IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Plaintiff,

v.

MICROSOFT CORPORATION,

Defendant.

Civil Action No. 98-1232 (TPJ)

STATE OF NEW YORK ex rel.

Attorney General DENNIS C. VACCO, et al.,

Plaintiffs,

v.

MICROSOFT CORPORATION,

Defendant.

PUBLICLY FILED VERSION

Civil Action No. 98-1233 (TPJ)

PLAINTIFFS' JOINT RESPONSE TO MICROSOFT'S

MOTION FOR SUMMARY JUDGMENT AND REPLY IN

SUPPORT OF MOTIONS FOR PRELIMINARY INJUNCTION

DATED: August 31, 1998

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Plaintiff,

v.

MICROSOFT CORPORATION,

Defendant.

Civil Action No. 98-1232 (TPJ)

STATE OF NEW YORK ex rel.

Attorney General DENNIS C. VACCO, et al.,

Plaintiffs,

v.

MICROSOFT CORPORATION,

Defendant.

Civil Action No. 98-1233 (TPJ)

PLAINTIFFS' JOINT RESPONSE TO MICROSOFT'S

MOTION FOR SUMMARY JUDGMENT AND REPLY IN

SUPPORT OF MOTIONS FOR PRELIMINARY INJUNCTION

.	INTRODUCTION

Microsoft's motion for summary judgment misstates plaintiffs' claims, the evidence concerning them, and the applicable law. When there is a claim that Microsoft does not want to deal with, it simply ignores it. When there is evidence contrary to Microsoft's factual assertions, it ignores that too, even when it is contained in the same document or deposition on which Microsoft seeks to rely. When controlling precedent is at odds with Microsoft's arguments, it either ignores the authority or treats it as having been overruled sub silentio by lower court rulings.

For purposes of its summary judgment motion, Microsoft does not, and could not, dispute that it has monopoly power in the market for PC operating systems. And on summary judgment, Microsoft does not, and could not, dispute the existence of a pattern of anticompetitive conduct that has preserved its dominance of the PC operating system market and which threatens to extend that dominance to other markets. In essence, Microsoft's summary judgment motion thus invites this Court to rule, as a matter of law, that because of supposedly unique characteristics of the computer software business, the antitrust laws do not (and cannot) prohibit an entrenched software monopolist like Microsoft from engaging in the broad series of anticompetitive acts at the core of this case.

Microsoft enjoys the most important and perhaps the most durable monopoly in the economy today. Microsoft has been the dominant supplier of personal computer desktop operating systems for more than 15 years, with market shares (depending on how they are measured) ranging from 80 percent to 95 percent.

PC manufacturers have, and recognize they have, no realistic alternative to Microsoft's Windows operating systems. Microsoft prices its Windows operating systems virtually without regard for the prices of other operating systems. Microsoft's monopoly power is illustrated by its ability to secure agreements from competitors and potential competitors (including companies as powerful as Intel) to reduce or eliminate their competition with Microsoft.

Successful entry or expansion of new operating systems competitors has proven impossible, in significant part because of the applications programming barrier to entry. Computer users want PCs that will run the widest range, and largest number, of programs. Because of Microsoft's market share and sustained dominance, many more PC applications have been developed for its operating systems than for those of any other manufacturer. Windows' high market share begets more applications, which in turn preserve and increase its high market share, which in turn begets still more applications, and so on. Unless and until the success of a particular operating system comes to depend less on the number of applications written specifically for it and more on the merits of that operating system, Microsoft's power is likely to remain self-perpetuating.

In the past few years, two related industry developments have occurred that have the potential to erode the applications programming barrier to entry, and thereby ultimately to threaten Microsoft's PC operating system monopoly.

One development was Java, software sponsored by Sun Microsystems that is designed in part to enable programmers to write applications that can be used "cross platform" (i.e., on multiple operating systems) without substantial modification.

(As used herein, "SJ Ex" refers to exhibits which accompany this Joint Response.)

Another development was the explosion in popularity of the World Wide Web, and of Internet browser applications (primarily Netscape's Navigator browser) used to access and view material on the Web. Because of the explosive growth of the Internet, and the ease with which Netscape's browser enabled computer users to access the Internet, Netscape's browser quickly came to be widely distributed and used.

The widespread distribution and use of Netscape's browser was significant in two ways. First, the browser itself was a platform to which applications could be written -- and thereafter run on any of the many operating systems with which that browser was usable.

By May 1995 Microsoft's CEO recognized Netscape as a competitive threat United States' Memorandum in Support of Motion for Preliminary Injunction, filed May 18, 1998, ("PI Brief"), Exhibit (hereinafter "PI Ex.") 2.

Second, Netscape's Navigator browser became a primary method by which the Java components necessary for computer users to utilize and benefit from Java programs were distributed. Indeed, in July 1997,

SJ Ex. 61, p.1. The more applications that were written to the "Java Virtual Machine" component shipped with Netscape's browser, the more applications that could be used on non-Microsoft operating systems -- and the more the applications programming barrier to entry would erode.

Microsoft immediately set out to eliminate the potential threats posed by Netscape and Java. At the specific and pointed direction of Microsoft CEO Bill Gates, Microsoft set out to

In support of this effort, Microsoft entered into a series of anticompetitive agreements with customers and competitors to restrict the use of Java and to substitute the use of Microsoft's version of Java, known as "J/Direct."

PI Ex. 101.

At the same time, Microsoft (again at the specific direction of CEO Bill Gates) set out to eliminate Netscape as a viable browser supplier -- and thereby to eliminate both Netscape's distribution of Java and Netscape's evolution into a platform that could erode the applications programming barrier to entry. Microsoft first attempted to monopolize the browser market by a patently illegal proposal to Netscape that the two companies divide the market and restrict or eliminate competition (with Netscape agreeing not to compete in offering its browser for Windows 95). When Netscape rejected Microsoft's illegal proposal, Microsoft undertook to eliminate Netscape's ability to compete effectively as a browser supplier, and to preserve and increase barriers to entry in the PC operating system market by a series of predatory and anticompetitive acts and agreements. Among other things, Microsoft:

Set out to "cut off Netscape's air supply" by giving Microsoft's browser away for free (and thereby eliminating Netscape's ability to charge for its browser) and entering into agreements with Internet Content Providers which required those ICPs to agree not to pay Netscape;

Discouraged customers, suppliers, and others from doing business with Netscape by announcing publicly (and telling customers privately) that Microsoft would make its browser "forever free" and that Netscape therefore had no viable business;

Entered into agreements with PC manufacturers and Internet Service Providers that effectively foreclosed Netscape from the most important channels of distribution and substantially increased Netscape's costs;

Entered into agreements with ISPs, ICPs, and others to eliminate or reduce those firms' promotion and/or distribution of Netscape's browser;

Used its monopoly power to induce major computer industry firms, including Apple and Intel, to limit or reduce their use of and support for Netscape's browser;

and

Tied Microsoft's Internet Explorer browser to its monopoly Windows PC operating system and prohibited PC makers from removing that browser.

Although Microsoft also set out to improve its browser (which was initially so poor in quality and function that it would have received virtually no distribution if not for Microsoft's restrictive agreements and the tie to Windows), Microsoft recognized that

PI Ex. 23. Because Microsoft believed that it could not win what it repeatedly described as "the browser war" legitimately and on the merits, it resorted to the predatory and anticompetitive agreements and conduct described above; and it is those agreements and conduct that unlawfully maintain Microsoft's operating systems monopoly and threaten to extend that monopoly to the browser market.

The cumulative effect of Microsoft's anticompetitive and illegal conduct has been, and continues to be, to increase Microsoft's share of Internet browser usage; to reduce the revenues and increase the costs of rival browser manufacturers; to deter innovation by other browser manufacturers and, more generally, by others in the industry that would otherwise seek to develop new software products in competition with Microsoft; and to further entrench Microsoft's operating system monopoly.

Microsoft's conduct with respect to Java and browsers is part of a broad pattern of antitcompetitive conduct designed to eliminate competition, to maintain and strengthen Microsoft's core monopoly over PC operating sytems, and to monopolize key applications markets.

For example, Microsoft's proposal to Netscape to divide the market and restrict or eliminate competition is part of a pattern that includes similar discussions with Intel (concerning Intel not continuing software development), Apple (concerning Apple agreeing to stop marketing QuickTime for use with Windows), and a small company called Real Networks (concerning a Real Networks assurance that it would get out of the base streaming media platform business and not share its technology with Microsoft's competitors). Microsoft's response to Netscape's rejection of its proposed market division is part of a pattern that includes Microsoft's response to Apple when Apple refused to withdraw its "QuickTime" software from competition with Microsoft's "NetShow" software.

SJ Ex. 60, p.0104683, is part of a pattern of using its control over the monopoly operating system to make competing products operate, or appear to operate, less effectively, a pattern that began at least as early as the Microsoft code designed to disrupt the use of DR-DOS. And Microsoft's tying of its browser to Windows is part of a pattern of tying applications to the operating system -- a pattern that will have no limit if Microsoft prevails in its view that it is free to combine any product it wishes with the operating system.

The extraordinary potential costs to consumers and the economy of Microsoft's conduct are particularly clear with respect to Java and the browser. First, Microsoft preserves its operating systems monopoly as both a rich and powerful monopoly in itself and as the engine for dominating related markets. Second, Microsoft extends its monopoly to browsers -- and thereby puts itself in a position to wield tremendous influence in directing computer users to particular products, services, and sites on the Web.

Because Microsoft's unlawful practices are continuing and are imposing ongoing harm to competition, plaintiffs filed with their Complaints motions for a preliminary injunction. Microsoft has opposed those motions and has itself moved for summary judgment. Microsoft's summary judgment motion (and its opposition to plaintiffs' motion for preliminary injunction) asks this Court to create a virtual exemption from the antitrust laws for Microsoft (and the entire computer software industry) and to permit a software monopolist such as Microsoft to use anticompetitive means to entrench and extend its monopoly without fear of judicial intervention. Microsoft further urges the Court to exempt from Section 1 of the Sherman Act any Microsoft decision to coercively tie together two separate products, so long as Microsoft can merely suggest a plausible claim of benefit from the tie. Such an exemption would be virtually complete, since the very nature of computer software makes it easy for software developers to join together separate products in ways that create some "plausible" benefit and that introduce some "plausible" technical interdependencies that may appear difficult to disentangle. Microsoft's extraordinary propositions go far beyond the rules previously adopted by any court, and are directly contrary to controlling Supreme Court precedent.

In addition to seeking wholesale exclusion from the reach of antitrust scrutiny for its anticompetitive activities, Microsoft's motion also tries to justify summary judgment by distorting and mischaracterizing the extensive factual record in this case.

Contrary to Microsoft's representation, MS Memo at 75-80, there is substantial evidence that Microsoft, with its entrenched monopoly in the market for PC operating system software, engaged in a series of predatory acts to maintain that monopoly and extend it to the market for internet browser software.

Contrary to Microsoft's representation, id., there is substantial (indeed, overwhelming) evidence that its predatory and exclusionary conduct was undertaken for the purpose of impeding competition.

Contrary to Microsoft's representation, MS Memo at 59-74, there is substantial evidence that Microsoft's exclusionary agreements with PC manufacturers and Internet Service Providers and Internet Content Providers have raised barriers to competition and effectively foreclosed competitors from significant distribution channels.

Contrary to Microsoft's representation, id., there is substantial evidence that the anticompetitive effects of these restrictive agreements far outweigh any purported business justifications.

Contrary to Microsoft's representation, MS Memo at 38-49, there is substantial evidence of separate demand in the marketplace that proves Microsoft's Internet browser is a separate product from the operating system.

And contrary to Microsoft's representation, MS Memo at 51-59, there is substantial evidence that the bootup and screen restrictions in Microsoft's contracts with PC manufacturers are far more onerous than is necessary to protect Microsoft's rights under federal copyright laws.

As this Court recognized at the August 6 hearing, the presence of even a single material factual dispute, without more, would require denial of Microsoft's motion. Transcript, Aug. 6, 1998 at 11:9-13. In fact, on every material issue the plaintiffs' evidence, even at this stage while discovery is still ongoing, is either uncontroverted or directly counters Microsoft's assertions. Given the strength and breadth of the plaintiffs' proof, Microsoft's claim that there are no genuine issues of fact is frivolous.

Much of the evidence that Microsoft ignores comes from its own files. Microsoft's approach in depositions and in its motion for summary judgment is to deny what its contemporaneous documents plainly say -- and to claim an astonishing lack of recall. Executives who are stated to be the author of documents claim not to remember writing them. Executives who are the stated recipients of documents claim not to remember receiving them. And both authors and recipients claim not to know what the documents mean.

Microsoft's CEO Bill Gates, who is placed at the center of key events by numerous documents, displayed a particular failure of recollection at his deposition. Compare, e.g., SJ Ex. 63 with Gates Dep., 89-92; SJ Ex.18 with Gates Dep. 94-95; SJ Ex. 64 with Gates Dep., 95,100,102,104,107-108; SJ Ex. 65 with Gates Dep., 160-62; SJ Ex. 354, p.6012956 with Gates Dep., 128-29, 207-08, 215-17; SJ Ex. 67 with Gates Dep., 132-33,135-36,163-64,165-66; SJ Ex. 68 with Gates Dep., 153,155,156-57; and SJ Ex. 69 with Gates Dep., 173-74,177,181-82,189- 91,194-95.

As discussed below, Microsoft's attempt to get Netscape to divide markets is well established by sworn testimony of participants and by contemporaneous notes.

By contrast, contemporaneous documents show that

Mr. Gates further testified that

(a)

SJ	Ex.

(b)

SJ Ex. 70

Mr. Gates' testimony appears to be part of a pattern of Microsoft attempting to rewrite history. For example,

Microsoft in its recent papers (and in the testimony of its deponents -- except when they slip) studiously avoids the term "browser." Although browser is a term used throughout Microsoft's documents and licenses, the industry literature, and even in the dictionary Microsoft publishes for software professionals, in the interest of Microsoft's litigation arguments it becomes a non-word. Witnesses claim they don't know what a browser is. What used to be browsers are now simply "bits" of "browsing technologies." Microsoft's refusal to recognize the existence of a browser extends not only to the "integrated" browser but to the stand-alone products Microsoft offers.

At the trial the trier of fact will undoubtedly give Microsoft's current positions the weight they deserve. There is, of course, no way that Microsoft can back away from its contemporaneous documents and statements in a summary judgment motion.

.	MICROSOFT IS NOT ENTITLED TO SUMMARY JUDGMENT

In order to obtain summary judgment, the moving party must demonstrate "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Beatty v. WMATA, 860 F.2d 1117, 1120-21 (D.C. Cir. 1988). The party seeking summary judgment carries the initial burden of demonstrating the absence of any genuinely disputed issue of material fact. See Beatty, 860 F.2d at 1122. Only then must the nonmoving party, through "'depositions, answers to interrogatories, . . . admissions on file'" and other appropriate evidence demonstrate that there is a genuine issue for trial. Celotex, 477 U.S. at 324. "The evidence must be viewed in a light most favorable to the nonmoving party, giving that party the benefit of all reasonable inferences." Startmore v. Goodbody, 866 F.2d 189, 191 (6th Cir. 1989) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 487 (1986)).

"It is axiomatic that Rule 56 must be used carefully so as not improperly to foreclose trial." Thompson Everett, Inc. v. National Cable Advertising, L.P., 57 F.3d 1317, 1323 (4th Cir. 1995). Courts should be especially cautious before entering summary judgment where, as here, liability is likely to turn on factual questions about the purpose and effects of conduct whose existence is not disputed. See, e.g., Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 482-86 (1992).

Microsoft's motion for summary judgment falls far short of meeting these standards.

With respect to plaintiffs' Section 2 claims, Microsoft limits its discussion to its bundling of Internet Explorer with Windows and certain restrictive agreements with OEMs, ISPs, and ICPs. Microsoft's motion (which seeks dismissal of plaintiffs' claims in their entirety) is insufficient on its face because it does not even address either Microsoft's attempt to induce Netscape not to compete, which in itself constitutes an unlawful attempt to monopolize, see United States v. American Airlines, Inc., 743 F.2d 1114,1120-21 (5th Cir. 1984), or the other elements of Microsoft's predatory maintenance of its monopoly and attempted monopolization (see infra, Section II.A).

Moreover, even with respect to the aspects of its conduct that it does address, Microsoft fails to remotely satisfy the summary judgment standard. Microsoft mounts essentially three attacks on the factual basis for plaintiffs' claims, asserting that: (1) there is no genuine issue that its agreements with OEMs, ISPs, and ICPs have not had sufficient anticompetitive effects to unreasonably restrain trade; (2) its bundling of Internet Explorer with Windows is not an unlawful tying arrangement because the two are not separate products; and (3) its restrictive agreements with OEMs are immunized from antitrust scrutiny by the copyright laws (and subsidiary justifications). These arguments are neither supported by substantial evidence, let alone the uncontested evidence that would be required to justify summary judgment, nor are they correct as a matter of law.

Microsoft's motion for summary judgment on the Section 1 tying claim fails both as a matter of law (because it rests on an erroneous intepretation of tying law standards set forth by the Supreme Court and the lower courts) and as a matter of fact (because it is plainly disputed whether Microsoft's conduct amounts to "conditioning" of Windows licenses on OEMs' acceptance of Internet Explorer, whether Windows and Internet Explorer are a single product or two separate products, and whether Microsoft's conduct has a "not insignificant" effect on interstate commerce).

We discuss below the types of anticompetitive conduct in which Microsoft has engaged. Much of Microsoft's conduct constitutes an independent violation of Section 1 of the Sherman Act; such conduct also necessarily violates Section 2 of the Sherman Act if Microsoft is found to possess monopoly power. United States v. Griffith, 334 U.S. 100, 106 (1948); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d. 227, 239 (1st Cir. 1983). In addition, conduct that does not violate Section 1 violates Section 2 if Microsoft is demonstrated to possess monopoly power and if the conduct has a significant exclusionary effect and was not reasonably necessary to achieve a legitmate business objective or "impaired competition in an unnecessarily restrictive way." Aspen Sking Co. v. Aspen Highlands Sking Corp., 472 U.S. 585, 605 (1985); Lorain Journal v. United States, 342 U.S. 143, 149 (1951). As Justice Scalia has observed: "Where a defendant maintains substantial market power, his activities are examined through a special lens: Behavior that might otherwise not be of concern to the antitrust laws -- or that might even be viewed as procompetitive -- can take on exclusionary connotations when practiced by a monopolist." Eastman Kodak, 504 U.S. at 488 (Scalia, J., dissenting).

Microsoft's Motion Ignores Its Predatory Conduct

Microsoft's motion virtually ignores the pattern of predatory conduct directed at raising the costs of Netscape and other Microsoft rivals, raising barriers to entry, depriving Netscape and other competitors of revenue and resources (even at the cost of Microsoft itself foregoing revenue), below-cost pricing, and intimidating and inducing both customers and distributors of Netscape's browser not to consider that browser on the merits.

First, Microsoft decided it would give its Internet browser away for free even though it was costing Microsoft hundreds of millions of dollars to develop, test, promote, and distribute Internet Explorer; even though Microsoft would not recoup except through the maintenance and expansion of monopoly power; and even though Netscape was charging OEMs, ISPs, and others for its Navigator browser.

as a browser supplier: "We are going to cut off their air supply. Everything they're selling, we're going to give away for free,"

PI Ex. 4.

Moreover, Microsoft set out to undercut Netscape's perceived viability -- and thereby discourage customers, suppliers, distributors, and others from dealing with Netscape -- by publicly warning Netscape (and those considering dealing with Netscape) in June and July 1996 that: "Our business model works even if all Internet software is free . . . . We are still selling operating systems. What does Netscape's business model look like? Not very good." SJ Ex. 69, p.4; see also SJ Ex. 67, pp.3-4 and Ex. 68, p.2. Microsoft went on to announce that its browser would be distributed free not only for an introductory period but would be "forever free."

Second, Microsoft did not stop at giving its browser away for free. Instead, Microsoft set out to do whatever it took to induce significant market participants to distribute and use its Internet Explorer browser instead of Netscape's browser -- including paying some customers to take the already free Internet Explorer and providing others with valuable concessions if they did so.

Ultimately, Microsoft succeeded in getting Intuit to agree not to support Netscape, but only after tying Intuit's access to valuable placement on the Windows desktop to Intuit's agreement to abandon Netscape. In Microsoft's April 1997 agreement with Intuit, Microsoft required Intuit to agree that it would, among other things:

(a)

(b)

(c)

(d)

SJ Ex. 72.

Third, Microsoft set out to further deprive Netscape of revenues by securing agreements from Internet Content Providers not to pay Netscape for participation in any competing Netscape "channel" or other browser service. PI Ex. 36-40.

Fourth, Microsoft undertook to raise Netscape's costs by closing off the most effective and profitable (and least costly) distribution channels for its browsers and thereby forcing Netscape to resort to less effective and more expensive distribution methods. See infra, Section II.B.1.

Fifth, Microsoft used its power to intimidate both customers and distributors not to adopt or support Netscape's browser (as well as non-Microsoft Java technology). Microsoft's dealings with Apple are illustrative of how far Microsoft was willing to go to limit Netscape's opportunities and to stifle Java.

On August 21, 1997,

On January 22, 1998,

On February 13, 1998

Microsoft's determination to restrict the support and distribution of Netscape's browser by Apple is particularly telling since Apple represents the main alternative to desktop PCs running Microsoft's Windows. Whatever the relevance of Microsoft's arguments about why it wanted Windows users also to use Internet Explorer, those arguments cannot apply to Internet Explorer use by Apple users.

In addition, there is no legitimate justification for Microsoft and Apple

Microsoft's Exclusionary Agreements With ISPs, ICPs and OEMs Are Unlawful

Microsoft's agreements with ISPs, OEMs, and ICPs are exclusionary in that they make it more difficult and costly for Microsoft's rivals to develop and distribute their Internet browsers and thus tend to exclude those rivals from the market. Exclusionary agreements of this nature are judged for antitrust purposes under the rule of reason, and they are unlawful if the exclusionary provisions are on balance anticompetitive -- if, in other words, they injure Microsoft's rivals by restricting their output more than they further Microsoft's legitimate objectives, National Society of Prof. Eng'rs v. United States, 435 U.S. 679, 691 (1978); American Ad Mgmt., Inc. v. GTE Corp., 92 F.3d 781, 791 (9th Cir. 1996), or if their harmful effects on Microsoft's rivals are not necessary in order to achieve Microsoft's legitimate objectives. Sullivan v. NFL, 34 F.3d 1091, 1103 (1st Cir. 1994), cert. denied, 513 U.S. 1190 (1995). There is substantial evidence that Microsoft's ISP, ICP and OEM agreements are unlawful. See, e.g., Sibley Dec., ¶¶ 61-65; Fisher Dec., ¶ III.D.; Warren-Boulton Dec., ¶¶ 52- 54.

Although Microsoft argues principally that its agreements do not materially harm its browser rivals, it also suggests that the agreements can be justified on the ground that they were entered into for "valid business reasons." MS Memo at 59, 61-62. But Microsoft cannot show

substantial, let alone undisputed, evidence, as to either the exclusionary effect of the agreements or their purported justifications. Microsoft is therefore not entitled to summary judgment on these issues.

Microsoft's Agreements Have Substantially Excluded Its Browser Rivals From The Most Important Browser Distribution Channels

The law condemns the impairment of competition on the merits, even if that impairment does not constitute complete exclusion of a rival or foreclosure of its opportunities. Even under the most exacting legal standard, the United States need not prove that every possible avenue of distribution has been effectively foreclosed to a rival. See, e.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) (denial of a necessary input merely impeded competitor's ability to market its product; competitor never contended that the joint marketing program at issue was essential to its survival). Rather, the exclusionary provisions in Microsoft's agreements are unlawful under Section 1 of the Sherman Act (and therefore under Section 2 as well) if on balance they impair competition and thus unreasonably restrain trade. See, e.g., Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327-28 (1961).

The rule of reason inquiry under Section 1 is practical and fact-based and focuses "directly on the challenged restraint's impact on competitive conditions." National Society of Prof. Eng'rs, 435 U.S. at 688. And, because Microsoft must, for purposes of its summary judgment motion, be deemed to be a monopolist, its agreements also should be condemned under Section 2 of the Sherman Act upon proof that they have had some exclusionary effect and were not reasonably necessary to achieving a legitimate business objective. Aspen Skiing Co., 472 U.S., at 605; see also 3 P.E. Areeda & H. Hovenkamp, Antitrust Law ¶ 651a, at 78 (conduct that "reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power" violates Section 2 and raises a presumption of harm).

Perhaps even more important, the exclusionary effect of each of Microsoft's restrictions must be determined in the context of all of Microsoft's other restrictions and pertinent market factors. First, the cumulative effect of all of Microsoft's restrictive agreements combined, rather than of any one individually, must be evaluated. Second, whatever the exclusionary impact on Microsoft's browser rivals of any one of Microsoft's agreements viewed in isolation, each such agreement is also plainly unlawful when, in light of all the other exclusionary factors and agreements affecting the market, its exclusionary impact is significant. See, e.g., Continental Ore. Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962). Thus, as the Supreme Court has made clear, instead of examining individual pieces of evidence in a vacuum as Microsoft would have this Court do, "plaintiffs should be given the full benefit of their proof, without tightly compartmentalizing the various factual components and wiping the slate clean after scrutiny of each." Id. at 699; see also City of Anaheim v. Southern California Co., 955 F.2d 1373, 1376 (9th Cir. 1992) (inquiring into the overall combined effect of specific individual acts); Litton Sys. Inc. v. American Tel. & Tel. Co., 700 F.2d 785, 816 (2d Cir. 1983); City of Mishawaka, Ind. v. American Elec. Power Co. Inc., 616 F.2d 976, 986 (7th Cir. 1980).

Microsoft's motion fails to address either the substantial evidence of foreclosure in the context of the other restrictions or the cumulative foreclosure as a whole. Instead, Microsoft seeks to obscure the issue by "tightly compartmentalizing" its few facts in exactly the way rejected by the Supreme Court. Plaintiffs' ample (often uncontroverted) evidence of substantial anticompetitive effects both in each of the most important browser distribution channels and as a cumulative whole requires denial of Microsoft's motion.

Microsoft's Browser Rivals Have Been Substantially Foreclosed From The ISP and OEM Channels

Plaintiffs' evidence, including unequivocal statements in Microsoft's business documents, leave no doubt that the two leading ways in which PC users obtain their browsers are from the Internet Service Providers ("ISPs") that connect them to the Internet, and from OEMs, installed on new PCs. Microsoft's restrictive agreements with ISPs and OEMs effectively foreclose Microsoft's browser competitors from these most-important distribution channels.

The ISP Agreements Foreclose Microsoft's Rivals

By their express terms, Microsoft's agreements with ISPs and OLSs significantly restrict Netscape and other competitors from access to this critical channel. Among the restrictions (detailed at PI Brief at 30-36) are the following:

ISPs must market, promote, and distribute Internet Explorer as the "exclusive" or "primary" browser, and cannot distribute a non-Microsoft browser unless it is specifically requested by the customer;

ISPs may not "express or imply" to a customer that another browser is available;

Even if a customer specifically requests a competing browser, Microsoft requires that ISPs ship Internet Explorer as the only browser a large majority of the time, usually for at least 75 to 85 percent of all browser shipments. The providers whose names appear in the Windows Online Services folder must ship Internet Explorer, and no other browser, at least 85% of the time; and

ISPs, with minor exceptions, cannot advertise or promote any non- Microsoft browsers.

There is concrete evidence of the market effects of these agreements. Microsoft's own documents track the degree of foreclosure they cause in the ISP channel. For example, in June 1996

Microsoft had entered into restrictive referral server agreements with all of the largest ISPs and OLSs.

Major ISPs and OLSs would have preferred to have maintained flexibility in the browsers they distribute and promote.

Because of Microsoft's agreements, however, many no longer distribute or promote Netscape Navigator at all.

Conspicuously omitting the huge OLSs, Microsoft argues that it has referral server agreements with only eleven out of thousands of U.S. ISPs. But, even putting OLSs aside, those eleven ISPs account for a substantial amount of the total U.S. Internet access provider subscriber base, see, e.g., SJ Ex. 26,

Once the OLSs, including AOL, CompuServe, and Prodigy -- all of which had and continue to have restrictive agreements with Microsoft -- are added to the picture, the significance of Microsoft's agreements becomes far more dramatic. In 1997, AOL alone accounted for

Plainly, the restrictive ISP agreements interfere with the distribution of non-Microsoft browsers.

Microsoft (again neglecting the huge and therefore critical OLSs) cites statistics suggesting that usage of Internet Explorer by customers of the ISPs that had entered into its exclusionary agreements is roughly equal to usage of Internet Explorer by customers of other ISPs. MS Memo at 12. These statistics are misleading and immaterial because they do not say anything about the impact of the restrictive agreements on the rate of browser acquisition over time. Microsoft appears to have aggregated Internet Explorer usage across all ISPs currently in the Windows Internet referral server -- even those such as Sprint, Concentric, and GTE, that

entered into referral server agreements as late as September 1997 and were distributing large numbers of Navigator to their customers before that date -- without controlling for the date on which subscribers of these services acquired their browser. Indeed, Microsoft's own documents show that Internet Explorer's share of browser usage is

The available evidence establishes that Microsoft's ISP restrictions have been quite effective at foreclosing competitors' browser distribution.

The OEM Agreements Foreclose Microsoft's Rivals

Microsoft's agreements with OEMs have the practical effect of significantly restricting Netscape and other competitors from access to, by Microsoft's own admissions, one of the two most important channels of browser distribution. Microsoft's Windows 95 and 98 license agreements with OEMs require that the OEMs license and install Internet Explorer in order to receive a license to Windows. PI Brief at 23-24. Microsoft's OEM agreements also prohibit the OEMs from removing the Internet Explorer icon, other means of access, or any of its code from Windows. Id.

Microsoft does not even attempt to refute the evidence that major OEMs, contractually prohibited from removing Internet Explorer from, or otherwise modifying the initial bootup sequence or Windows desktop screen of, the PCs they sell, are less likely to preinstall another browser, see PI Brief at 24-25; or even to consider other browser products on the merits. This effect is explained by practical OEM concerns -- including the likelihood of customer confusion, costly product testing, and increased support costs -- about preinstalling multiple browsers. See PI Brief at 24-25. In fact, Microsoft's own Senior Vice President of OEM Sales has testified that,

More recently, Netscape's former Vice President of Sales and Marketing testified that

Microsoft's only rejoinder to this evidence is that, under the letter of their Windows license agreements, OEMs are permitted to add icons and other browsers, MS Memo at 11-12.

The marketplace realities OEMs confront render such formalistic freedom meaningless because Microsoft's bootup and desktop screen restrictions deprive them of the ability to take the steps -- even modest steps to minimize confusion, testing, and support costs -- necessary to make adding other browsers commercially palatable.

Microsoft seeks to belittle the evidence of foreclosure in the OEM channel by contradicting its own internal documents and arguing that the OEM channel is insignificant as a channel for consumer browser distribution. Microsoft's only support for this assertion is

What Microsoft does not mention, however, is that it failed to

Given Microsoft's conduct in the OEM channel, it is dramatic evidence of competitive harm that Netscape has determined that it receives only

* * * * * In the aggregate, the restrictive terms of Microsoft's agreements with ISPs and OEMs have left Microsoft's browser rivals with significantly reduced access to distribution, and therefore with a Hobson's choice: suffer reductions in market share or increase reliance on far less efficient and more costly distribution channels.

In addition to the above points, Microsoft makes one other argument about both the ISP and OEM channels. As a general matter, Microsoft suggests there is no evidence of foreclosure because Netscape Navigator currently has an installed MS Memo at 9. To be sure, there is little doubt that Netscape was the first to recognize and respond to the tremendous commercial opportunity for Internet browsers and that it built up a large installed

base in the mid-'90s. But the relevant question is not whether the user base includes many who

got their browsers before Microsoft began its exclusionary practices, but whether Microsoft's agreements have since impaired the ability of Netscape and other rivals to continue to distribute their browsers.	Thus, Microsoft fails to establish the absence of a genuine dispute that there has been a substantial foreclosure of browser competition in the ISP and OEM channels.

Microsoft's ICP Agreements Materially Injure Its Browser Rivals

Microsoft argues that it has contracts with only 24 U.S. ICPs, and that the ICP channel is not a significant browser distribution channel. But the ICP agreements injure Microsoft's browser

distribution. Foreclosure is not limited to browser distribution. An ICP's endorsement of a particular browser and its accompanying standards has a real effect on browser adoption,

especially in a market characterized by network effects and heavily influenced by industry perception.

Indeed, Microsoft itself has recognized the importance of content providers, particularly in their standard-setting capacity, to its Internet mission.

Microsoft's ICP restrictions have, in addition, had significant impact on the browser usage and distribution practices of important ICPs. For instance, one of the largest

Microsoft also prevented

Absent these prohibitions, Intuit would have continued the promotion and distribution of Navigator, not only from its websites, but also in its capacity as a leading ISV.

These exclusionary effects must of course be considered in the context of Microsoft's other exclusionary practices. And they should be considered also in light of the importance and prominence of Microsoft's ICP partners (including Disney, Time Warner, and Intuit), which are among the most popular and visible of all content providers.

Relegating Its Rivals To Reliance On Other, Less Efficient And More Costly Distribution Channels Cannot Compensate For The Foreclosure Microsoft Has Created In The ISP, ICP and OEM Channels

Microsoft's summary judgment argument is largely premised on the fact that, putting the ISP, OEM, and ICP channels aside, other distribution channels remain available to Microsoft's rivals. But the alternatives are decidedly and demonstrably inferior. Most significantly, Microsoft itself has repeatedly recognized that ISPs and OEMs are the most important browser distribution channels.

Recent depositions of Netscape executives -- on which Microsoft misleadingly relies to support its assertions -- in fact unequivocably confirm the importance of the OEM and ISP channels to browser distribution.

The record further shows that other methods of distribution, such as mailing physical CDs or disks to individual homes, are more costly and much less effective than distribution through ISPs and OEMs.	In particular, as browsers have expanded in size the downloading of browsers has become more cumbersome, less effective, and a far less successful means of distributing browsers.

clearly establish

the serious limitations of downloading.

In light of this evidence, it is plain that numerous issues of fact remain disputed about the extent and significance of the exclusionary effects of Microsoft's ISP, OEM and ICP restrictions. Summary judgment is therefore unwarranted.

The Exclusionary Provisions In Microsoft's ISP, ICP And OEM Agreements Are Not Necessary To Further Legitimate Interests

Microsoft's summary judgment motion should be denied because plaintiffs have adduced strong proof of the significant exclusionary effects of Microsoft's practices. Microsoft's motion also must fail because Microsoft cannot show that there are no disputed material facts concerning

the other half of the rule of reason analysis: Microsoft's assertion that its contractual restrictions were implemented for "valid business reasons." MS Memo at 59, 61-62. On this point too the plaintiffs' evidence overwhelms Microsoft's unsubstantiated claims.

In addition to ignoring numerous disputed facts, Microsoft's argument on this point misstates the applicable legal standard. As discussed above, see supra, Section II.B, it is well- settled that an anticompetitive contractual restriction may be justified only if the restraint's anticompetitive effects are both outweighed by, and reasonably necessary to further, a legitimate business justification.

Microsoft is thus simply wrong when it argues that the mere existence of "legitimate business reasons" is sufficient to justify its exclusionary contract provisions. To prevail, it must demonstrate more -- that the asserted business reason is truly valid, that it could not be achieved by a means less restrictive of competition, and that its benefits outweigh the harm to competition resulting from the exclusionary provisions.

When measured against this standard, the evidence demonstrates not only that Microsoft's motion must be denied, but also that Microsoft's purported justifications for its exclusionary conduct are plainly insubstantial.

Microsoft's Anticompetitive Restrictions On ISPs Are Not Justified

Microsoft seeks to justify the restrictive provisions in its ISP agreements by arguing that the contracts are "nothing more than commonplace cross-marketing arrangements." MS Memo at 63. This simply repeats Microsoft's mantra that its conduct merely reflects "ordinary business practice[s] typical of those used in a competitive market" and therefore cannot "constitute anti- competitive conduct." MS Memo at 76 (internal quotations omitted). As noted above, that argument is incorrect as a matter of law in light of Microsoft's monopoly power. It is also factually infirm.

For example, Microsoft cites provisions in Netscape's browser distribution agreements

In addition, unlike the Microsoft agreements, Netscape's licenses contain

and (also unlike the Microsoft agreements) they do not

Microsoft argues that "consumers benefitted" from its ISP agreements because "they were part of an overall effort to make it easier for Windows 95 users to gain access to the Internet." MS Memo at 63, 67. This argument is both misleading and disingenuous. On their face, the exclusionary provisions harm consumers by making it more difficult for them to obtain non- Microsoft browsers, and Microsoft has not explained how those exclusions might benefit consumers. Moreover, even were Microsoft to offer proof that some part of the agreements benefit consumers, the relevant question is not that, but instead whether the exclusionary provisions in the agreements are necessary to achieve those benefits. They are not, and Microsoft cannot show any connection between making Internet Explorer available to more PC users, and restricting ISPs ability to distribute and promote competing browsers.

Microsoft suggests that the restrictions compensated Microsoft both for maintaining the ISP referral server and for permitting ISPs in it to enjoy the ICW's favorable desktop placement, MS Memo at 63, but there is no reason why Microsoft had to receive compensation in the form of exclusionary restrictions. To the contrary,

demonstrates that Microsoft could be compensated in ways that do not exclude rivals.

The evidence shows that any interest Microsoft might assert in receiving compensation for "renting" its desktop real-estate is pretextual. See Eastman Kodak, 504 U.S. at 484. According to Microsoft executives,

Indeed, Microsoft recently made the decision to permit major OEMs to place the ISPs of the OEM's choice in the Internet Connection Wizard for Windows 98 and to

thereby confirming that Microsoft has little interest in charging for its desktop real-estate.

Far from trying to benefit consumers, Microsoft imposed its ISP restrictions to choke off distributional avenues for competing browsers and thereby choke off consumer choice. See

b.	Microsoft's Anticompetitive Restrictions On OLSs

Are Not Justified

Microsoft defends its contractual restrictions on the ability of OLSs to promote and distribute non-Microsoft browsers with the refrain that the restrictions are necessary to prevent "free riding." See generally Sylvania, 433 U.S. at 55 (explaining that preventing free riding may justify certain vertical restraints). As Microsoft explains, the OLSs are given preferred placement on the Windows desktop and assistance in developing a proprietary client (or browser "shell") based on Internet Explorer in exchange for the OLSs' agreement to curtail their distribution and promotion of non-Microsoft browsers. See MS Memo at 71. Having granted OLSs these benefits, the argument runs, Microsoft is entitled to "some assurance that the OLSs will not take advantage of that assistance and then turn around and adopt competing technologies." Id. at 72.

As Judge Easterbrook has explained, however, "[w]hen payment is possible, free-riding is not a problem because the 'ride' is not free." See Chicago Professional Sports Ltd. Partnership v. NBA, 961 F.2d 667, 675 (7th Cir. 1992) (Easterbrook, J.). If Microsoft wishes to be paid for benefits it confers on Online Service Providers, then -- as with its ISP agreements -- it can charge OLSs a fee rather than receive compensation in the form of exclusionary rights. Microsoft similarly cannot show that restricting OLSs' distribution and promotion of competing browsers is reasonably necessary to ensure that competitors do not free ride on Microsoft's technological assistance. Any such assistance Microsoft provides to an OLS would be useful only in developing a customized OLS browser based on Internet Explorer, and could not readily be used to assist the OLS in working with Netscape or another browser producer. Thus, there is negligible danger of free riding. Because Microsoft cites no evidence, let alone a lack of genuinely disputed evidence, to the contrary, its argument therefore cannot meet its summary judgment burden.

Microsoft's Anticompetitive Restrictions On ICPs Are Not Justified

Microsoft offers the same justifications for the exclusionary provisions in its ICP agreements; and, for the same reasons, those asserted justifications are insufficient. Even if Microsoft's creation of its "channel bar" might have "facilitated the use of innovative technologies and provided consumers with easy access to high quality content on the Internet," see MS Memo at 69-70, Microsoft makes no attempt to explain why restricting ICPs' relationships with competing web browsers and requiring ICPs to implement Internet Explorer-specific technologies is reasonably necessary to provide ICPs placement on the channel bar. Moreover, the restrictions apply only to ICPs' relationships with the top two "Other Browsers,"

a fact that supports the inference that Microsoft imposed the restriction not for any procompetitive purpose but rather to impede the commercial opportunities of its leading competitors.

In any event, there simply is no justification for Microsoft's restrictions on ICP's ability to compensate Netscape, and Microsoft asserts none. At a minimum, there certainly is no undisputed justification, and therefore no basis for summary judgment.

Microsoft's Restrictive OEM Licenses Are Not Justified

Microsoft's principal defense of the exclusionary provisions in its OEM agreements is an argument of antitrust immunity based on the copyright laws. That argument is addressed separately in Section II.D, below. We address here Microsoft's effort to defend the exclusionary OEM agreements on economic grounds.

Microsoft first asserts that its OEM restrictions "preserve[] the operating system as a stable and consistent platform that supports a broad range of compatible software applications software." MS Memo at 57. The platform issue, however, has to do with the APIs to which ISVs write. Those APIs are unaffected by alterations to the Windows boot-up sequence, modifications to the contents of desktop folders, or creation of icons of different shapes and sizes. To the contrary, Microsoft has promoted Internet Explorer to end-users on the basis that the icon

could be easily removed, see Gaspar Dec. ¶ 19 (Consent Decree Case); Sibley Dec. ¶ 43 n.48 (citing sources); Cole 50:2 - 51:24, while using its screen restrictions to prohibit the OEMs from removing the Internet Explorer icon themselves. Thus, lifting the prohibition on OEMs removing access to web browsing via Internet Explorer would not "undermine the consistency of the [Windows] platform in any meaningful way." Sibley Dec. ¶ 43.

Microsoft provides no evidentiary support for its platform argument. Even if it did, factual questions concerning the degree to which the restriction furthers the asserted justification, and whether the justification outweighs the anticompetitive effects it causes, plainly would preclude summary judgment. See, e.g., id. ¶ 43 & n.47 (questioning Microsoft's argument because ISVs commonly distribute shared program libraries with applications to ensure that their software runs on the large installed base of machines that lack the latest version of Windows).

Microsoft also argues that its restrictions on altering the initial boot-up process "promote a consistent user experience," MS Memo at 47, but the record makes clear that there are disputed questions of material fact as to whether Microsoft's restrictions are reasonably tailored to that

end. As an initial matter, Microsoft's contention that the challenged restrictions are justified in order to provide customers the benefit of "the same initial user experience" across brands, MS Memo at 58 (emphasis added), is belied by Microsoft's own conduct. See Sibley Dec.¶ 47. Among other things, Microsoft permits (1) all OEMs to ship Windows 98 with the "active desktop" either on or off; (2) all OEMs to add items of varying sizes to the active desktop (but not to the traditional Windows desktop),

(4) some OEMs to replace the list of ISPs included in the Internet Referral Server with their own lists; and (5) all OEMs to preload the software of the OEM's choice, subject to Microsoft's license restrictions.

These exceptions create considerable variation in the initial experience a PC user will have depending on the OEM from which he or she buys their PC. This level of variation makes clear that, at most, Microsoft's restrictions might help preserve some very general "look and feel" of the Windows operating system. The challenged restrictions, however, cannot be shown to be reasonably necessary to achieve that objective. Removal by OEMs of the Internet Explorer icon and other means of using Internet Explorer to browse the Web (which Microsoft prohibits) would not affect the overall "look and feel" of Windows any more than when OEMs add various software (which Microsoft readily permits). Nor is the "look and feel" of Windows impaired by permitting OEMs to install icons of different sizes; Microsoft permits precisely that in those instances when an OEM ships the active desktop enabled (which, because it provides additional ways of launching Internet Explorer, also increases the likelihood that the user will use Internet Explorer).

Even with respect to the Windows initial boot process, where Microsoft at least can plausibly argue some legitimate interest in ensuring that users supply and receive certain information, the exclusionary provisions in its OEM agreements are far broader than necessary.

As noted above, Microsoft prevents OEMs from

Microsoft also argues that "substantial consumer confusion and disappointment would result if new personal computers arrived with various advertised features of Windows altered or deleted in various ways unintended by Microsoft." MS Memo at 58. For two reasons, this argument does not justify the exclusionary restrictions in the OEM agreements.

Significant factual issues exist as to whether the restrictions challenged by the plaintiffs were designed to advance Microsoft's asserted interest. Internal Microsoft documents show that Microsoft began serious efforts to enforce and augment its exclusionary provisions only

Second, Microsoft could have achieved the objective of preventing consumer confusion through substantially less anticompetitive means. For instance, Microsoft has permitted certain OEMs to

There is no reason why Microsoft could not similarly permit OEMs to insert additional screens in the start-up sequence that permit end users to select the browser of their choice, pursuant to guidelines designed to ensure the process' smooth operation and preserve the general "uniformity" of the first-boot process.

Moreover, that OEMs -- who have an unquestioned interest in meeting consumer demand - - have sought at various times to remove the Internet Explorer icon from the Windows 95 and Windows 98 desktops,

or urged Microsoft to ship Windows 98 with Internet Explorer uninstalled,

supports the conclusion that permitting OEMs to remove the Internet Explorer icon and associated means of browsing the web would meet, rather than disappoint, consumer

expectations. Any legitimate interest in avoiding "consumer confusion and disappointment," see MS Memo at 58, could be met by requiring disclosure when OEMs remove the means of using Internet Explorer to browse the Web. OEMs vigorously compete against one another by advertising to end users the particular features of the machines they sell; many OEMs allow end-

users to choose the precise components of their PCs, including the preinstalled software; and because the OEM market is competitive, OEMs that cause user "confusion and disappointment" would be punished by fewer sales,

There is every reason, therefore, to believe that a labeling requirement can prevent customer disappointment without inflicting the competitive harm caused by Microsoft's exclusionary license provisions.

For similar reasons, Microsoft's restrictions cannot be sustained on the theory that they "preserve[] Microsoft's reputation as a supplier of quality operating system software." MS

Memo at 58-59. OEMs have no incentive to engage in conduct that will cause consumer

confusion or otherwise impair Microsoft's goodwill. OEMs not only bear their own support costs and face vigorous competition, but also bear the costs of customer support calls directed to Microsoft, as Microsoft refers customer calls to the pertinent OEM.

Thus, Microsoft's contention, MS Memo at 58, that its reputation, not the OEMs', would "suffer if Windows did not perform as represented" by Microsoft misses the point; the very structure Microsoft has created (quite aside from its contractual restrictions) is designed to ensure that OEMs take actions consistent with preserving Microsoft's reputation.

Moreover, the facts simply do not support Microsoft's contention that lifting the

challenged restrictions threatens to tarnish the Windows brand. Permitting OEMs to promote browsers and to provide browser choice in the boot-up sequence no more threatens Microsoft's reputation than Microsoft's decision to permit OEMs to provide in that sequence their own ISP sign-up software. Nor does permitting OEMs to vary the size of shapes and icons, which Microsoft permits when the OEM ships the "active desktop" enabled (but with respect to the "classic" desktop screen). Of course, even if Microsoft's conduct were consistent with respect to the claimed justification, a labeling requirement, as discussed above, would (along with ordinary OEM incentives to minimize costs and seek to meet consumer demand) suffice to prevent any reputational injury to Microsoft from OEM removal of the means of using Internet Explorer to browse the web, removal of the On-Line Services Folder, or addition of a choice of user interface in the initial boot-up sequence.

Finally, Microsoft cannot argue that its screen restrictions are justified because they simply reflect ordinary business practice typical of those used in a competitive market. First, as already noted, this argument simply does not apply here because of Microsoft's uncontested monopoly power. Second, the factual reality is that, far from using practices similar to Microsoft, other operating system vendors commonly allow significantly more customization than Microsoft. For instance,	permits OEMs to choose among alternative

interfaces and to decide whether or not to install the browser that ships with its operating system products; and does not believe that permitting OEMs these options will impair its goodwill, fragment its operating system as a platform, cause end-user confusion or disappointment.

Microsoft's Sudden Revision Of Some Of Its Exclusionary Agreements On The Eve Of Litigation Provides No Basis For Summary Judgment

Microsoft argues that certain exclusionary provisions in its ISP and ICP agreements challenged by the plaintiffs are "effectively moot," MS Memo at 13, on the ground that Microsoft has "unilaterally waived" those provisions. See id. at 65, 68. (Microsoft makes no such argument about its OEM or OLS restrictions.)

Microsoft's courthouse conversion suggests, at the very least, both that Microsoft has no legitimate need for those provisions and that it recognizes their doubtful legality. But it does not provide a legal defense in these cases. To the contrary, "[i]t is the duty of the courts to beware of efforts to defeat injunctive relief by protestations of repentance and reform." United States v. Oregon State Med. Soc'y, 343 U.S. 326, 333 (1952).

There are several flaws in Microsoft's mootness argument. In the first place, Microsoft has not waived all of its exclusionary agreements. While it announced last March -- the night before Mr. Gates testified before Congress about the agreements -- that it was waiving the restrictive provisions, it in fact waived some provisions, modified but did not entirely abandon others, and left some agreements -- including the exclusionary provisions in its agreement with AOL, which is by far the largest and most important ISP -- entirely unchanged.

In any event, it is plain that this Court retains jurisdiction to pass on the legality of even the "waived" practices because those practices caused anticompetitive effects that are within the court's power to remedy. See Northwestern Environmental Defense Center v. Gordon, 849 F.2d 1241, 1245 (9th Cir. 1988) ("The fact that the alleged violation has itself ceased is not sufficient to render a case moot. As long as effective relief may still be available to counteract the effects of the violation, the controversy remains live and present.").

Moreover, regardless of the effects of Microsoft's abandoned or modified conduct, it is settled that "voluntary cessation of allegedly illegal conduct" does "not make the case moot." United States v. W.T. Grant Co., 345 U.S. 629, 632 (1953). In such circumstances -- when the "defendant is free to return to his old ways," id. -- the defendant must demonstrate that it is "'absolutely clear'" that "'the allegedly wrongful behavior could not reasonably be expected to recur.'" Vitek v. Jones, 445 U.S. 480, 487 (1980) (quoting United States v. Phosphate Export Ass'n, 393 U.S. 199, 203 (1968)). Microsoft has not met this "heavy" burden. County of Los Angeles v. Davis, 440 U.S. 625, 631 (1979). With respect to both its ISP and ICP restrictions, Microsoft merely abandoned some of the challenged practices when threatened with government enforcement action. It has not even "disclaimed any intention to revive them." W.T. Grant, 345 U.S. at 633. And, even if it had made such a disclaimer, "[s]uch a profession does not suffice to make a case moot." Id.

Microsoft's Requirement That OEMs Distribute Internet Explorer As A Condition Of Licensing Windows Is An Unlawful Tying Arrangement

Microsoft's Forced Licensing of Internet Explorer to OEMs Violates Section 1 Of The Sherman Act

There are four elements to a Section 1 per se tying claim: (1) two separate products or services exist; (2) the sale of one product (the tying product) is conditioned on the purchase of the other (the tied product); (3) the seller has "appreciable economic power" in the tying market; and (4) the tying arrangement affects a not insubstantial volume of interstate commerce in the tied product. See Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 1, 9-18 (1984); Eastman Kodak, 504 U.S. at 462. For the purposes of summary judgment, on which all disputed issues must be resolved against the moving party, Microsoft does not contest the third and fourth elements. Its arguments on the first and second are both factually and legally inadequate to warrant summary judgment. Indeed, its coercive bundling of Internet Explorer with Windows is per se illegal.

Microsoft Conditions The License Of Windows On OEM Distribution Of Internet Explorer

Microsoft devotes a single page to the "conditioning" element of the plaintiffs' tying claims, arguing that its refusal to allow OEMs to license Windows without Internet Explorer does not amount to "conditioning" because it has charged OEMs only a single royalty for both Windows and Internet Explorer and "has never charged OEMs a separate royalty" for Internet Explorer alone. MS Memo at 49. This formalism fails to address the evidence that, despite the fact that Internet Explorer and Windows are not separately priced, Microsoft's coercive bundling and refusals to permit unbundling have constituted, and continue to constitute, a powerful anticompetitive mechanism.

Microsoft correctly states that "conditioning the availability of one product on the purchase of another is a necessary element of a tying claim under Section 1 of the Sherman Act." MS Memo at 49. However, Microsoft misinterprets the "purchase" (or "conditioning") requirement to mean that a separate charge must be assessed for Internet Explorer. To the contrary, as Professors Areeda and Hovenkamp explain:

A tying arrangement is the sale or lease of one item ("tying product") only on condition that the buyer or lessee take a second item ("tied product") from the same source. . . . And the tie may be obvious as in the classic form, or somewhat more subtle, as when a machine is sold or leased at a price that covers "free" servicing.

3A P.E. Areeda & H. Hovenkamp, Antitrust Law, ¶ 760b6 (1996). Whether the market price of the tied product is zero or something higher is thus immaterial to the potential for anticompetitive harm, and accordingly should be immaterial to analysis of whether there is a tying arrangement.

Even though no separate price is charged for Internet Explorer, and even though it is licensed under the same licensing agreement as Windows, the evidence plainly indicates that Microsoft's insistence that OEMs accept and preinstall it constitutes anticompetitive conditioning because it has materially affected OEMs' judgment as to the browser software they preinstall on their PCs. See supra, Section II.B.1.a(2). The competitive harm which the per se rule against tying is designed to prevent includes the denial of "free access to the market for the tied product" and the forcing of consumers to "forego their free choice between competing products." Northern Pac. Ry., 356 U.S. 1, 6 (1958). Microsoft's tying of Internet Explorer to Windows produces these precise evils, and thus imposes real costs on OEMs. Microsoft's argument -- the mere formalism that there is no separately priced purchase of Internet Explorer -- cannot entitle it to summary judgment.

Under The Clear Standards Set Forth By The Supreme Court And

In Subsequent Caselaw, Windows and Internet Explorer Are

Separate Products For Purposes Of Tying Analysis

Microsoft's real attack on the plaintiffs' per se tying claim challenges the first element of the tying offense, whether Internet Explorer and Windows operating systems are separate products. Instead of coming to grips in any serious way with Jefferson Parish and Eastman Kodak, the controlling decisions on the separate product issue, Microsoft relies on prior and/or distinguishable lower court decisions, and on the D.C. Circuit's decision in the consent decree action brought last year by the United States, United States v. Microsoft, 1998 WL 327855 (D.C. Cir. June 23, 1998) (hereinafter, "the consent decree case").

The Supreme Court held in Jefferson Parish, and reiterated in Eastman Kodak, that whether something that is sold by the defendant as a single package or bundle consists of one or more "products" for tying purposes depends on whether there is demand for each of the bundled products separately, apart from the package, and whether, in light of this separate demand, it is efficient for the defendant to sell the different components or products separately. The antitrust issue raised by tying doctrine is thus whether the defendant is required also to offer an unbundled alternative (i.e., offer the tying product without the particular tied product required as a condition of that offer), based on whether there is demand for the products separately.

Jefferson Parish makes clear that the test is based in economics, not technology. Under Jefferson Parish, "the answer to the question whether one or two products are involved turns not on the functional relation between them, but rather on the character of the demand for the two items." 466 U.S. at 19; see also Multistate Legal Studies, 63 F.3d at 1547; Klamath-Lake Pharmaceutical Assn. v. Klamath Medical Service Bureau, 701 F.2d 1276, 1289 (9th Cir.), cert. denied, 464 U.S. 822 (1983) ("Products that function together and are sold in combination may still be 'separate' if consumers would prefer to buy them individually at the price necessary to market them separately . . . . It is the relationship of the producer's selling decision to market demand, not the physical characteristics of the products alone, that determines the existence of legally separable products.")

There Is Separate Demand For

Internet Explorer And Windows

Microsoft concedes that there is demand for Internet Explorer without or separate from Windows operating systems. For example, the evidence shows that Microsoft has for years

offered Internet Explorer separate from Windows, both for Windows users and for users of operating systems other than Windows, and even Microsoft's brief argues that many users obtain their browsers separately. See MS Memo at 9-17. Customers who acquire either Microsoft's browser or another browser in these various ways, whether from ISPs (in most cases), through retail purchase, or otherwise, obviously do so independently of the acquisition of their operating system. Microsoft offers Internet Explorer separately, and users obtain it separately, in order to satisfy consumer demand for web browsers.

Microsoft argues that there is no separate demand for the alleged tying products

(Windows 95 and Windows 98) without the tied product (Internet Explorer) on the ground that the plaintiffs "cannot show that there is separate demand for operating system software products

that do not provide web browsing functionality." MS Memo at 45. This argument is both wrong on the facts and rests on a misunderstanding of the applicable legal test. The issue is not whether there is demand for operating system (tying) products without any browser (tied) products whatsoever, but rather whether there is demand for the particular tying product (Windows)

without the particular tied product (Internet Explorer) required by the defendant.

The facts presented in Jefferson Parish itself are a clear example of this point. The Supreme Court fully recognized that there was, and could be, no suggestion that anyone wanted surgery (the tying product) without any anesthesia (the tied product); but it nonetheless asked whether there was demand for surgery without the particular anesthesiologists required by the defendant, and cited numerous earlier cases in which tying arrangements had been found despite the uselessness of the tying product without some product in the tied product market. See Jefferson Parish, 466 U.S. at 19, n.30, 22-23.

In any event, there is abundant, uncontroverted evidence both of demand (and a separate market) for Windows without any browser product at all, and of demand for Windows without Internet Explorer in particular. This evidence includes the following.

(1)	OEMs have repeatedly sought to effectively remove Internet Explorer by removing icons and other means of access to Internet Explorer, and they have sought both to sell computers both without Internet browsing capability at all and with browsers other than Internet Explorer.

Microsoft argues that "[r]emoving `icons and other means of access' is not the same as removing Internet Explorer, and thus does not establish separate consumer demand for Windows without those technologies." MS Memo at 47. But as discussed below, it is immaterial whether OEMs have sought to remove all "technologies" that Microsoft chooses to associate with Internet Explorer. The issue for tying purposes is the economic question whether OEMs have sought, whether by removing icons, other means of access, or otherwise, to serve demand for Windows without Internet Explorer from the perspective of the end user. The evidence shows exactly that.

(2)	Some users prefer Windows operating systems with a browser other than Internet Explorer; other users, particularly corporate customers, prefer Windows operating systems with no browser at all. Microsoft ignores the evidence both that some corporate users do not want to license any browser along with Windows, and that other users wish to select from among competing browsers on the merits and across operating system platforms, and therefore do not

want to have Internet Explorer forced upon them.

This evidence too shows separate demand for Windows without Internet Explorer.

(3)	Microsoft and others in the industry recognize that browsers and operating

systems are separate products. As detailed in the plaintiffs' PI Briefs, Microsoft has recognized it is in a "browser war" with Netscape, has made obtaining ever higher "browser share" a top corporate goal in order to win that war, and has meticulously tracked that browser share wholly apart from its share of Windows or any other product. See U.S. PI Memo at 19-22, 60-64, and cites therein. Moreover, Microsoft's strategy of making its Internet Explorer browser "cross- platform" (i.e., available to run on multiple operating systems) itself demonstrates that the browser is a separate product. The cross-platform versions of Internet Explorer are designed to

satisfy consumer demand for browsers as products in their own right, not as components of particular operating systems. Indeed, Microsoft recognizes that numerous users do not wish to have their choice of browser linked to their choice (or lack thereof) of operating system. Microsoft does not dispute that it has developed versions of Internet Explorer 3.0 and 4.0 for the Macintosh, Windows 3.1, and Solaris, or that it will continue to develop future versions of Internet Explorer to be a cross-platform product.

(4)	The practices of vendors of other operating systems demonstrate that there is separate demand for operating systems. Microsoft argues that Windows and Internet Explorer should not be considered separate products on the ground that "every modern operating system for personal computers includes a variety of technologies that facilitate access to information on

the Internet, including web browsing functionality." MS Memo at 45. The evidence shows just the opposite. Other operating system vendors approach the bundling, if any, of browser

products with their operating systems in a way fundamentally different from Microsoft.

Microsoft has not identified a single operating system vendor which requires licensees to install and not to remove a particular browser as a condition of licensing the operating system. Rather, other vendors either do not bundle a browser at all, see, e.g., Wack Dec., ¶¶ 23-26, or permit OEM licensees not to install a browser offered with the operating system (or to remove it after installation) if they wish. See, e.g.,

Microsoft does not really contest the evidence that both it and other industry participants treat browsers as separate products or that some OEMs and computer users would like to obtain Windows operating systems without the Internet browsing functionality provided by Internet Explorer. It argues, instead, that this evidence is insufficient because there must be evidence of "widespread sales of the tying item in unbundled form." MS Memo at 45, quoting 10 P.E.

Areeda, H. Hovenkamp, E. Elhauge, Antitrust Law ¶ 1745d2 at 211. But Microsoft is creating a legal "Catch-22." There obviously cannot be widespread sales of Windows without Internet Explorer because Microsoft, with its dominance of the desktop PC operating system market, has consistently required OEMs to take Internet Explorer as a condition of obtaining Windows. For this very reason, the available (and substantial) evidence of separate demand for Windows and Internet Explorer may well understate the actual extent of such demand. OEMs, having long

since recognized that they have no choice, have simply acquiesced with Microsoft's required bundling.

It Would Be Efficient To Offer OEMs

The Option Of Windows Without Internet Explorer

The efficiency question in tying cases is whether, in light of the demand for an unbundled option, it is efficient for the defendant to provide such an option. Eastman Kodak, 504 U.S. at 462. Thus, in this case the question is whether it is efficient for Microsoft to satisfy the demand for separate or standalone browsing functionality provided by Internet Explorer, and the demand for Windows operating system functionality without the web browsing functionality provided by Internet Explorer.

There is no dispute that Microsoft can efficiently satisfy end users' demand for separate or standalone web browsing functionality. Microsoft does so by offering the standalone versions of its Internet Explorer web browser product, both to users of Windows and to users of various non- Windows operating systems.

Similarly, if Microsoft wanted to satisfy the demand of OEMs and computer users for operating systems without the web browsing functionality provided by Internet Explorer, rather than wanting just to exclude its browser rivals, it could efficiently offer those OEMs or users the alternative of Windows without that particular web browsing functionality. In the case of Windows 95, Microsoft concededly provided the means, through the Add/Remove utility, for users to remove Internet Explorer. It could have offered OEMs a similarly unbundled version of Windows 95, but chose not to do so and, instead, prohibited the OEMs from themselves utilizing the Add/Remove utility or otherwise removing IE.

With regard to Windows 98, where Microsoft has chosen not to offer anyone the ready means of removing Internet Explorer using the Add/Remove utility or otherwise, it would nonetheless be efficient for Microsoft to offer an unbundled alternative. Felten Dec., ¶¶ 7-10.

Of course, under Jefferson Parish, Microsoft need not necessarily offer a version of Windows 98 without utilization of any browsing functionality, but rather without that functionality necessarily belonging to a particular browser -- Internet Explorer. This is precisely what other operating system vendors universally, and efficiently, do in providing their operating system products. Plaintiffs' evidence will establish that it is readily possible and efficient for Microsoft to offer Windows 98 in a way that satisfies the demand of OEMs and users who desire either an operating system without web browsing functionality or an operating system on which it is easier or more economical to install a different web browser product.

Microsoft argues that the removal of what it calls "Internet Explorer technologies" from Windows 98 will "severely degrad[e] the operating systems." MS Memo at 42. This argument -- the linchpin of Microsoft's entire defense to the tying claims -- rests on a semantic sleight of hand and is insufficient for summary judgment both as a matter of law and as a matter of fact. This sleight of hand is Microsoft's equation of "Internet Explorer technologies" with every bit of software code used to browse the Internet using Internet Explorer. This gambit, identical to the one Microsoft attempted and the Court rejected last winter, is inconsistent with the economic inquiry made in Jefferson Parish.

The efficiency of providing an unbundled alternative is fundamentally an economic question, not a technical one. As OEMs have recognized, removing access to Web browser functionality from Windows or another software product effectively removes the web browser, eliminating the ability of the remaining Windows product to satisfy the separate demand for such functionality (even if shared files are left behind). Moreover, removing such functionality or access to such functionality from Windows leaves a fully functioning operating system that satisfies the demand of OEMs and users who desire either an operating system without web browsing functionality or on which it is easier or more economical to install a different browser. Microsoft can efficiently remove or permit OEMs to remove the specific Internet Explorer Web browser functionality from its bundled Windows products and, if desired, to substitute the Web browsing functionality provided by competing browsers.

Cases Involving Product Design Do Not Create Any Exemption From The Antitrust Laws

Microsoft argues that the "integration" of "Internet Explorer technologies" with Windows 98 is a "technological" tie-in and is, therefore, subject to "a specific body of case law" that prevents any inquiry into the nature of the tie, the facts bearing on its adoption and implementation, or its competitive effects. MS Memo at 20. Indeed, Microsoft argues that "technically interconnected products" are essentially "immune" from tying claims -- that the court's inquiry is at an end once a defendant has made a plausible showing that there is "some" technological benefit from the challenged combination and that the tie was not carried out "solely for the purpose of tying two separate products." MS Memo 20, 24 (emphasis added). In substance, Microsoft argues that, even though it may be a monopolist, its bundling of Internet Explorer with Windows is not subject to antitrust scrutiny so long as it can show some plausible benefit from the conduct, regardless of whether the conduct is anticompetitive regardless of whether the conduct is on balance beneficial or harmful to consumers.

As discussed in Section II.C.2, infra, Microsoft's arguments do not and cannot justify its conduct under Section 2 of the Sherman Act if (as is clear here) the conduct serves to maintain monopoly power by raising barriers to entry, increasing rivals' costs, or foreclosing competition on the merits.

Microsoft rests its argument on a few lower court cases that, for two reasons, are inapposite here, even as to plaintiffs' Section 1 claims. First, Microsoft's interpretation of these cases conflicts with the Supreme Court's later, seminal pronouncements on tying law in Jefferson Parish and Eastman Kodak. Second, Microsoft has not properly understood even the cases on which it relies.

Both the Supreme Court and the lower courts have relied on the demand-based analysis mandated by Jefferson Parish to evaluate separate product claims in "technological" tie-ins under Section l of the Sherman Act. See Eastman Kodak, 504 U.S. at 461-63 (in context of what the Court characterized as a "high-technology" service industry, relied on Jefferson Parish and other established tying cases, without any suggestion that any different, more relaxed "body of law" should apply in technology-related cases); Data General v. Grumman Systems Support, 36 F.3d 1147, 1178-81 (lst Cir. 1994) (alleged tie of ADEX software and services); Service & Training, 963 F.2d at 683-85 (reversing grant of summary judgment to defendant on claim of tie between ADEX and repair services); Allen-Myland v. IBM Corp., 33 F.3d 194, 200-16 (3d Cir. 1994) (reversing judgment for defendant on alleged tie of large-scale mainframe computers and the labor to install upgrades to mainframes); Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1339 (9th Cir. 1984) (holding tie of NOVA computer system to NOVA operating system unlawful).

Similarly, the cases on which Microsoft relies in fact look to standard tie-in criteria to evaluate the lawfulness of "technological" ties and rest on facts materially different from those alleged (and not disputed by Microsoft) here.

In Telex Corp. v. IBM Corp., 367 F. Supp. 258 (N.D. Okla. 1973), rev'd other grounds, 510 F.2d 894 (10th Cir. 1975), for example, which appears to be the origin of the "technological" tie-in language, the court held that, unlike the circumstances here, there was no forced tie of memory and control functions in a central controller. Telex, 367 F. Supp. at 347 ("the integrated control in the System 370 is wholly optional. IBM continues to offer central processing units without integrated controllers.")

Similarly, in Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307 (5th Cir. 1976), the court applied traditional tie-in law to hold that plaintiff's failure to prove coercion in the alleged tie (of computer hardware to a computer time-sharing software franchise known as "Response I") was fatal to its claim. Id. at 1327-30. After discussing the absence of coercion in great detail and at great length, the court suggested in a sentence of dicta that a tie of two different products accomplished by product design would be unlawful only if "the technological factor tying the hardware to the software has been designed for the purpose of tying the products, rather than to achieve some technologically beneficial result." Id. at 1330 (citing Telex). Here, of course, there is substantial evidence of anticompetitive purpose, see U.S. Memorandum in Support of Motion for Preliminary Injunction at 60-64; and Microsoft enforced its tie, not just by product design, but also by contractual prohibitions on OEM efforts to delete the browser.

In Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534, 539-42 (9th Cir. 1983), the plaintiff alleged an "implicit" tie of Kodak's new 110 camera to the film and processing supplies needed to use it. Foremost is readily distinguishable from the present case because it involved not the bundling of products, but rather the development of new technological formats that rendered competitors' complements incompatible. The court explained there that the "so-called technological tie" of a new product that could not be used with old complements, and thus required the purchase of new ones, did not "standing alone" (without any contractual requirement that users take the two together) establish a per se unlawful tying arrangement. Id. at 542. Here, of course, the tying claim is premised not on the creation of any incompatibility, but rather on the clearly demonstrated contractual coercion lacking in Foremost.

Microsoft describes Innovation Data Processing, Inc. v. IBM Corp., 585 F. Supp. 1470 (D.N.J. 1984), as a case "squarely on point" for the superficial reason that it "involved the integration of new features into an operating system." MS Memo at 28. But the court there held that there was no unlawful tie of MVS operating system software and DFDSS software because, unlike Microsoft in this case, defendant licensed them separately as well as together, at the user's option. Id. at 1474-75.

Finally, in ILC I, the court used traditional tie-in criteria to conclude that a disk drive that integrated a drive unit and head/disk assembly was not an unlawful tie-in. The court found that the drive unit and the head/drive assembly were designed to be and would be used as a unit; that the aggregation offered dramatically larger online storage capacity previously unavailable; that the aggregation satisfied a recognized customer need; that the aggregation resulted in cost savings that were passed on, at least in part, to end users; that the drive unit and head/drive assembly were normally used by customers in fixed proportions; and that the practice of other industry participants, including the plaintiff, was to sell integrated disks and the drive on which they operated for a single price. 448 F. Supp. at 232-34. The court's analysis, based on these factors, is flatly inconsistent with Microsoft's argument that, once the defendant makes a plausible showing of some technological benefit, the court should look no further. Moreover, the facts that led the ILC I court to find a single product are conspicuously different than those in this case. Operating systems and browsers are not used in fixed proportions; not all sellers bundle the products together; no consumer savings have been shown to result from the bundling of Windows and Internet Explorer; and not even Microsoft claims that the benefits from bundling Internet Explorer (as opposed to any other browser) are "dramatic." See 448 F.Supp. at 233.

Thus, even if the cases on which Microsoft relies were good law -- and, to the extent they precede and conflict with Jefferson Parish and Eastman Kodak and their progeny, they are not -- they would not provide a basis for summary judgment. Those cases ultimately turned on traditional tie-in law, not some special laissez faire rules for product design cases, and that law requires an inquiry into the economic facts relevant to each element of the tie-in standard. For example, in In re IBM Peripheral EDP Devices, 481 F. Supp. 965 (N.D. Cal. 1979), aff'd, 698 F.2d 1377 (9th Cir. 1983), the court refused to defer to product design choices whenever they are "justified" or "reasonable" because that would "ignore[] the possibility that a superior product might be used as a vehicle for tying sales of other products, and would pronounce products superior even where the predominant evidence indicated they were not." 481 F. Supp. at 1003. Instead, the existing generalized standard, one applicable to all types of otherwise legal conduct by a monopolist, must be applied to the technological design activity at issue here:

[I]f the design choice is unreasonably restrictive of competition, the monopolist's conduct violates the Sherman Act. This standard will allow the fact finder to consider the effects of the design on competitors; the effects of the design on consumers; the degree to which the design was the product of desirable technological creativity; and the monopolist's intent, since a contemporaneous evaluation by the actor should be helpful to the fact finder in determining the effects of a technological change. Id.

There is no basis in the cases or sound antitrust policy for courts to grant to monopolists the kind of deference Microsoft seeks. Product design questions can be complex, but they are not beyond the competence of courts; courts deal with those and similar questions in product liability, environmental, medical or engineering malpractice, and similar cases.

Microsoft would have the court believe that showing any plausible benefit from product design is the same as showing that consumers benefit from the design. That is plainly wrong. A new product design, particularly one that bundles what would be deemed under ordinary tying standards to be two separate products, can never be said unambiguously to benefit consumers unless consumers are given the choice whether to take the bundle. Such a bundled design does not just reduce cost or improve the functioning of one of the products, but rather changes the products' various attributes. Invariably, a bundled product design will have some pluses (e.g., the kind of one-stop shopping benefits present with any tie-in) and some minuses (e.g., in the case of Windows and Internet Explorer, increased size and impairment of user access to other browsers); and, as with Microsoft's Windows and Internet Explorer products, some purchasers will prefer the bundle and others will prefer to buy the products separately. As both the Supreme Court and lower courts have repeatedly recognized, it is for the market, not the self-serving assertions of the defendant, to determine whether products are good or bad.

It is for these reasons that the Supreme Court made clear in Jefferson Parish, and reiterated in Eastman Kodak, that tie-ins are to be assessed on the basis of consumer demand. Indeed, the defendants in Jefferson Parish, like Microsoft here, argued that the "package" of facilities and services including anesthesiology "d[id] not involve a tying arrangement at all -- that they [were] merely providing a functionally integrated package of services." 466 U.S. at 18-19 (emphasis added). The Supreme Court rejected the argument, recognizing that companies, whether in low or high technology industries, would always be able to show some plausible synergies. See id. at 25, n.41 ("[W]e reject the view of the District Court that the legality of an arrangement of this kind turns on whether it was adopted for the purpose of improving patient care."); see also Multistate Legal Studies, 63 F.3d 1540, 1547 (10th Cir. 1995) (bundled version of two products should not be considered single product simply because the combination represents an "effort to improve the [tying product] by adding elements to it"). The same is true here. Microsoft's case, resting on the immaterial argument that Windows and Internet Explorer are "integrated," does not warrant summary judgment.

The Court Of Appeals Decision In The Consent Decree Case Does Not Provide A Basis For Summary Judgment Under The Antitrust Laws

Microsoft places principal reliance for its argument that "technically interconnected products" are essentially "immune" from tying claims on the Court of Appeals' recent decision in the consent decree case. MS Memo at 20. Microsoft argues that the consent decree decision sets the legal framework for this case: The "court's evaluation of a claim of integration must be narrow and deferential," and "an integrated product should pass muster if there are 'facially plausible benefits to its integrated design.'" MS Memo at 26, quoting slip op. at 14-15. But the Court of Appeals' holding that facially plausible benefits "pass muster" at the preliminary injunction phase of a lawsuit involving the interpretation of a consent decree neither disposes of nor forecloses full analysis of the legal and factual issues raised here.

The principal issue in the consent decree case was whether the challenged tie was an "integrated" product within the specific meaning of language in Section IV(E)(I) of the decree. As addressed by the Court of Appeals, that issue was not coextensive with whether Microsoft bundled one product or two under established antitrust law. The precise issue before the court was whether the government was likely to establish its claim that Microsoft had violated a provision of the consent decree, which exempted the "develop[ment]" of "integrated product[s]" from its scope -- not whether it had violated the antitrust laws. Slip op. at *10 ("the decree does not embody either the entirety of the Sherman Act or even all 'tying' law under that Act," and it cannot be read "as though its animating spirit were solely the antitrust laws," citing United States v. Armour & Co., 402 U.S. 673, 681-82 (1971)). The Court understood its task as construing the decree as a contract, looking to the parties' intent in determining the appropriate meaning of the word "integrated," which in any event is immaterial here. Slip op. at *19. As the Court elsewhere noted: "The antitrust question is of course distinct. The parties agree that the consent decree does not bar a challenge under the Sherman Act." Id. at *15, n.14 (emphasis added).

Moreover, the Court of Appeals expressly left to a more fully developed record whether, in fact, Microsoft's arguments about "technological benefit" could be substantiated, slip op. at 18, and even whether Windows 95 and Internet Explorer are an "integrated" product within the meaning of the consent decree. Id. at 16 & n.15 (Microsoft had "ascrib[ed] facially plausible benefits to its integrated design," which "the [government] may not have contested . . . as vigorously as it might . . . . The ultimate sorting out of any factual disputes . . . we of course cannot resolve on the limited record before us"). The court's decision was "tentative," id. at 19, and "subject to reexamination on a more complete record." Id. at 18. It accordingly cannot serve as a basis for summary judgment in this case.

To be sure, the Court of Appeals did express in dicta concern about the competence of courts to scrutinize the packaging of products in high technology industries such as the computer software business. The court noted that "[a]ntitrust scholars have long recognized the undesirability of having courts oversee product design, and any dampening of technological innovation would be at crosspurposes with the antitrust law." Microsoft, 1998 WL 327855, at *12. But those concerns do not conflict with, and cannot effect an overruling of, Jefferson Parish and its progeny. The Jefferson Parish market test does not require courts to engage in product design oversight or even to look at the relative technological benefits of various products. Rather, the market test enables courts to let the market evaluate the technological benefits and detriments of bundled and unbundled products. Cf. Digital Equipment Corp. v. System Industries, Inc., 1990 WL 5588 (D. Mass. 1990) (fact that two products are technologically interrelated is not determinative under Jefferson Parish separate products test). If there is sufficient demand, then Jefferson Parish requires the defendant to offer the unbundled alternative and to let the market, not the defendant, decide whether the bundle is desirable.

In any event, even if Microsoft were correct that the legal standard to be applied in this case is that technologically tied products are immune from Section 1 scrutiny so long as the "integration" of products produces "plausible" synergistic benefits and the integration is not purely pretextual, see 1998 WL 327855, at *13, summary judgment in favor of Microsoft would still be inappropriate because there are numerous genuinely disputed material facts.

As to Windows 98, Microsoft claims that there can be no genuine dispute that the inclusion of Internet Explorer in Windows 98 achieves technologically beneficial results. MS Memo at 33. However, the facts cast serious doubt on the assertion that there are any necessary synergistic benefits of the bundled version, and that Microsoft's requirement that Internet Explorer be used is not pretextual.

First, as discussed above, there is no compelling evidence that requiring the use of Internet Explorer in particular, as opposed to any other browser inserted by an OEM or end user, is necessary to provide the benefits Microsoft describes. For example, the other operating system vendors which have incorporated browsing functionality into their operating systems universally respect "browser neutrality" in doing so, either by bundling multiple browsers or contractually and technically permitting OEMs and end users to replicate the synergies of bundling by substituting browsers different than the one selected as default by the operating system manufacturer.

Second, Microsoft cannot claim without serious dispute that all (or even most) users consider the integration beneficial; there is evidence that certain users (e.g., classes of corporate customers) do not prefer the integration -- that is, they want an unbundled version. See also SJ Ex. 6.

Finally, there is a genuine issue of material fact whether, under the standard applied by the D.C. Circuit to the consent decree, Windows 98 and Internet Explorer were essentially "bolted" together. As the United States has previously discussed, see PI Memo at 60-64, numerous Microsoft documents describe the bundling of Internet Explorer with Windows 98 as precisely motivated by a desire to thwart competition among browsers (as opposed to maintaining a competitive advantage among operating systems) -- and even to specifically "weld" the products together in response to this desire.

In light of these factors, even under the unduly narrow standard articulated by the Court of Appeals under the consent decree, disputed issues of material fact preclude summary judgment.

Microsoft's Forced Licensing Of Internet Explorer To OEMs Violates Section 2 Of The Sherman Act

The Complaints allege that Microsoft's forced licensing of Internet Explorer as a condition of OEMs licensing its Windows operating systems significantly injures other browsers and, both alone and in concert with Microsoft's other anticompetitive conduct, violates Section 2 of the Sherman Act. It constitutes both unlawful monopolization of the PC operating system market -- because it injures other browsers that threaten to provide an alternative platform that would diminish the monopoly power of Microsoft's operating systems -- and an unlawful attempt to monopolize the market for Internet browsers.

"'The offense of monopoli[zation] under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.'" Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 481 (1992) (quoting United States v. Grinnell Corp., 384 U.S. 570-71 (1966)). The offense of attempted monopolization under Section 2 has three elements: "that the defendant (1) has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize, and (3) a dangerous probability of achieving monopoly power. Spectrum Sports v. McQuillan, 506 U.S. 447, 456 (1993). In substance, Section 2 prohibits the maintenance or creation of monopoly power by anticompetitive means. See, e.g., Aspen Skiing, 472 U.S. at 602- 603 (Section 2 condemns maintenance of power when accomplished through improper or anticompetitive means); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 239 (1st Cir. 1983) (Breyer, J.) (explaining that "[a] monopolist's conduct that from a competitive point of view is unreasonable" violates Sherman Act section 2).

As discussed above, Microsoft argues largely that its licensing of Windows on condition that OEMs license Internet Explorer is not an unlawful tying arrangement because Internet Explorer and Windows comprise a single product. MS Memo at 38-48. But, whatever the merits of that argument under Section 1, it does not follow that Microsoft's forced licensing of Internet Explorer cannot be challenged under Section 2. As the leading antitrust treatise explains:

Tying law's 'two product' inquiry distinguishes competitive from anticompetitive bundling only imperfectly. Some bundling may be anticompetitive under § 2 even though the bundled items are technically a single product. . . . For example, concluding that morning and evening newspaper advertising are the same product for tying purposes does not foreclose a § 2 challenge to a dominant newspaper's use of morning/evening bundling to destroy an evening rival.

10 P. E. Areeda, E. Elhauge, and H. Hovenkamp, Antitrust Law ¶ 1752g, at 289 n.46 (1996) (emphasis added). The very "technological tying" cases Microsoft invokes hold that Section 2 may be violated when a monopolist "uses" its monopoly "power to tighten its hold on the

market." Berkey Photo, 603 F.2d at 274-75; Northeastern Tel. Co. v. American Tel. & Tel. Co., 651 F.2d 76, 84-85 (2d Cir. 1981), cert. denied, 455 U.S. 943 (1982); Telex, 510 F.2d at 926-27. Those cases also make clear that, in determining whether a product design decision amounts to an unlawful use of monopoly power (or, in the language of other cases, is "predatory" or "exclusionary"), the usual Section 2 standard applies and not some special, deferential rule. See Northwest Telephone, 651 F.2d at 84-85 & 95 n.29; In re IBM Peripherals EDP Devices

Antitrust Litigation, 481 F. Supp. 965, 1003 (N.D. Cal. 1979) (rejecting the argument that

illegality should be found only when "the intent was solely an illegal one" and concluding that "[a] more generalized standard, one applicable to all types of otherwise legal conduct by a monopolist . . . must be applied to the technological design activity at issue here."), aff'd,

671 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955 (1983); see also GAF Corp. v. Eastman

Kodak Co., 519 F. Supp. 1203, 1228-29 & n.19 (S.D.N.Y. 1981) ("the 'reasonableness' of the design of a monopolist's new products . . . may be scrutinized under § 2 in cases in which . . . a single firm controls the entire market or in which a monopolist engages in coercive conduct to affect consumer choice," and "an absolute monopolist's design conduct is subject to antitrust scrutiny by a jury"); California Computer Products, Inc. v. IBM Corp., 613 F.2d 727, 735-36 (9th Cir. 1979).

Microsoft argues that its refusal to license Windows except with Internet Explorer is

simply an "ordinary business practice[] typical of those used in a competitive market" and, for this reason, cannot "constitute anti-competitive conduct violative of Section 2." MS Memo at 76 (quoting Trace X Chem., Inc. v. Canadian Indus., Ltd., 738 F.2d 261, 266 (8th Cir. 1984), cert. denied, 469 U.S. 1160 (1985)). This contention, however, is both factually and legally flawed.

As noted above, the evidence shows that other operating system vendors permit OEMs to license

their operating system without a particular browser, and to remove browsers shipped with the operating system. Moreover, other operating system vendors, in contrast to Microsoft, lack monopoly power; and it has long been clear that, "[w]here a defendant maintains substantial market power, his activities are examined through a special lens: Behavior that might otherwise not be the concern to the antitrust laws -- or that might even be viewed as procompetitive -- can take on exclusionary connotations when practiced by a monopolist." Eastman Kodak, 504 U.S.

at 488 (Scalia, J., dissenting on other grounds) (quoting 3 P.E. Areeda and D.F. Turner, Antitrust Law ¶ 813, at 300-02 (1978)).

Thus, the Section 2 issues cannot be disposed of by looking merely to the practices of

firms other than Microsoft. Instead, they must be resolved by asking the question that Section 2 requires -- whether Microsoft's insistence that OEMs license Internet Explorer as a condition of licensing Windows is anticompetitive. In making that assessment, the Supreme Court explained in Aspen, the court should inquire whether the monopolist's conduct "'(1) tends to impair the opportunity of rivals'" and (2) "'does so in an unnecessarily restrictive way.'" 472 U.S. at 605 n.32 (quoting 3 P.E. Areeda & D.F. Turner, Antitrust Law 78 (1978)). In other words, Section 2 is violated when a monopolist engages in conduct that excludes rivals and the exclusion is not reasonably necessary to achieve asserted legitimate business objectives. See In re IBM

Peripherals EDP Devices Antitrust Litig., 481 F. Supp. at 1003 ("If the design choice is unreasonably restrictive of competition, the monopolist's conduct violates the Sherman Act. The standard will allow the factfinder to consider the effects of the design on competitors; the effects of the design on consumers; the degree to which the design was the product of desirable

technological creativity; and the monopolist's intent, since a contemporaneous evaluation by the actor should be helpful to the factfinder in determining the effects of a technological change.").

The evidence here establishes without question material disputes on these issues. First,

the evidence leaves no doubt that, because of Microsoft's monopoly power, OEMs have no alternative to the Windows operating system and, thus, to licensing Internet Explorer; that OEMs that license Internet Explorer are less likely as a result also to distribute other browsers; and that the forced licensing of Internet Explorer thus forecloses the opportunities of rival browsers. See supra, Section II.B. The exclusion of non-Microsoft browsers in this way is not a "competitive advantage" that "'accrues to any integrated firm,'" MS Memo at 80 (quoting Berkey Photo, 603 F.2d at 276), but rather is a consequence of Microsoft's desktop operating system monopoly.

Second, the evidence supports the conclusion that this exclusion of non-Microsoft

browsers was not reasonably necessary in order for Microsoft to achieve any legitimate business objective. Microsoft could offer OEMs the option of a Windows product without Internet

Explorer being required to supply browsing functionality and/or easily permit OEMs to remove the means of access to Internet browsing functionality. See supra, Section II.C.1. It chose to tie Internet Explorer, instead, precisely in order to deny its browser rivals access to the OEM distribution channel.

This belief in the effectiveness of the tie has remained unwavering. See, e.g.,

This evidence, and the factual disputes it demonstrates, preclude summary judgment on the Section 2 claim.

Microsoft's Windows Copyright Does Not Protect Its Anticompetitive OEM License Practices

Microsoft begins its copyright argument by announcing that "Windows 95 and Windows 98 are both copyrighted works," MS Memo at 54, as though that talismanic invocation were enough to shield it from the antitrust laws. But possession of a copyright does not permit its owner to do whatever it likes with that copyright, in defiance not only of antitrust law but also of copyright policy. Microsoft's conduct with respect to its copyrighted works violates both. Moreover, the relevant facts regarding the restrictions in Microsoft's licensing agreements are sharply contested, precluding summary judgment.

Microsoft Does Not Have 'Moral Right" Protection

In Its Copyrighted Software

Much of Microsoft's copyright argument relies on a limited and rather obscure set of cases suggesting that copyright owners are vested with a "moral right" of integrity in their works. This is a continental law concept largely foreign to American jurisprudence.

Microsoft relies most heavily on Gilliam v. ABC, 538 F.2d 14 (2d Cir. 1976), which does contain language suggesting that the court envisioned a new right of integrity where a work was significantly changed but still promoted under its original name; the decision spoke of the "mutilation" of a work by a licensee. But the Gilliam court itself acknowledged the lack of statutory or doctrinal support in copyright for its newly-created right. Indeed, the court ultimately grounded its new right in trademark instead. In any event, in the two decades since

the decision Gilliam has not been read expansively by other courts. See, e.g., Halicki v. United Artists, 812 F.2d 1213 (9th Cir. 1987) (refusing to endorse the broad new moral right plaintiff

read Gilliam to create); Weinstein v. University of Illinois, 811 F.2d 1091, 1095 n.3 (7th Cir.

1987) (same); Smith v. Montoro, 648 F.2d 602 (9th Cir. 1981) (same); Paramount v. Video Broadcasting, 724 F. Supp. 808, 820 (D. Kan. 1989) (juxtaposition of advertisements with copyrighted movie on videotape was not copyright infringement, despite Gilliam); cf. Seshadri v. Kasraian, 130 F.3d 798, 803 (7th Cir. 1997) (rejecting a Gilliam-based integrity argument,

noting that the plaintiffs "might conceivably have some remedy, but it wouldn't be under the Copyright Act.").

Whatever policy justifications might exist for a moral right of integrity in works of

art, the context in which the concept was developed, they are substantially weaker when the work at issue is a computer program. Computer programs -- and particularly operating systems -- are functional works. Their value resides not in their artistry, but in what they do. Cf. Apple Computer v. Microsoft Corp., 35 F.3d 1435 (9th Cir. 1994). Numerous software cases have allowed defendants to make alterations to a plaintiff's program in appropriate circumstances, and for a variety of reasons. Indeed, the Copyright Act itself expressly allows owners of a copy of a

computer program to "adapt" it in appropriate circumstances without the permission of the copyright owner, a power that is fundamentally at odds with Microsoft's asserted "right of integrity" for software. See 17 U.S.C. § 117; Aymes v. Bonelli, 47 F.3d 23 (2d Cir. 1995).

At a minimum, application of this novel concept to software raises a number of material factual issues, none of which Microsoft has addressed. These include the extent of copyright protection in the portions of the software being modified, the extent and type of the modification involved, the purpose of the modification, and the consequences of permitting or prohibiting it. All of these facts are sharply contested, and summary judgment on this issue would be particularly inappropriate.

Copyright Protection Is In Any Event Not Unlimited

The thrust of Microsoft's copyright argument is that it is free to do whatever it wishes in licensing its copyrighted works. But copyright law does not provide an unbounded property

right. Rather, as the Supreme Court has repeatedly recognized, it is a limited power designed to encourage to a reasonable degree the creation of new works of authorship. See, e.g., Stewart v. Abend, 495 U.S. 207, 224-25 (1990) (noting the Copyright Act's "balance between the artist's

right to control the work . . . and the public's need for access"); Computer Assocs. Int'l, Inc. v. Altai, Inc., 982 F.2d 693, 711 (2d Cir. 1992) ("interest of copyright law is not in simply

conferring a monopoly on industrious persons, but in advancing the public welfare through rewarding artistic creativity, in a manner that permits the free use and development of non- protectable ideas and processes"); Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975) ("private motivation must ultimately serve the cause of promoting broad public availability of literature, music and other arts"). Limits on the scope of a copyright include the requirement that protection extend only to "original works of authorship," Feist, 499 U.S. at 346-47; the requirement that copyright protection extend only to the author's expression, and not to the underlying idea being expressed, 17 U.S.C. § 102(b); Baker v. Selden, 101 U.S. 99 (1879); and

the absence of copy protection against certain "fair" uses, 17 U.S.C. § 107; Campbell v. Acuff- Rose Music Inc., 510 U.S. 569 (1994).

In the context of computer programs, these limitations impose significant restrictions on Microsoft's claimed "right to control the manner in which its copyrighted works are used." MS Memo at 54. First, it is by now well established that the copyright in a computer program cannot extend to the functional aspects of that computer program; to design choices dictated by

necessity, cost, convenience or consumer demand; or to portions of the program that are not original to its creator. See, e.g., Mitel v. Iqtel, 124 F.3d 1366, 1374-76 (10th Cir. 1997)

(interface specifications of a communications protocol are freely copiable because they are functional rather than expressive); Apple v. Microsoft Corp., 35 F.3d at 1441 (user interface of a computer program entitled to only limited protection against "virtually identical" copying, because of license and because of limited number of different ways the underlying idea can be expressed); and Computer Associates, 982 F. 2d at 715 (significant portions of the structure, sequence, and organization of a program may be copied in order to write a similar program to run on a different platform).

Second, copyright law does not provide Microsoft with the unfettered right "to license

their intellectual property as they see fit." MS Memo at 54. Rather, copyright's misuse doctrine imposes significant restrictions on the ability of a copyright owner to extend its control to

adjacent markets, to prevent the development and use of interoperable programs by competitors, or to impose anticompetitive restrictions on licensees. Several cases are instructive. In DSC Communications v. DGI Technologies, the Fifth Circuit held that it was likely copyright misuse for DSC to use its copyright in the computer program operating a telephone switch to try to

prevent a competitor from designing and testing a compatible switch that used DSC's protocols. 81 F.3d at 601. And in Lasercomb America v. Reynolds, 911 F.2d 970 (4th Cir. 1990) and Practice Management Info. Corp. v. American Med. Ass'n, 121 F.3d 516 (9th Cir. 1997), as amended Jan. 9, 1998, the Fourth and Ninth Circuits found copyright misuse where a copyright owner entered into license agreements that restricted its licensees from competing with it.

These intellectual property principles establish that Microsoft's copyrights do not give it the right to impose whatever restrictions it wishes on its licensees. Instead, copyright law offers no protection for license restrictions, like those at issue here, that attempt to extend Microsoft's

rights beyond what the copyright laws protect or for those that attempt to impose anticompetitive conditions on the licensing of the copyright.

Copyright Interests Do Not Provide Immunity From The Antitrust Laws

The underlying error in Microsoft's copyright argument is that it proceeds from an assumption that, if Microsoft's restrictions are contained in a license to legitimately copyrighted material, the copyright automatically prevails and any restrictions it chooses to insert in its licensing agreements are permissible under the antitrust laws. This assumption is wrong.

A copyright does not give its owner immunity from the laws of general applicability. Examples are legion, and antitrust law is among them. See, e.g., Data General Corp. v. Grumman Sys. Support, 36 F.3d 1147, 1185 n.63 (1st Cir. 1994) ("[i]t is in any event well settled that concerted and contractual behavior that threatens competition is not immune from antitrust scrutiny simply because it involves the exercise of copyright privileges"; citing cases). Antitrust liability may attach to anticompetitive licensing restrictions. See United States v. Loew's, Inc.,

371 U.S. 38 (1962); United States v. Paramount Pictures, 334 U.S. 131 (1948); Straus v. American Publishers Ass'n, 231 U.S. 222, 234 (1913); Digidyne, 734 F.2d 1336.

One of the principles adopted by the courts in reconciling antitrust and copyright law is

that a copyright owner may not use licensing agreements to impose certain anticompetitive

restrictions on its licensees. Thus, efforts to use a copyright license to obtain control in an adjacent market or to tie copyrighted to uncopyrighted works have been held to violate the

antitrust laws. Eastman Kodak, 504 U.S. at 479 n.29 ("The Court has held many times that

power gained through some natural and legal advantage such as a patent, copyright, or business acumen can give rise to liability if a seller exploits his dominant position in one market to expand his empire into the next."); Eastman Kodak v. Image Technical Servs., 125 F.3d 1195 (9th Cir. 1997); Digidyne, 734 F.2d 1336.

Here, the United States complains about allegedly anticompetitive restrictions Microsoft has included in its licensing agreements: requiring the preinstallation and display of Internet Explorer and preventing OEMs from utilizing preferred means of developing and installing their own add-on programs or customizing the user interface. With regard to each restriction, the conduct at issue is not whether Microsoft has an intellectual property right not to license its copyrighted works, but whether Microsoft's insertion into its license agreements of restrictions

that exclude competing browsers and maintain and extend Microsoft's operating system

monopoly violates the antitrust laws.

Microsoft's Copyright Does Not Preclude Appropriate Relief Once An Antitrust Violation Has Been Proved

Finally, Microsoft suggests that the relief sought by the United States would infringe its copyright interests. But Microsoft's rights under the copyright laws are very different at the remedy stage, after liability has been established. Courts have regularly ordered compulsory

licensing of valid patents and copyrights as a remedy for a proven antitrust violation. See, e.g., United States v. Glaxo Group, 410 U.S. 52 (1973) (compulsory licensing of present and future patents at a court-set rate was an appropriate remedy for past antitrust violations); United States

v. National Lead Co., 332 U.S. 319, 328-35 (1947); Hartford-Empire Co. v. United States, 323 U.S. 386, 419 (1945); F.M. Scherer, Industrial Market Structure and Economic Performance

456 (1980) ("compulsory licensing has been specified as a remedy in more than 125 antitrust

cases . . ."). If plaintiffs establish that Microsoft's licensing restrictions violate the law, the copyright laws will pose no obstacle to an appropriate remedy.

.	PLAINTIFFS ARE ENTITLED TO PRELIMINARY AND PERMANENT RELIEF

Contrary to the unsupported assertions in its Memorandum in Opposition to Plaintiffs' Motions for Preliminary Injunction, Microsoft clearly possesses monopoly power; its conduct has excluded competition; and its conduct cannot be justified by self-serving pronouncements as to

the benefits of "integration" and its asserted rights in the "integrity" of its intellectual property.

Microsoft claims that the relevant product market in this case is broader than that alleged by the plaintiffs, and that the appropriate market encompasses not only operating systems for

Intel-based PCs, but also for minicomputers, workstations, non-Intel based PCs, network computers attached to mainframes, and handheld computers. See MS Memo. at 10-11. Microsoft's assertion that operating systems for other types of computers are substitutes for desktop PC operating systems is utterly unsupported by anything other than speculation and conjecture. There is no evidence that hardware such as workstations (adapted to run higher- powered applications than PCs) or handheld computers (adapted to run lower-powered

applications than PCs) provide viable substitutes for Intel-based desktop PCs for any significant number of users. To the contrary, the evidence supports plaintiffs' allegations that the relevant market in this case is no broader than (and perhaps

narrower than) one for desktop operating systems for Intel-based PCs.

The Court of Appeals has twice considered actions against Microsoft and has commented on its apparent monopoly power and the characteristics of the operating system market that have contributed to this power. See United States v. Microsoft Corp., 56 F.3d 1448, 1451-53 (D.C. Cir, 1995); United States v. Microsoft Corp., 1998 WL 327855, *1 (D.C. Cir. 1998) ("Because IBM chose to install Microsoft's operating system on its personal computers, Microsoft acquired an 'installed base' on millions of IBM and IBM-compatible PCs. That base constituted an exceptional advantage, and has created exceptional risks of monopoly, because of two characteristics of the software industry -- increasing returns to scale and network externalities.").

Of course, some of the other companies in the operating system business are large and well-funded, and have numerous smart engineers at their disposal. But those assets do not enable firms to enter and compete meaningfully in the relevant market. The evidence plainly indicates that other would-be operating system competitors, including computer giant IBM, despite the

resources at their disposal, have been unable to penetrate the desktop operating system market.	Measured against the historical record of such companies' utter failure to gain a foothold in the competitive battle against Windows, their resources might as well be infinite. The barriers to entry -- exactly the barriers described by the plaintiffs in their opening briefs -- would be no less high.

Microsoft seeks to deal with these barriers (most notably, the strong network effects exhibited by the operating system market) by simply assuming them away. Microsoft offers no evidence at all to support its claim that the large installed base of Windows users serves as a "magnet" for entry, and certainly none that rebuts the substantial evidence that Microsoft's dominance is reinforced by the positive feedback loop between Windows-specific applications

and further growth in the Windows installed base.

Not a single operating system vendor witness called to testify in these proceedings has even remotely suggested that he views selling to the Windows installed base as an attractive business opportunity. To the contrary, such vendors repeatedly have testified that the desktop market is essentially foreclosed, forcing them to direct their efforts elsewhere.

Finally, Microsoft futilely seeks refuge in the assertion that operating system prices remain low and represent a small portion of the cost of a personal computer, and that the relevant market is characterized by rapid technological advances. Whether operating system technology has advanced in the past several years (itself a subjective judgment which Microsoft makes no effort

to substantiate) is immaterial. The courts have consistently held that a firm may possess

monopoly power in an industry notwithstanding the fact that innovation has continued to occur and prices have not increased. See, e.g., Allen-Myland, 33 F.3d at 210-11; Greyhound Computer Corp. v. IBM Corp., 559 F.2d 488, 497 (9th Cir. 1977).

Moreover, Microsoft's argument misstates the facts. The prices of nearly all other components of personal computers have decreased substantially, even while their technological capabilities have dramatically expanded. See, e.g.,	The price of Windows has not. Ibid. As a result, the percentage of the cost of a PC to a consumer represented by Windows has been steadily increasing.

have declined to take any pricing action in response, choosing instead to maintain Windows royalties at least at prior levels. This is evidence of monopoly power, not the absence thereof.

As discussed in preceding sections of this Memorandum, Microsoft's monopoly power is the lens through which its anticompetitive conduct must be viewed.

OEMs repeatedly

express fear of disrupting their relationships with Microsoft. Both their absence of choice and their fear is consistent only with the fact that Microsoft possesses monopoly power. This power, in turn, is the fulcrum by which Microsoft's coercive business practices have been implemented, distinguishing them in critical ways from the non-predatory practices of Microsoft's operating system and browser competitors. Microsoft's exclusionary conduct is not, as Microsoft characterizes it, merely "commonplace." It is extraordinary, and extraordinary for the very reason it offends the antitrust laws: it coerces consumer, OEM, ISP, and ISV purchasing and licensing decisions and forecloses competition through the exertion of monopoly power, not the ordinary power of persuasion based purely on the merits of Microsoft's products.

* * * * * * * * *

For the reasons set forth in plaintiffs' memoranda in support of preliminary injunction, and based on the evidence set forth previously and herein, plaintiffs meet each of the factors required for the entrance of preliminary and permanent injunctive relief.

Respectfully submitted,

DATED: August 31, 1998	__________/s/___________________

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.

Denise M. DeMory

Mark S. Popofsky

Attorneys

David Boies

Special Trial Counsel

U.S. Department of Justice

Antitrust Division

450 Golden Gate Avenue Room 10-0101

San Francisco, CA 94102

415/436-6660

_______/s/_______________________

Dennis C. Vacco

Attorney General

Pamela Jones Harbour

Deputy Attorney General

Stephen D. Houck

Chief, Antitrust Bureau

Alan R. Kusinitz

Assistant Attorney General

Antitrust Bureau

New York State Department of Law

120 Broadway, Suite 2601

New York, New York 10271

(212) 416-8282