The COurt of Appeals Decision:
First, let me try to post this puppy. It's really long, so I'll do it in multiple posts.
UNITED STATES OF AMERICA, APPELLEE
v.
MICROSOFT CORPORATION, APPELLANT
No. 97-5343 Consolidated with 98-5012
UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF
COLUMBIA CIRCUIT
1998 U.S. App. LEXIS 13242
April 21, 1998, Argued
June 23, 1998, Decided
PRIOR HISTORY: [*1] Appeals from the United States District Court for the District of Columbia. (No. 94cv01564).
DISPOSITION: Reversed and remanded. The reference to the master was in effect the imposition on the parties of a surrogate judge and either a clear abuse of discretion or an exercise of wholly non-existent discretion. Granted mandamus to vacate the reference.
COUNSEL: Richard J. Urowsky argued the cause for appellant. With him on the brief were John L. Warden, Steven L. Holley, Richard C. Pepperman, II, Andrew C. Hruska, James R. Weiss, William H. Neukom and David A. Heiner, Jr.
A. Douglas Melamed, Deputy Assistant Attorney General, U.S. Department of Justice, argued the cause for appellee. With him on the briefs were Joel I. Klein, Assistant Attorney General, Catherine G. O'Sullivan and Mark S. Popofsky, Attorneys.
Daniel E. Lungren, Attorney General of California, James E. Ryan, Attorney General of Illinois, Carla J. Stovall, Attorney General of Kansas, J. Joseph Curran, Jr., Attorney General of Maryland, Scott Harshbarger, Attorney General for the Commonwealth of Massachusetts, Jeremiah W. (Jay) Nixon, Attorney General of Missouri, Joseph P. Mazurek, Attorney General of Montana, Frankie Sue [*2] Del Papa, Attorney General of Nevada, Tom Udall, Attorney General of New Mexico, and W.A. Drew Edmondson, Attorney General of Oklahoma, members of the Bar of this Court, were on the brief of certain States as amici curiae, with whom appeared the various other Attorneys General of the participating States.
JUDGES: Before: WALD, WILLIAMS and RANDOLPH, Circuit Judges. Opinion for the Court filed by Circuit Judge WILLIAMS. Opinion concurring in part and dissenting in part filed by Circuit Judge WALD.
OPINIONBY: WILLIAMS
OPINION: WILLIAMS, Circuit Judge: The district court entered a preliminary injunction prohibiting Microsoft Corporation from requiring computer manufacturers who license its operating system software to license its internet browser as well. In granting the preliminary injunction the court also referred the government's motion for a permanent injunction to a special master. Microsoft appeals the preliminary injunction and applies for a writ of mandamus revoking the reference to a master. We find that the district court erred procedurally in entering a preliminary injunction without notice to Microsoft and substantively in its implicit construction of the consent decree on which [*3] the preliminary injunction rested. We also grant the petition for mandamus and direct the district court to revoke or revise its reference.
I.
This case arises from Microsoft's practices in marketing its Windows 95 operating system. An operating system is, so to speak, the central nervous system of the computer, controlling the computer's interaction with peripherals such as keyboards and printers. Windows 95 is an operating system that integrates a DOS shell with a graphical user interface, i.e., a technology by which the operator performs functions not by typing at the keyboard but by clicks of his mouse. Operating systems also serve as "platforms" for application software such as word processors. As the word "platform" suggests, the operating system provides a basic support structure for an application via "application programming interfaces" ("APIs"), which provide general functions on which applications can rely. Each operating system's APIs are unique; hence applications tend to be written for particular operating systems. The primary market for operating systems consists of original equipment manufacturers ("OEMs"), which make computers, install operating systems and other [*4] software that they have licensed from vendors such as Microsoft, and sell the package to end users. These may be either individual consumers or businesses.
In an earlier opinion, also arising from litigation generated by the Justice Department's 1994 antitrust suit against Microsoft, we briefly described Microsoft's role in the software industry and some of the industry's economics. United States v. Microsoft Corp., 312 U.S. App. D.C. 378, 56 F.3d 1448, 1451-52 (D.C. Cir. 1995). Because IBM chose to install Microsoft's operating system on its personal computers, Microsoft acquired an "installed base" on millions of IBM and IBM-compatible PCs. That base constituted an exceptional advantage, and created exceptional risks of monopoly, because of two characteristics of the software industry--increasing returns to scale and network externalities. First, because most of the costs of software lie in the design, marginal production costs are negligible. Production of additional units appears likely to lower average costs indefinitely. (I.e., the average cost curve never turns upward.) Second, an increase in the number of users of a particular item of software increases the number of other [*5] people with whom any user can share work. As a result, Microsoft's large installed base increases the incentive for independent software vendors to write compatible applications and thereby increases the value of its operating system to consumers.
The Department's 1994 complaint alleged a variety of anticompetitive practices, chiefly in Microsoft's licensing agreements with OEMs. Along with it, the Department filed a proposed consent decree limiting Microsoft's behavior, the product of negotiations between Microsoft, the Department and European competition authorities. Most relevant here is IV(E) of the decree:
Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon:
(i) the licensing of any other Covered Product, Operating System Software product or other product (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products); or
(ii) the OEM not licensing, purchasing, using or distributing any non-Microsoft product.
The Department sees a violation of IV(E)(i) in Microsoft's marketing of Windows 95 and its [*6] web browser, Internet Explorer ("IE").
The Internet is a global network that links smaller networks of computers. The World Wide Web ("the Web") is the fastest-growing part of the Internet, composed of multimedia "pages" written in Hypertext Markup Language ("HTML") and connected to other pages by hypertext links. Browsers enable users to navigate the Web and to access information.
Most browsers are designed according to a "multiplatform" approach, with different versions for each of a variety of different operating systems. Joint Appendix ("J.A.") 81. Browsers also have the potential to serve as user interfaces and as platforms for applications (which could then be written for the APIs of a particular browser rather than of a particular operating system n1), providing some of the traditional functions of an operating system. Widespread use of multi-platform browsers as user interfaces has some potential to reduce any monopoly-increasing effects of network externalities in the operating system market. Browsers can enable the user to access applications stored on the Internet or local networks, or to operate applications that are independent of the operating system. J.A. 103-05.
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n1 Similarly, Sun Microsystems's "Java" programming language allows programmers to write applications that will run on any computer, regardless of the operating system, as long as certain Java-related software (a Java "virtual machine" and Java "class libraries") is present. Internet browsers incorporate the necessary Java-related software, and hence allow Java programs to live up to their "write once, run anywhere" billing.
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Microsoft has developed successive versions of IE, the first of which was initially released with Windows 95 in July 1995. Microsoft's Windows 95 license agreements have required OEMs to accept and install the software package as sent to them by Microsoft, including IE, and have prohibited OEMs from removing any features or functionality, i.e., capacity to perform functions such as browsing. J.A. 86-89.
The first three versions of IE were actually included on the Windows 95 "master" disk supplied to OEMs. Department Br. at 4; J.A. 1277-78. IE 4.0, by contrast, was initially distributed on a separate CD-ROM and OEMs were not required to install it. Microsoft intended to start requiring OEMs to preinstall IE 4.0 as part of Windows 95 in February 1998. On learning of Microsoft's plans, the Department became concerned that this practice violated IV(E)(i) by effectively conditioning the license for Windows 95 on the license for IE 4.0, creating (in its view) what antitrust law terms a "tie-in" between the operating system and the browser. n2 (It is not clear why extension of Microsoft's established IE policy to IE 4.0 aroused the Department's concern.) It filed a petition seeking to [*8] hold Microsoft in civil contempt for its practices with respect to IE 3.0, and requesting "further" that the court explicitly order Microsoft not to employ similar agreements with respect to any version of IE.
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n2 The Department's language suggests that two products, and indeed, two license agreements are at issue. See, e.g., the Department Br. at 4 ("Microsoft conditioned its OEM licenses to Windows 95 on OEMs' licensing Internet Explorer.") It is undisputed that OEMs enter into only one license agreement, which covers IE as part of Windows 95. J.A. 1274. Microsoft's central argument, of course, is that there is only one product. The terminology used in our introductory recitation of facts is of course not intended to resolve, or to reflect any resolution of, contested issues, and no inference as to those issues should be drawn from the wording of this section.
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A party seeking to hold another in contempt faces a heavy burden, needing to show by "clear and convincing evidence" that the alleged contemnor has violated [*9] a "clear and unambiguous" provision of the consent decree. Armstrong v. Executive Office of the President, 303 U.S. App. D.C. 107, 1 F.3d 1274, 1289 (D.C. Cir. 1993). Finding IV(E)(i) ambiguous, the district court denied the Department's contempt petition. But that left open the possibility that Microsoft's practices might in fact violate the consent decree (though not so clearly as to justify contempt), and the district court continued the proceedings in order to answer that question, appointing a special master not only to oversee discovery but also to propose findings of fact and conclusions of law. For the meantime, the court entered a preliminary injunction forbidding Microsoft
from the practice of licensing the use of any Microsoft personal computer operating system software (including Windows 95 or any successor version thereof) on the condition, express or implied, that the licensee also license and preinstall any Microsoft Internet browser software (including Internet Explorer 3.0, 4.0, or any successor versions thereof).
J.A. 1300.
A detour is necessary to explore what this injunction meant. In some of its papers before the court the Department had [*10] argued for an order barring Microsoft from "forcing OEMs to accept and preinstall the software code" that it separately distributes at retail as IE 3.0. J.A. 996. Microsoft had responded that a Windows 95 operating system without IE software code simply would not function. The government characterized that assertion as "greatly overblown." J.A. 1237. The district court, in its justifying memorandum, referred to the injunction as barring Microsoft from "forcing OEMs to accept and preinstall the software code" separately distributed as IE 3.0, J.A. 1296-97; i.e., it employed the Department's exact words on the subject. After the injunction was issued, Microsoft and the Department had further consultations, at the end of which they entered a stipulation that Microsoft would be in compliance with the injunction if it extended to OEMs 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." J.A. 1780-81. It appears not to be disputed that these alternate modes of compliance do not remove the IE software code, which indeed continues [*11] to play a role in providing non-browser functionality for Windows. In fact, browser functionality itself persists, and can be summoned up either by entering four lines of code or by running any application (such as Quicken) that contains the code necessary to invoke the functionality. J.A. 1649-55. The agreed-upon means of compliance simply enable the OEMs to make user access to IE more difficult. n3
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n3 Additionally, by allowing OEMs to conceal IE, rather than to refuse it, the remedy fits poorly with the Department's tying theory. A tie-in is not affected by the purchaser's ability to discard the tied good.
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Microsoft appealed, as authorized by 28 U.S.C. 1292(a)(1), and also sought mandamus directing the district court to revoke the reference to the special master.
II.
Microsoft claims at the outset that the district court, after finding no contempt, should simply have dismissed the Department's petition. But although the petition was styled simply as one for an order to show cause "Why Respondent Microsoft [*12] Corporation Should Not Be Held in Civil Contempt," its prayer for relief sought not only pure contempt remedies (such as the attention-grabbing request for $1,000,000 a day in damages), but also an order directing Microsoft to cease and desist from requiring "OEMs to license any version of Internet Explorer as an express or implied condition of licensing Windows 95." J.A. 41. This was plainly a request for clarification of the consent decree, pinning down its application to the browser issue. Such a clarification may properly take the form of an injunction. See Brewster v. Dukakis, 675 F.2d 1, 3-4 (1st Cir. 1982). Indeed, as a consent decree contains an injunction already, a clarification naturally acquires the same character. (Of course, if the supplementary language goes beyond the consent decree, it is a modification rather than a clarification, and is governed by different standards. See, e.g., United States v. Western Elec. Co., 282 U.S. App. D.C. 271, 894 F.2d 430, 435 (D.C. Cir. 1990) ("Manufacturing Appeal").) Although the framing of this request as part of a remedy for contempt may have been odd, Microsoft does not contest that the proceeding put in controversy [*13] the meaning of IV(E)(i) as applied to its browser technology.
This government request for clarification appeared in its petition shortly after its primary request--that the court adjudge Microsoft to be in contempt--and the word "further." Following "further" are a raft of requests for orders, this being just one. Microsoft says this clearly shows that the request was contingent on a finding of contempt. It further (here, in the sense of "additionally") presses on us some lines from a colloquy between the district court and a Department lawyer during the final hearing (December 5, 1997) before the court made its decision to issue a preliminary injunction:
THE COURT: All right. Let me go to the relief that you have requested here. Your petition is in terms phrased only as a petition for a finding of contempt.
MR. MALONE: That's correct, Your Honor.
THE COURT: We've have [sic] gone beyond the show cause [stage]. They have shown cause, and we're now at the contempt stage.
Is that the only relief that you're looking for, or am I
to read the petition as what I am inclined to read it as, and that is a petition for specific enforcement?
MR. MALONE: I think that is exactly [*14] how the Court should read it, Your Honor. I think we have said, very clearly, in arguing since the beginning that we want the Court--we believe the Court can find Microsoft in contempt and can impose this specific relief to remedy the contempt, and should quickly.
Microsoft has opposed that on merits grounds, but I don't think Microsoft has come along and said, "You can't do that. This is just an order to show cause or something else."
The merits are very much before the Court, and what we're asking is for the specific relief that we requested in the petition.
That really boils down to, Your Honor, simply an order telling Microsoft, "You may no longer force OEMs to take Internet Explorer as a condition of getting your Windows 95 license."
J.A. 1235-36.
In fact we think this dialogue suggests either that the Department's request was always in the alternative or that it modified the request to make it such. "I think that is exactly how the Court should read it" comes in response to a suggestion that the petition be read as a request for specific enforcement, and the interest in clarification is presented as the Department's central concern. J.A. 1295. Given the district [*15] court's participation in the colloquy, we might be inclined, if necessary, to defer to its understanding of the Department's prayer for relief.
Even if we found that the Department's request was in fact contingent on a finding of contempt, however, we do not think the district court would have erred in clarifying the decree sua sponte as an incident to its denial of the contempt petition. Contempt motions are often accompanied by requests for clarification in the alternative. But they also often elicit declaratory clarifications, and sometimes even amendments, as accompaniments to denials even without (so far as appears) explicit alternative requests for clarification. See, e.g., Wilder v. Bernstein, 49 F.3d 69, 71-72 (2d Cir. 1995); Thermice Corp. v. Vistron Corp., 832 F.2d 248, 250-51 (3d Cir. 1987); Gov't of the Virgin Islands v. Sun Island Car Rentals, Inc., 819 F.2d 430, 431 (3d Cir. 1987); Movie Systems, Inc. v. MAD Minneapolis Audio Distributors, Inc., 717 F.2d 427, 429-30 (8th Cir. 1983); Vertex Distributing, Inc. v. Falcon Foam Plastics, Inc., 689 F.2d 885, 888 n.2, 892 (9th Cir. 1982); Stolberg v. Board of Trustees for State Colleges, 541 F.2d [*16] 890, 892 (2d Cir. 1976); Red Ball Int. Demolition Corp. v. Palmadessa, 947 F. Supp. 116, 121 (S.D.N.Y. 1996); Johnson v. Heckler, 604 F. Supp. 1070, 1075-76 (N.D. Ill. 1985).
We are aware of no case raising doubts about the propriety of clarification incident to the denial of a contempt petition. Indeed, at oral argument Microsoft conceded "in principle" the court's authority to continue the proceeding in order to clarify the decree. Transcript at 11. n4 Of course, the above cases characteristically did not explicitly affirm the district court's authority, although one did just that. See Vertex, 689 F.2d at 892 ("The district court could properly clarify that ambiguous language, and this it did, requiring defendants to change their future advertising to comply with the consent judgment, as clarified.").
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n4 Microsoft then grounded its objection on the fact that the Department had urged the court "not to permit discovery, not to conduct an evidentiary hearing and to decide the matter on the papers before the District Court." Id. at 12. These objections, however valid, are completely independent of the theory we address here. As we find the preliminary injunction procedurally defective on other grounds, we need not reach them.
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Microsoft points out that the question of district court authority is jurisdictional, so that mere practice may not be enough. But much repeated practice illumines the generally understood meaning of petitions for contempt citations. A court granting a clarification that the parties have not explicitly requested has at most construed the petition to contain an implicit request for declaratory relief. This construction seems altogether reasonable where, as here, the petition clearly puts the meaning of the consent decree in issue and the petition makes the standard request (in the rather typical words of this petition) for "such further orders as the nature of the case may require and as the Court may deem just and proper to compel obedience to and compliance with the orders and decrees of this Court." J.A. 43. Cf. Johnson, 604 F. Supp. at 1075-76 (denying contempt petition but clarifying decree in response to request for further relief under 28 U.S.C. 2202).
Because it was not error for the court to address the issue of clarification, we must decide whether the preliminary injunction was correctly granted.
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