The COurt of Appeals Decision (Third Post --- The Consent Decree A):
IV.
Section IV(E) arose from a 1993 complaint filed with the Directorate General IV of the European Union ("DG IV") (the principal competition authority in Europe). Novell, a rival software vendor, alleged that Microsoft was tying its MS-DOS operating system to the graphical user interface provided by Windows 3.11. Before the introduction of Windows 95, which integrated the two, Microsoft marketed the DOS component and the Windows component of the operating system separately, and Windows 3.11 could be operated with other DOS products. But Novell, which marketed a competing DOS product, DR-DOS, complained that by means of specific marketing practices--particularly "per processor and per system licenses," J.A. 754--Microsoft was creating economic incentives for OEMs to preinstall MS-DOS as well as Windows 3.11, thereby using its power in the market for DOS-compatible graphical user interfaces (where it commanded a near 100% market share) to affect OEM choice in the DOS market. n8 J.A. 839-48.
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n8 The indirect nature of the alleged tie may explain why IV(E)(i) bars an agreement whose terms are "expressly or impliedly conditioned upon ... the licensing of any other Covered Product."
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During June 1994 negotiations with the Department, Microsoft proposed the possibility of a joint settlement, and representatives of DG IV participated in meetings in Brussels and later in Washington, D.C. On July 15, 1994, the three sides reached agreement and Microsoft and the Department signed a stipulation agreeing to entry of the consent decree, including IV(E). Both Microsoft and the Department characterize IV(E) as an "anti-tying" provision.
Microsoft and the Department engage in a brief battle over the extent to which antitrust law may be relevant to this dispute. Without wasting time on the parties' somewhat exaggerated positions, we can simply say that Microsoft is clearly right that the decree does not embody either the entirety of the Sherman Act or even all "tying" law under the Act, and the Department is equally right to point out that the consent decree emerged from antitrust claims, unresolved though they were, so that we must keep procompetitive goals in mind in the interpretive task.
As Armour makes clear, however, an antitrust consent decree cannot be read as though its animating spirit were solely the antitrust laws. "The decree itself cannot be said [*29] to have a purpose; rather the parties have purposes, generally opposed to each other, and the resultant decree embodies as much of those opposing purposes as the respective parties have the bargaining power and skill to achieve." 402 U.S. at 681-82.
The court's task, then, is to discern the bargain that the parties struck; this is the sense behind the proposition that consent decrees are to be interpreted as contracts. See, e.g., ITT Continental Baking Co., 420 U.S. at 236-37; Richardson, 127 F.3d at 101; Manufacturing Appeal, 894 F.2d at 1390. To find the meaning of an ambiguous provision we look for the intent of the parties, just as we would with a contract. See Western Elec. Co., 12 F.3d at 231-32 (reading ambiguous provision of consent decree "in light of the parties' jointly intended purpose" (internal quotation omitted)); NRM Corp. v. Hercules, Inc., 244 U.S. App. D.C. 356, 758 F.2d 676, 681-82 (D.C. Cir. 1985) (contract interpretation). In that quest we may rely on the same aids to construction as we would when interpreting an ambiguous contract, including "the circumstances surrounding the formation of the consent order." See ITT, 420 U.S. at [*30] 238.
Section IV(E)(i) represented the parties' agreed "solution" to the problem posed by the Novell complaint. The practices complained of there, coupled with the decree's explicit acceptance of Windows 95, establish the competing models that guide our resolution of the present dispute. Whatever else IV(E)(i) does, it must forbid a tie-in between Windows 3.11 and MS-DOS, and it must permit Windows 95. Thus if the relation between Windows 95 and IE is similar to the relation between Windows 3.11 and MS-DOS, the link is presumably barred by IV(E)(i). On the other hand, a counter-analogy is Windows 95 itself, which the decree explicitly recognizes as a single "product" (it defines it as a "Covered Product," II(1)(v)), even though, as we have said, Windows 95 combines the functionalities of a graphical interface and an operating system. If the Windows 95/IE combination is like the MS-DOS/graphical interface combination that comprises Windows 95 itself, then it must be permissible.
The parties offer us little help in picking the correct analogy. Both propose readings of IV(E)(i) that fail to reconcile its language with the facts of the Novell complaint and the later permissible [*31] release of Windows 95. The Department claims that IV(E)(i) prohibits Microsoft from bundling together a Covered Product and anything that "Microsoft simultaneously treats" and "antitrust law regards" as "a distinct commercial product." Department Br. at 37-38. It says that the browser-Windows pair is caught in the first filter (Microsoft's treatment of IE as a separate product) because Microsoft provides it separately to end users, sells versions of IE 4 for different operating systems, advertises IE 4, tracks its performance in a "browser market," and distributes it on a separate CD-ROM. J.A. 32-37. For antitrust criteria, the Department draws on Jefferson Parish Hosp. District No. 2 v. Hyde, 466 U.S. 2, 80 L. Ed. 2d 2, 104 S. Ct. 1551 (1984), for the proposition that products are distinct for tying purposes if consumer demand exists for each separately. (The Department notes correctly that this does not require demand for one product without the other but simply demand for the two products from different sellers. See id. at 19 & n.30.)
We are not convinced that these indicia necessarily point to separateness, especially those that depend on Microsoft's treatment. Microsoft [*32] plausibly characterizes the IE that it provides to end users as an operating system upgrade, as does its rival Netscape, J.A. 589, and the Department offers no means of distinguishing an upgrade from a separate product. Versions developed for different operating systems may be better understood as different products altogether; hence, their relevance to separateness is obscure. Distribution of software code on a separate CD-ROM shows nothing at all about whether the code is integrated into an operating system (software for an operating system that is clearly a single product may take up many disks).
The Department's interpretation of the "integrated products" proviso does nothing to remedy its reading of the body of IV(e)(i). On the Department's account, the proviso allows Microsoft to incorporate new features into an operating system and offer the package to OEMs--as long as it and antitrust law do not simultaneously treat those features as "a distinct commercial product." Department Br. at 37-38. But these are just the criteria deployed to argue that IE is an "other product"; if the proviso merely reiterates them (to say that what is not an "other product" is "integrated"), it [*33] does nothing. And while the Department says that the proviso would protect Microsoft from a charge that it had violated the decree by adopting a technology incompatible with other firms' products, Department Br. at 37 n.17, it is not apparent how IV(E)(i)'s ban might prohibit such conduct nor how, if it did, the proviso on integration would help it. In short, the Department effectively reads the proviso out of IV(e)(i).
But the most immediate problem with this reading is that it produces the wrong result on the Novell allegations. In its attempts to define the "product" IE, the Department consistently invokes the concept of "browser functionality." Department Br. at 10; Department Motion for Contempt, J.A. 1317-19; Department Reply Memorandum in Support of Motion for Contempt, J.A. 1424, 1429. But if functionality is the criterion of identity (which the Department asserts so as to claim that the "browser functionality" in Windows 95 is the same product as IE 4 for other operating systems), Windows 95 looks like a tie-in of two products (MS-DOS and Windows 3.11) that were sold separately in the market: it contains the functionalities of both. On the Department's reading, it should [*34] thus be prohibited unless Microsoft refrains from marketing MS-DOS separately. There is some suggestion that Microsoft has in fact continued to license MS-DOS separately, at least to end users. Microsoft Reply Br. at 1516. More significantly, the consent decree does not condition its approval of Windows 95 on Microsoft's marketing behavior with respect to MS-DOS. The failure to produce the right result when applied to Windows 95, one of the situations clearly resolved by the decree, is a fatal flaw. n9
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n9 In rejecting the Department's use of functionality here we do not mean to suggest that it is never an appropriate criterion of identity. In some contexts it may be appropriate to treat as equivalent two products that supply the same functionality, if they meet the same demand. Computer programs written for different operating systems, however, do not seem to meet the same demand, so that acceptance of functionality as a sufficient criterion of identity would lead to odd results. Here, of course, the decree's acceptance of Windows 95 as a "product" rebuts the Department's view of what is forbidden; one possible explanation might be that functionality works as an initial screen for defining products, but one that is trumped by the "integrated products" proviso.
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The interpretation that Microsoft advances most strongly suffers mirror-image defects: it lacks much logical sense and it fails to fit the decree's setting, the disposition of the Novell complaint. Microsoft stresses IV(E)(i)'s "integrated products" proviso, saying that the addition of any feature to an operating system, as by simply putting the disk containing a compatible application in the same box with the operating system disk and requiring an OEM to install both, creates an integrated product--unless Microsoft also licenses the feature on a stand-alone basis "in the OEM channel."
This interpretation neatly matches the failure of the Department's theory to account for the permissibility of Windows 95: Microsoft's reading would provide zero relief to Novell, for it would allow Microsoft to bundle MS-DOS with Windows 3.11 as long as it did not license MS-DOS separately to OEMs. In short, the Department's reading does not permit Windows 95, and Microsoft's does not prohibit a bundle of Windows 3.11 and MS-DOS. Neither can be the correct interpretation of a provision that was intended to do both.
Curiously, in both parties' readings Microsoft's behavior determines the permissibility [*36] of conditioned licensing. This would be no defect if the behavior were in some way relevant to the economic principles of tie-ins. But it is not. The Department offers no theory as to how a seller's abstaining from separate marketing of the tied good might blunt the possible anticompetitive effects of bundling. n10 It seems especially beside the point where the goods are complements used in fixed proportions. A monopolist who ties two such goods has no obvious reason to market the tied good separately: since all buyers of the tying good will also take the tied good, the residual market for the tied good will be minimal. If the concern is that the tie-in makes it more difficult for competitors to enter the market for the tying good (because they must also offer the tied good), see Grappone, Inc. v. Subaru of New England, 858 F.2d 792, 795-96 (1st Cir. 1988) (Breyer, J.), separate marketing of the tied good actually mitigates the posited harm by facilitating new entry into the market for the tying good. Thus both readings allow legitimation by behavior that is either irrelevant or actively harmful.
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n10 The hospital in Jefferson Parish surely did not offer the tied good (anesthesia) separately from the tying good (surgery), but this fact played no role in the Court's decision.
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We think it quite possible, however, to find a construction of IV(E)(i) that is consistent with the antitrust laws and accomplishes the parties' evident desires on entering the decree. The Department and DG IV were concerned with the alleged anticompetitive effects of tie-ins. Microsoft's goal was to preserve its freedom to design products that consumers would like. Antitrust scholars have long recognized the undesirability of having courts oversee product design, and any dampening of technological innovation would be at crosspurposes with antitrust law. Thus, a simple way to harmonize the parties' desires is to read the integration proviso of IV(E)(i) as permitting any genuine technological integration, regardless of whether elements of the integrated package are marketed separately.
This reading requires us, of course, to give substantive content to the concept of integration. We think that an "integrated product" is most reasonably understood as a product that combines functionalities (which may also be marketed separately and operated together) in a way that offers advantages unavailable if the functionalities are bought separately and combined by the purchaser.
The point [*38] of the test is twofold and may be illustrated by its application to the paradigm case of the Novell complaint and the subsequent release of Windows 95. First, "integration" suggests a degree of unity, something beyond merely placing disks in the same box. If an OEM or end user (referred to generally as "the purchaser") could buy separate products and combine them himself to produce the "integrated product," then the integration looks like a sham. If Microsoft had simply placed the disks for Windows 3.11 and MS-DOS in one package and covered it with a single license agreement, it would have offered purchasers nothing they could not get by buying the separate products and combining them on their own. n11
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n11 The same analysis would apply to peripherals. If, for example, Microsoft tried to bundle its mouse with the operating system, it would have to show that the mouse/operating system package worked better if combined by Microsoft than it would if combined by OEMs. This is quite different from showing that the mouse works better with the operating system than other mice do. Compare Sep. Op. at 1-2. See X Areeda, Antitrust Law P 1746b. Problems seem unlikely to arise with peripherals, because their physical existence makes it easier to identify the act of combination. It seems unlikely that a plausible claim could be made that a mouse and an operating system were integrated in the sense that neither could be said to exist separately. An operating system used with a different mouse does not seem like a different product. But Windows 95 without IE's code will not boot, J.A. 1623, and adding a rival browser will not fix this. If the add/remove utility is run to hide the IE 4 technologies, Windows 95 reverts to an earlier version, OEM service release ("OSR") 2.0. J.A. 1660-61.
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Windows 95, by contrast, unites the two functionalities in a way that purchasers could not; it is not simply a graphical user interface running on top of MS-DOS. Windows 95 is integrated in the sense that the two functionalities--DOS and graphical interface--do not exist separately: the code that is required to produce one also produces the other. Of course one can imagine that code being sold on two different disks, one containing all the code necessary for an operating system, the other with all the code necessary for a graphical interface. But as the code in the two would largely overlap, it would be odd to speak of either containing a discrete functionality. Rather, each would represent a disabled version of Windows 95. The customer could then "repair" each by installing them both on a single computer, but in such a case it would not be meaningful to speak of the customer "combining" two products. Windows 95 is an example of what Professor Areeda calls "physical or technological interlinkage that the customer cannot perform." X Areeda, Antitrust Law 1746b at 227, 228 (1996).
So the combination offered by the manufacturer must be different from what the purchaser could [*40] create from the separate products on his own. The second point is that it must also be better in some respect; there should be some technological value to integration. Manufacturers can stick products together in ways that purchasers cannot without the link serving any purpose but an anticompetitive one. The concept of integration should exclude a case where the manufacturer has done nothing more than to metaphorically "bolt" two products together, as would be true if Windows 95 were artificially rigged to crash if IEXPLORE.EXE were deleted. Cf. ILC Peripherals Leasing Corp. v. International Business Machines Corp., 448 F. Supp. 228, 233 (N.D. Cal. 1978) ("If IBM had simply bolted a disk pack or data module into a drive and sold the two items as a unit for a single price, the 'aggregation' would clearly have been an illegal tying arrangement.") aff'd per curiam sub nom. Memorex Corp. v. International Business Machines Corp., 636 F.2d 1188 (9th Cir. 1980); X Areeda, Antitrust Law P 1746 at 227 (discussing literal bolting). Thus if there is no suggestion that the product is superior to the purchaser's combination in some respect, it cannot be deemed integrated. n12
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n12 Thus of course we agree with the separate opinion that "commingling of code ... alone is not sufficient evidence of true integration." Sep. Op. at 4. Commingling for an anticompetitive purpose (or for no purpose at all) is what we refer to as "bolting."
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It might seem difficult to put the two elements discussed above together. If purchasers cannot combine the two functionalities to make Windows 95, it might seem that there is nothing to test Windows 95 against in search of the required superiority. But purchasers can combine the functionalities in their stand-alone incarnations. They can install MS-DOS and Windows 3.11. The test for the integration of Windows 95 then comes down to the question of whether its integrated design offers benefits when compared to a purchaser's combination of corresponding stand-alone functionalities. The decree's evident embrace of Windows 95 as a permissible single product can be taken as manifesting the parties' agreement that it met this test.
The short answer is thus that integration may be considered genuine if it is beneficial when compared to a purchaser combination. But we do not propose that in making this inquiry the court should embark on product design assessment. In antitrust law, from which this whole proceeding springs, the courts have recognized the limits of their institutional competence and have on that ground rejected theories of "technological tying." A court's evaluation of a claim [*42] of integration must be narrow and deferential. n13 As the Fifth Circuit put it, "Such a violation must be limited to those instances where the technological factor tying the hardware to the software has been designed for the purpose of tying the products, rather than to achieve some technologically beneficial result. Any other conclusion would enmesh the courts in a technical inquiry into the justifiability of product innovations." Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307, 1330 (5th Cir. 1976).
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n13 The separate opinion seems to take this reluctance to engage in the evaluation of product design as deference to Microsoft's interpretation of the consent decree. See Sep. Op. at 2-3. It is nothing of the sort. We defer to neither party in interpreting the consent decree; in fact, we reject both parties' readings. We suggest here only that the limited competence of courts to evaluate high-tech product designs and the high cost of error should make them wary of second-guessing the claimed benefits of a particular design decision.
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In fact, Microsoft did, in negotiations, suggest such an understanding of "integrated." In response to the Department and DG IV's statement of concern about tying, it asserted its right to "continue to develop integrated products like [Windows 95] that provide technological benefits to end users." J.A. 756 (emphasis added). Microsoft later withdrew this qualifying phrase, J.A. 760, in order, it claims, to avoid the application of "vague or subjective criteria"--though why the absence of criteria should cure a vagueness problem is unclear. But we do not think that removing the phrase can drain the word "integrated" of all meaning, and we do not accept the suggestion that the Department and DG IV bargained for an "integrated products" proviso so boundless as to swallow IV(E)(i). Significantly, Microsoft assured the Department and DG IV that the elimination of the qualifying phrase "did not represent a substantive change." J.A. 761.
We believe this understanding is consistent with tying law. The Court in Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451, 119 L. Ed. 2d 265, 112 S. Ct. 2072 (1992), for example, found parts and service separate products because sufficient [*44] consumer demand existed to make separate provision efficient. See id. at 462. But we doubt that it would have subjected a self-repairing copier to the same analysis; i.e., the separate markets for parts and service would not suggest that such an innovation was really a tie-in. (The separate opinion, we take it, makes roughly the same point by its observation about digital cameras. See Sep. Op. at 3-4.) Similarly, Professor Areeda argues that new products integrating functionalities in a useful way should be considered single products regardless of market structure. See X Areeda, Antitrust Law P 1746b. n14
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n14 The antitrust question is of course distinct. The parties agree that the consent decree does not bar a challenge under the Sherman Act.
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We emphasize that this analysis does not require a court to find that an integrated product is superior to its stand-alone rivals. See ILC Peripherals Leasing Corp. v. International Business Machines Corp., 458 F. Supp. 423, 439 (N.D. Cal. 1978) ("Where there [*45] is a difference of opinion as to the advantages of two alternatives which can both be defended from an engineering standpoint, the court will not allow itself to be enmeshed 'in a technical inquiry into the justifiability of product innovations.'") (quoting Leasco, 537 F.2d at 1330), aff'd per curiam sub nom. Memorex Corp. v. IBM Corp., 636 F.2d 1188 (9th Cir. 1980). We do not read IV(E)(i) to "put[ ] judges and juries in the unwelcome position of designing computers." IX Areeda, Antitrust Law P 1700j at 15. The question is not whether the integration is a net plus but merely whether there is a plausible claim that it brings some advantage. Whether or not this is the appropriate test for antitrust law generally, we believe it is the only sensible reading of IV(E)(i). |
