, in the public record, materials produced pursuant to the CID. The relevant passage of 15 U.S.C. § 1313(c)(3), from which Microsoft cites for the authority that the United States is prohibited from disclosing such information to the public, begins with the critical phrase: "Except as otherwise provided in this section, . . . ." The relevant subsection that expressly permits the United States to disclose the CID materials to this Court, 15 U.S.C. § 1313(d)(1), provides:

Whenever any attorney of the Department of Justice has been designated to appear before any court, . . . in any case or proceeding, the custodian of any documentary material, answers to interrogatories, or transcripts of oral testimony may deliver to such attorney such material, answers, or transcripts for official use in connection with any such case . . . or proceeding as such attorney determines to be required.

Furthermore, Microsoft has cited no authority that limits the United States' right to use the documents against Microsoft in the current proceeding. As such, because the Microsoft documents were produced pursuant to a CID and Visitation Letters, the United States may use them in the current proceedings, without limitation.

This Circuit applies a "strong presumption in favor of public access to judicial proceedings." EEOC v. National Children's Center, 98 F.3d 1406, 1409 (D.C. Cir. 1996), and has stated that "[t]he courts are public institutions that best serve the public when they do their business openly and in full view." Id. at 1408. Moreover, this Circuit has recognized the importance of making court records accessible to the public, especially when the Government is a party to the lawsuit and objects to the sealing of documents. Id. at 1409; see also Martin Marietta Corp. v. Dalton, 974 F. Supp. 37 (D.D.C. 1997) (responding to a Freedom of Information Act request, this Court stated that disclosure of potentially confidential information in the hands of the Government is important to "open agency action to the light of public scrutiny"). Further, the fact that public filings refer to exhibits and attachments may enhance the need that the exhibits and attachments be part of the public record. EEOC, 98 F.3d at 1410- 1411. As such, the presumption of openness favors unsealing the Microsoft documents in this matter.

Microsoft has made no real effort to suggest that any document submitted by either party to this action contains any real confidences. The documents filed under seal by Microsoft, for example, were all created in or before April 1994. Inasmuch as Microsoft has not made the showing it must make in order to qualify for a protective order, see United States Motion to Unseal, attached herewith, the documents now under seal should be placed in the public record.

CONCLUSION

For the foregoing reasons, the United States respectfully requests that the Court rule on the present record that Microsoft is violating the Final Judgment and order the relief requested in the United States' Petition.

Date:	Respectfully submitted,

_____________________________

JOEL I. KLEIN

Assistant Attorney General

A. DOUGLAS MELAMED

Principal Deputy Assistant Attorney General

REBECCA P. DICK

Director of Civil Non-Merger Enforcement

CHRISTOPHER S CROOK

Chief

PHILLIP R. MALONE

STEVEN C. HOLTZMAN

PAULINE T. WAN

KARMA M. GIULIANELLI

MICHAEL C. WILSON

SANDY L. ROTH

JOHN F. COVE, Jr.

Attorneys

Attorneys for the United States