Exhibit 10 To The Comments Of Relpromax Antitrust Inc.

TO THE COMMENTS

OF RELPROMAX ANTITRUST INC.

TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF CASES AND AUTHORITIES

1. INTRODUCTION
2. FACTUAL AND PROCEDURAL BACKGROUND
3. ARGUMENT

    

    

    

    

    

    

    

    

    

    

   1. THE TUNNEY ACT REQUIRES FULL DISCLOSURE BY MICROSOFT 7

       

       

       

       

      1. Mr. Rule's Undisclosed Conversations Prior To November 15, 2001 Are Not Exempted From Disclosure

          

          

         1. Mr. Rule Was Not Counsel Of Record For Microsoft Prior To November 15, 2001
         2. Mr. Rule Was Not Counsel Of Record For Microsoft Even After November 15, 2001
      2. The Undisclosed Conversations Of Microsoft's Other Lobbyists With Executive Or Legislative Branch Officials Are Not Exempted From Disclosure
      3. Additional Undisclosed Conversations May Have Caused A Predawn Telephone Call From A Senior Aide To The Attorney General To A Lobbyist
   2. THE TUNNEY ACT WAS INTENDED TO PREVENT AN ABUSE OF POWER IN THE CURRENT SITUATION

       

       

      1. The Lawful $200,000 ITT Pledge Related To One Of The Impeachable Abuses Of Power In The Early 1970's Was Equivalent To About $650,000 In 2001 Dollars Which Amount Is Vastly Exceeded By Over $23 Million Microsoft Has Lawfully Spent On Federal Campaign Contributions And Lobbying Since 1997

          

          

          

          

         1. The ITT Litigation and the Kleindienst Nomination
         2. The Impeachment Resolution
         3. Since 1997 Microsoft Has Spent Over $23 Million On Federal Lobbying And Campaign Contributions
      2. The Tunney Act Was Intended To Protect The Consuming Public From The Type Of Forces At Work Today In Connection With The RPFJ
   3. ON THE PRESENT RECORD THE UNITED STATES WILL NOT BE ABLE TO COMPLY WITH THE COURT ORDER OF NOVEMBER 8, 2001, REQUIRING CERTIFICATION BY THE UNITED STATES OF COMPLIANCE WITH TUNNEY ACT PROCEDURES
   4. THE COURT SHOULD AGAIN ODER FULL DISCLOSURE, ALLOW FULL DISCOVERY OF HE NECESSARY FACTS, AND EXTEND THE TIME FOR COMMENTS OR TERMINATE CONSIDERATION OF THE RPFJ
   5. IF THE COURT DOES NOT ORDER FULL DISCLOSURE NOW, ENTRY OF THE RPFJ COULD BE REVERSED ON APPEAL FOR THAT REASON ALONE; HOWEVER, IF THE COURT ORDERS ADDITIONAL DISCLOSURE AND THEN ENTERS THE RPFJ, THERE WOULD BE A LOWER POSSIBILITY OF REVERSAL DUE TO DEFENDANT'S FAILURE TO COMPLY WITH THE DISCLOSURE PROVISIONS OF THE TUNNEY ACT
   6. RELPROMAX AS THE ONLY PARTY OR PROPOSED AMICUS CURIAE WITH AN EXPRESSED INTEREST IN OBTAINING FULL DISCLOSURE FROM MICROSOFT SHOULD BE GRANTED THE RIGHT TO LIMITED PARTICIPATION AS AN AMICUS CURIAE IN THE TUNNEY ACT PROCEEDINGS

REQUEST FOR ORAL HEARING

EXHIBIT LIST

CASES

U.S. v. Microsoft, 84 F.Supp.2d 9 (D.D.C. 1999)

U.S. v. Microsoft, 87 F.Supp.2d 30 (D.D.C. 2000)

U.S. v. Microsoft, 97 F.Supp.2d 59 (D.D.C. 2000)


STATUTES

2 U.S.C. §1602(9)

2 U.S.C. §1603 (Section 4 of the Lobbying Disclosure Act of 1995)

2 U.S.C. §1603(a)(2)

2 U.S.C. §1604 (Section 5 of the Lobbying Disclosure Act of 1995)

15 U.S.C. §16(b)-(h) (Antitrust Procedures and Penalties Act (Tunney Act))

15 U.S.C. §16(b)

15 U.S.C. §16(d)

15 U.S.C. §16(e)

* 15 U.S.C. §16(f)(3)

15 U.S.C. § 16(f)(5)

* 15 U.S.C. §16(g)


RULES

Federal Rule of Civil Procedure 5

Federal Rule of Civil Procedure 7(a)

* Local Civil Rule 83.6(a)


OTHER AUTHORITIES

Cong. Rec., Senate, July 18, 1973, pp. 24597-8

Cong. Rec., Senate, July 18, 1973, p. 24599

Cong. Rec., Senate, December 9, 1974, p. 38585

Statement Of Information, Hearings Before The Committee On The Judiciary House Of Representatives, Ninety-Third Congress, Second Session, Pursuant To H.Res. 803, Book V, Part I, Department Of Justice ITT Litigation - Richard Kleindienst Nomination Hearings

House Report 93-1305, August 20, 1974, pp. 139-183

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

1. • INTRODUCTION

The Antitrust Procedures and Penalties Act (Tunney Act) was signed on December 21, 1974, to remedy one of the many abuses of power which led to the adoption of the second of three Articles of Impeachment of the President by the Committee on the Judiciary of the United States House of Representatives on July 27, 1974, and to the only Presidential resignation in the history of our nation on August 9, 1974. The Tunney Act is not merely some procedural nicety. The Tunney Act is discussed in greater detail below (see section III.B., pp. 18-22, "The Tunney Act Was Intended To Prevent An Abuse Of Power In The Current Situation").

Defendant Microsoft Corporation ("Microsoft") has not complied with the disclosure requirements of the Tunney Act, specifically 15 U.S.C. §16(g), or this Court's Order dated November 8,2001. Pursuant to 15 U.S.C. §16(b) and (g), anyone has the statutory right to comment on the Revised Proposed Final Judgment ("RPFJ") in captioned Civil Action 98-1232 for fifty (50) days after Microsoft complies with 15 U.S.C. §16(g). Relpromax Antitrust Inc. ("Relpromax") hereby asserts its statutory right, which is also the statutory right of all Americans, to consider for fifty (50) days a true and complete disclosure by Microsoft pursuant to 15 U.S.C. §16(g) and then to file with the United States such written comments as it deems appropriate with respect to the RPFJ in light of the information disclosed pursuant to 15 U.S.C. §16(g).

Accordingly, Relpromax seeks an order:

1) granting Relpromax status as an amicus curiae with the right of limited participation in proceedings so it can assist, if necessary, in obtaining, inter alia, the statutorily required (and Court ordered) disclosure;

2) compelling Microsoft to comply with the statute and the November 8, 2001, order; and,

3) extending the time for comments to provide Relpromax and all interested parties with their statutory rights.

2. • FACTUAL AND PROCEDURAL BACKGROUND

From 1993 through 1996, Microsoft contributed a total of about $366,000 to federal parties and candidates.¹ Declaration of Brian Dautch ("Dautch Dec."), ¶¶ 2- 3 and Attachments 1 and 2. (A copy of the Dautch Declaration is attached hereto as Exhibit A.)

On May 18, 1998, these civil actions were filed.

From 1997 through July 31, 2001, Microsoft contributed a total of over $6.8 million to federal parties and candidates. Dautch Dec., ¶ 2, and Attachment 1.

From 1997 through June 30, 2001, in addition to about $6.8 million in contributions Microsoft spent an additional $17.6 million on lobbyists who contacted many federal agencies and Members of the House and Senate seeking support for Microsoft's antitrust policies. Dautch Dec., ¶¶2, and 8-42 and Attachments 1, and 9-43. Given that Microsoft contributed to the campaigns of 38 U.S. Senators and 124 U.S. Representatives in 2001 alone (a non-election year), it is even possible that some of the federal legislators contacted by Microsoft about its antitrust problems had received, and/or may have been seeking, Microsoft campaign contributions. Dautch Dec., ¶ 2 and Attachment 1.

On July 6, 1998, Charles F. Rule, Esq., became a registered lobbyist for Microsoft. From approximately 1986 to 1989, Mr. Rule was the Assistant Attorney General in charge of the Antitrust Division of the United States Department of Justice. Dautch Dec., ¶4, and Attachment 7. In 1998, Mr. Rule was a partner with the lobbying firm² of Covington & Burling of Washington, D.C. On July 6, 1998, Covington &Burling filed a Lobbying Registration, pursuant to 2 U.S.C. §1603(a)(2), indicating that Mr. Rule was among the firm's "employees" who had acted or expected to act as lobbyists for Microsoft Corporation.³ On page 2 of the Lobbying Registration, Covington &Burling reported that the lobbyists expected to lobby on issues including "[c]ompetition matters affecting computer industry software."

On August 12, 1999, Covington & Burling filed a mid-year 1999 Lobbying Report (Form LD-2) indicating that for the period from January 1, 1999, through June 30, 1999, the firm received $40,000 from Microsoft for lobbying.⁴ On page 6 of the form, Covington & Burling reported that Charles F. Rule lobbied the U.S. House of Representatives and the U.S. Senate for Microsoft on "[c]ompetition issues affecting computer software industry."

On September 28, 2001, this Court docketed an order requiring the parties to engage in intensive settlement negotiations until November 2,2001. A copy of the order is attached hereto as Exhibit B.

From on or about October 1, 2001, to November 6, 2001, according to written unsworn testimony by lobbyist Rule, he was one of the principal representatives for Microsoft in the negotiations with respect to the RPFJ. Dautch Dec., ¶4 and Attachment 3.

On November 6, 2001, the United States and Microsoft filed a Stipulation and attached form of Revised Proposed Final Judgment. The Stipulation was signed on behalf of the United States by Charles A. James, Assistant Attorney General in charge of the Antitrust Division of the United States Department of Justice.⁵ (A copy of the Stipulation is attached hereto as Exhibit C.) In the Stipulation, Microsoft agreed to make the disclosure required by 15 U.S.C. § 16(g). Stipulation, ¶ 3.

On November 8, 2001, this Court ordered Microsoft to make the disclosure required by 15 U.S.C. §16(g) "within ten days of the publication of the proposed Final Judgment in the Federal Register." (A copy of the Court's Order dated November 8, 2001, is attached hereto as Exhibit D.)

On November 15,2001, lobbyist Charles F. Rule, Esq., apparently attempted to become a counsel of record for Microsoft in Civil Action No. 98-1232 pending before this Court. On November 15,2001, a document titled "Notice Of Entry Of Appearance" for Charles F. Rule was filed with this Court and is recorded as electronic docket entry number 29 in Civil Action No. 98- 1232. (A copy of the Notice Of Entry Of Appearance is attached hereto as Exhibit E.) According to the court docket for Civil Action No. 98-1232, the Notice Of Entry Of Appearance for Mr. Rule was signed and filed by Bradley Smith and not by Mr. Rule. According to the official docket, no document filed on behalf of Microsoft in this civil action (or Civil Action No. 98-1233) from November 15, 2001, through January 18, 2002, has been signed by Mr. Rule on behalf of Microsoft.⁶

On November 16, 2001, an item appeared on the front page of The Wall Street Journal which item stated in full:

On November 28, 2001, the RPFJ was published in the Federal Register along with a copy of a document titled "Competitive Impact Statement" which was filed with this Court on November 15, 2001. On December 10, 2001, Microsoft filed Defendant Microsoft Corporation's Description Of Written Or Oral Communications Concerning The Revised Proposed Final Judgment And Certification Of Compliance Under 15 U.S.C. §16(g) ("Microsoft's Description"). (A copy of Microsoft's Description is attached hereto as Exhibit F.) The Description purported to reveal "'any and all written or oral communications by or on behalf of" Microsoft 'with any officer or employee of the United States concerning or relevant to'" the RPFJ with the exception only of "communications made by counsel of record alone with the Attorney General or the employees of the Department of Justice alone [emphasis added]." Microsoft Description, pp. 1-2. Microsoft's Description reveals only: 1) that unnamed "counsel for Microsoft" (n.b. as opposed to "counsel of record for Microsoft") met with plaintiffs' representatives and mediators from September 27, 2001, through November 6, 2001, and that a Mr. William Poole of Microsoft participated in some of the meetings from October 29, 2001, through November 2, 2001; and, 2) that at an October 5,2001, meeting, technical questions were discussed by Ms. Linda Averett, and Messrs. Michael Wallent, Robert Short, and Chad Knowlton (all of Microsoft) with plaintiffs' representatives and plaintiffs' technical expert Professor Edward Felten. Microsoft certified that with the submission of the Microsoft Description, Microsoft "has complied with the requirements of 15 U.S.C. §16(g) and that this submission is a true and complete description of such communications known to Microsoft." Microsoft's Description was electronically signed by John Warden, Esq., of the law firm of Sullivan & Cromwell. The name of Charles F. Rule appears on the document apparently as Counsel for Microsoft. There is no signature line on the document for Mr. Rule's signature. Other than the appearance of Mr. Rule's name well below and to the left of Mr. Warden's name, there is no mention of Mr. Rule by name in the Microsoft Description or of any communications Mr. Rule had on behalf of Microsoft with any officer of employee of the United States concerning or relevant to the RPFJ (for example, oral or written communications or promises during the course of the intensive month-long negotiations which led to the RPFJ or drafts of proposed language for the RPFJ).

On December 12,2001, Mr. Rule appeared (along with Assistant Attorney General Charles A. James and others) and submitted written testimony (not under oath) on behalf of Microsoft concerning the RPFJ before the Committee on the Judiciary of the United States Senate. Dautch Dec., ¶4, Attachment 3. In this testimony concerning the captioned civil actions, Mr. Rule (referring to the RPFJ as "PFJ") stated (p. 1, sentences 3-4):

3. • ARGUMENT

1. 1. • THE TUNNEY ACT REQUIRES FULL DISCLOSURE BY MICROSOFT

The relevant portions of the Tunney Act are now codified as Title 15 U.S.C. §16(b)-(h). The Tunney Act applies to the current proposal for a consent judgment (RPFJ) by the United States in captioned Civil Action No. 98-1232 which was brought by the United States under the antitrust laws. 15 U.S.C. §16(b). To cast sunlight on any potential abuse of power, to provide the public with information necessary both to understanding the full context of the RPFJ and to providing as insightful comments as possible (as allowed by 15 U.S.C. §16(d)), and to provide the Court with information the Court must have prior to determining whether entry of the RPFJ is in the public interest (as required by 15 U.S.C. §16(e)), Microsoft must make the disclosures required by 15 U.S.C. §16(g) which provides in full that [emphasis added below]:

Both the Tunney Act and this Court's November 8, 2001, Order setting forth the schedule to be followed to comply with the Tunney Act in this case clearly grant the public fifty (50) days to prepare and file comments on the RPFJ after defendant's true and complete disclosure of all communications specified by 15 U.S.C. §16(g).

As is shown below, the Microsoft Description of December 10, 2001, did not meet the requirements of 15 U.S.C. §16(g).

There are at least five broad categories of communications which should have been disclosed: 1) oral or written communications by or on behalf of Mr. Rule acting in any capacity for Microsoft; 2) oral or written communications in Mr. Rule's presence (these communications were not made by counsel of record alone); 3) oral or written communications which may have induced the Deputy Chief of Staff to the Attorney General of the United States (David Israelite, who recused himself from any involvement with Microsoft matters due to a conflict of interest) to place a predawn telephone call on October 9, 2001, to a lobbyist for a Microsoft competitor complaining about the competitor's support for the retention of independent private counsel by the States suing Microsoft in Civil Action No. 98-1233; 4) oral or written communications or promises by Microsoft lobbyists (other than Mr. Rule) or Microsoft personnel to officers or employees of the United States; and, 5) communications made at Microsoft's request or suggestion to officers or employees of the United States (e.g., communications by Members or employees of either House of Congress to officers or employees of the Executive Branch).

1. 1. 1. • Mr. Rule's Undisclosed Conversations Prior to November 15, 2001 Are Not Exempted from Disclosure
         1. • Mr. Rule Was Not Counsel Of Record For Microsoft Prior to November 15, 2001

The statute, 15 U.S.C. § 16(g), exempts from disclosure only two types of oral or written communications with any officer or employee of the United States. First, the statute exempts communications between counsel of record and the Attorney General alone (i.e., outside the presence of Microsoft personnel and other Justice Department officers or employees). Second, the statute exempts communications between counsel of record and employees of the Department of Justice alone (i.e., outside the presence of Microsoft personnel and non-employees of the Justice Department). The statute does not provide for a lobbyist (or other person who is not counsel of record) to conduct negotiations with the Attorney General and/or Justice Department employees and then, after reaching agreement on a consent judgment, convert from a lobbyist into a counsel of record in order to shield from disclosure communications and negotiations conducted when he was not counsel of record.

At a minimum, the term "officer or employee" in 15 U.S.C. §16(g) should include any officer or employee of the Executive Branch. It is clear that offices and employees of the Executive Branch are within the scope of the statute because the two classes of exclusions are of officers or employees of the Executive Branch (i.e., the Attorney General and employees of the Department of Justice). Arguably, the term "officer or employee" in 15 U.S.C. §16(g) could also include any "officer or employee" of the Legislative Branch. The precise scope of the term "officers and employees" within the meaning of 15 U.S.C. §16(g) appears to be a matter of first impression in this Court. Given the control of the Justice Department budget by the Congress, the importance of disclosing communications by Microsoft with Members of Congress or their staff concerning or relating to the RPFJ is manifest. In any event, the statute makes clear that any communication concerning or relating to the RPFJ made on behalf of Microsoft (whether by Microsoft, a Senator, or anyone else) to an Executive Branch officer or employee must be disclosed under 15 U.S.C. §16(g).

Mr. Rule was not a counsel of record prior to November 15,2001. Accordingly, any oral or written communications made by him, or on his behalf, concerning or relevant to the RPFJ to any officer or employee of the United States must be disclosed. Clearly, communications made in the negotiations which resulted in the RPFJ both concern the RPFJ and are relevant to the RPFJ.

Mr. Rule was the Assistant Attorney General in charge of the Antitrust Division long after the Tunney Act became the law. While the disclosure requirements of 15 U.S.C. §16(g) would apply to Mr. Rule's client even if Mr. Rule were totally unfamiliar with antitrust law, the disclosure requirements should be applied strictly given that Mr. Rule was the principal law enforcement officer of the United States charged with enforcing this precise statute for about three (3) years.

If Mr. Rule's testimony to the effect that he was a principal negotiator on behalf of Microsoft of the RPFJ is accurate, then there are clearly undisclosed communications made by Mr. Rule or in his presence.

Typically, a principal representative in negotiations would have made oral comments to the negotiators for the United States. Further, the principal negotiator would have submitted written drafts of language (whether in electronic, magnetic, or paper form) to be used in the RPFJ.

Also, there is the matter of Lobbyist Rule's contacts with the Administration which contacts were reported by The Wall Street Journal. What precisely does Microsoft want to conceal? Why does Microsoft want to conceal these communications? Discovery (or a true and complete disclosure under 15 U.S.C. §16(g)) is needed to provide the American people and this Court with the answer to these questions.

1. 1. 1. 2. • Mr. Rule Was Not Counsel Of Record For Microsoft Even After November 15, 2001

If Microsoft's position is that Mr. Rule's communications prior to and during settlement negotiations did not have to be disclosed because on the date the Microsoft Description was filed Mr. Rule was a counsel of record, that position is both untenable and, as discussed above, contrary to the plain language of the statute.

Local Civil Rule 83.6(a) governs the process by which an attorney becomes a counsel of record and provides in full that:

As mentioned above, as of the date of this Memorandum, Mr. Rule has not in connection with the captioned civil actions signed any pleading described in Rule 7(a) of the Federal Rules of Civil Procedure (i.e., basically, various types of complaints and answers).

The typical written notice of entry of an appearance is signed by the attorney entering the appearance. For example, when appearances were entered by Douglas Davis, Esq., Steven Kuney, Esq., and Brendan Sullivan, Esq., each of these attorneys signed and flied a written notice of appearance containing the necessary information. (Copies of the notices of appearance for Messrs. Douglas, Kuney, and Sullivan are attached hereto as Exhibits G, H, and I, respectively.) Mr. Rule did not sign or file what purports to be his written notice of entry of appearance. The written notice attempting to enter an appearance for Mr. Rule was signed and filed by Bradley Smith, Esq., of Sullivan & Cromwell.

As noted above, Mr. Rule has not, in connection with the captioned Civil Actions, signed any pleading described in Federal Rule of Civil Procedure 7(a).

Thus, arguably Mr. Rule was not a counsel of record even when the Microsoft Description was filed on December 10, 2001. Accordingly, any oral or written communications Mr. Rule had with officers or employees of the United States concerning or relating to the RPFJ must be disclosed.

1. 1. 2. • The Undisclosed Conversations of Microsoft's other Lobbyists With Executive Or Legislative Branch Officials Or Employees Are Not Exempted From Disclosure

Even if Mr. Rule's testimony to the effect that he was a principal negotiator on behalf of Microsoft of the RPFJ were inaccurate and even if Mr. Rule had absolutely no oral or written communications at any time of any type, kind, or description with any officer or employee of the United States (whether in the Executive or Legislative Branch), it is still likely that there were other undisclosed oral or written communications made by or on behalf of Microsoft concerning or relevant to the RPFJ.

In addition to Mr. Rule, Microsoft has a substantial number of other inside and outside federal lobbyists who were paid on the order of $17,645,000 from 1997 through June 30, 2001.

A partial list of some known lobbying expenditures and contacts includes the following:

1. From January 1, 1999, through June 30,2001, according to the official reports required by Section 5 of the Lobbying Disclosure Act of 1995, 2 U.S.C. {} §1604, the lobbying firm of Barbour Griffith & Rogers, Washington, D.C., reported receiving $1,380,000 from Microsoft for lobbying the House and Senate concerning issues including "the Justice Department's Antitrust inquiry." Dautch Dec., ¶¶8-12 and Attachments 9-13.

2. The official reports show that from July 1, 1997 to June 30, 2001, the lobbying firm of Clark & Weinstock, New York, New York, received $1,480,000 from Microsoft for lobbying the House and Senate concerning issues including Microsoft's position on the Department of Justice antitrust suit against Microsoft. Dautch Dec., ¶¶13-19 and Attachments 14- 20.

3. The official reports show that from January I, 1998 to June 30, 1999, the lobbying firm of Covington & Burling received $140,000 from Microsoft for lobbying the House and Senate concerning, inter alia, competition issues affecting the computer software industry. Dautch Dec., ¶¶20-22 and Attachments 21-23.

4. The official reports show that from July 1, 1997, to June 30, 2001, the lobbying firm of Downey Chandler, Inc. (at times known as Downey McGrath Group), received $560,000 from Microsoft for lobbying the Office of the Vice President, the Departments of Justice, State, and Commerce, and the House and Senate concerning issues including the Department of Justice's antitrust suit against Microsoft. Dautch Dec., ¶¶ 23-30 and Attachments 24-31.

5. From July 1, 1999 to June 30, 2001, the official reports show that McSlarrow & Associates, at times known as McSlarrow Consulting, L.L.C., received $200,000 from Microsoft for lobbying the House and Senate concerning issues including competition in the software industry. Dautch Dec., ¶¶32-35 and Attachments 33-36.

6. From January 1, 2000 to June 30, 2000, the official report shows that Microsoft itself spent $3,340,000 on lobbying the National Security Agency, Federal Bureau of Investigation, Senate, House, the Departments of Justice, Commerce, and Defense concerning issues including competition in the software industry.⁷ Dautch Dec., ¶36 and Attachment 37.

7. From July 1, 1997 to June 30, 2001, the official reports show that Preston Gates Ellis & Rouvelas Meeds received $1,380,000 from Microsoft for lobbying the White House, the Vice President, the National Security Agency, the Central Intelligence Agency, the National Security Council, the Office of Science and Technology Policy, the Federal Bureau of Investigation, the U.S. Trade Representative, the National Economic Council, the Office of Management and Budget, the Departments of Justice arid Commerce, and the House and Senate concerning issues including competition in the software market. Dautch Dec., ¶¶37-42 and Attachments 38-43.

The massive amount of money spent on lobbying raises a number of issues relevant to the Tunney Act disclosure Microsoft should have made including, but not limited to, those mentioned below.

First, given that Microsoft was ably represented by accomplished in-house counsel and the distinguished law firm of Sullivan & Cromwell upon whom all opposing parties were required to serve all documents pursuant to Federal Rule of Civil Procedure 5, why was it necessary to spend over $1.3 million for Barbour Griffith & Rogers to monitor the same civil action? Where did the money really go? What did the money really buy? Did Barbour Griffith & Rogers discuss the Microsoft antitrust litigation with any officer or employee of the United States while the RPFJ was being negotiated?

Second, as of June 30, 2001, Microsoft, its employees, and its outside lobbyists had spent upwards of $20,000,000 over several years lobbying, and where possible making campaign contributions, to many officers and employees of the United States. It is difficult to believe that when negotiations intensified and were conducted around-the-clock⁸ in October, 2001 not one of the legions of Microsoft lobbyists in whom the company invested millions made a single call to any officer or employee of the United States concerning or relevant to the RPFJ. In particular, it is difficult to imagine that no United States Representative and no United States Senator was asked to contact the Executive Branch in support of Microsoft.

1. 1. 3. • Additional Undisclosed Conversations May Have Caused A PredawnTelephone Call From A Senior Aide To The Attorney General To A Lobbyist

The New York Times of November 2, 2001, reported ("States Biding for Time to Study Microsoft Settlement Plan" by Stephen Labaton, pp. C1 and C4) that:

Given the impact of the RPFJ on an important sector of the economy and the over-riding importance of maintaining public confidence in the integrity of both public officials and the judicial process, it would be reasonable to inquire of both Messrs. Israelite and Berman either at a hearing before the Court or at a deposition whether any conversation such as that set forth in the article published on November 2, 2001, by The New York Times ever occurred. The conversation, if it occurred, was not privileged. Because Mr. Israelite is recused from taking official action with respect to Microsoft, the inquiry would also not require any intrusion into the reasons for any of his authorized official actions. If the conversation occurred at the request of Microsoft, this Court and the public have a statutory right to know that fact.

1. 2. • THE TUNNEY ACT WAS INTENDED TO PREVENT AN ABUSE OF POWER IN THE CURRENT SITUATION

       

      1. The Lawful $200,000 ITT Pledge Related To One Of The Impeachable Abuses Of Power In The Early 1970's Was Equivalent To About $650,000 In 2001 Dollars Which Amount Is Vastly Exceeded By Over $23 Million Microsoft Has Lawfully Spent On Federal Campaign Contributions and Lobbying Since 1997

          

         1. The ITT Litigation and the Kleindienst Nomination

In 1969, the United States filed three civil antitrust actions against the International Telephone and Telegraph Corporation ("ITT") challenging the acquisition by ITT of three corporations (Canteen Corporation, Hartford Fire Insurance Company, and Grinnell Corporation). Statement Of Information, Hearings Before The Committee On The Judiciary House Of Representatives, Ninety-Third Congress, Second Session, Pursuant To H. Res. 803, Book V, Part I, Department Of Justice ITT Litigation - Richard Kleindienst Nomination Hearings ("Statement Of Information" or "SOI"), pages 3-4. (A copy of the basic statement of facts in the Statement Of Information is attached as Attachment 45 to the Dautch Declaration.)

Attorney General John Mitchell was recused because his former law firm had represented an ITT subsidiary; Deputy Attorney General Richard Kleindienst acted as Attorney General in connection with the litigation and sought and received approval from Counsel to the President John Ehrlichman before filing the first civil action. SOI, p. 3.

On December 31, 1970, ITT won a judgment in the Grinnell case after a trial. SOI, p. 13.

From April to June, 1971, a substantial amount of political pressure was applied by the President and his assistants to Deputy Attorney General Kleindienst and Assistant Attorney General in charge of the Antitrust Division Richard McLaren to convince them to forego an appeal and settle the ITT cases. SOI, pp. 17-31.

On July 21, 1971, ITT-Sheraton pledged up to $200,000 to bring the 1972 Republican National Convention to San Diego, California. SOI, p. 32. There is no suggestion that this contribution by itself was illegal.

On July 31, 1971, a settlement of the ITT litigation was announced. SOI, p. 34.

On February 15, 1972, the President nominated Richard Kleindienst to be Attorney General. SOI, p. 36.

On February 29, March 1 and March 3, 1972, three columns by columnist Jack Anderson were published alleging a connection between the ITT-Sheraton pledge and the ITT antitrust settlement and alleging the involvement of Messrs. Mitchell and Kleindienst. SOI, p. 39. (Copies of the Anderson columns and a memorandum allegedly written by an ITT lobbyist, Ms. Dita Beard, all of which were included in the evidentiary material supporting the Statement Of Information are attached as Attachment 46 to the Dautch Declaration.) As a result of publication of the first two Anderson columns, Mr. Kleindienst asked that his confirmation hearings be re-opened. SOI, p. 39.

At the hearings in 1972 on his nomination to be Attorney General, Mr. Kleindienst denied talking to all the President's men other than casually about the ITT matter and also denied receiving any suggestions from them about the action the Justice Department should take in the ITT cases. SOI, p. 42.

On June 12, 1972, Richard Kleindienst became Attorney General. SOI, p. 61.

On May 16, 1974, Richard Kleindienst pleaded guilty to one count of refusing or failing fully to respond to questions propounded to him by the Senate Committee on the Judiciary during the hearings in 1972 on his nomination to be Attorney General. SOI, p. 66.

On August 9, 1974, the President resigned.

1. 1. 1. 2. • The Impeachment Resolution

The second Article of Impeachment (adopted by a vote of 28-10 in the House Judiciary Committee on July 27, 1974) charged the President with using the powers of his office in violation of his constitutional oath, disregarding his constitutional duty to take care that the laws be faithfully executed, and repeatedly engaging in five (5) types of conduct violating the constitutional rights of citizens, impairing the due and proper administration of justice and the conduct of lawful inquiries, or contravening the laws governing agencies of the executive branch and the purpose of those agencies.

The specification of the fourth type of allegedly improper conduct stated in full with respect to the President that (emphasis added):

During the Senate debate preceding adoption of the Antitrust Procedures and Penalties Act (the Tunney Act), Senator Tunney said:

1. 1. 1. 3. • Since 1997 Microsoft Has Spent Over $23 Million On Federal Lobbying And Campaign Contributions

As mentioned above, since 1997, Microsoft has spent in excess of $23,000,000 on federal campaign contributions and lobbying with substantial effort devoted to lobbying concerning the captioned civil actions. The ITT pledge of $200,000 in 1971 is the equivalent of about $650,000 in 2001 dollars. Dautch Dec., ¶43.

There is no suggestion that any of Microsoft's expenditures by themselves are illegal.

In the instant matter, the Justice Department won at trial and on appeal. The Department has agreed to what some have characterized as a "sweetheart" settlement negotiated behind closed doors by a lobbyist for Microsoft which, so far, has not revealed information the Tunney Act (and this Court's order) require it to reveal.

1. 1. 2. • The Tunney Act Was Intended To Protect The Consuming Public From The Type Of Forces At Work Today In Connection With The RPFJ

The point is not that an unfortunate chapter in our nation's history has repeated itself or might repeat itself precisely but rather that the same type of economic forces at work in connection with the ITT litigation are at work today. In the United States, the presence of strong economic forces tends to bring about the involvement of political forces.

In 2001 dollars, the amount ITT pledged to buy influence and access in 1971 is greatly exceeded by the amount spent by Microsoft in the last few years on lobbying and campaign contributions. The impact ITT had on the 1971 economy while substantial pales in comparison to the impact Microsoft and its products have on the 2002 economy. The forces at work today may be stronger than those in play thirty years ago.

The problem was aptly summarized in the following quotations (by Senator Tunney during Senate debate) from testimony before the Senate Judiciary Committee by United States Circuit Judge J. Skelly Wright, Chief Judge of the United States Court of Appeals for the District of Columbia Circuit:

1. 3. • ON THE PRESENT RECORD THE UNITED STATES WILL NOT BE ABLE TO COMPLY WITH THE COURT ORDER OF NOVEMBER 8, 2001, REQUIRING CERTIFICATION BY THE UNITED STATES OF COMPLIANCE WITH TUNNEY ACT PROCEDURES

On November 8, 2001, this Court ordered the United States to file, when appropriate, a certification of compliance with the Antitrust Procedures and Penalties Act (Tunney Act). Given the apparent failure of Microsoft to comply with the Tunney Act and the United States' knowledge of this apparent compliance failure, it would appear to be difficult, if not impossible, for the United States to provide the required certification in good faith. This difficulty provides another reason for the Court to order compliance by Microsoft with the terms of 15 U.S.C. §16(g).

1. 4. • THE COURT SHOULD AGAIN ORDER FULL DISCLOSURE, ALLOW FULL DISCOVERY OF THE NECESSARY FACTS, AND EXTEND THE TIME FOR COMMENTS OR TERMINATE CONSIDERATION OF THE RPFJ

Even if Microsoft chooses to amend the Microsoft Description in an attempt to comply with a second court order (after defying the first court order) with respect to 15 U.S.C. §16(g), the Court should consider allowing limited discovery by Relpromax Antitrust Inc., as an amicus curiae, into the communications revealed and into the issue of whether all communications were in fact revealed in order to avoid the prospect that Microsoft's initial reticence infects a disclosure which purports to be in accord with the terms of a second disclosure order.

Alternatively, in the interests of judicial economy, the Court may terminate all consideration of the RPFJ at this time and deny entry of the RPFJ on the grounds that the Court has not been provided with the information the statute requires the defendant to provide as a condition precedent to approval of a consent judgment in these circumstances.

1. 5. • IF THE COURT DOES NOT ORDER FULL DISCLOSURE NOW, ENTRY OF THE RPFJ COULD BE REVERSED ON APPEAL FOR THAT REASON ALONE; HOWEVER, IF THE COURT ORDERS ADDITIONAL DISCLOSURE AND THEN ENTERS THE RPFJ, THERE WOULD BE A LOWER POSSIBILITY OF REVERSAL DUE TO DEFENDANT'S FAILURE TO COMPLY WITH THE DISCLOSURE PROVISIONS OF THE TUNNEY ACT

Given the procedural history of this case (i.e., Judges Sporkin and Jackson were removed from this case or its predecessors by the Court of Appeals), it would indeed be unfortunate if the Court were to allow Microsoft to withhold information to which the public has a statutory right, determine that entry of the RPFJ is in the public interest, and then be reversed on appeal due to the failure of Microsoft to comply with 15 U.S.C. § 16(g) (necessitating re-commencement of the Tunney Act procedures with respect to the current RPFJ several years from now). Alternatively, if the Court were to order full compliance with the Tunney Act now, the delay would be minimal (on the order of sixty (60) days) and (assuming Microsoft made a true and complete disclosure) any decision to enter the RPFJ could not be reversed due to Microsoft's failure to comply with its disclosure obligations under the Tunney Act.

1. 6. • RELPROMAX AS THE ONLY PARTY OR PROPOSED AMICUS CURIAE WITH AN EXPRESSED INTEREST IN OBTAINING A FULL DISCLOSURE FROM MICROSOFT SHOULD BE GRANTED THE RIGHT TO LIMITED PARTICIPATION AS AN AMICUS CURIAE IN THE TUNNEY ACT PROCEEDINGS

The Litigating States¹⁰ (the governments which did not settle in Civil Action No. 98-1233) are not parties to Civil Action No. 98-1232. While they and their citizens of course have Tunney Act rights, the Litigating States have, so far, expressed little interest on the record of Civil Action No. 98-1232 in obtaining for their citizens' consideration during the comment period the information from Microsoft to which the public is entitled under the Tunney Act.

Given his responsibility for the Antitrust Division and his signature on the Stipulation filed with the RPFJ on November 6, 2001, the Assistant Attorney General in charge of the Antitrust Division knew, or in the exercise of reasonable care should have known, that lobbyist Rule was one of Microsoft's principal representatives during the negotiations which led to the RPFJ and was not, at the time, counsel of record for Microsoft. As far as can be determined from the public court record of this case, the United States has not exerted itself in any way to obtain a proper disclosure from Microsoft or to encourage Microsoft to amend the Microsoft Description.

The attitude of the Justice Department has changed under the leadership of Attorney General John Ashcroft.¹¹ The Department's attitude toward this civil action was perhaps best expressed by Assistant Attorney General James at the December 12,2001, Senate Judiciary Committee hearing. Due to a roll call vote, Mr. James was given just a few moments for his opening remarks of the day. The first point he chose to make was "some argue that the case never should have been filed."¹²

Another reason for the statutory requirement of fifty (50) days to consider the defendant's communications is that the significance of any individual communication in light of the RPFJ may only be apparent to one person or a few persons. The consideration time allows interested persons either to consult with others or experts or to conduct additional informal or (with the Court's approval) formal inquiries into the facts in order to be able to advise both the United States and the Court of the full implications of the disclosures in light of the RPFJ. Given the carefully crafted statutory arrangement, the Congress realized that the Court on its own can not be expected either to uncover or understand all the implications of Microsoft's communications for the RPFJ without the assistance of persons at least interested enough in the RPFJ, the nule of law, and/or the avoidance of another impeachment inquiry due to, inter alia, an abuse of the antitrust settlement power to devote their time to the public interest in this matter.

Given that Relpromax is an interested person and, in particular, interested in obtaining the information to which it has a statutory right pursuant to 15 U.S.C. §16(g), it would be appropriate and in the public interest for the Court to enter an order, pursuant to 15 U.S.C. §16(f)(3), in the form submitted herewith authorizing limited participation by Relpromax in proceedings before the court.

The Court has extended itself to make all of Microsoft's communications available to the entire nation by instituting electronic filing for the captioned civil actions. This means that anyone anywhere with Internet access and a PACER ("Public Access to Court Electronic Records") account is able to read Microsoft's Description of its communications concerning and relevant to the RPFJ without having to travel all the way from one end of the country to the courthouse.

It is now time for Microsoft to comply with the statute.

In Senate debate which preceded adoption of the Tunney Act, Sen. John Tunney quoted the words of Supreme Court Justice Louis Brandeis to sum up the meaning and purpose of the Act:

"Sunlight is the best disinfectant."¹³

The Court may order an oral hearing on this motion pursuant to 15 U.S.C. §16(0(5) which provides in full that:

It is in the public interest that the proper statutorily required disclosure be made. It is further in the public interest that the public be allowed their statutory right to consider the full ramifications of the RPFJ for fifty (50) days after a true and complete disclosure by Microsoft of all non-exempt communications with officers or employees of the United States concerning or relevant to the RPFJ. Accordingly, pursuant to 15 USC sec. 16(f)(5), movant requests an oral hearing on this motion at the Court's earliest convenience.
 

FOOTNOTES

1 The total includes contributions directly to candidates or political action committees reported as made by individuals who listed Microsoft as an employer.

2 See 2 U.S.C. §1602(9).

3 The Lobbying Registration (dated June 29, 1998) is known as Form LD-1 which is required to be filed by 2 U.S.C. §1603 (Section 4 of the Lobbying Disclosure Act of 1995). The Lobbying Registration was filed with the Office of the Clerk of the U.S. House of Representatives. A copy of this Lobbying Registration is Attachment 4 to the Dautch Dec.

4 The Lobbying Report (dated August 10, 1999) is on a form known as Form LD-2 which form is required to be filed by 2 U.S.C. §1604 (Section 5 of the Lobbying Disclosure Act of 1995). The Lobbying Report was filed with the Secretary of the United States Senate. The Lobbying Report is Attachment 23 to the Dautch Dec.

5 The Stipulation was also signed on behalf of certain plaintiffs in the companion Civil Action No. 98-1233 (i.e., the States of Illinois, Kentucky, Louisiana, Maryland, Michigan, New York, ,North Carolina, Ohio, and Wisconsin) (hereinafter referred to as "Settling States").

6 There is no indication in the electronic docket, which is the only docket available for this stage of Civil Action No. 98-1232, that Mr. Rule has signed any pleading described in Rule 7(a), F.R.Civ.P., in ink and then caused the document to be filed electronically by someone else with the Court.

7 On November 5, 1999, this Court entered Findings of Fact adverse to Microsoft. U.S. v. Microsoft, 84 F.Supp.2d 9 (D.D.C. 1999). On April 3, 2000, this Court entered Conclusions of Law holding Microsoft to be in violation of the antitrust laws. U.S. v. Microsoft, 87 F.Supp.2d 30 (D.D.C. 2000). On June 7, 2000, this Court entered an order requiring Microsoft to devise a plan to split itself into an operating systems business and an applications business. U.S. v. Microsoft, 97 F.Supp.2d 59 (D.D.C. 2000).

8 Statement of Charles F. Rule to the Committee on the Judiciary, US. Senate, December 12, 2001 (Dautch Dec., Attachment 3, ¶2).

9 In addition to the Microsoft stonewall, the Justice Department is apparently stonewalling the ranking minority member of the House Judiciary Committee, Rep. John Conyers, Jr., concerning the reported Israelite-Berman predawn conversation. On Nov. 6, 2001, Rep. Conyers wrote a letter to the Attorney General inquiring about the alleged conversation. (A copy of a press release containing the text of the letter from Rep. Conyers is Attachment 44 to the Dautch Dec.) As far as can be determined, no response had been received by Rep. Conyers from the Attorney General as of January 22, 2002.

10 The Litigating States are the District of Columbia, California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, and West Virginia.

11 David Israelite, Mr. Ashcroft's Deputy Chief of Staff, reportedly owns 100 shares of sMicrosoft stock worth about $6,610 at the close of trading on January 18, 2002. Dautch Dec., ¶ 44 and Attachment 8. David Israelite recused himself from any involvement in the antitrust suit against Microsoft. The President's campaign, his Inaugural fund, Attorney General Ashcroft, and his various campaign committees received about $180,000 in contributions from Microsoft and its employees in 1999 and 2000. Dautch Dec., ¶2 and Attachment 1. Mr. Ashcroft has not recused himself from any involvement in the antitrust suit against Microsoft.

12 The full preliminary transcript is attached as Attachment 49 to the Dautch Dec. The remarks referred to appear on page 10.

13 Cong. Rec. Senate, July 18, 1973, p. 24599.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

DECLARATION OF BRIAN DAUTCH

1. • My name is Brian Dautch. I am a law clerk for Peter Peckarsky, Esq. I have personal knowledge of the facts testified to below and if called as a witness could testify to those facts.
   • Attached hereto as Attachment 1 is a copy of an article dated September 6, 2001 and titled "Microsoft Antitrust Case: An Update on the Company's Lobbying and Campaign Contributions" and related information which was downloaded from the website (ww.opensecrets.org) of The Center For Responsive Politics ("CRP"). The chart on page 2 of Attachment 1 shows that Microsoft an its employees contributed about $6.8 million to national political parties and federal candidates from 1997 through July 31,2001. The chart on page 3 of Attachment 1 shows that Microsoft spent about $17.1 million on federal lobbying from 1997 through December 31, 2000. The CRP reported it had found $161,250 in contributions from Microsoft or its employees to the Bush campaign or the Bush-Cheney Inaugural Fund. The CRP also reported it had found $19,250 in contributions in 1999 and 2000 to the campaign of Attorney General Ashcroft and to the Ashcroft Victory Committee. The listings and dates for $19,000 of these contributions are shown in Attachment 1 hereto.
   • Attached hereto as Attachment 2 is a copy of a copy of the mission statement of the Center For Responsive Politics which was downloaded from the website (www.opensecrets.org) of The Center For Responsive Politics.
   • Attached hereto as Attachment 3 is a copy of the unsworn Statement of Charles F. (Rick) Rule, presented on December 12,2001, to the Senate Judiciary Committee. Attached hereto as Attachment 4 is a copy of a Lobbying Registration for registrant Covington & Burling dated June 29, 1998. Attached hereto as Attachment 7 is a copy of Charles F. "Rick" Rule's resume, which I obtained from the website of Fried, Frank, Harris, Shriver, and Jacobson (www.friedfrank.com).
   • Attached hereto as Attachment 5 is a copy of an item from the front page of the A section of The Wall Street Journal, dated November 16, 2001.
   • Attached hereto as Attachment 6 is a copy of the preliminary transcript of the December 12,2001 Senate Judiciary Committee hearing concerning the proposed settlement of the Microsoft antitrust case.
   • Attached hereto as Attachment 8 is a copy of an article titled "States Biding for Time to Study Microsoft Settlement Plan" by Stephen Labaton which appeared in The New York Times, November 2, 2001, on pages C1 and C4.
   • Attached hereto as Attachment 9 is a copy of Form LD-2 dated August 5, 1999, in which Barbour, Griffith, and Rogers ("BGR") reported that during the first half of 1999, it received $300,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 10 is a copy of Form LD-2 dated February 13, 2000, in which BGR reported that during the last half of 1999, it received $320,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 11 is a copy of Form LD-2 dated August 12, 2000, in which BGR reported that during the first half of 2000, it received $300,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 12 is a copy of Form LD-2 dated February 14, 200 I, in which BGR reported that during the last half of 2000, it received $240,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 13 is a copy of Form LD-2 dated August 14, 2001, in which BGR reported that during the first half of 2001, it received $220,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 14 is a copy of Form LD-2 dated February 6, 1998, in which Clark and Weinstock ("CW") reported that during the last half of 1997, it received $80,000 from Microsoft for lobbying. 14. Attached hereto as Attachment 15 is a copy of Form LD-2 dated August 4, 1998, in which CW reported that during the first half of 1998, it received $160,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 16 is a copy of Form LD-2 dated February 11, 1999, in which CW reported that during the last half of 1998, it received $220,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 17 is a copy of Form LD-2 dated August 9, 1999, in which CW reported that during the first half of 1999, it received $220,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 18 is a copy of Form LD-2 dated August 11, 2000, in which CW reported that during the first half of 2000, it received $280,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 19 is a copy of Form LD-2 dated February 9, 2001, in which CW reported that during the last half of 2000, it received $280,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 20 is a copy of Form LD-2 dated August 9, 2001, in which CW reported that during the first half of 2001, it received $240,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 21 is a copy of Form LD-2 dated August 4, 1998, in which Covington & Burling ("CB") reported that during the first half of 1998, it received $40,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 22 is a copy of Form LD-2 dated February 4, 1999, in which CB reported that during the last half of 1998, it received $60,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 23 is a copy of Form LD-2 dated August 10, 1999, in which CB reported that during the first half of 1999, it received $40,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 24 is a copy of Form LD-2 dated February 13, 1998, in which Downey Chandler, Inc. ("DCI") reported that during the last half of 1997, it received $60,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 25 is a copy of Form LD-2 dated August 7, 1998, in which DCI reported that during the first half Of 1998, it received $80,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 26 is a copy of Form LD-2 dated February 16, 1999, in which DCI reported that during the last half of 1998, it received $60,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 27 is a copy of Form LD-2 dated July 30, 1999, in which DCI reported that during the first half of 1999, it received $80,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 28 is a copy of Form LD-2 dated February 14, 2000, in which DCI (now called Downey McGrath Group, Inc., or "DMG"), reported that during the last half of 1999, it received $100,000 from Microsoft for lobbying.'
   • Attached hereto as Attachment 29 is a copy of Form LD-2 dated August 11, 2000, in which DMG reported that during the first half of 2000, it received $80,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 30 is a copy of Form LD-2 dated February 14, 2001, in which DMG reported that during the last half of 2000, it received $40,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 31 is a copy of Form LD-2 dated August 14, 2001, in which DMG reported that during the first half of 2001, it received $60,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 32 is a copy of Form LD-2 dated August 14, 2000, in which Lackman & Associates, L.L.C., ("L&A") reported that up to June 30, 2000, it received $17,500 from Microsoft for lobbying.
   • Attached hereto as Attachment 33 is a copy of Form LD-2 dated January 21, 2000, in which McSlarrow & Associates, L.L.C. ("MA") reported that during the last half of 1999, it received $40,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 34 is a copy of Form LD-2 dated August 10, 2000, in which MA (now known as McSlarrow Consulting, L.L.C., or "MC") reported that during the first half of 2000, it received $40,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 35 is a copy of Form LD-2 dated February 2, 2001, in which MC reported that during the last half of 2000, it received $60,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 36 is a copy of Form LD-2 dated August 12, 2001, in which MC reported that during the first half of 2001, it received $60,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 37 is a copy of Form LD-2 dated August 11, 2000, in which Microsoft reported that during the first half of 2000, it spent $3,340,000 for lobbying.
   • Attached hereto as Attachment 38 is a copy of Form LD-2 dated February 17, 1998, in which Preston, Gates, Ellis, & Rouvelas Meeds, L.L.P. ("PGERM") reported that during the last half of 1997, it received $220,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 39 is a copy of Form LD-2 dated August 14, 1998, in which PGERM reported that during the first half of 1998, it received $360,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 40 is a copy of Form LD-2 dated February 14, 2000, in which PGERM reported that during the last half of 1999, it received $200,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 41 is a copy of Form LD-2 dated August 14, 2000 in which PGERM reported that during the first half of 2000, it received $220,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 42 is a copy of Form LD-2 dated February 14,2001, in which PGERM reported that during the last half of 2000, it received $260,000 from Microsoft for lobbying.
   • Attached hereto as Attachment 43 is a copy of Form LD-2 dated August 14, 2001, in which PGERM reported that during the first half of 2001, it received $120,000 from Microsoft for lobbying.
   • On January 14, 2001, I called the Bureau of Labor Statistics to inquire about changes in the Consumer Price Index. The BLS advised me that a Consumer Price Index of 100 on January 1, 1972 would equate to a CPI of 326 on January 1, 2001.
   • According to the Wall Street Journal of January 21,2002, p. C8, the closing price of Microsoft common stock on January 18, 2002 was $66.10 per share.
   • Attached hereto as Attachment 44 is a copy of a press release dated November 6, 2001, from Congressman John Conyers, Jr., which appears to contain the text of a letter dated November 6, 2001, from Rep. Conyers to The Honorable John Ashcroft, Attorney General of the United States.
   • Attached hereto as Attachment 45 is a copy of the basic statement of facts in the Statement Of Information, Hearings Before The Committee On The Judiciary House Of Representatives, Ninety-Third Congress, Second Session, Pursuant To H. Res. 803, Book V, Part I, Department Of Justice ITT Litigation - Richard Kleindienst Nomination Hearings.
   • Attached hereto as Attachment 46 are copies of pages 614-615, 634-636 from the Supporting Evidence in Statement Of Information, Hearings Before The Committee On The Judiciary House Of Representatives, Ninety-Third Congress, Second Session, Pursuant To H. Res. 803, Book V, Part II, Department Of Justice ITT Litigation - Richard Kleindienst Nomination Hearings. A two (2) page memorandum dated June 25, 1971, from D. D. Beard to W. R. Merriam is on pages 614-615. Columns by Jack Anderson dated February 29, 1972, March 1, 1972, and March 3, 1972, appear on pages 634-636, respectively.

I declare under' penalty of perjury that the foregoing is true and correct, executed in Washington, D.C., on January 23, 2002.

TO THE

DECLARATION OF BRIAN DAUTCH

Microsoft Antitrust Case:
An Update on the Company's
Lobbying and Campaign Contributions

After more than three years of investigations, litigation and intensive lobbying, the Justice Department today announced it would no longer seek a break-up of the computer giant Microsoft, ending one aspect of a landmark case that sent the company's campaign contributions soaring and formally introduced the computer industry to Washington politics.

The decision by the Bush administration to vacate the lawsuit that was first initiated in 1998 by the Clinton Justice Department is considered a major victory for Microsoft, which nearly tripled its campaign contributions and more than doubled its lobbying expenditures during its fight against the antitrust case.

During the 1999-2000 election cycle, Microsoft contributed more than $4.7 million in soft money, PAC and individual contributions to federal candidates and parties--almost three times what the company contributed during the previous three election cycles combined. More than half that money went to Republicans.

The Bush campaign reported $61,250 in contributions from Microsoft employees during 1999-2000. Attorney General John Ashcroft, a former U.S. Senator from Missouri, reported just $9,250 in contributions from Microsoft during the last elections, though the company did contribute $10,000 to the Ashcroft Victory Committee, a soft money account run jointly by the Ashcroft campaign and the National Republican Senatorial Committee.

But that's not all the money that Microsoft has thrown around Washington in recent years. During the calendar year 2000 alone, Microsoft spent almost $6.4 million to lobby Congress and the Clinton administration, according to reports filed with the U.S. Senate. That's a significant increase over the $4.9 million in lobbying expenditures the company reported in 1999. And Microsoft also was a major contributor to the Bush- Cheney Inaugural Fund, donating $100,000 to the gala last January.

Just months into the 2001-02 election cycle, Microsoft already ranks as a significant contributor, giving just over $700,000 to federal parties and candidates, split almost evenly between the two major parties. (This includes contributions reported to the FEC through the end of July.)

However, the lawsuit's most significant impact on campaign finance extends beyond Microsoft itself. The antitrust lawsuit proved to be a major turning point in the tech industry's involvement in Washington politics.

Shortly after the Justice Department launched its lawsuit, Microsoft became one of the first computer companies to open lobbying offices in Washington and was one of the first to contribute major soft money dollars to the political parties. By the year 2000, computers and Internet companies ranked No. 7 on the list of the biggest industry givers on the federal level, contributing more than $39.7 million. Since 1997, Microsoft has been the industry's biggest contributor.

*Based on FEC data downloaded 9/1/01. The totals for the 2002 election cycle 'including fund-raising numbers reported to the FEC through July 31,2001.

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Microsoft PAC & Individual
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*Based on FEC data downloaded 9/1/01.

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* Based on FEC data downloaded 9/1/01.

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TO THE

DECLARATION OF BRIAN DAUTCH

Before the Committee on the Judiciary
United States Senate
December 12, 2001

Mr. Chairman and members of the Committee, good morning. It is a pleasure to appear before you today on behalf of Microsoft Corporation to discuss the proposed consent decree or Revised Proposed Final Judgment (the "PFJ") to which the U.S. Department of Justice and nine of the plaintiff states have agreed. As this committee is aware, I am counsel to Microsoft in the case and was one of the principal representatives for the company in the negotiations that led to the proposed consent decree.

The PFJ was signed on November 6th after more than a month of intense, around-the-clock negotiations with the Department and representatives of all the plaintiff states. The decree is currently subject to a public interest review by Judge Kollar-Kotelly under the Tunney Act. Because we are currently in the midst of that review and because nine states and the District of Columbia have chosen to continue the litigation, t must be somewhat circumspect in my remarks. However, what I can -- indeed, must -- stress is that, in light of the Court of Appeals' decision last summer to "drastically" reduce the scope of Microsoft's liability and in light of the legal standards for imposing injunctive relief, the Department and the settling states were very effective in negotiating for broad, strong relief. As the chart in the appendix depicts, ever since the Department and the plaintiff states first filed their complaints in May 1998, the case has been shrinking. What began with five claims, was whittled down to a single monopoly maintenance claim by a unanimous Court of Appeals. Even with respect to that surviving claim, the appellate court affirmed Judge Jackson's findings on only about a third (12 of 35) of the specific acts which the district court had found support that claim.

Given that history and the law, there is no reasonable argument that the PFJ is too narrow or that it fails to achieve all the relief to which the Department was entitled. In fact. as these remarks explain. the opposite is true -- faced with rough, determined negotiators on the other side of the table, Microsoft agreed to a decree that goes substantially beyond what the plaintiffs were likely to achieve through litigation. Quite frankly, the PFJ is the strongest, most regulatory conduct decree ever obtained (through litigation or settlement) by the Department.

Why then, one might ask, would Microsoft consent to such a decree? There are two reasons. First. the company felt strongly that it was important to put this matter behind it and to move forward constructively with its customers, its business partners, and the government. For four years, the litigation has consumed enormous resources and been a serious distraction. The constant media drumbeat has obscured the fact that the company puts a premium on adhering to its legal obligations and on developing and maintaining excellent relationships with its partners and customers. Litigation is never a pleasant experience, and given the magnitude of this case and the media attention it attracted, it is hard to imagine any more costly, unpleasant civil litigation.

Second. while the Department pushed Microsoft to make substantial, even excessive concessions to get a settlement, there were limits to how far the company was willing or able to go (limits, by the way, which the Department and the settling states managed to reach). Microsoft was fighting for an important principle -- the ability to innovate and improve its products and services for the benefit of consumers. To that end, Microsoft insisted that the decree be written in a way to allow the company to engage in legitimate competition on the merits. Despite the substantial burdens the decree will impose on Microsoft and the numerous ways in which Microsoft will be forced to alter its conduct, the decree does preserve Microsoft's ability to innovate, to improve its products, and to engage in procompetitive business conduct that is necessary for the company to survive.

In short, at the end of the negotiations, Microsoft concluded that the very real costs that the decree imposes on the company are outweighed by the benefits, not just to Microsoft but to the PC industry and consumers generally.

The Court of Appeals' "Road Map" for Relief

In order to evaluate the decree, one must first appreciate the h/story of this case and how drastically the scope of Microsoft's liability, was narrowed at the appellate level. When this case began with the filing of separate complaints by the Department and the plaintiff states in May of 1998, it was focused on Microsoft's integration of browsing functionality, called Internet Explorer or lie into Windows 98, which the plaintiffs alleged to be an illegal tying arrangement.

The complaints of the Department and the states included five separate claims: (1) a claim under section 1 of the Sherman Act that the tie-in was per se illegal; (2) another claim under section 1 that certain promotion and distribution agreements with Internet service providers (ISPs), Internet content providers (ICPs), and on-line service providers (OSPs) constituted illegal exclusive dealing; (3) a claim under section 2 of the Sherman Act that Microsoft had attempted to monopolize Web browsing software; (4) a catch-all claim under section 2 that the alleged conduct that underlay the first three claims amounted to illegal maintenance of Microsoft's monopoly in PC operating systems; and (5) a claim by the plaintiff states (but not part of the Department's complaint) under section 2 that Microsoft illegally "leveraged" its monopoly in PC operating systems. As discovery got underway, the case dramatically expanded as the plaintiffs indiscriminately began identifying all manner of Microsoft conduct as examples of the company's illegal efforts to maintain its monopoly. But then, the case began to shrink.

"In response to Microsoft's motion for summary judgment, the district court dismissed the states' Monopoly leveraging claim (claim 5).

"After trial, Judge Jackson held that the plaintiffs failed to prove that Microsoft's arrangements with ISPs, ICPs, and OSPs violated section 1 (claim 2).

"Judge Jackson did, however, conclude that the plaintiffs had sustained their claims that Microsoft illegally tied IE to Windows (claim 1), illegally attempted to monopolize the browser market (claim 3), and illegally maintained its monopoly (claim 4), basing his decision on 35 different actions engaged in by Microsoft.

"In a unanimous decision of the Court of Appeals sitting en banc. the court reversed the trial court on the attempted monopolization claim (claim 3) and remanded with instructions that judgment be entered on that claim in favor of Microsoft.

"The unanimous court also reversed Judge Jackson's decision with respect to the tie-in claim (claim 1 ). The appellate court held that. in light of the prospect of consumer benefit from integrating new functionality into platform software such as Windows. Microsoft's integration of IE into Windows had to be judged under the rule of reason rather than the per se approach taken by Judge Jackson. The Court of Appeals refused to apply the per se approach because of "our qualms about redefining the boundaries of a defendant's product and the possibility of consumer gains from simplifying the work of applications developers [by ensuring the ubiquitous dissemination of compatible APIs]." The court's decision did allow the plaintiffs on remand to pursue the tie-in claim on a rule of reason theory; however, shortly after the remand, the plaintiffs announced they were dropping the tie-in claim.

"With respect to the only remaining claim (monopoly maintenance - claim 4), the Court of Appeals affirmed in part and reversed in part the lower court and substantially shrank Microsoft's liability. After articulating a four-step burden-shifting test that is highly fact intensive, the appellate court reviewed the 35 different factual bases for liability and rejected nearly two-thirds of them.

In the case of seven of those 35 findings (concerning such conduct as Microsoft's refusal to allow OEMs to replace the Windows desktop, Microsoft's design of Windows to "override the user's choice of a default browser," and Microsoft's development of a Java virtual machine (JVM) that was incompatible with Sun's JVM), the appellate court specifically reversed Judge Jackson's decision.

The Court of Appeals dismissed sixteen of the remaining findings by reversing Judge Jackson's holding that Microsoft had engaged in a general "course of conduct" that amounted to illegal monopoly maintenance -- the so-called "monopoly broth" theory.

With respect to the remaining twelve findings (concerning such things as Microsoft's refusal to allow PC manufacturers (OEMs) to remove end-user access to IE, Microsoft's exclusive arrangements with ISPs, and its "commingling" of software code to frustrate OEMs ability, to hide access to IE), the court did affirm Judge Jackson's findings as not being "clearly erroneous." And even as to those twelve, a number were practices -- for example, the arrangements with ISPs -- that Microsoft had already ceased.

As a result, when the case was remanded to the district court and reassigned to Judge Kollar-Kotelly, four-fifths of the original claims were all but gone. With respect to the sole surviving claim, nearly two-thirds of the supporting findings had been rejected by the Court of Appeals. In the words of the Court of Appeals, its decision "drastically altered the scope of Microsoft's liability."

The Relevance of the Drastic Narrowing of Liability

The Court of Appeals' decision makes clear the critical significance of the drastic reduction in the scope of Microsoft's liability in terms of the relief to which the plaintiffs are entitled. As the court noted in instructing the lower court on how the remand for remedy should be handled.

"A court.., must base its relief on some clear 'indication of a significant causal connection between the conduct enjoined or mandated and the violation found directed toward the remedial goal intended.' 3 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW 653(b), at 91- .92 (1996). In a case such as the one before us where sweeping equitable relief is employed to remedy multiple violations, and some -- indeed most -- of the findings of remedial violations do not withstand appellate scrutiny, it is necessary to vacate the remedy decree since the implicit findings of causal connection no longer exist to warrant our deferential affirmance .... In particular, the [district] court should consider which of the decree's conduct restrictions remain viable in light of our modification of the original liability decision."

At the time Judge Kollar-Kotelly ordered the parties into intensive negotiations, she clearly recognized the importance of the drastic alteration to the scope of Microsoft's liability. The judge informed the government that its "first and most obvious task is going to be to determine which portions of the former judgment remain appropriate in light of the appellate court's ruling and which portions are unsupported following the appellate court's narrowing of liability." The judge went on to note that "the scope of any proposed remedy must be carefully crafted so as to ensure that the enjoining conduct falls within the [penumbra] of behavior which was found to be anticompetitive." The judge also stated that "Microsoft argues that some of the terms of the former judgment are no longer appropriate, and that is correct. I think there are certain portions where the liability has been narrowed."

Before discussing the negotiations and the decree itself, I would like to make three other points about the crafting of antitrust remedies that also are relevant to considering the relief to which the plaintiffs were entitled. First, the critics of the PFJ routinely ignore the fact that the Department has long acknowledged that Microsoft lawfully acquired its monopoly position in PC operating systems. Indeed, the Department retained a Nobel laureate in the first Microsoft case in 1994 to submit an affidavit to the district court opining that Microsoft had reached its position in PC operating systems through luck, skill, and foresight. It is tree of course that Microsoft has now been found liable for engaging in conduct that amounted to illegal efforts to maintain that position: however, there is precious little in the record establishing any causal link between the twelve illegal acts of "monopoly maintenance" and Microsoft's current position in the market for PC operating systems. Thus, contrary. to the critics' overheated rhetoric, there is no basis for relief designed to terminate an "illegal monopoly."

Second, decrees in civil antitrust cases are designed to remedy, not to punish. All too often, the critics of this decree speak as though Microsoft was convicted of a crime. It was not. This is a civil case, subject to the rules of civil rather than criminal procedure. To the extent the plaintiffs tried to get relief that could be deemed punitive, that relief would have been rejected.

Third, a decree must serve the purposes of the antitrust laws, which is a "consumer welfare prescription." I realize we are in the "season of giving," but an antitrust decree is not a Christmas tree to fulfill the wishes of competitors, particularly where that fulfillment comes at the expense of consumer welfare. Calls for royalty-free licensing of Microsoft's intellectual property, or for imposing obligations on Microsoft to distribute third party, software at no charge, or for Microsoft to facilitate the distribution of an infinite variety of bastardized versions of Windows (and make sure they all run perfectly) are great for a small group of competitors who know that such provisions will quickly destroy Microsoft's incentives and ability to compete (not to mention violate the Constitution's proscription against "takings"). Such calls, however, are anathema to consumers' interests in a dynamic, innovative computer industry. Twenty. years ago, my old boss and antitrust icon, Bill Baxter, warned about the anticompetitive consequences of antitrust decrees designed simply to "add sand to the saddlebags" of a particularly fleet competitor like Microsoft. it's a warning the courts would certainly heed today.

To their credit, the negotiators for the Department and the settling states understood these three fundamental antitrust principles. While we may have had to remind the other side of these principles from time to time. we did not have to negotiate for their adherence to them. Taxpayers and consumers can be proud that their interests were represented by honorable men and women with the utmost respect for the rule of law. For others to insinuate that. by agreeing to a decree that honors these three fundamental principles, the Department and the settling states "caved" or settled for inadequate relief is as offensive as it is laudable.

The Negotiations

It is against the background I have sketched that. on September 27th, Judge Kollar-Kotelly ordered the parties into intensive, "around the clock" negotiations. Microsoft had already indicated publicly its strong desire to try to settle the case, and so it welcomed the judge's order. As has been widely reported, all the parties in the case took the court's order very seriously. Microsoft assembled in Washington, D.C., a core team of in-house and outside lawyers who have been living with this case for years, and who spent virtually all of the next five weeks camped out in my offices down the street. Microsoft's top legal officer was in town during much of the period directing the negotiations. Back in Redmond, the company's most senior executives devoted a great deal of time and energy to the process, and we were all supported by a large group of dedicated lawyers, businesspeople, and staff.

From my vantage point, the Department and the states (at least those that settled) made an equivalent effort. As the mediator v, Tote after the process ended, "No part" was left out of the negotiations .... Throughout most of the mediation the 19 states (through their executive committee representatives) and the federal government (through the staff of the antitrust division) worked as a combined 'plaintiffs' team." Jay Himes from the office of the New York Attorney General Eliot Spitzer and Beth Finnerty from the office of the Ohio Attorney General Betty Montgomery, represented the states throughout the negotiations, putting in the same long hours as the rest of us. At various points Mr. Himes and Ms. Finnerty were joined by representatives from other states, including Kevin O'Connor from the office of Wisconsin Attorney General James Doyle.

The negotiations began on September 28th and continued virtually non-stop until November 6th. During the first two weeks, we negotiated without the benefit of a mediator. As the}' say in diplomatic circles, the discussions were "full and frank." The Department lawyers and the state representatives in the negotiation were extremely knowledgeable, diligent, and formidable.

Microsoft certainly hoped to be able to reach a settlement quickly and before a mediator was designated. However, the views on all sides were sufficiently strong and the need to pay attention to every sentence, phrase, and punctuation mark so overwhelming that reaching agreement proved impossible in those first two weeks. Eric Green. a prominent mediation specialist, was appointed by the court and with the help of Jonathan Marks spent the next three weeks helping the parties find common ground. As Professor Green and Mr. Marks wrote after the mediation ended,

"Successful mediations are ones in which mediators and parties work to identity and overcome barriers to reaching agreement. Successful mediations are ones in which all the parties engage in reasoned discussions of issues that divide them, of options for settlement, and of the risks. opportunities, and costs that each part), faces if a settlement isn't reached. Successful mediations are ones in which, settle or not. senior representatives of each party have made informed and intelligent decisions. The Microsoft mediation was successful."

Working day and night virtually until the original .November 2 deadline set by the judge. Microsoft and the Department agreed to and signed a decree early on November 2. The representatives of the states also tentatively agreed, subject to an opportunity from November 2 until November 6 to comer with the other states that were more removed from the case and negotiations. During that period, the states requested several clarifying modifications to which Microsoft (and the Department) agreed.

From press reports, it appears that during this period the plaintiff states also were being subjected to intense lobbying by a few of Microsoft's competitors who were desperate either to get a decree that. would severely cripple if not eventually destroy Microsoft or at least to keep the litigation (and the attendant costs imposed on Microsoft) going. Notwithstanding that pressure, New York, Wisconsin, and Ohio -- the states that had made the largest investment in litigating against Microsoft and in negotiating a settlement -- along with six other plaintiff states represented by a bipartisan group of state attorneys general signed onto the Revised PFJ on November 6.

The Proposed Final Judgment

Throughout the negotiations, Microsoft was confronted by a determined and tough group of negotiators for the Department and the states. They made clear that there would be no settlement unless Microsoft went well beyond the relief to which, Microsoft believes, the Court of Appeals opinion and the law entitles the plaintiffs. Once that became clear, Microsoft relented in significant ways, subject only to narrow language that preserved Microsoft's ability to innovate and engage in normal, clearly procompetitive activities. Professor Green, the one neutral observer of this drama has noted the broad scope of the prohibitions and obligations imposed on Microsoft by the PFJ, stating during the status conference with Judge Kollar-Kotelly that "the parties have not stopped at the outer limits of the Court of Appeals' decision, but in some important respects the proposed final judgment goes beyond the issues affirmed by the Court of Appeals to deal with issues important to the parties in this rapidly-changing technology."

I do not intend today to provide a detailed description of each provision of the PFJ; the provisions speak for themselves. It may come as something of a surprise in light of some of the uninformed criticism hurled at the decree, but one of Microsoft's principal objectives during the negotiations was to develop proscriptions and obligations that were sufficiently clear, precise and certain to ensure that the company and its employees would be able to understand and comply with the decree without constantly engendering disputes with the Department. This is an area of complex technology and the decree terms on which the Department insisted entailed a degree of technical sophistication that is unprecedented in an antitrust decree. Drafting to these specifications was not easy, but the resulting PFJ is infinitely clearer and easier to administer than the conduct provisions of the decree that Judge Jackson imposed in June 2000.

If, as one might suspect would be the outcome in a case such as this, the PFJ were written to proscribe only the twelve practices affirmed by the Court of Appeals, the decree would be much shorter and simpler. The Department and settling states, however, insisted that the decree go beyond just focused prohibitions to create much more general protections for a potentially large category of software, which the PFJ calls "middleware." But even these expansive provisions to foster middleware competition were not sufficient to induce the Department and the states to settle; rather, the?' insisted that Microsoft also agree to additional obligations that bear virtually no relationship to any of the issues addressed by the district court and the Court of Appeals. And lastly they insisted on unprecedented enforcement provisions. I will briefly describe each of these three sets of provisions.

1. Protections for "Middleware"

The case :hat the plaintiffs tried and the narrowed liability, that survived appellate review all hinged on claims that Microsoft took certain actions to exclude Netscape's Navigator browser and Sun's Java technology from the market in order to protect the Windows operating system monopoly. The plaintiffs successfully argued that Microsoft feared that Navigator and Java, either alone or together, might eventually include and expose a broad set of general purpose APIs to which software developers could write as an alternative to the Windows APIs. Since Navigator and Java can run on multiple operating systems, if they developed into general purpose platforms, Navigator and Java would provide a means of overcoming the "applications barrier" to end, and threaten the position of the Windows operating system as platform software.

A person might expect that a decree designed to address such a monopoly maintenance claim would provide relief with respect to Web-browsing software and Java or, at most, to other general purpose platform software that exposes a broad set of APIs and is ported to run on multiple operating systems. The PFJ goes much further. The Department insisted that obligations imposed on Microsoft by the decree extend to a range of software that has little in common with Navigator and Java. The decree applies to "middleware" broadly defined to include, in addition to Web-browsing software and Java. instant messaging software, media players, and even email clients -- software that, Microsoft believes, has virtually no chance of developing into broad, general purpose platforms that might threaten to displace the Windows platform. In addition, there is a broad catch-all definition of middleware that in the future is likely to sweep other similar software into the decree.

This sweeping definition of middleware is significant because of the substantial obligations it imposes on Microsoft. Those obligations -- a number of which lack any correspondence to the monopoly maintenance findings that survived appellate review -- are intended to create protections for all the vendors of software that fits within the middleware definition. Taken together, the decree provisions provide the following protections and opportunities:

" Relations with Computer Makers. Microsoft has agreed not to retaliate against computer makers who ship software that competes with anything in its Windows operating system.

" Computer Maker Flexibility. Microsoft has agreed to grant computer makers broad new rights to configure Windows so as to promote non-Microsoft software programs that compete with features of Windows. Computer makers will now be free to remove the means by which consumers access important features of Windows, such as Internet Explorer, Windows Media Player, and Windows Messenger. Notwithstanding the billions of dollars Microsoft invests developing such cool new features, computer makers will now be able to' replace access to them in order to give prominence to non-Microsoft software such as programs from AOL Time Warner or RealNerworks. (Additionally. as is the case today, computer makers can provide consumers with a choice --that is to say access to Windows features as well as to non-Microsoft software programs.)

" Windows Design Obligations. Microsoft has agreed to design furore versions of Windows, beginning with an interim release of Windows XP, to provide a mechanism to make it easy for computer makers, consumers and software developers to promote non-Microsoft software within Windows. The mechanism will make it easy to add or remove access to features built in to Windows or to non-Microsoft software. Consumers will have the freedom to choose to change their configuration at any time.

" Internal Interface Disclosure. Even though there is no suggestion in the Court of Appeals' decision that Microsoft fails to disclose APIs today and even though the Court of Appeals' holding on monopoly power is predicated on the idea that there are tens of thousands of applications written to call upon those APIs. Microsoft has agreed to document and disclose for use by its competitors various interfaces that are internal to Windows operating system products.

"Relations with Software Developers. Microsoft has agreed not to retaliate against software or hardware developers who develop or promote software that competes with Windows or that runs on software that competes with Windows.

" Contractual Restrictions. Microsoft has agreed not to enter into any agreements obligating any third part?, to distribute or promote any Windows technology exclusively or in a fixed percentage, subject to certain narrow exceptions that apply to agreements raising no competitive concern. Microsoft has also agreed not to enter into agreements relating to Windows that obligate any software developer to refrain from developing or promoting software that competes with Windows.

These obligations go far beyond the twelve practices that the Court of Appeals found to constitute monopoly maintenance. One of the starkest examples of the extent to which these provisions go beyond the Court of Appeals decision relates to Microsoft's obligations to design Windows in such a way as to give third parties the ability, to designate non-Microsoft middleware as the "default" choice in certain circumstances in which Windows might otherwise be designed to utilize functionality. integrated into Windows. As support for his monopoly maintenance conclusion, Judge Jackson had relied on several circumstances in which Windows was designed to override the end users' choice of Navigator as their default browser and instead to invoke IE. The Court of Appeals, however, reviewed those circumstances and reversed Judge Jackson's conclusion on the ground that Microsoft had "valid technical reasons" for designing Windows as it did. Notwithstanding this clear victory, Microsoft acceded to the Department's demands that it design future versions of Windows to ensure certain default opportunities for non-Microsoft middleware.

2. Uniform Prices and Server Interoperability

Nevertheless, agreeing to this ,side range of prohibitions and obligations designed to encourage the development of middleware broadly defined was not enough to get the plaintiffs to settle. Instead, the?" insisted on two additional substantive provisions that have absolutely no correspondence to the findings of monopoly maintenance liability that survived appeal.

" Uniform Price List. Microsoft has agreed to license its Windows operating system products to the 20 largest computer makers (who collectively account for the great majority, of PC sales) on identical terms and conditions, including price (subject to reasonable volume discounts for computer makers who ship large volumes of Windows).

" Client/Server Interoperability. Microsoft has agreed to make available to its competitors, on reasonable and non-discriminatory terms, any protocols implemented in Windows desktop operating systems that are used to interoperate natively with any Microsoft server operating system.

In the case of the sweeping definition of middleware and the range of prohibitions and obligations imposed on Microsoft, there is at least a patina of credibility to the argument that the penumbra of the twelve monopoly maintenance practices affirmed by the Court of Appeals can be stretched to justify those provisions, at least as "fencing in" provisions. There is no sensible reading of the Court of Appeals decision that would provide an}" basis for requiring Microsoft to charge PC manufacturers uniform prices or to make available the proprietary protocols used by Windows desktop operating systems and Windows server operating systems to communicate with each other. Nevertheless. because the plaintiffs insisted that they would not settle without those two provisions. Microsoft also agreed to them.

Before mining to the enforcement provisions of the PFJ, I want to say a word about the few provisos included in the decree that provide narrow exceptions to the various prohibitions and obligations imposed on Microsoft. Those exceptions were critical to Microsoft's willingness to agree to the sweeping provisions on which the plaintiffs insisted. Without these narrowly tailored exceptions, Microsoft could not innovate or engage in normal procompetitive commercial activities. The public can rest assured that the settling plaintiffs insisted on language to ensure that the exceptions only apply when they promote consumer welfare. For example, some companies that compete with Microsoft for the sale of server operating systems apparently have complained about the so-called "security carve-out" to Microsoft's obligation to disclose internal interfaces and protocols. That exception is very narrow and only allows Microsoft to withhold encryption "keys" and the similar mechanisms that must be kept secret if the security, of computer networks and the privacy of user information is to be ensured. In light of all the concern over computer privacy and security, these days, it is surprising that there is any controversy, over such a narrow exception.

3. Compliance and Enforcement

The broad substantive provisions of the PFJ are complemented by an unusually strong set of compliance and enforcement provisions. Those provisions are unprecedented in a civil antitrust decree. The PFJ creates an independent three-person technical committee, resident on the Microsoft campus, with extraordinary powers and full access to Microsoft facilities, records, employees and proprietary technical data, including Windows source code, which is the equivalent of the "secret formula" for Coke. The technical committee provides a level of technical oversight that is far more substantial than any provision of any other antitrust decree of which I am aware. At the insistence of the plaintiffs, the technical committee does not have independent enforcement authority; rather, reports to the plaintiffs and, through them, to the court. The investigative and oversight authority of the technical committee in no way limits or reduces the enforcement powers of the DOJ and states: rather, the technical committee supplements and enhances those powers. Each of the settling states and DOJ have the power to enforce the decree and have the ability to monitor compliance and seek a broad range of remedies in the event of a violation.

Microsoft also agreed to develop and implement an internal antitrust compliance program, to distribute the decree and educate its management and employees as to the various restrictions and obligations. In recent years, Microsoft has assembled in-house one of the largest, most talented groups of antitrust lawyers in corporate America. They are already engaged in substantial antitrust compliance counseling and monitoring. The decree formalizes those efforts, and quite frankly adds vet?' substantially to the in-house lawyers' work. As we speak, that group, together with key officials from throughout the Microsoft organization, are working to implement the decree and to ensure the company's compliance with it.

As with the substantive provisions, Microsoft agreed to these unprecedented compliance and enforcement provisions because of the adamance of the plaintiffs and because of the highly technical nature of the decree. Microsoft, the Department, and the settling states recognized that it was appropriate to include mechanisms -- principally, the technical committee -- that will facilitate the prompt and expert resolution of any technical disputes that might be raised by third parties, without in any way derogating from the government's full enforcement powers under the decree. Although the enforcement provisions are unprecedented in their stringency and scope, they are not necessitated or justified by any valid claim that Microsoft has failed to comply with its decree obligations in the past. In fact. Microsoft has an exemplar?.' record of complying with the consent decree to which the company and the Department a agreed in 1994. In 1997, the Department did question whether Microsoft's integration of IE into Windows 95 violated a "fencing in" provision that prohibited contractual tie-ins, but Microsoft was ultimately vindicated by the Court of Appeals. Microsoft has committed itself to that same level of dedication in ensuring the company's compliance with the PFJ.

Conclusion

The PFJ strikes an appropriate balance in this complicated case, providing opportunities and protections for firms seeking to compete while allowing Microsoft to continue to innovate and bring new technologies to market. The decree is faithful to the fact that the antitrust laws are a "consumer protection prescription," and it ensures an economic environment in which all parts of the PC- ecosystem can thrive.

Make no mistake, however, the PFJ is tough. It will impose substantial new obligations on the company, and it will require significant changes in the way Microsoft does business. It imposes heavy costs on the company and entails a degree of oversight that is unprecedented in a civil antitrust case. For some competitors of Microsoft, however, apparently nothing short of the destruction of Microsoft -- or at least the ongoing distraction of litigation -- will be sufficient. But if the objective is to protect the interests of consumers and the competitive process, then this decree more than achieves that goal.

Finally, for all those who are worried about the furore and what unforeseen developments may not be covered by this case and the decree, remember that the Court of Appeals decision now provides guideposts, which previously did not exist, for judging Microsoft's behavior, and that of other high technology companies, going forward. Those guidelines, it is true, are not always easy to apply ex ante to conduct; however, now that the Court of Appeals has spoken, we all have a much better idea of the way in which section 2 of the Sherman Act applies to the software industry. In short, what antitrust law" requires of Microsoft is today much clearer than it was when this case began. We have all learned a lot over the last four years, and Microsoft has every incentive to ensure that history does not repeat itself.

TO THE

DECLARATION OF BRIAN DAUTCH

REGISTRANT

1. Name of Registrant Covington & Burling

   Address 1201 Pennsylvania Avenue, N.W.

   City Washington          State DC     Zip 20004

   ---

2. Principal place of business (if different from line 1)

   City Same          State/Zip (or Country)

   ---

3. Telephone number and contact name

   (202) 662-6000     Contact Stuart Stock

   ---

4. General description of registrant's business or activities Law Firm

5. Name of Client Microsoft Corporation

   Address One Microsoft Way

   City Redmond          State WA     Zip 98052

   ---

6. Principal place of business (if different from line 5)

   City Same          State/Zip (or Country)

   ---

7. General description of client's business or activities
   Computer software company

REGISTRANT EMPLOYEES

8. Name and title of each employee of the registrant who has acted or is expected to act as a lobbyist for the client identified on line 5. Indicate any employee who served as a "covered executive branch official" or "covered legislative branch official" within 2 years before the date that the employee first acted or will act as a lobbyist for the client, and state the executive or legislative branch position(s) in which the employee served. Attach Lobbying Registration Addendum if necessary.
   • E. Jason Albert, Associate
     Victoria A. Carter, Associate
     Charles F. Rule, Partner
     Laurie C. Self, Of Counsel

LOBBYING ISSUES

9. General lobbying issue areas (select applicable codes, listed in instructions and on reverse side of Form 1.D-l, page 1)

     CPI        CPT        TRD      _______    _______    _______    _______

10. Specific lobbying issues (current and anticipated)
    • Protection of intellectual property rights, including copyrights,
    • Electronic commerce matters.
    • Competition matters affecting computer software industry.

AFFILIATED ORGANIZATIONS

11. Name, address, and principal p}ace of business of any entity other than the" client that contributes more than $10,000 to the lobbying activities covered by this registration in a semiannual period, and in whole or in part plans, supervises, or controls the registrant's lobbying activities. If none, so state.

12. Name, address, principal place of business, amount of ,'my contribution of more than $10,000, and approximate percentage of equitable ownership in the client of any foreign entity that:
    1. holds at least 20% equitable ownership in the client or in any organization identified on line 11 ; or
    2. directly or indirectly, in whole or in major part, plans, supervises, controls, directs, finances or subsidizes the activities of the client or any organization identified on line 11; or
    3. is an affiliate of the client or any organization identified on line 11 and has a direct interest in the outcome of the lobbying activity.

If none, so state.

Form LD-1 (1/96)

TO THE

DECLARATION OF BRIAN DAUTCH

Excerpt of The Wall Street Journal
Friday, November 16, 2001

Washington Wire

LEGAL LOOPHOLE: Microsoft tries to shield Ill; top Washington lawyer, Charles F. Rule, from having to reveal some contacts with the administration before he negotiated the company's controversial antitrust settlement. He was formally named a counsel of record yesterday, exempting him from disclosures otherwise demanded under a 1974 law requiring court review of antitrust deals.

For a copy of the front page visit The Wall Street Journal.

TO THE

DECLARATION OF BRIAN DAUTCH

Copyright 2001 eMediaMillWorks, Inc.
(f/k/a Federal Document Clearing House, Inc.)
FDCH Political Transcripts

December 12, 2001, Wednesday

TYPE: COMMITTEE HEARING

LENGTH: 9425 words

COMMITTEE: SENATE JUDICIARY COMMITTEE

HEADLINE: U.S. SENATOR PATRICK LEAHY (D-VT) HOLDS HEARING ON "THE MICROSOFT SETTLEMENT: A LOOK TO THE FUTURE."

SPEAKER:
U.S. SENATOR PATRICK LEAHY (D-VT), CHAIRMAN

LOCATION: WASHINGTON, D.C.

WITNESSES:

CHARLES JAMES, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE
JAY HIMES, ANTITRUST BUREAU CHIEF, OFFICE OF THE ATTORNEY GENERAL
CHARLES RULE, COUNSEL, MICROSOFT CORPORATION
LAWRENCE LESSIG, PROFESSOR, STANFORD LAW SCHOOL
MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER FEDERATION OF AMERICA
JONATHAN ZUCK, PRESIDENT, ASSOCIATION OF COMPETITIVE TECHNOLOGY
MATTHEW SZULIK, PRESIDENT AND CEO, RED HAT, INC.
MITCHELL KERTZMAN, PRESIDENT AND CEO, LIBERATE TECHNOLOGIES

BODY:

U.S. SENATE JUDICIARY COMMITTEE HOLDS A HEARING ON THE MICROSOFT SETTLEMENT

DECEMBER 12,2001

SPEAKERS:
U.S. SENATOR PATRICK J. LEAHY (D-V-F)
CHAIRMAN
U.S. SENATOR EDWARD M. KENNEDY (D-MA)
U.S. SENATOR JOSEPH R. BIDEN JR. (D-DE)
U.S. SENATOR HERBERT KOHL (D-WI)
U.S. SENATOR DIANNE FEINSTEIN (D-CA)
U.S. SENATOR RUSSELL D. FEINGOLD (D-WI)
U.S. SENATOR CHARLES E. SCHUMER (D-NY)
U.S. SENATOR RICHARD DURBIN (D-IL)
U.S. SENATOR MARIA CANTWELL (D-WA)
U.S. SENATOR JOHN EDWARDS (D-NC)

U.S. SENATOR ORRIN G. HATCH (R-UT)
RANKING MEMBER
U.S. SENATOR STROM THURMOND (R-SC)
U.S. SENATOR CHARLES E. GRASSLEY (R-IA)
U.S. SENATOR ARLEN SPECTER (R-PA)
U.S. SENATOR JON KYL (R-AZ)
U.S. SENATOR MIKE DEWINE (R-OH)
U.S. SENATOR JEFF SESSIONS (R-AL)
U.S. SENATOR SAM BROWNBACK (R-KS)
U.S. SENATOR MITCH MCCONNELL (R-KY)

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

I told Senator DeWine earlier -- now this would probably cause a recall petition for the Republican Party in Ohio, but what a terrific job he did as chairman and what a terrific job Senator Kohl has done as chairman on antitrust matters in pointing out that they're issues of great complexity, very important to everybody here in the Senate. I've look at the proposed settlement the Department of Justice and nine states have transmitted to the District Court. The reason that they planned for the conclusion of what has really been a landmark antitrust litigation. But now, it's going to pass the legal test set out in the Tunney Act if it's going to gain court approval. That test is both simple and broad, and requires an evaluation of whether the proposed settlement is in the public interest.

There is significant difference of opinion over how well the proposed settlement passes this legal test. In fact, the states participating in the litigation against Microsoft are evenly split - - nine states joined in the proposed settlement and nine non-settling states presented the court with an alternative remedy.

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

Scrutiny of the proposed settlement by this committee during the course of the Tunney Act proceeding is particularly important. The focus of our hearing today is to examine whether the proposed settlement is good public policy and not to go into the legal technicalities.

The questions raised here and views expressed may help inform the court. I plan with Senator Hatch to forward to the court the record of this hearing for consideration as the court goes about the difficult task of completing the Tunney Act proceedings and the remedy solved by the non-settling states.

I am especially concerned that the District Court takes the opportunity seriously to consider the remedy proposal of the non- settling states but to consider them before she makes her final determination on the other parties' proposed settlement.

The insights of the other participants in this complicated and hard-fought case are going to be valuable additions to the comments received in the Tunney Act proceeding. I would hope that it would help inform the evaluation whether the settlement is in the public interest, a matter of which for many people is still an open question.

The effects of this case extend beyond simply the choices available in the software marketplace. The United States has long been the world leader in bringing innovative solutions to software problems, in creating new tools and applications for use on computers and the web, and in driving forward the flow of capital into these new and rapidly growing sectors of the economy.

This creativity is not limited just to Silicon Valley. My own home area, Burlington, Vermont, ranks seventh in the nation in terms of patent filings. Burlington has 38,000 people. It's in a county of about 130,000 people. It is not per capita. This is actual filings -- seven in the nation.

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

So, with that in mind, I intend to ask the representatives of the settling parties how their resolution of this conflict will serve the ends that the antitrust laws require.

Our courts have developed a test for determining the effectiveness of a remedy in a Sherman Act case: The remedy must end the anti-competitive practices, it must deprive the wrongdoer of the fruits of the wrongdoing and it must ensure that the illegality never recurs.

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

I have noted my concern that the procedural posture of this case not jeopardize the opportunity of the non-settling states to have their day in court and not deprive the District Court of the value of their views on appropriate remedies in a timely fashion. In addition, I have two basic areas of concern about the proposed settlement.

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

Testifying about the first Microsoft-Justice Department consent decree, Mr. Rule said, quote: "Ambiguities in decrees are typically resolved against the government. In addition, the government's case must rise or fall on the language of the decree; the government cannot fall back on some purported 'spirit' or 'purpose' of the decree to justify an interpretation not clearly supported by the language."

LEAHY: So, we take seriously such counsel, and would worry if ambiguity in the proposed settlement would jeopardize its enforcement.

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

Any lawyer Who has litigated cases, and Mr. James, I would certainly include you, any business person knows how distracting litigation of this magnitude can be and appreciates the value that reaching an appropriate settlement can have not only for the parties but also for consumers, who are harmed by anti-competitive conduct, and the economy. I'm the first one to say that we'd like some finality, so everybody involved, all companies, can know what the standards are and all consumers can know what they are.

Because of that, I do not come to this hearing prejudging the merits of this proposed settlement but instead as one who is ready to embrace a good settlement that puts an end to the merry-go-round of Microsoft litigation over consent decrees.

But the serious questions that have been raised about the scope, enforceability and effectiveness of this proposed settlement leave me concerned that, if it's approved in its current form, it may simply be an invitation for the next chapter of litigation. I want an end to this thing. I think everybody wants at end to it, but we want an end to it where we know what the rules are going to be. If we don't know what the rules are going to be, as sure as the sun rising in the East, we're going to face these issues again.

On this point, I share the concern of Judge Robert Bork, who warns, in his written submission, that the proposed settlement "contains so many ambiguities and loopholes as to make it unenforceable, and likely to guarantee years of additional litigation".

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

I yield to Senator Hatch who has been such a support of hearings on this issue earlier.

HATCH: Thank you, Mr. Chairman.

As you know, we conducted a series of hearings, as you've mentioned, in this committee in 1997 and 1998 to examine the policy implications of the competitive landscape of the then burgeoning high- tech economy and industry, which was about to explode with the advent of the Internet.

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

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

My interest in the competitive marketplace in the high-technology industry was animated by my strong opposition to regulations of the industry, whether by government, or by one or few companies.

As we may remember, the hearings before the Judiciary Committee developed an extensive record of Microsoft's conduct, and evidenced various efforts by the company to maintain and extend its operating system monopoly.

These findings, I would note, were reaffirmed by a unanimous, and ideologically diverse Court of Appeals. The Microsoft case -- and its ultimate resolution -- present one of the most important developments in antitrust law in recent history, certainly in my memory.

As I have emphasized before, having a monopoly is not illegal under our laws. In fact, in a successful capitalist system, striving to be one should be encouraged, as a matter of fact.

However, anti-competitive conduct intended to maintain or extend this monopoly would harm competition and could possibly be violative of our laws. I believe no one would disagree that the D.C. Circuit Court's decision reaffirmed the fundamental principle that a monopolist -- even a monopolist in a high-tech industry like software -- must compete on the merits to maintain its monopoly, which brings us to today's hearing. We are here to examine the policy implications of the proposed settlement in the government's antitrust litigation against Microsoft.

Mr. Chairman, rather than closing the book on the Microsoft inquiry, the proposed settlement appears to be only the end of the latest chapter.

The settling parties are currently in the middle of the so-called Tunney Act process before the court. And, the non-settling parties have chosen to further litigate this matter and last week filed their own proposed settlement.

This has been a complex case with significant consequences for Microsoft, high-tech entrepreneurs and the American public as well. The proposed settlement between Microsoft and the Justice Department and nine of the plaintiff state attorneys general is highly technical.

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

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

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

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

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

I am also cognizant of both the limitation of the claims contained in the original Justice Department complaint by the D.C. Circuit, as well as the standards for enforcement under settled antitrust law.

I believe that further information regarding precisely how the proposed settlement will be interpreted, given D.C. Circuit case law, is necessary to any full and objective analysis of the remedies proposed therein. I hope that this hearing will result in the development of such information that would supplement the questions that I put forth to the Department.

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

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

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

This issue is one that is relevant for this committee to consider as a larger policy matter, as well as how it relates to this case and the proposed settlement we are examining today. Let me just say that one of things that worries me is what are the enforcement capabilities of this settlement agreement? It was only a few years before these matters arose that Microsoft had agreed to a consent decree -- to a conduct decree that many feel that they did not live up to.

I think it's a legitimate issue to raise as to how well the agreement that the Justice Department has worked out with Microsoft and nine of the plaintiffs, how will it be enforced if anti- competitive conduct continues.

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

LEAHY: I did, I did.

HATCH: Let me raise it, because he does make some interesting comments in his letter and if I can read them, I think they might be -- at least part of opening up the questions in this matter. I'll just quote a few paragraphs.

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

He describes the impact on future Netscapes as follows and let me just read a couple of paragraphs in this regard: "As discussed in the attached document, the unambiguous conclusion is that the PFJ agreed upon last month by Microsoft and the Department of Justice had been in existence in 1994, Netscape would have never been able to obtain the necessary venture capital financing. In fact, the company would have not come into being in the first place. The work of Mark Andresson's team at the University of Illinois in developing the Mosaic browser would likely have remained an academic exercise. An innovative, independent browser company simply could not survive under the PFJ and such would be the effect on any company developing the future technologies as innovative as the browser was in the mid-1990s."

He goes on to characterize whether or not Microsoft could have developed itself, but let me just read the last two paragraphs of this letter: "If the PFJ's provisions are allowed to go into effect, it is unrealistic to think that anybody would ever secure venture capital financing to compete against Microsoft. This would be a tragedy for our nation. It makes a mockery of the notion that the PFJ is, quote, "good for the economy", unquote. If the PFJ goes into effect, it will subject an entire industry to dominance by an unconstrained monopolist, thus snuffing out competition, consumer choice and innovation in perhaps our nation's most important industry. And worse, it will allow them to extend their dominance to more traditional businesses, such as financial services, entertainment, telecommunications and perhaps many others.

Four years ago, I appeared before committee and was able to demonstrate, with the help of the audience, that Microsoft undoubtedly had a monopoly. Now it has been proven in the course that Microsoft not only having a monopoly, but they have illegally maintained that monopoly through a series of abusive and predatory actions. I submit to the committee that Microsoft is infinitely stronger in each of their core businesses than they were four years ago, despite the fact that their principal arguments have been repudiated eight to zero by the federal courts. Now, if you'll keep these thoughts in mind during your hearing, let me send a more detailed analysis of my views as followed".

Well, the importance of that letter is basically, Barksdale was one of the original complainants against Microsoft and was one of the very important witnesses before this committee in those years when we were trying to figure out what we're doing here.

And I don't think you can ignore that, so these questions have to be answered that he raises, plus the questions that I had given as well.

So, that's the -- you put that letter in the record?

LEAHY: I have and also I understood you wanted those letters (inaudible).

HATCH: I appreciate it.

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

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

Thank you, Mr. Chairman.

LEAHY: Thank you.

Senator Kohl?

KOHL: Mr. Chairman, we thank you for holding this hearing here today. This is a crucial time for competition in the high tech sector of our economy. After spending more than three years pursuing its groundbreaking antitrust case against Microsoft, the government has announced a settlement.

But the critical question remains, will this settlement break Microsoft's stranglehold over the computer software industry and restore competition in this vital sector of our economy. I have serious doubts that it will.

An independent federal court, both a trial court and a court of appeals found that Microsoft broke the law and that its violation should be fixed. This antitrust case was as big as they come.

Microsoft crushed a competitor, illegally tried to maintain its monopoly and stifled innovation in this market. Now, after all these years of litigation, of charges and countercharges, this settlement leaves us wondering, "Did we really accomplish anything?" Or, in the words of the old song, "Is that all there is?"

Does this settlement debate a Supreme Court mandate that it must deny the antitrust violator the fruits of its illegal conduct? It seems to me and to many, including nine of the states that joined the federal government in suing Microsoft, that this settlement agreement is not strong enough to do the job to restore competition to the computer software industry,

It contains so many loopholes; qualifications and exceptions that many worry that Microsoft will easily be able to evade its provisions.

Today, for the vast majority of computer users, the first thing they see when they turn on their machine is the now familiar Microsoft logo placed on the Microsoft start menu. And all of their computer operations take place through the filter of Microsoft's Windows operating system.

Microsoft's control over the market is so strong that today, more than 95 percent of all personal computers run under Windows operating system, a market share high enough to constitute a monopoly under antitrust law.

Its share of the Internet browsing market is now over 85 percent and reported a profit margin of 25 percent in the most recent quarter, a very high number in challenging economic times.

Microsoft has the power to dictate terms to manufacturers who wish to gain access to the Windows operating system and the ability to leverage its dominance into other forms of computer software. Microsoft has never been shy about using its market power.

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

We stand today on the threshold of writing the rules of competition in the digital age. We have two options. One option involves one dominate company controlling the computer desktop facing minor restraints that expire in five years, but acting as a gatekeeper to 95 percent of all personal computer users.

The other mile is the flowering of innovation and new products that resulted from the breakup from the AT&T telephone monopoly nearly 20 years ago. From cell phones to faxes, from long distance price wars to the development of the Internet itself, the end of the telephone monopoly brought an explosion of new technologies and services that benefit millions of consumers every day. We should insist on nothing less in this case.

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

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

LEAHY: Thank you.

Senator DeWine?

DEWINE: Mr. Chairman, thank you very much for holding this very important hearing concerning the Department of Justice's proposed final judgment in its case against Microsoft.

Mr. Chairman, as we examine this judgment and attempt to imagine what it will mean for the future of competition in this market, we must keep in mind the serious nature of this case.

According to the D.C. Circuit Court, Microsoft did, in fact, violate our antitrust laws. Their behavior hurt the competitive marketplace. This is something that we must keep in mind as we examine the proposed final judgment.

This hearing is particularly important at this time, because federal law does require the District Court to examine the proposed settlement and determine if it is, in fact, in the public interest.

Federal law clearly allows the public to be heard on such matters. I believe that this forum today will further that process of public discussion.

The Court of Appeals in this case, relying on established Supreme Court case law, explained when appropriate remedy in antitrust case, such as this one, must seek to accomplish. It should unfetter the market and anti-competitive conduct, terminate the illegal monopoly and deny the defendant the fruits of its violations.

It's important, Mr. Chairman, that we examine where the proposed decree would, in fact, accomplish these goals. There seems to be a great deal of disagreement about what the competitive impact of the decree will be. While the proposed settlement, correctly, I believe, focuses primarily on the market for middleware, there has been a great deal of concern raised about the mechanism for enforcing such a settlement. Specifically, I think we need to discuss further whether the public interest would be better served with a so-called special master or some sort of administrative mechanism or whether the Justice Department can be more effective in enforcing the decree on its own.

In addition to the Department of Justice's proposed final judgment, we also have the benefit of another remedy's proposal which has been submitted to the court by nine states that did not join with the antitrust division's proposal. I would like to hear from our witnesses about the role they believe this alternative proposal should play in the ongoing Tunney Act proceedings.

As I mentioned early, Mr. Chairman, the Court of Appeals directed that any remedies should seek to deny Microsoft the fruits of its illegal activities. One clear benefit Microsoft derives from its violations was the effective destruction of Netscape as a serious competitor and a decrease in Java's market presence.

It's obviously impossible to go back in time and resurrect the exact market structure that existed, but it is important to discuss how the proposed settlement deals with this problem.

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

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

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

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

LEAHY: Mr. James, there's a vote on the floor. I think there's about two or three minutes left in the roll call vote. We're going to suspend while we go to vote, but I think...

JAMES: I have a really brief statement. Could I make that before you adjourn?

LEAHY: You can.

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

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

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

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

Thank you very much, Mr. Chairman.

LEAHY: I think, Mr. James, I think you'd know from the comments that we're across the board here. Everybody, or the majority of the people favor a settlement, but I must say that I don't think the majority of the people favor any settlement. They favor a good settlement and that's what the questions will be directed at and that's why nine attorneys general have expressed concern. Nine agreed with the settlement, nine disagreed with the settlement. These are all very good, very talented people.

So, in your testimony when we come back, you've heard a number of the questions that have been raised and we look forward to you responding to them.

We'll stand in recess while we vote.

(RECESS)

LEAHY: Sorry for that.

LEAHY: Mr. James, I should put on for the record, Mr. James has served as the assistant attorney general for the antitrust division since June 2001. He previously served as deputy assistant attorney general for the Antitrust Division for the first Bush administration from 1989 to '92. He served as acting assistant attorney general for several months in '92.

He was then the head of the antitrust practice of Jones Day Reavis & Pogue in Washington. Not knowing what the Senate schedule might be, Mr. James, we'll put your whole statement in the record, of course. I wonder if you might summarize it, but also with some reference to the charge made in the letter to Senator Hatch and myself by Mr. Barksdale, who said. had this been the ground rules -- we never would have been able to get Netscape off the ground had it been the ground rules at the time they began Netscape, they would have never been able to create Netscape. If that is accurate, of course, we've got a real problem,

So, Mr. ,lames, it's all yours.

JAMES: Thank you, Senator Leahy and good morning to you and members of the committee.

I'm pleased to appear before you today to discuss the proposed settlement of our still pending case against Microsoft Corporation.

With me today are Deborah Majoris (ph), my deputy, and Phil Malone (ph), who has been the lead staff lawyer on the Microsoft case from the very beginning. I note their presence here because they were the ones who responded to the judge's order that we negotiate around the clock and I think they've recovered now.

As you know, on November 2, the department and nine states entered into the proposed settlement. We're in the midst of the Tunney Act period, as you know, and that will end at the end of January at which point the District Court will determine whether the settlement is in the public interest. We think that it is.

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

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

The antitrust division complaint had four counts: attempted monopolization of browser market in violation of Section II; individual and competitive acts; and a course of conduct to maintain the operating system monopoly in violation of Section II of the Sherman Act; tying it's own browser to the operating system in violation of Section I; and exclusive dealing in violation of Section I.

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

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

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

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

I recount all of this history to make two basic points that I think are important as we discuss the settlement.

First, the case, even as initially framed by the Department of Justice, was a fairly narrow challenge. It was never a direct assault on the acquisition of the operating system monopoly itself.

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

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

It's probably worth talking just briefly about the monopoly maintenance claim. The claim alleges that Microsoft engages in various anti-competitive practices, the NT, the development of rival web browsers and lava. These products came to be known as middleware and was thought to pose a threat to the operating system monopoly because they had the potential to become platforms for other software applications.

The court noted that the middleware threat was nascent, that is to say that no one could predict when, if ever, enough applications would be written to middleware for it to significantly displace the operating system monopoly.

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

In particular, are our decree contains a very broad definition of middleware that specifically includes a forms of platform software that have been identified as potential operating system threats today and likely to emerge as operating system threats in the future, in the broadest terms types of contractual restrictions and exclusionary arrangements the Court of Appeals found to be unlawful.

The defense is in those prohibitions where the appropriate nondiscrimination and non- retaliation provisions and it creates an environment which middleware developers can create programs that compete with Microsoft on a function -- like function basis to a regime of mandatory API documentation and disclosure.

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

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

I would note, however...

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

JAMES: I will be happy to do so.

And with that, I'd be happy to answer your questions.

LEAHY: Did you have more you wanted to say on the letter before you...

JAMES: No, sir. I'm happy to respond to what you folks want to talk about.

LEAHY: The Department of Justice has been involved in litigation against Microsoft for more than 11 years. I am one of those who had hoped throughout that that the parties might come to some conclusion. I think that it's in the best interest if you can have a fair conclusion; it's the best interests of the consumers, the government, Microsoft, competitors and everybody else.

I have no problem with that, but that presupposes the right kind of settlement. Over the course of those 11 years, the parties entered into one consent decree and that just ended up with a whole lot more litigation over the terms of that consent decree.

I mention that because you take this settlement and its already being criticized by some for the vagueness of its terms and its loopholes. Judge Robert Bork warned that it's and I think I'm quoting him correctly, "likely to guarantee years of additional litigation".

Now, what kind of assurances can you give or what kind of predictions can you give that if this settlement is agreed to by the courts, that we're going to see an end to this litigation, we're going to have to stop this kind of merry go round of Microsoft litigation concerning compliance or even the meanings of the consent decrees. I notice a lot of people in this room on both sides of issue. I have a feeling they are here solely because of their interest in government and not because and not because the meter is running.

A lot of us would like to see this thing end, but why do you feel that this decree, this settlement is so good that it's going to end?

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

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

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

LEAHY: But keep in mind that usually these kinds of decrees, if it's not specifically laid out, the courts tend to decide the vague questions against the government, not for. Fortune Magazine called it and said even the loopholes have loopholes, a pretty strong statement from a very pro-business magazine.

The settlement limits the types of retaliation Microsoft can take against PC manufacturers that want to carry or promote non-Microsoft software, but some would say that gives a green light to other types of retaliation.

Now, I don't know why doesn't the settlement ban all types of retaliation. It has no -- the Court of Appeals, it said twice you commingle the browser and operating system code you violate Section II of the Sherman Act. The proposed settlement contains no prohibit on commingling code. There is no provision barring the commingling of browser code with the operating code.

So, you've got areas where they can retaliate. You don't have the barring of this commingling of code. I mean, are these -- Fortune Magazine, Judge Bork and others justified in thinking there are too many loopholes here, notwithstanding the levels of enforcement.

JAMES: Let me take your points in order -- first on the subject of retaliation.

Retaliation is a defined term in this decree. It's a term that we are using to define a sort of conduct that Microsoft can engage in when it engages in ordinary commercial transactions.

I don't think that there is any scope in the bounds of this case to prohibit Microsoft from engaging in any form of collaborative conduct with anyone in the computer industry.

Certainly, the types of collaborative conduct that are permitted, the so-called "loopholes", are the type of conduct that is permitted under standard Supreme Court law embodied in decisions like broadcast music and NCAA, also embodied in the Federal Trade Commission- Department of Justice joint venture guidelines that sanction forms of conduct, so that we think that antitrust lawyers certainly can understand these types of issues and that we think the courts can understand these types of issues.

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

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

What the Department of Justice wanted was an appropriate as a remove functionality that would give consumers the choice between middleware functionalities. That is exactly the remedy we have here and we think it's an effective remedy.

We've gone beyond that particular aspect of this by including into our decree a specific provision that deals with the question of defaults, in other words, the extent to which a Microsoft middleware -- a non-Microsoft middleware product can take over and be (inaudible) both automatically in place of a Microsoft middleware product. That's something that was not in the earlier decree. It's a step beyond what was included in Judge Jackson's order.

We think that we have addressed the product integration aspects of the Microsoft monopoly made in this claim in exactly the terms that the department has always pursued with regard to that particular issue and we're completely satisfied with that aspect of the relief.

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

Senator DeWine?

DEWINE: Thank you, Mr. Chairman.

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

Netscape, for example, vocally opposed Microsoft during this litigation and many of Netscape's complaints really were validated by the courts. And yet, Netscape ended up losing battle.

This sort of result has led some to question whether our antitrust laws can be effective in this particular industry and I personally believe the antitrust laws are essential to promoting competition within the industry and throughout the country.

But I would like to hear what your views are on this subject. What lessons do you think this case teaches us in regards to that and what do we say to people like Netscape?

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

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

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

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

DEWINE: One provision of the proposed final judgment requires Microsoft to allow consumers or computer manufacturers to enable access to competing products. However, to qualify for these protections, it must have had a million copies distributed in the United States within the previous year.

This would seem to me to run contrary to traditional antitrust philosophy promoting new competition. Why are these protections limited to larger competitors?

JAMES: I'm actually glad you asked that question, Senator, because that's one of the prevailing, I think, misconceptions of the decree,

The provisions of the decree that require Microsoft to allow a OEM placed middleware product on the desktop apply without regard to whether or not that product has been distributed to i million people. That is an absolute requirement.

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

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

But I want to be very clear here, Senator. Every qualifying middleware product without regard to how many copies its distributed, an OEM can place that product on the desktop immediately without regard to this I million threshold. And quite frankly, in today's world, 1 million copies distributed is not a substantial matter. I think in the last year I might have gotten 1 million copies of AOL 5.0 in the mail.

So, I don't think that that's really a very large impediment.

DEWINE: Can I ask one last question?

You've mentioned in a number of provisions the settlement will (inaudible) beyond the four corners of a case. But Microsoft agreed to these conditions anyway. What are they and what is the goal of these provisions?

JAMES: Well, I think one of the most important one is the default provision. As of the time of our original case, these middleware products were fairly simple, operating in a fairly simple way. You went -- you clicked onto that product, you evoked that product and then you used it in whatever way was appropriate.

In today's world, software has changed. We see what they call a more "seamless user interface user experience", and it's necessary for people to operate deeply within the operating system on an integrated basis.

There were allegations that Microsoft overrode consumer choice in these default mechanisms in the case. With regard to each and every one of those instances alleged by the Justice Department, the Justice Department lost. The court found that count for Microsoft.

Notwithstanding that as a matter of fencing in and improving the nature of this decree, we have included into this issue the subject of defaults.

Another important area, I think, is a question of server interoperability and that's a very, very important issue as we see going forward. If you go back and read the complaint in this case, you will find the word "server" almost virtually never appears. There's no sort of very specific allegations that go to this.

We thought that this was an important alternative platform issue. We thought it was important to stretch for relief in this area and we did so and got, I think, relief that is very effective in preserving this as people go into an environment of more distributive web processing.

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

DEWINE: Thank you, Mr. Chairman.

LEAHY: We're checking one -- and I mentioned this to Senator Kohl and Senator Sessions and Senator Cantwell (inaudible) been here to answer questions. We're finding out from the floor (inaudible) there may have been a (inaudible). Any senator has a right under Senate rules to object to committees meeting more than two hours after the Senate goes in session. We're on the farm bill and a number of appropriations and other central matters so that I've been told that a senator has objected, as every senator has a right to do, to its continuance.

And as a result, the good senator said they want us to, contrary to what is going on in the Senate floor, we have to respect the rules of the Senate. I do, and we're going to have to recess this hearing at this time. I'm going to put into the record the statements of all those who have come here to testify.

Senator Hatch and I will try and find a time we might reconvene this hearing because both Senator Hatch and I feel this is a very important hearing. Statements will be placed in the record. The record will be open for questions that might be submitted.

I apologize to everybody. We did not anticipate this. With 100 senators, every so often somebody exercises that rule. I emphasize, senators have the right to exercise that rule, especially when we're in the last three weeks of the session. I think we're going to break for Christmas Day, but we're in the last three weeks of this session and I think senator (inaudible) wants to make sure senators pay attention to (inaudible).

HATCH: Mr. Chairman?

LEAHY: Senator Hatch, we really technically out of time.

HATCH: Mr. Chairman, we are out of time. Any Senator can invoke a two-hour rule and a senator has done that. Fortunately, I think it was against the finance committee markup today, but we reported out to bill anyway right within the time constraint. That's where I went.

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

So, I hope that we can reconvene within a relatively short period of time and continue this hearing, because it is a very, very important hearing and we apologize to you that this happened.

LEAHY: It's out of our hands, but I would normally recess until tomorrow, but tomorrow we have this time for an executive committee meeting of the Judiciary Committee to do as we've done many times already, to vote out a large number of judges.

So, with that, we stand recessed.

(UNKNOWN): Mr. Chairman, just a matter of procedure. I am troubled by what I understand to be a decision to send this transcript to the court as an official document from Congress in the middle of a litigation that's ongoing. I would think that anybody's statement that they gave could be sent to the court. Any senator can write a letter to the court.

LEAHY: I appreciate -- we need to be...

(UNKNOWN): I haven't studied it fully, but as a (inaudible) it troubles me to have a...

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

We stand in recess.

(UNKNOWN): I will be recorded as objecting.

END

NOTES:
???? - Indicates Speaker Unknown
-- - Indicates could not make out what was being said. off mike - Indicates could not make out what was being said.

PERSON: PATRICK J LEAHY (94%); EDWARD M KENNEDY (72%); JOSEPH R BIDEN (57%); DIANNE FEINSTEIN (56%); RICHARD J DURBIN (55%); HIKE DEWINE (55%); ORRIN G HATCH (54%); STROH THURMOND (54%); JOHN EDWARDS (54%); ARLEN SPECTER (53%); JON L KYL (53%); JEFF SESSIONS (52%); HITCH MCCONNELL (51%); HERB KOHL (50%); RICHARD MICHAEL DEWINE (50%);

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Date/Time: Wednesday, January 23, 2002 - 3:59 PM EST

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FRIED
FRANK
HARRIS
SHRIVER &
JACOBSON

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Attorney Database

Charles F. (Rick) Rule is a partner resident in Fried Frank's Washington, DC and New York offices and head of the firm's antitrust practice. He joined the firm in 2001.

Mr. Rule's practice focuses on providing U.S. and international antitrust advice to a variety, of high-profile corporations. counseling, structuring joint ventures (including business-to- business exchanges) and representing major corporations in connection with investigations by the U.S. Department of Justice, the Federal Trade Commission and the European Commission.

Mr. Rule has represented clients such as Eli Lilly & Company, Microsoft Corporation, US Airways Inc., WorldCom, Inc., the National Basketball Association, Goodyear Tire and Rubber Co., and Air Products and Chemicals, Inc. He has also been involved in the antitrust clearance of some of the highest-profile mergers in recent years, including advising NYNEX in its merger with Bell Atlantic (now known as Verizon Communications) and serving as Exxon's lead counsel in its successful merger with Mobil Oil Corporation (now known as ExxonMobil Corporation).

Mr. Rule served as William Baxter's special assistant, in 1982, in the Antitrust Division of the Department of Justice. He served as acting head of the Division for almost half of 1985 and was appointed to the job permanently in late 1986, becoming the youngest person ever to be confirmed to the position of Assistant Attorney General in charge of the Antitrust Division. Mr. Rule continued as the Assistant Attorney General through the remainder of the Reagan Administration and for the first several months of the George Bush, Sr. Administration. He received the Edmund J. Randolph Award from the Department of Justice in 1988. Following his departure from the Justice Department in 1989, Mr. Rule was a partner and head of the antitrust practice at the Washington, DC law firm of Covington & Burling.

Mr. Rule has served as a distinguished adjunct professor of law at American University's Washington College of Law. He was the inaugural chair of the Corporations, Securities and Antitrust Practice Group of the Federalist Society, and, from 1989-91, was chair of the Economics Committee of the ABA Antitrust Section. He is currently a member of the Advisory Board of BNA's Antitrust & Trade Regulation Report and also a member of the advisory boards of the Washington Legal Foundation and the Landmark Legal Foundation.

Mr. Rule is included among the world's leading antitrust lawyers in the Chambers Global 2000-2001 listing. His biography appears in Who's Who in America. Who's Who in the East. Who's Who in American Law and similar publications.

Mr. Rule has written extensively and is a frequent lecturer on a variety, of antitrust and regulatory topics, and he contributes a regular column on antitrust issues to the Daily Deal. (See attached publications list.)

Mr. Rule received his JD in 1981 from the University of Chicago Law School and his BA, summa cure laude, in 1978 from Vanderbilt University. He served as a law clerk for Chief Judge Daniel M. Friedman of the old United States Court of Claims (now the Court of Appeals for the Federal Circuit). He is on the Visiting Committee for the University of Chicago Law School. He is admitted to the bar in the District of Columbia.

Disclaimer. Last updated: August 29, 2001.
Copyright © 2001 Fried Frank Harris Shriver & Jacobson. All rights reserved.

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The New York Times

States Biding for Time to Study Microsoft Settlement Plan

By STEPHEN LABATON

WASHINGTON, Nov. 1 -- The 18 states involved in tile government's landmark antitrust lawsuit against Microsoft rebuffed repeated request,' today by Microsoft and the Justice Department to join the tentative settlement they reached a day earlier.

Concluding a series of meetings in Washington and cross-country telephone calls, the slate prosecutors instead agreed among themselves to ask the federal judge overseeing tile case for time to examine the details of the proposed deal.

The judge, Colleen Kollar-Kotelly of Federal District Court for the District of Columbia, has ordered the lawyers In the case to appear before her on Friday morning to report progress in the mediation proceedings that she set up five weeks ago.

Today Microsoft and senior Justice Department officials engaged with a mediator in shuttle diplomacy, vigorously pressing the states to adopt the agreement, people Involved in the case said.

Under that pressure, leaders of the group struggled to hold together a fragile alliance that was being led from Washington by Tom Miller, the attorney general of Iowa, and Richard Blumenthal, the attorney general of Connecticut. Working from the headquarters here of the National Association of Attorneys General, the two were Joined by lower-level lawyers from other states, including New York and California.

After a conference call this afternoon, the states agreed to have their newly hired lawyer, Brendan Sullivan, ask the judge for more time to consider tile request. The decision was described as unanimous. Pressing hardest for the delay were representatives from California, Connecticut, Massachusetts, Ohio and Wisconsin, according to one lawyer Involved in the case.

Participants described the state officials as wary of accepting a deal before scrutinizing the text of any proposed consent decree, particularly in light of the history of the case. "The last time I saw a public policy issue as important and difficult as Microsoft decided under impossible time constraints and without a chance for adequate public review was when California passed its electricity deregulation bill," said Bill Lockyer, the California attorney general. "I'm not about to stand by and see that happen again."

It was an inartfully drawn consent decree in 1994 that became the center of the initial lawsuit filed by the Justice Department against Microsoft. In that case, Microsoft was accused of violating the terms of the decree by integrating its Internet Explorer browser software into its Windows operating system. The company replied that it had done nothing improper because the decree did not explicitly constrain it from such integration.

The state prosecutors today faced a difficult legal calculation. Several of them were described as being skeptical of the proposed deal but also uncertain whether they would be able to proceed as a group at odds with the federal government.

A break between the states and the Justice Department would throw the case uncharted and possibly ?? legal waters. No agreement ca?? effect without the approval of a??ral judge, and it is impossible to predict how Judge Kollar-Kotelly might react to the concerns of the states.

Nor is it certain whether her approval of a settlement would prevent the states from proceeding with their own antitrust lawsuit against Microsoft To approve the proposed deal struck with the Justice Department, Judge Kollar-Kotelly would have to find that it was in the public interest.

Today's developments capped a remarkable week of behind-the scenes negotiations in Washington. For Microsoft, the main negotiator has been Charles F. Rule of Fried, Frank, Harris, Shriver & Jacobson, a former assistant attorney general in charge of antitrust during the Reagan administration, where he got to know a young colleague working on antitrust issues at the Federal Trade Commission named Charles' A. James. Mr. James, the current head of the antitrust division, is leading the federal government's effort to settle the case.

News of the proposed settlement between Microsoft and the Justice Department propelled the company's stock and contributed to a broader rally in the markets. Microsoft shares rose 6.4 percent, or $3.69, to $61.84.

Some of Microsoft's largest competitors voiced bitter disappointment about the terms of the proposed deal and asserted that the company had used its political influence with a Republican administration to try to quickly put an end to the case.

The rivals said that during court hearings that will be 'required on the proposed settlement, they intended to provide evidence of what they say was an improper discussion between a senior aide to Attorney General John Ashcroft who had been a top official in the Republican Party and a Republican lobbyist for AOL-Time Warner that demonstrated Microsows political muscle. In a statement issued today, Representative John Conyers Jr., Democrat of Michigan, also indicated he would be examining that incident, word of which has been circulating widely in recent days among lawyers, lobbyists and executives following the case.

The aide to Mr. Ashcroft, David Israelite, had been the political director of the Republican National Committee, which received hundreds of thousands of dollars from Microsoft during the 2000 presidential campaign. Mr. Israelite, now Mr. Ashcroft's deputy chief of staff, has recused himself from any involvement in the Microsoft antitrust case because he owns 100 shares of Microsoft stock.

The 1obbyist involved in the discussion was said to be Wayne Berman, who is also a top Republican fundraiser.

According to the notes of a person briefed about the conversation on Oct. 9, the day it is said. to have occurred, Mr. Israelite called Mr. Berman.

"Are you guys behind this business of the states hiring their own lawyers in the Microsoft case?" Mr. Israelite asked Mr. Berman in the predawn conversation, according to the notes. "Tell your clients we wouldn't be too happy about that."

Mr. Israelite purportedly told the AOL lobbyist that the Supreme Court would probably deny a Microsoft appeal later in the day, as the court in fact did, clearing the way for the Justice Department to push hard for a settlement with the company. According to people who were later briefed on the conversation by an AOL executive, Mr. Israelite then complained that AOL, a leading Microsoft rival, had been trying to "radicalize" the states to oppose a settlement.

In recent interviews, both Mr. Israelite and Mr. Berman denied that they had had any conversations about the Microsoft case or that they had talked at all that day.

"I find it offensive if someone has suggested that I violated the terms of my recusal, because I take that very seriously," Mr. Israelite said.

But an AOL executive said he was notified by Mr. Berman about his conversation with Mr. Israelite on Oct. 9, the day it was said to have occurred. Nevertheless, this executive and others at AOL said that upon re-examination of Mr. Berman's initial description of the conversation with Mr. Israelite, the company concluded that the account of the con- versation might not have been reliable enough to justify filing an ethics complaint.

But other industry executives and lobbyists said they thought the conversation had occurred and would ask Judge Kollar-Kotelly to order an inquiry. Today Edward J. Black, president of the Computer and Communications Industry Association, a trade group whose members include many of Microsoft's corporate adversaries, said he and other groups would be raising the incident as part of a court proceeding to consider the merits of the settlement.

"Something is very rotten here," Mr. Black stud. "Israelite is a recused official. He holds Microsoft stock. He raised a lot of money from Microsoft. He steered money into critical states that helped win the election. And then he takes action to help facilitate getting Microsoft out of trouble in an enforcement action."

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