The Court of Appeals Decision (Post four -- The Consent Decree-B):
On the facts before us, Microsoft has clearly met the burden of ascribing facially plausible benefits to its integrated design as compared to an operating system combined with a stand-alone browser such as Netscape's Navigator. n15 Incorporating browsing functionality into the operating system allows applications to avail themselves of that functionality without starting up a separate browser [*46] application. J.A. 944, 965. n16 Further, components of IE 3.0 and even more IE 4-especially the HTML reader--provide system services not directly related to Web browsing, enhancing the functionality of a wide variety of applications. J.A. 607-22, 1646-48. Finally, IE 4 technologies are used to upgrade some aspects of the operating system unrelated to Web browsing. For example, they are used to let users customize their "Start" menus, making favored applications more readily available. J.A. 490-95; 1662-64. They also make possible "thumbnail" previews of files on the computer's hard drive, using the HTML reader to display a richer view of the files' contents. J.A. 1664-69. Even the Department apparently concedes that integration of functionality into the operating system can bring benefits; responding to a comment on the proposed 1994 consent decree (which the Department published in the Federal Register as required by the Tunney Act), it stated that "a broad injunction against such behavior generally would not be consistent with the public interest." 59 Fed. Reg. 59426, 59428 (Nov. 17, 1994).
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n15 This issue is peripheral on the Department's interpretation of IV(E)(i), and the Department may not have contested it as vigorously as it might. The guidance this opinion seeks to provide is limited to setting out the legal framework for analysis. The ultimate sorting out of any factual disputes is a different question, and one we of course cannot resolve on the limited record before us. [*47]
n16 It is possible, of course, for applications vendors to bring about this Microsoft-created integration by distributing IE with their applications, which is apparently a relatively common practice. See J.A. 953, 966. Distribution by application vendors does not affect the conclusion that the integrated design brings benefits, nor does it suggest that IE has an existence apart from Windows 95. The consequence of this practice is simply that such applications upgrade the purchaser's operating system to the Windows 95/IE level. The customer's act of installing the application implements Microsoft's prior integration of IE into Windows 95.
The record also suggests that there are some inefficiencies associated with application vendors' redistribution of IE code. Application vendors' affidavits assert that if the browser is installed in computers before sale, "installation of our product is faster, we have reduced product support issues, the perceived footprint (memory use) of our product is smaller, and in general customer perception of our product is better." J.A. 953, 966. Although the drawbacks of installation by applications vendors can be alleviated by OEMs' preinstalling an integrated operating system containing IE technologies, the drawbacks are not necessary consequences of a standalone design, but rather incidental costs of a particular method of bringing about the benefits of integration, namely, distribution of code by applications vendors. Thus they are not relevant to our comparison of the stand-alone and integrated designs.
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The conclusion that integration brings benefits does not end the inquiry we have traced out. It is also necessary that there be some reason Microsoft, rather than the OEMs or end users, must bring the functionalities together. See X Areeda, Antitrust Law P 1746b at 227; P 1747 at 229. Some more subtleties emerge at this stage, parallel to those encountered in determining the integrated status of Windows 95. Microsoft provides OEMs with IE 4 on a separate CD-ROM (a fact to which the Department attaches great significance). It might seem, superficially, that the OEM is just as capable as Microsoft of combining the browser and the operating system.
But the issue is not which firm's employees should run particular disks or CD-ROMs. A program may be provided on three disks--Windows 95 certainly could be--but it is not therefore three programs which the user combines. Software code by its nature is susceptible to division and combination in a way that physical products are not; if the feasibility of installation from multiple disks meant that the customer was doing the combination, no software product could ever count as integrated. The idea that in installing IE 4 an OEM is combining [*49] two stand-alone products is defective in the same way that it would be nonsensical to say that an OEM installing Windows 95 is itself "combining" DOS functionality and a graphical interface. As the discussion above indicates, IE 3 and IE 4 add to the operating system features that cannot be included without also including browsing functionality. See J.A. 1661-68. Thus, as was the case with Windows 95, the products--the full functionality of the operating system when upgraded by IE 4 and the "browser functionality" of IE 4-do not exist separately. n17 This strikes us as an essential point. If the products have no separate existence, it is incorrect to speak of the purchaser combining them. Purchasers who end up with the Windows 95/IE package may have installed code from more than one disk; they may have taken the browser out of hiding; 18 they may have upgraded their operating system--indeed, Netscape characterizes the installation of IE 4 as "really an OS [operating system] upgrade." J.A. 589. But they have not combined two distinct products.
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n17 Our colleague's separate opinion suggests that IE may be separated from Windows 95 by treating some or all of the code that supplies operating system functionality as part of the operating system. Sep. Op. at 15. But apart from that code, there is nothing more to IE than the four lines of programming required to summon browsing functionality from code that also supplies operating system functionality. J.A. 1654. Those four lines look more like a key to opening IE than anything that could plausibly be considered IE itself. [*50]
n18 The preliminary injunction, as construed by the parties' later stipulation, treats Microsoft as in compliance if it allows the options of (1) running the Add/Remove Programs utility with respect to IE 3.x and (2) removing the IE icon from the desktop and from the Programs list in the Start menu and marking the file IEXPLORE.EXE "hidden." See above at p. 7. The injunction's evidently unique status as a remedy for a "tying" complaint, requiring the defendant merely to allow an intermediary to hide the allegedly tied product, suggests the oddity of treating as separate products functionalities that are integrated in the way that Windows 95 and IE are.
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What, then, counts as the combination that brings together the two functionalities? Since neither fully exists separately, we think the only sensible answer is that the act of combination is the creation of the design that knits the two together. OEMs cannot do this: if Microsoft presented them with an operating system and a stand-alone browser application, rather than with the interpenetrating design of Windows 95 and IE 4, the OEMs could [*51] not combine them in the way in which Microsoft has integrated IE 4 into Windows 95. They could not, for example, make the operating system use the browser's HTML reader to provide a richer view of information on the computer's hard drive, J.A. 1665--not without changing the code to create an integrated browser. This reprogramming would be absurdly inefficient. Consequently, it seems clear that there is a reason why the integration must take place at Microsoft's level. This analysis essentially replays our comparison of Windows 95 to a bundle of MS-DOS and Windows 3.11 and concludes that the Windows 95/IE package more closely resembles Windows 95 than it does the bundle. The factual conclusion is, of course, subject to reexamination on a more complete record. On the facts before us, however, we are inclined to conclude that the Windows 95/IE package is a genuine integration; consequently, IV(E)(i) does not bar Microsoft from offering it as one product.
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A few words with respect to our colleague's separate opinion may clarify our position. Judge Wald suggests that "the prohibition and the proviso could reasonably be construed to state that Microsoft may offer an 'integrated' [*52] product to OEMs under one license only if the integrated product achieves synergies great enough to justify Microsoft's extension of its monopoly to an otherwise distinct market." Sep. Op. at 3. We are at a loss to understand how a section that (1) articulates a prohibition and (2) sets a limit on the reach of the prohibition n19 can be read to state a balancing test. Apart from the lack of textual support, we think that a balancing test that requires courts to weigh the "synergies" of an integrated product against the "evidence of distinct markets," Sep. Op. at 5, is not feasible in any predictable or useful way. Courts are ill equipped to evaluate the benefits of high-tech product design, n20 and even could they place such an evaluation on one side of the balance, the strength of the "evidence of distinct markets," proposed for the other side of the scale, seems quite incommensurable. Both Jefferson Parish and Eastman Kodak use their "distinct markets" analysis in a binary fashion: markets are distinct or they are not. See 466 U.S. at 21-22; 504 U.S. at 462. If, as the record suggests, Microsoft proposed modification of the integration proviso because of concern about "vague [*53] or subjective criteria," J.A. 760, an interpretation requiring courts to weigh evidence that establishes distinctness (or does not) against a sliding scale of net synergistic value looks like the most total transvaluation one can imagine.
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n19 The proviso may be read to do this either by clarifying the concepts of "Covered Product" and an "other product" to prevent an "integrated" product from constituting a forbidden duo, or by carving out an exception for integrated products even if they otherwise represent such a duo. We do not believe that the choice of approach makes a substantive difference.
n20 Our colleague seems to hint that one way to perform this evaluation is to examine whether the integrated product "overwhelms" the separate market. Sep. Op. at 10. But data on market performance will obviously not be available when the new product is introduced, and in any case, the overwhelming of the separate market is precisely what is feared and may simply indicate anticompetitive practices.
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Institutional [*54] competence may not have been foremost in the parties' minds in drafting the consent decree, and judicial inability to apply a test does not ipso facto mean that the parties did not intend it. But if they did intend a balancing test, they kept that intent well hidden. Nothing in their contemporaneous conduct (or in the conduct of anyone, at any time) suggests that they contemplated a balancing inquiry. Windows 95 was not subjected to any such analysis, though the markets it unified were substantial and obviously distinct. J.A. 790-96. Indeed, one might think that an especially compelling case would be required to "justify Microsoft's extension of its monopoly," Sep. Op. at 3, via Windows 95. Windows 95 leveraged Microsoft's Windows 3.11 market power into the operating system market, where network externalities are most apparent. See Microsoft, 56 F.3d at 1451. According to the separate opinion, Windows 95 should have required the utmost justification. But nothing suggests that it was analyzed that way, and it seems more likely that it passed muster not because the synergies of its integration outweighed the evidence of distinct markets but because it was, simply, integrated.
The [*55] view expressed in the separate opinion seems sure to thwart Microsoft's legitimate desire to continue to integrate products that had been separate--and hence necessarily would have been provided in distinct markets. By its very nature "integration" represents a change from a state of affairs in which products were separate, to one in which they are no longer. By focusing on the historical fact of separate provision, the separate opinion puts a thumb on the scale and requires Microsoft to counterbalance with evidence courts are not equipped to evaluate. We do not think that this makes sense in terms of the text of the consent decree, the evidence of the parties' intents, the values the decree was presumably intended to promote, or the competence of the judiciary.
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At this stage, then, the Department has not shown a reasonable probability of success on the merits. Given this failure, there is no reason to allow the preliminary injunction to remain in effect pending a proper hearing, and we reverse the district court's grant.
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