The court of Appeals Decision (Post Six -- Concurrence by Judge Wald-A)
CONCURBY: WALD (In Part)
DISSENTBY: WALD (In Part)
DISSENT: WALD, Circuit Judge, [*67] concurring in part and dissenting in part: I depart from my colleagues only as to their interpretation of the consent decree, which I believe unnecessarily narrows the scope of the inquiry that the district court may conduct on remand. First, the majority opinion appears to decide that there is only one reasonable interpretation of section IV(E)(i), notwithstanding the fact that we are remanding for further factual development that may well be relevant to the most faithful interpretation of the section. Second, although the majority claims to have rooted its interpretation in antitrust law in accordance with the intent of the parties, it interprets section IV(E)(i) in a way that is, in fact, inconsistent with at least some governing precedent. For these reasons, I write separately to suggest that there may be an interpretation of section IV(E)(i) more consonant with the intent of the drafters and the weight of antitrust law. If facts are found on remand to support such an alternative interpretation, it should not be foreclosed by the majority opinion.
Under the majority's interpretation, the proviso of section IV(E)(i), which says that section IV(E)(i) "in and of itself shall not [*68] be construed to prohibit Microsoft from developing integrated products," is too safe a harbor with too easily navigable an entrance: So long as Microsoft has created a design to combine functionalities in a way that offers the ultimate user some "plausible" advantage otherwise unavailable, Microsoft may require OEMs to install the resulting creation in its entirety, without fear of running aground on the main prohibition of section IV(E)(i) (which prohibits Microsoft from entering into any license agreement "in which the terms of that agreement are expressly or impliedly conditioned upon" the licensing of any "other product"). To my mind, this reading does not impose nearly enough scrutiny on "integration" and renders the central prohibition of section IV(E)(i) largely useless. Cf. Beal Mortgage, Inc. v. FDIC, 132 F.3d 85, 88 (D.C. Cir. 1998) (noting the "cardinal interpretive principle that we read a contract to give meaning to all of its provisions and to render them consistent with each other") (internal quotation omitted). The majority's interpretation would not, for example, appear to prevent Microsoft from requiring OEMs to license the right to sell computer peripherals ( [*69] e.g., mice) as a condition of licensing Windows 95 so long as Microsoft had the prescience to include code in Windows 95 that made the cursor more responsive to the enduser's touch than it would be with other mice. I think the majority would agree, however, that under any reasonable reading of section IV(E)(i), the tying of mice to Windows 95 would clearly be prohibited. n1 I fail to see why the analysis should be so different for software than for peripherals or why our "evaluation of a claim of integration must be [any more] narrow and deferential," Maj. Op. at 25, for software than for other computer-related products. See, e.g., Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 112, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989) (courts construe contractual provisions "without deferring to either party's interpretation"). Our role, after all, is to interpret the consent decree as we would a contract: in a manner that is "grounded in the text of the agreement and contemporaneous understandings of its purposes, not in our own conception of wise policy." United States v. Western Elec. Co., Inc., 269 U.S. App. D.C. 436, 846 F.2d 1422, 1427 (D.C. Cir. 1988).
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n1 The majority asserts that if 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," a test that is "different from showing that the mouse works better with the operating system than other mice do." Majority Opinion ("Maj. Op.") at 23 n.11. But this seems to me to misstate the majority's own test, which asserts that "the act of combination is the creation of the design that knits the two together" and not which firm's employees effect the physical combination. Id. at 28-30. If this is the case, then the majority's test would consider whether the design that "knits together" Microsoft's mouse and the operating system offers advantages unavailable through the combination of a competitor's mouse and the operating system. This is, I think, a standard easily met. For instance, Microsoft could develop a mouse with a patented, modestly useful feature, design its operating system to work best when used with a mouse that had this feature, and then require OEMs to buy the two products together. The mouse and the operating system would qualify as integrated under the majority's test. The majority says that IE 4.0 and Windows 95 are integrated because the "full functionality of the operating system when upgraded by IE 4 and the 'browser functionality' of IE 4 ... do not exist separately." Id. at 29. Likewise, the full functionality of the patented mouse and Microsoft's mouse-friendly operating system would not exist separately; the two would be designed for each other, and their full functionality would only exist when combined. Thus, under the majority's test, Microsoft would have avoided the effect of section IV(E)(i) altogether, even if its patented mouse was of little extra value to the user. I would not think that the proviso was intended to swallow the consent decree in this way.
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Another--some might say more--reasonable reading of section IV(E)(i) would give much greater weight to the main prohibition of the section. On its face, that prohibition forbids Microsoft from requiring OEMs to accept under one agreement any offering that is in reality two products: a "Covered Product" and, for purposes of this case, an "other product." The proviso, on the other hand, permits Microsoft to develop and license "integrated" products. n2 Read together, I think the prohibition and the proviso could reasonably be construed to state that Microsoft may offer an "integrated" 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.
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n2 The proviso states only that Microsoft is permitted to "develop" integrated products, but the parties agree that "develop" should not be limited to mere research and development.
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As I explain below, and as I read the majority opinion to agree, the consent [*71] decree was drafted against a backdrop of antitrust law. Under antitrust law, two products are considered distinct if there exists "sufficient consumer demand so that it is efficient for a firm to provide [the first product] separately from [the second]." Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 462, 119 L. Ed. 2d 265, 112 S. Ct. 2072 (1992). The difficulty in this case is that technological evolution can change the boundaries of what is "efficient." For example, Eastman Kodak cites cameras and film as examples of two functionally linked products for which there exist separate markets. See id. at 463. But antitrust law presumably would not bar the development of digital cameras, which do not require film in any conventional sense.
Thus, antitrust law cannot avoid determining whether a particular technological development has occurred because it is efficient or merely because it permits a monopolist to extend its monopoly to a new market. Software code is a particularly stark example of why such analysis is essential if antitrust concepts are to survive at all. Here, the majority effectively exempts software products from antitrust analysis by [*72] stating that "software code by its nature is susceptible to division and combination in a way that physical products are not." Maj. Op. at 28. But this to me is an argument for closer, rather than more relaxed, scrutiny of Microsoft's claims of integration. An operating-system designer who wished to turn two products into one could easily commingle the code of two formerly separate products, arranging it so that "Windows 95 without IE's code will not boot," id. at 23 n.11, so that Windows 95 without Internet Explorer would "represent a disabled version of Windows 95," id. at 23, and so that Internet Explorer instructs the Add/Remove function to leave so much of that program in place that "four lines of programming" will suffice to activate it, see id. at 29 n.17. This is not to say that commingling of code is per se pernicious or even suspicious. Rather, the point is that commingling alone is not sufficient evidence of true integration; the courts must consider whether the resulting product confers benefits on the consumer that justify a product's bridging of two formerly separate markets.
Although this task is difficult, it is by no means the impossible project that [*73] the majority suggests. As I explain below, traditional antitrust analysis, and the usual methods of the law, provide the courts with a range of ways to address the ultimate question of efficiency. See, e.g., PSI Repair Servs., Inc. v. Honeywell, Inc., 104 F.3d 811, 817 (6th Cir. 1997), cert. denied, 138 L. Ed. 2d 195, 117 S. Ct. 2434 (1997) (citation omitted) ("While we are mindful of the various efficiency gains that can accrue to both suppliers and consumers from bundling certain products together, we are confident that the antitrust laws provide the tools to distinguish between meritorious and non-meritorious claims."). As I see it, the efficiency calculus takes two factors into account. The first is evidence that there are real benefits to the consumer associated with integrating two software products; I call these benefits "synergies." n3 The second is independent evidence, of the type that is usually employed in antitrust analysis, that a genuine market exists for the two products provided separately. For example, Windows 95 includes a built-in calculator program with relatively few functions. Although there may be few synergies associated with building this program into [*74] the operating system, there is also not likely to be much of a market for this program provided separately, and this factor must be taken into account. Market evidence of demand for independent products will spare the courts from the need to speculate in the abstract about considerations of efficiency.
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n3 The majority questions the institutional competence of the courts to judge the level of synergy provided by an "integrated" product. See Maj. Op. at 25. By no means do I endorse routine judicial intervention in the details of product design. But I also do not endorse (as the majority comes close to doing) judicial abdication in the face of complexity. The courts are certainly capable of determining whether a particular integration offers any synergistic benefits at all and whether these benefits are minimal, significant, or great. As this is a factual determination, they may be guided in this effort by, for example, affidavits, consumer surveys, and other evidence presented by the parties as well as testimony from experts selected by the parties or by the court. Certainly this approach is preferable to the majority's proposal, under which antitrust law surrenders to any bona fide assertion of a "plausible" benefit of integration.
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Taken together, then, these two factors generate a balancing test. The greater the evidence of distinct markets, the more of a showing of synergy Microsoft must make in order to justify incorporating what would otherwise be an "other" product into an "integrated" whole. If the evidence of distinct markets is weak, then Microsoft can get by with a fairly modest showing (although perhaps not the minimal showing required by the majority). But if there are clearly two distinct markets, then Microsoft would need to demonstrate substantial synergies in order to compel OEMs to accept a new "integrated" product that bridges those markets. In other words, the decree does not purport to chill Microsoft's technological development of its products by prohibiting a product outright merely because it incorporates new features--the proviso makes clear that Microsoft is free to design such products and to market their benefits to OEMs such that OEMs overwhelmingly choose the new product over a competitor's product. n4 The proviso thus becomes a safe harbor only for those integrations in which the "other product" has been (legitimately) technologically subsumed in a greater whole. n5
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n4 During his tenure as special master in this case, Lawrence Lessig offered a similar, although not identical, interpretation of section IV(E)(i) in a letter that has been made part of the record in this appeal. See Letter from Lessig to Malone et al., January 19, 1998 (asserting that the prohibition of section IV(E)(i) forbids only tying through contract; it does not, as the proviso makes clear, forbid tying through technological efforts). The fact that Professor Lessig has proposed this quite plausible alternate interpretation of section IV(E)(i) does not, of course, suggest that his interpretation is the only acceptable one--that is a matter for the proceedings on remand to determine. [*76]
5 The majority expresses puzzlement as to how a section "that (1) articulates a prohibition and (2) sets a limit on the reach of the prohibition" can be read to state a balancing test. Maj. op. at 31. As I read section IV(E)(i), its application turns on distinguishing two products from a single, integrated product. The section surely requires that the product be legitimately integrated; otherwise, section IV(E)(i) would have no force. One plausible interpretation of the decree is that it refers the court to antitrust law to decide whether a product is legitimately integrated; in these circumstances, the antitrust analysis requires balancing. For my part, I am at a loss to understand how a consent decree that is clearly intended to limit Microsoft's conduct could be read to impose so little scrutiny of that conduct.
One might ask why, under my proposed reading, section IV(E)(i) contains a proviso at all. I think it possible that the proviso was intended, "in the intensely lawyered atmosphere surrounding this decree, to make assurance doubly sure," United States v. Western Elec. Co., Inc., 304 U.S. App. D.C. 199, 12 F.3d 225, 238 (D.C. Cir. 1993) (Williams, J., dissenting)--in other words, that it was a lawyerly redundancy. I do not think, however, that it is necessary to read the proviso as serving so limited a function. Under my reading, the proviso serves to clarify that the prohibition of section IV(E)(i) is not boundless--that a product is not barred simply because it contains new combinations of previously existing functionalities. The proviso thus functions to eliminate one possible reading of section IV(E)(i). Given that the proviso is cast in terms of interpretation-it says that section IV(E)(i) "shall not be construed" to bar integrated products--it is appropriate to accord it this limited, interpretive function.
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Thus, the real question for purposes of determining if a violation of the degree has taken place is whether a new combination of formerly separate functionalities still contains an "other product" or if the two functionalities have been legitimately blended, or "integrated," and so have lost their former identities and become one product to which the prohibition no longer applies. (This, of course, is a factual question to be explored on remand.) As I have already suggested, and as the majority agrees, given the context in which section IV(E)(i) arose, it is appropriate to look to antitrust law as a guide to determining when such integration occurs. Although the majority opinion claims that its construction is consistent with antitrust law, see Maj. Op. at 22, it does not, in my view, give due weight to the Supreme Court's holding in Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 80 L. Ed. 2d 2, 104 S. Ct. 1551 (1984), the leading guide to the separate product determination. n6 In Jefferson Parish, the Court considered whether anesthesiological services, which a hospital had required patients to take only from certain anesthesiologists, were in fact separate [*78] products from the other services provided by the hospital or, rather, were part of what the hospital claimed was a "functionally integrated package of services." Id. at 19. In rejecting the hospital's argument that such a package did not involve a tying arrangement, the Court held that "the answer to the question whether one or two products are involved turns not on the functional relation between them, but rather on the character of the demand for the two items." Id. Thus, the fact that the hospital provided "the space, equipment, maintenance, and other supporting services necessary to operate the anesthesiology department," purchased the necessary drugs and supplies, and furnished the required nursing personnel, id. at 6, did not prevent a finding of separateness, nor did the district court's conclusion that the hospital believed that a "closed system" anesthesiology department "resulted in the best quality of patient care." Hyde v. Jefferson Parish Hosp. Dist. No. 2, 513 F. Supp. 532, 540 (E.D. La. 1981). In other words, despite the overlap between the services provided by the hospital and those provided by the anesthesiologist, and despite the claimed benefits [*79] of an "integrated" relationship, the Court held that the proper focus of analysis was whether the arrangement tied two distinct markets for products that are separate from the buyer's perspective. See Jefferson Parish, 466 U.S. at 19-20 (citing Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 97 L. Ed. 1277, 73 S. Ct. 872 (1953), and Fortner Enters. v. United States Steel Corp., 394 U.S. 495, 22 L. Ed. 2d 495, 89 S. Ct. 1252 (1969)). It is not clear to me why this analysis should be markedly less applicable in the technological context; indeed, the post-Jefferson Parish trend is to apply its test even in the technological realm. See, e.g., Allen-Myland, Inc. v. International Bus. Machs. Corp., 33 F.3d 194, 211-12 (3d Cir. 1994) (computer parts and installation); Service & Training, Inc. v. Data Gen. Corp., 963 F.2d 680, 684 (4th Cir. 1992) (diagnostic software and maintenance/repair service); Digidyne Corp. v. Data Gen. Corp., 734 F.2d 1336, 1339 (9th Cir. 1984) (central processing units and operating system); cf. Jefferson Parish, 466 U.S. at 25 n.42 ("In the past, we have refused to tolerate manifestly anticompetitive conduct simply because [*80] the health care industry is involved.").
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n6 The majority rejects DOJ's contention that a product is separate if Microsoft so treats it, see Maj. Op. at 19-20, but it does not address the government's associated contention that a product is separate if antitrust law so treats it, see id. at 19 (noting DOJ's citation of Jefferson Parish).
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The tying analysis is, of course, a pragmatic one. For example, no one would claim that tying law was violated by the practice of selling shoes in pairs despite the possible existence of some market for only left shoes (among those with only one foot, for example, or with differently sized feet). Likewise, it is in all likelihood not a tying violation for Jefferson Parish's hospital to require that patients accept the hospital's receptionists (instead of bringing their own) and accept the cleaning services and meals provided in their rooms (instead of making other arrangements) and to charge patients for these services. This is so even though there might be a [*81] limited group of patients who would prefer to make their own arrangements for receptionists, cleaning, and meals. Cf. Jefferson Parish., 466 U.S. at 22 n.36 (noting that the antitrust analysis might differ for "radiologists, pathologists, and other types of hospital-based physicians"); see also Jack Walters & Sons Corp. v. Morton Bldg., Inc., 737 F.2d 698, 703 (7th Cir. 1984) (noting that "the practice has been to classify a product as a single product if there are rather obvious economies of joint provision"). In the case of the shoes, the receptionist, and the cleaning, a judgment is made that the benefits of joint provision clearly predominate over what is undoubtedly a minimal separate market (if one can be said to exist at all). In the case of the anesthesiologist, by contrast, the Court found that the claimed benefits--24-hour anesthesiology coverage, flexible scheduling, and facilitation of work routine, professional standards, and equipment maintenance--were not sufficient to justify joint provision because there was a very substantial market for anesthesiologists' services and because these benefits could be achieved without the forced tie (by, for example, promoting [*82] the benefits of the hospital's anesthesiologists to patients and setting standards of compatibility). See Jefferson Parish, 466 U.S. at 25 n.42. Under this doctrine, then, an "integrated" product cannot simply be one where some benefit exists as a result of joint provision, since the hospital easily met this standard. Rather, "integration" must mean something more: a combination of functionalities in which the synergies created predominate over the existence of a separate market--in other words, where the benefits of the combination dissuade consumers from seeking and suppliers from providing the alleged "tied" product. n7
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n7 As to the majority's observation that a product is not "integrated" if OEMs could perform the integration equally well on their own, my only comment is that this is an obvious point, and I am unclear what it adds to the analysis. A synergy should only count as such if it has benefits that the purchaser could not achieve equally well on his own. For example, there are synergistic benefits to combining cookies and milk, but a consumer can achieve them perfectly well at home. Thus, a supermarket could not ordinarily invoke this synergy as a justification for requiring cookies and milk to be bought together.
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This alternative interpretation of section IV(E)(i) also accommodates the majority's "paradigm" case. The mere provision of Windows 3.11 and DOS 6.22 as a single product may have created some benefits--reduction of transaction costs, guaranteed compatibility, and a single source of customer support services, for example. These benefits were not, however, enough to overwhelm the existence of a separate operating system market--indeed, the very presence of Novell's product as an operating system to be used with Windows 3.11 suggests the existence of such a market. See, e.g., J.A. 845 (DG IV Statement of Objections) ("Such tying affects the competitive freedom of the licensee to find a better substitute or obtain better terms for the operating system to be used with Windows."). Windows 95, however, is a different matter. In that case, the whole is clearly greater than the sum of its parts--as the majority notes, "it is not simply a graphical user interface running on top of MS-DOS." Maj. Op. at 23. And it is clear on the present record that Microsoft, at least, understood Windows 95 to provide such benefits. See, e.g. J.A. 1101 (Microsoft's "Windows 95 Feature Review") ("When [*84] you first boot Windows 95 it is immediately apparent that the old world of Windows running on top of MS-DOS is no more."). Thus, the synergistic benefits appear to have been large enough so that it would have been reasonable for DOJ to agree to treat Windows 95 as an integrated product. n8
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n8 The majority objects that there is no evidence that Microsoft and DOJ subjected Windows 95 to a balancing analysis. Maj. Op. at 31-32. Because of the procedural posture of this case, however, there is little evidence of any kind in the record as to what the parties to the consent decree intended. There is certainly no indication that Microsoft and DOJ subjected Windows 95 to the majority's minimal test.
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