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ORAL ARGUMENT SCHEDULED FOR FEBRUARY 26-27, 2001

FINAL VERSION

Nos. 00-5212, 00-5213

IN THE UNITED STATES COURT OF APPEALS FOR THE
DISTRICT OF COLUMBIA CIRCUIT

UNITED STATES OF AMERICA and STATE OF NEW YORK, et al.,

Plaintiff-Appellees,

MICROSOFT CORPORATION,

Defendant-Appellant

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

BRIEF FOR APPELLEES UNITED STATES AND THE STATE PLAINTIFFS

ELIOT SPITZER
   Attorney General of the
  State of New York
PREETA D. BANSAL
  Solicitor General
HARRY FIRST
  Assistant Attorney General
MELANIE L. OXHORN
  Assistant Solicitor General
RICHARD L. SCHWARTZ
  Assistant Attorney General
   120 Broadway
   New York, New York 10271
JAMES E. DOYLE
  Attorney General of Wisconsin
KEVIN J. O'CONNOR
  Lead State Counsel
  Office of Attorney General
  State Capitol, Suite 114 East
  Madison WI 53707-7857
   (608) 266-8986

A. DOUGLAS MELAMED
  Acting Assistant Attorney General
JEFFREY H. BLATTNER
  Deputy Assistant Attorney General
JEFFREY P. MINEAR
DAVID C. FREDERICK
  Assistants to the Solicitor General
MARY JEAN MOLTENBREY
   Director, Civil Non-Merger
  Enforcement
CATHERINE G. O'SULLIVAN
ROBERT B. NICHOLSON
DAVID E. BLAKE-THOMAS
JOHN F. COVE, JR.
SUSAN M. DAVIES
ADAM D. HIRSH
ANDREA LIMMER
PHILLIP R. MALONE
DAVID SEIDMAN
CHRISTOPHER SPRIGMAN
  Attorneys
   Department of Justice
   Washington D.C. 20530
   (202) 514-2413

CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

All parties, intervenors and amici appearing before the district court and in this court are listed in the Brief for Appellant.
References to the rulings at issue appear in the Brief for Appellant.
This case was previously before this Court in Nos. 98-5399 and 98-5400, United States v. Microsoft Corp., 165 F.3d 952 (D.C. Cir. 1999).
There are no other related cases currently pending in this Court or in any other court.

TABLE OF CONTENTS

CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

TABLE OF CONTENTS

TABLE OF AUTHORITIES

GLOSSARY

STATEMENT AS TO STATUTES AND REGULATIONS

STATEMENT OF ISSUES

STATEMENT OF THE CASE

Introduction
Course Of Proceedings

Statement Of Facts

Microsoft's Operating System Monopoly
1. The Market
2. The Applications Barrier To Entry
Combating The Middleware Threats

SUMMARY OF ARGUMENT

ARGUMENT

STANDARD OF REVIEW

MICROSOFT VIOLATED SECTION 2 OF THE SHERMAN ACT THROUGH A COURSE OF ANTICOMPETITIVE CONDUCT THAT MAINTAINED ITS OPERATING SYSTEM MONOPOLY
MICROSOFT ATTEMPTED TO MONOPOLIZE THE BROWSER MARKET
1. Microsoft's Proposal To Netscape In June 1995 Constituted Attempted Monopolization
2. Microsoft's Pattern Of Conduct Following Netscape's Failure To Accept Its Proposal Constituted Attempted Monopolization
MICROSOFT VIOLATED SECTION 1 OF THE SHERMAN ACT BY TYING INTERNET EXPLORER TO WINDOWS
THE DISTRICT COURT DID NOT COMMIT REVERSIBLE ERROR IN THE SCHEDULING OR CONDUCT OF THE PROCEEDINGS ON LIABILITY
1. The District Court Did Not Abuse Its Discretion In Managing Its Docket
2. The District Court Did Not Rely On Inadmissible Hearsay In Making Any Essential Finding Of Fact
THE DISTRICT COURT PROPERLY ORDERED STRUCTURAL AND CONDUCT REMEDIES AND FOLLOWED APPROPRIATE PROCEDURES IN DOING SO
1. The District Court Did Not Abuse Its Discretion In Ordering The Remedy
  1. Divestiture Of Microsoft Into "OpsCo" And "AppsCo"
  2. Conduct Restrictions
2. The District Court Did Not Err By Entering Its Decree Without A Separate Evidentiary Hearing On Remedy
JUDGE JACKSON'S OUT-OF-COURT COMMENTS DO NOT MERIT VACATING THE JUDGMENT OR REMOVING HIM FROM FURTHER PROCEEDINGS

CONCLUSION

ADDENDUM A Statutes And Regulations

ADDENDUM B Index To The District Court's Findings Of Fact

ADDENDUM C Witnesses, Deponents, And Others Named In This Brief

TABLE OF AUTHORITIES

(Authorities upon which we chiefly rely are marked with an asterisk)

Cases

A.H. Cox & Co. v. Star Mach. Co., 653 F.2d 1302 (9th Cir. 1981)

AD/SAT v. Associated Press, 181 F.3d 216 (2d Cir. 1999)

Adams v. Hinchman, 154 F.3d 420 (D.C. Cir. 1998)

Advanced Computer Servs. of Mich., Inc. v. MAI Sys. Corp., 845 F. Supp. 356 (E.D. Va. 1994)

Advanced Health-Care Servs. v. Radford Cmty. Hosp., 910 F.2d 139 (4th Cir. 1990)

Am. Can Co. v. Mansukhani, 814 F.2d 421 (7th Cir. 1987)

Am. Prof'l Testing Serv., Inc. v. Harcourt Brace Jovanovich Legal & Prof'l Publ'ns, Inc.,

108 F.3d 1147 (9th Cir. 1997)

Am. Tobacco Co. v. United States, 328 U.S. 781 (1946) (67%)

Amadeo v. Zant, 486 U.S. 214 (1988)

Anderson v. City of Bessemer City, 470 U.S. 564 (1985)

* Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)

Ass'n for Intercollegiate Athletics for Women v. NCAA, 735 F.2d 577 (D.C. Cir. 1984)

Atari Games Corp. v. Oman, 888 F.2d 878 (D.C. Cir. 1989)

Atchinson v. District of Columbia, 73 F.3d 418 (D.C. Cir. 1996)

Bailey v. Fed. Nat'l Mortgage Ass'n, 209 F.3d 740 (D.C. Cir. 2000)

Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325 (7th Cir. 1986).

Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1993)

Berry v. District of Columbia, 833 F.2d 1031 (D.C. Cir. 1987)

BMI v. CBS, 441 U.S. 1 (1979)

Brown Shoe Co. v. United States, 370 U.S. 294 (1962)

C.E. Servs., Inc. v. Control Data Corp., 759 F.2d 1241 (5th Cir. 1985)

Cal. Computer Products, Inc. v. IBM Corp., 613 F.2d 727 (9th Cir. 1979)

Cardinal Films, Inc. v. Republic Pictures Corp., 148 F. Supp. 156 (S.D.N.Y. 1957)

Carey Can., Inc. v. Columbia Cas. Co., 940 F.2d 1548 (D.C. Cir. 1991)

Caribbean Broad. Sys., Ltd. v. Cable & Wireless PLC, 148 F.3d 1080 (D.C. Cir. 1998)

Citizen Publ'g Co. v. United States, 394 U.S. 131 (1969)

City of Anaheim v. S. Cal. Edison, 955 F.2d 1373 (9th Cir. 1992)

City of Groton v. Conn. Light & Power Co., 662 F.2d 921 (2d Cir. 1981)

Coastal Fuels of P.R., Inc. v. Caribbean Petroleum Corp., 79 F.3d 182 (1st Cir. 1996)

Comm. for Creative Non-Violence v. Reid, 846 F.2d 1485 (D.C. Cir. 1988)

Concord Boat Co. v. Brunswick Corp., 207 F.3d 1039 (8th Cir.), cert. denied,

121 S. Ct. 428 (2000).

Conoco Inc. v. Inman Oil Co., 774 F.2d 895 (8th Cir. 1985)

* Cont'l Ore Co. v. Union Carbide & Carbon Co., 370 U.S. 690 (1962).

* Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147 (1st Cir. 1994)

* Davoll v. Webb, 194 F.3d 1116 (10th Cir. 1999)

Dial A Car, Inc. v. Transp., Inc., 82 F.3d 484 (D.C. Cir. 1996)

* Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992)

Eli Lilly & Co. v. Generix Drug Sales, Inc., 460 F.2d 1096 (5th Cir. 1972)

Ford Motor Co. v. United States, 405 U.S. 562 (1972)

Foster v. Md. State Sav. & Loan Ass'n, 590 F.2d 928 (D.C. Cir. 1978)

Gen. Elec. Co. v. Joiner, 522 U.S. 136 (1997)

Gen. Indus. Corp. v. Hartz Mountain Corp., 810 F.2d 795 (8th Cir. 1987)

Gilliam v. ABC, Inc., 538 F.2d 14 (2d Cir. 1967)

Gracen v. Bradford Exch., 698 F.2d 300 (7th Cir. 1983)

* Greater Kan. City Laborers Pension Fund v. Superior Gen. Contractors, Inc.,

104 F.3d 1050 (8th Cir. 1997)

H.J., Inc. v. Int'l Tel. & Tel. Corp., 867 F.2d 1531 (8th Cir. 1989)

Halberstam v. Welch, 705 F.2d 472 (D.C. Cir. 1983)

Harris v. Rivera, 454 U.S. 339 (1981)

Image Technical Servs. v. Eastman Kodak, 125 F.3d 1195 (9th Cir. 1997)

* In re Barry, 946 F.2d 913 (D.C. Cir. 1991)

* In re Fine Paper Antitrust Litig., 685 F.2d 810 (3d Cir. 1982)

In re IBM Peripheral EDP Devices Antitrust Litig., 481 F. Supp. 965 (N.D. Cal. 1979)

In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir.),

petition for cert. filed, 69 U.S.L.W. 3087 (July 11, 2000) (No. 00-62),

Ind. Grocery, Inc. v. Super Valu Stores, Inc., 864 F.2d 1409 (7th Cir. 1989)

* Int'l Boxing Club of N.Y., Inc. v. United States, 358 U.S. 242 (1959)

Int'l Salt Co. v. United States, 332 U.S. 392 (1947)

* Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984)

LaShawn v. Barry, 87 F.3d 1389 (D.C. Cir. 1996)

Lee v. A.R.T. Co., 125 F.3d 580 (7th Cir. 1997)

* Liteky v. United States, 510 U.S. 540 (1994)

Lone Star Steakhouse & Saloon, Inc. v. Alpha of Va., Inc., 43 F.3d 922 (4th Cir. 1995)

Los Angeles Land Co. v. Brunswick Corp., 6 F.3d 1422 (9th Cir. 1993)

LucasArts Entm't Co. v. Humongous Entm't Co., 870 F. Supp. 285 (N.D. Cal. 1993)

M & M Med. Supplies & Serv., Inc. v. Pleasant Valley Hosp., Inc., 981 F.2d 160 (4th Cir. 1992)

Mass. Mut. Life Ins. Co. v. Ludwig, 426 U.S. 479 (1976)

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986)

Milmark Servs., Inc. v. United States, 731 F.2d 855 (Fed. Cir. 1984)

Montgomery County Ass'n of Realtors, Inc. v. Realty Photo Master Corp.,

878 F. Supp. 804 (D. Md. 1995)

Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal & Prof'l Publ'ns, Inc.,

63 F.3d 1540 (10th Cir. 1995)

Multi-Med. Convalescent & Nursing Ctr. of Towson v. NLRB, 550 F.2d 974 (4th Cir. 1977)

N. Pac. R. Co. v. United States, 356 U.S. 1 (1958).

Nat'l Bank of Commerce v. Shaklee Corp., 503 F. Supp. 533 (W.D. Tex. 1980)

Nat'l Soc'y of Prof'l Eng'rs v. United States, 435 U.S. 679 (1978)

NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85 (1984)

* Neumann v. Reinforced Earth Co., 786 F.2d 424 (D.C. Cir. 1986)

Northeastern Tel. Co. v. AT&T Co., 651 F.2d 76 (2d Cir. 1981)

Otter Tail Power Co. v. United States, 410 U.S. 366 (1973)

Palmer v. BRG of Ga., Inc., 498 U.S. 46 (1990)

Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989 (2d Cir. 1974)

Re/Max Int'l, Inc. v. Realty One, Inc., 173 F.3d 995 (6th Cir. 1999)

Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421 (9th Cir. 1995)

Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989)

* Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986)

Roy B. Taylor Sales, Inc. v. Hollymatic Corp., 28 F.3d 1379 (5th Cir. 1994)

S. Pac. Communications Co. v. AT&T, 740 F.2d 980 (D.C. Cir. 1984)

Schine Chain Theatres, Inc. v. United States, 334 U.S. 110 (1948)

SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981)

Simpson v. Union Oil Co. of Cal., 377 U.S. 13 (1964)

Sitka Sound Seafoods, Inc. v. NLRB, 206 F.3d 1175 (D.C. Cir. 2000)

Socialist Workers Party v. Ill. State Bd. of Elections, 566 F.2d 586 (7th Cir. 1977)

Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984)

* Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993)

Standard Oil Co. v. United States, 221 U.S. 1 (1911)

Stearns Airport Equip. Co., Inc. v. FMC Corp., 170 F.3d 518 (5th Cir. 1999)

Sun Microsystems, Inc. v. Microsoft Corp., 21 F. Supp. 2d 1109 (N.D. Cal. 1998),

vacated, 188 F.3d 1115, 1123 (9th Cir. 1999),

on remand, 87 F. Supp. 2d 992, 998 (N.D. Cal. 2000)

Swift & Co. v. United States, 196 U.S. 375 (1905)

Taylor Publ'g Co. v. Jostens, Inc., 216 F.3d 465 (5th Cir. 2000)

Tendler v. Jaffe, 203 F.2d 14 (D.C. Cir. 1953)

Times-Picayune Publ'g Co. v. United States, 345 U.S. 594 (1953)

U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589 (1st Cir. 1993)

United States ex rel. Modern Elec., Inc. v. Ideal Elec. Sec. Co., 81 F.3d 240 (D.C. Cir. 1996)

United States v. Alcoa, 148 F.2d 416 (2d Cir. 1945)

United States v. Alcoa, 91 F. Supp. 333 (S.D.N.Y. 1950)

* United States v. Am. Airlines, Inc., 743 F.2d 1114 (5th Cir. 1984)

United States v. Am. Tobacco Co., 221 U.S. 106 (1911)

United States v. AT&T, 552 F. Supp. 131 (D.D.C. 1982),

aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983)

* United States v. Barry, 961 F.2d 260 (D.C. Cir. 1992)

United States v. Bausch & Lomb Optical Co., 321 U.S. 707 (1944).

United States v. Crescent Amusement Co., 323 U.S. 173 (1944)

United States v. E.I. du Pont de Nemours & Co., 177 F. Supp. 1 (N.D. Ill. 1959)

* United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956)

* United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316 (1961)

United States v. Griffith, 334 U.S. 100 (1948)

* United States v. Grinnell Corp., 384 U.S. 563 (1966)

United States v. Haldeman, 559 F.2d 31 (D.C. Cir. 1976)

United States v. Loew's Inc., 371 U.S. 38 (1962)

United States v. Matlock, 415 U.S. 164 (1974)

* United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998)

United States v. Microsoft Corp., 1998-2 Trade Cas. (CCH) ¶ 72,261 (D.D.C. 1998)

United States v. Microsoft Corp., 84 F. Supp. 2d 9 (D.D.C. 1999) (Findings of Fact)

United States v. Microsoft Corp., 87 F. Supp. 2d 30 (D.D.C. 2000) (Conclusions of Law)

United States v. Microsoft Corp., 97 F. Supp. 2d 59 (D.D.C. 2000) (Remedy Order)

United States v. National Lead Co., 332 U.S. 319 (1947)

United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948)

United States v. Prod. Plated Plastics, Inc., 762 F. Supp. 722 (W.D. Mich. 1991)

United States v. Studiengesellschaft Kohle, m.b.H, 670 F.2d 1122 (D.C. Cir. 1981)

United States v. Syufy Enters., 903 F.2d 659 (9th Cir. 1990)

United States v. Taylor, 487 U.S. 326 (1988)

United States v. U.S. Gypsum Co., 340 U.S. 76 (1950)

United States v. U.S. Gypsum Co., 438 U.S. 422 (1978)

United States v. United Shoe Mach. Corp., 391 U.S. 244 (1968)

United States v. W. Elec. Co., 900 F.2d 283 (D.C. Cir. 1990)

United States v. Ward Baking Co., 376 U.S. 327 (1964)

United States v. Westinghouse Elec. Corp., 648 F.2d 642 (9th Cir. 1981)

W. Parcel Express v. UPS, 190 F.3d 974 (9th Cir. 1999)

Walsh v. Schlecht, 429 U.S. 401 (1977)

WGN Cont'l Broad. Co. v. United Video, Inc., 693 F.2d 622 (7th Cir. 1982)

William Inglis & Sons Baking Co. v. ITT Cont'l Baking Co., 668 F.2d 1014 (9th Cir. 1982)

Woods v. Bourne Co., 60 F.3d 978 (2d Cir. 1995)

Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969)

Statutes & Rules

15 U.S.C. 1

15 U.S.C. 2

17 U.S.C. 101

17 U.S.C. 102

17 U.S.C. 106

175 F.R.D. 363 et seq. (1998)

28 U.S.C. 455

Fed. R. Civ. P. 1

Fed. R. Civ. P. 52

Fed. R. Evid. 106

Fed. R. Evid. 611

Fed. R. Evid. 703

Fed. R. Evid. 803

Treatises & Other Authorities

Phillip E. Areeda et al., Antitrust Law

Steve Ballmer, The Microsoft Suit, Wash. Post, Jan. 24, 2000, at A20

Robert H. Bork, The Antitrust Paradox (1993)

Joel Brinkley, A Microsoft Remedy: Antitrust Experts Offer

Prescriptions, N.Y. Times, Nov. 15, 1999, at C1

Joel Brinkley, U.S. and 17 States Ask Judge to Cut Microsoft in 2 Parts;

Serious Curbs Also Sought, N.Y. Times, Apr. 29, 2000, at A1

Joel Brinkley, U.S. Hires Advisory Firm in Microsoft Case,

N.Y. Times, Dec. 3, 1999, at C2

Joel Brinkley & Steve Lohr, Microsoft and U.S. Unable to

Reach Antitrust Accord, N.Y. Times, Apr. 2, 2000, at A1

Joel Brinkley & Steve Lohr, U.S. v. Microsoft (2000)

Rajiv Chandrasekaran, Justice Dept. Hires Firm to Study

Microsoft 'Remedies,' Wash. Post, Dec. 3, 1999, at E3

Dartmouth Alumni Mag. Nov./Dec. 2000, at 44

James V. Grimaldi, Microsoft Filing Critical of Judge,

Wash. Post, Nov. 28, 2000, at E1

James V. Grimaldi, Microsoft Judge Says Ruling at Risk,

Wash. Post, Sept. 29, 2000, at E1

John E. Lopatka & William H. Page, A (Cautionary) Note

on Remedies in the Microsoft Case, Antitrust, Summer 1999, at 25 138

Manual for Complex Litigation (Third) (1995)

Report of the Judicial Conference Committee on Codes of Conduct (Sept. 1992)

R. Craig Romaine & Steven C. Salop, Slap Their Wrists?

Tie Their Hands? Slice Them into Pieces? Alternative Remedies

for Monopolization in the Microsoft Case, Antitrust, Summer 1999, at 1

Peter Spiegel, Microsoft Judge Defends Post-Trial Comment, Fin. Times, Oct. 6, 2000, at 4

Wright & Miller, Federal Practice and Procedure § 6026

GLOSSARY

ACT	Amici Association for Competitive Technology and Computing Technology Industry Association
ACT Br.	ACT's amicus brief, November 27, 2000.
AOL	America Online, Inc., an online service (OLS). FF 15 (JA 2252).
API	Application programming interface. APIs "exposed" by a computer program, such as an operating system or middleware, provide other computer programs with means of access to blocks of code that perform particular tasks, such as displaying text on the computer screen. FF 2 (JA 2250).
CL	Conclusions of law. The district court's April 3, 2000 order, 87 F. Supp. 2d 30 (D.D.C. 2000) (JA 2410-37).
DX	Defendant's exhibit in the district court.
FF	Findings of fact. The district court's November 5, 1999 order, 84 F. Supp. 2d 9 (D.D.C. 1999) (JA 2247-350).
FJ	Final Judgment, 97 F. Supp. 2d 59, 63-74 (D.D.C. 2000) (JA 2845-56).
GX	Plaintiffs' exhibit in the district court.
Hollaar Br.	Amicus brief of Dr. Lee Hollaar, December 27, 2000.
HTML	Hypertext Markup Language. The language to create Web pages with hyperlinks and markup for formatting. FF 233 (JA 2305).
IAP	Internet access provider. Includes ISPs and OLSs, which provide computer users with access to the Internet. FF 15 (JA 2252).
ICP	Internet content provider. Individuals and organizations that have established a presence, or "site," on the Web by publishing a collection of Web pages. FF 13 (JA 2252).
IE	Internet Explorer, Microsoft's Web browser. FF 17 (JA 2252).
Intel- compatible PC	A PC designed to use a microprocessor in, or compatible with, Intel's 80x86/Pentium microprocessor family. FF 3 (JA 2250-51).
Internet	A global electronic network of computers. FF 11 (JA 2251).
ISP	Internet service provider, such as MindSpring or Netcom, which provides Internet access to subscribers. FF 15 (JA 2252).
ISV	Independent software vendor. A developer of applications. FF 28 (JA 2255).
Java	A programming language and related middleware that enable applications written in that language to run on different operating systems. FF 73 (JA 2267).
JVM	Java Virtual Machine. A program that translates Java bytecode (which a Java compiler has produced from sourcecode written in the Java language) into instructions that the operating system can understand. FF 73 (JA 2267).
Middleware	Software that relies on the APIs provided by the operating system on which it runs, but also exposes its own APIs. FF 28 (JA 2255).
MS Br.	Microsoft's opening brief in this Court, November 27, 2000.
Navigator	Netscape Communications Corporation's Web browser. FF 17 (JA 2252).
NSP	Native Signal Processing. NSP software enables Intel microprocessors to perform certain tasks (useful for advanced video and graphics performance) usually carried out by separate chips called "digital signal processors." FF 95 (JA 2272).
OEM	Original equipment manufacturer. FF 10 (JA 2251). In this brief, a manufacturer of PCs.
OLS	An online service that provides Internet access, various other services, and an array of proprietary content to subscribers. FF 15 (JA 2252).
OS or Operating System	A software program that controls the allocation and use of computer resources. FF 2 (JA 2250).
PC	Personal computer. A digital information processing device designed for use by one person at a time. FF 1 (JA 2250).
Platform	Software, like an operating system or middleware, that exposes APIs. FF 2, 69 (JA 2250, 2266).
Port, or Porting	Adapting an application program written for one OS to run on a different OS. FF 4 (JA 2251).
Remedy Order	District Court's June 7, 2000 decision on remedy, 97 F. Supp. 2d 59, 59-63 (D.D.C. 2000) (JA 2841-45).
RX	Plaintiffs' remedy exhibit in the district court.
Web	The World Wide Web. A massive collection of digital information resources stored on servers throughout the Internet, typically provided in the form of hypertext documents, commonly referred to as "Web pages." FF 12 (JA 2251).
Web Browser (or Browser)	Software that enables a user to select, retrieve, and perceive resources on the Web. FF 16 (JA 2252). In this brief, the term "browser" by itself means "Web browser."
Windows	A family of software packages produced by Microsoft, each including an operating system. The principal members of this family for purposes of this case are Windows 95, Windows 98, and successors, which include operating systems for Intel-compatible PCs. FF 6-8 (JA 2251).

STATEMENT AS TO STATUTES AND REGULATIONS

Pertinent statutes and regulations are bound with this brief as Addendum A. Except for the items in Addendum A, all applicable statutes, etc., are contained in the Brief for Appellant.

STATEMENT OF ISSUES

Whether Microsoft violated Section 2 of the Sherman Act, 15 U.S.C. 2, by engaging in a course of exclusionary conduct that protected and maintained its personal computer operating system monopoly.
Whether Microsoft violated Section 2 of the Sherman Act, 15 U.S.C. 2, by attempting to monopolize the market for Web browsers.
Whether Microsoft violated Section 1 of the Sherman Act, 15 U.S.C. 1, by tying its Internet Explorer Web browser to its Windows operating system.
Whether any of the district court's procedural and evidentiary rulings constituted an abuse of discretion requiring reversal of the judgment.
Whether the district court abused its discretion by ordering structural separation of Microsoft into two entities and transitional restrictions on its conduct.
Whether the district court's extrajudicial comments about the case require vacating the judgment or removing the district judge.

STATEMENT OF THE CASE

A. Introduction

The United States and numerous States (collectively, the government) sued Microsoft Corporation to enjoin it from violating antitrust laws that embody fundamental principles of lawful competition. The government proved at trial that Microsoft had engaged in a broad pattern of anticompetitive conduct to eradicate a developing threat to its monopoly power in its core business personal computer operating systems and that Microsoft's conduct had harmed consumers. Findings of Fact (FF), United States v. Microsoft Corp., 84 F. Supp. 2d 9 (D.D.C. 1999) (JA 2247-2350). The district court determined that Microsoft's conduct violated Section 1 and Section 2 of the Sherman Act, 15 U.S.C. 1, 2, as well as analogous state laws. Conclusions of Law (CL), United States v. Microsoft Corp., 87 F. Supp. 2d 30 (D.D.C. 2000) (JA 2410-37). The court's judgment imposed a remedy to stop the violations and restore competitive conditions in the marketplace. United States v. Microsoft Corp., 97 F. Supp. 2d 59 (D.D.C. 2000) (Remedy Order) (JA 2841-56).

The government's case at trial and the district court's findings of fact and conclusions of law focused on Microsoft's unlawful campaign to maintain its monopoly power in violation of Section 2. The evidence demonstrated that Microsoft engaged not just in aggressive, lawful competition, but also in predatory conduct to thwart the development of emerging technologies that would allow "applications," such as word processors, spreadsheets, games, and other useful programs, to be written so they would run on operating systems other than Microsoft's "Windows" without costly adaptation. The evidence showed that Microsoft acted out of concern that those technologies would erode the "applications barrier to entry" that protected its Windows monopoly.

Microsoft specifically set out to protect its monopoly from erosion by two "middleware" technologies Netscape's Navigator Web browser and Sun's Java software. Those technologies had the potential to enable software developers to design a single version of an application that would run on a wide variety of operating systems. The increased availability of software that could run on operating systems other than Windows would have made alternative operating systems more attractive to consumers and would thus have eroded Windows' market dominance. In effect, Microsoft sought by anticompetitive means to insulate its operating system monopoly from the kinds of technological and entrepreneurial changes that have characterized other parts of the industry. The evidence further established that, in the course of taking unlawful steps to maintain its Windows monopoly, Microsoft engaged in tying and in attempted monopolization of the browser market in violation of Sections 1 and 2 of the Sherman Act.

In response to the public interest in resolving this case expeditiously and in recognition of the rapid pace of technological change in software markets, the district court conducted a fair and efficient trial. The court's 412 findings of fact painstakingly and accurately describe the relevant market (FF 18-32 (JA 2252-57)), Microsoft's power in that market (FF 33-67 (JA 2257-66)), the middleware threat (FF 68-78 (JA 2266-68)), Microsoft's response to that threat (FF 79-407 (JA 2268-2348)), and the effects on consumers of Microsoft's efforts to protect the applications barrier to entry (e.g., FF 408-12 (JA 2348-50)). The court specifically found that Microsoft's conduct harmed the company's direct and indirect customers, stifled innovation, and would not have been profitable or made business sense but for its effect of maintaining Microsoft's operating system monopoly. See, e.g., FF 409-12 (JA 2349-50). The court's findings of fact are supported by the extensive trial record, including a wealth of evidence from Microsoft's own contemporaneous documents. The court's findings also correctly distinguished lawful from unlawful conduct. The court imposed an appropriate remedy based on its factual findings and the circumstances before it.

Microsoft declines to acknowledge the district court's core findings of fact and instead recites, as its Statement of the Case, a sanitized description of its actions based largely on its own proposed but rejected findings. Microsoft, however, is not entitled to re-tender its proposed findings to this Court. Rather, this Court conducts its appellate review based on the district court's findings, which "shall not be set aside unless clearly erroneous." Fed. R. Civ. P. 52(a). See Anderson v. City of Bessemer City, 470 U.S. 564, 573-74 (1985). That standard of review is dispositive of the fact-findings in this case because nowhere in its submission does Microsoft assert specifically that any fact found by the district court is clearly erroneous. The following description of the case is based on the trial proceedings and the facts found by the district court.

B. Course Of Proceedings

On May 18, 1998, the United States filed a complaint alleging that Microsoft had violated Sections 1 and 2 of the Sherman Act, 15 U.S.C. 1, 2. The opening paragraphs of that complaint describe Microsoft's "monopoly power in the market for personal computer operating systems" (US Compl. § I, ¶ 2 (JA 139)); the "high barriers to entry in [that] market" (id. at § I, ¶ 3 (JA 139)); the "significant potential threat to Microsoft's operating system monopoly" from new technologies (id. at § I, ¶ 4 (JA 139)); and the various "anticompetitive activities" that Microsoft undertook "[t]o protect its valuable Windows monopoly against such potential competitive threats, and to extend its operating system monopoly into other software markets" (id. at § I, ¶ 5 (JA 140)). Although the complaint further alleged that some of Microsoft's actions independently violated the antitrust laws in other respects, the core of the government's allegations was Microsoft's maintenance of its operating system monopoly. Id. at § I, ¶¶ 2-13 (JA 139-43). The complaint sought specific injunctive relief and "such other preliminary and permanent relief as is necessary and appropriate to restore competitive conditions in the markets affected by Microsoft's unlawful conduct." Id. at § VIII, ¶ 3 (JA 191). Twenty states and the District of Columbia filed a similar complaint the same day (one state later withdrew), and the district court consolidated the cases at Microsoft's request.

After extensive discovery, the court began a 78-day trial on October 19, 1998, which ended on June 24, 1999. The court heard testimony from 26 witnesses and admitted depositions of 79 other witnesses and 2733 exhibits. On November 5, 1999, the court entered its Findings of Fact (JA 2247-350). The court then ordered the parties to engage in mediation before Chief Judge Posner of the U.S. Court of Appeals for the Seventh Circuit. On April 3, 2000, after four months of intensive mediation efforts that ultimately failed, the court entered its Conclusions of Law (JA 2410-37).

The district court held that Microsoft successfully engaged in a series of anticompetitive acts to protect and maintain its personal computer operating system monopoly, in violation of Section 2 of the Sherman Act. It also concluded that Microsoft violated Section 2 by attempting to monopolize the market for Web browsers and Section 1 by tying its Web browser to its operating system. Moreover, the court found that Microsoft's conduct violated various state laws. The court rejected the government's claim that Microsoft's exclusive dealing contracts violated Section 1. (The remedy it ordered effectively terminated and prohibited such agreements, however, because they were part of the Section 2 violation.)

The court then proceeded to consider a remedy for Microsoft's antitrust violations, inviting the parties to submit proposals. After reviewing those submissions, and holding a hearing on May 24, 2000, the court noted that the government had offered "a proposed form of final judgment that would mandate both conduct modification and structural reorganization by the defendant when fully implemented." Remedy Order at 61 (JA 2843). Microsoft rejected the government's proposed remedy and requested "months of additional time to oppose the relief sought in all other respects" based on its "surprise" at the scope of the government's proposed remedy. The court explained that "Microsoft's profession of surprise is not credible. From the inception of this case Microsoft knew, from well-established Supreme Court precedents dating from the beginning of the last century, that a mandated divestiture was a possibility, if not a probability, in the event of an adverse result at trial." Id. The court further noted that "the Court's Findings of Fact gave clear warning to Microsoft that the result would likely be adverse, yet the Court delayed entry of its Conclusions of Law for five months" so that mediation on a remedy could occur. Id. "Even assuming that Microsoft negotiated in utmost good faith in the course of mediation, it had to have in contemplation the prospect that, were mediation to fail, the prevailing plaintiffs would propose to the Court a remedy most to their liking and least likely to be acceptable to Microsoft." Id.

On June 7, 2000, the court entered a Final Judgment (FJ) that requires Microsoft, following the conclusion of this appeal, to submit a plan to reorganize itself into two separate firms: an "Operating System Business" and an "Applications Business." The court would review that plan and the government's response prior to its implementation. The "OpsCo" would receive the operating system business and "AppsCo" would receive the rest of Microsoft's businesses. FJ § 1 (JA 2846). The Final Judgment also requires Microsoft to comply with transitional injunctive provisions until the structural remedy becomes effective. Some of those provisions terminate upon completion of the reorganization; others, three years later. FJ §§ 1.d, 3 (JA 2846, 2851). Explaining that "the proposed final judgment is represented to the Court as incorporating provisions employed successfully in the past," the court further stated that the remedy "appears to the Court to address all the principal objectives of relief in such cases, namely, to terminate the unlawful conduct, to prevent its repetition in the future, and to revive competition in the relevant markets." Remedy Order at 63 (JA 2845).

C. Statement Of Facts

The district court's detailed findings of fact show that Microsoft undertook an extensive campaign of exclusionary acts to maintain its operating system monopoly. The findings are based on the court's consideration of the entire trial record and its assessment of the credibility of the witnesses' testimony. See 84 F. Supp. 2d at 12 (JA 2250). The court had access to the government's 875-page proposed findings of fact, including a hyperlinked CD-ROM version, which compiled in detail the evidentiary support for the government's case. (Copies of that CD-ROM are being lodged with this Court.)

Microsoft's Operating System Monopoly
A personal computer (PC) is designed for use by one person at a time. It consists, inter alia, of central processing components (a microprocessor and main memory), software, and data storage (e.g., a hard disk). FF 1 (JA 2250).⁽¹⁾ The software on a PC largely consists of an operating system (OS) and applications. An application is designed to accomplish a specific task, such as word processing. The OS "controls the allocation and use of computer resources" and serves as a "platform" for applications by exposing interfaces (application programming interfaces, or APIs) that applications invoke to perform crucial tasks such as displaying text on a screen. FF 2 (JA 2250).
1. The Market
  For the maintenance of monopoly and tying claims, the district court found that the relevant market for evaluating Microsoft's monopoly power was the "licensing of all Intel-compatible PC operating systems worldwide." CL at 36 (JA 2416); FF 18 (JA 2252); Fisher ¶ 62 (JA 13892). "Intel-compatible" PCs are designed to function with Intel's 80x86 and successor family of microprocessors (or compatible microprocessors). FF 3 (JA 2250-51). Operating systems designed for Intel-compatible PCs do not run on other PCs, and OSs designed for other PCs do not run on Intel-compatible PCs. FF 4 (JA 2251). Consumers are very reluctant to substitute away from Intel-compatible PCs (for any reason, including an increase in OS prices) because to do so would entail incurring substantial costs and would not result in a satisfactory substitute. FF 19-27 (JA 2252-55).⁽²⁾ Thus, a monopolist of OSs for Intel-compatible PCs "could set the price of a license substantially above that which would be charged in a competitive market and leave the price there for a significant period of time without losing so many customers as to make the action unprofitable." CL at 36 (JA 2416); FF 18 (JA 2252).⁽³⁾
  The court concluded that "the proof of Microsoft's dominant, persistent market share protected by a substantial barrier to entry, together with Microsoft's failure to rebut that prima facie showing effectively and the additional indicia of monopoly power, have compelled the Court to find as fact that Microsoft enjoys monopoly power in the relevant market." CL at 37 (JA 2417), citing FF 33 (Microsoft "could charge a price for Windows substantially above that which could be charged in a competitive market") (JA 2257); see Fisher ¶ 62 (JA 13892).⁽⁴⁾ The court highlighted four important factors. First, "Microsoft possesses a dominant, persistent, and increasing share of the worldwide market for Intel-compatible PC operating systems." FF 35 (JA 2257). "Every year for the last decade, Microsoft's share of the market for Intel-compatible PC operating systems has stood above ninety percent [and] [f]or the last couple of years, the figure has been at least ninety-five percent." Id.⁽⁵⁾ Even if the market were broadened to include operating systems for the Apple Macintosh, which is not an Intel-compatible PC, Microsoft's share "would still stand well above eighty percent." Id.⁽⁶⁾ Second, an "applications barrier to entry" prevents competitors from attracting significant consumer demand and "would continue to do so even if Microsoft held its prices substantially above the competitive level." FF 36 (JA 2257). Third, original equipment manufacturers of PCs (OEMs) "uniformly are of a mind that there exists no commercially viable alternative" to Windows. FF 54 (JA 2262).⁽⁷⁾ Fourth, through a range of actions over several years, "Microsoft has comported itself in a way that could only be consistent with rational behavior for a profit-maximizing firm if the firm knew that it possessed monopoly power, and if it was motivated by a desire to preserve the barrier to entry protecting that power." CL at 37 (JA 2417), citing FF 67, 99, 136, 141, 215-16, 241, 261-62, 286, 291, 330, 355, 393, 407 (JA 2266, 2273, 2282-84, 2300-01, 2307, 2312, 2318-20, 2329, 2335, 2344, 2348).⁽⁸⁾ The court rejected Microsoft's arguments regarding alleged constraints on its monopoly power and its contentions that its pricing and innovation were inconsistent with monopoly power. CL at 37 (JA 2417); FF 57-67 (JA 2263-66).
2. The Applications Barrier To Entry
  The OS serves principally two functions: It enables the computer's hardware to operate; and it serves as a platform for applications programs, such as word-processing and spreadsheets. The latter function is the source of what the district court found to be an "applications barrier to entry" that protects Microsoft's monopoly power in the OS market. FF 30-52 (JA 2256-62).
  This barrier results from "an intractable 'chicken-and-egg' problem . . . . Users do not want to invest in an operating system until it is clear that the system will support generations of applications that will meet their needs, and developers do not want to invest in writing or quickly porting [i.e., adapting] applications for an operating system until it is clear that there will be a sizeable and stable market for it." FF 30 (JA 2256).⁽⁹⁾ As the district court found, that "self-reinforcing cycle" is sometimes referred to as the "network effect," a "phenomenon by which the attractiveness of a product increases with the number of people using it." FF 39 (JA 2258).
  The applications barrier to entry increases the dependence of both consumers and software developers on Windows and thus perpetuates Microsoft's OS monopoly.⁽¹⁰⁾ For consumers, the applications barrier to entry limits the choice of an operating system. "The consumer wants an operating system that runs not only types of applications that he knows he will want to use, but also those types in which he might develop an interest later." FF 37 (JA 2257). "The fact that a vastly larger number of applications are written for Windows than for other PC operating systems attracts consumers to Windows, because it reassures them that their interests will be met as long as they use Microsoft's product." Id. (JA 2258). "The overwhelming majority of consumers will only use a PC operating system for which there already exists a large and varied set of high-quality, full-featured applications, and for which it seems relatively certain that new types of applications and new versions of existing applications will continue to be marketed at pace with those written for other operating systems." FF 30 (JA 2256).⁽¹¹⁾
  For software developers, the applications barrier to entry creates disincentives to write programs for operating systems other than Microsoft's. "An application that is written for one PC operating system will operate on another PC operating system only if it is ported to that system, and porting applications is both time-consuming and expensive." FF 38 (JA 2258).⁽¹²⁾ Consequently, applications developers "tend to write first to the operating system with the most users Windows" and will write applications for other operating systems "only to the extent that the marginal added sales justify the cost of porting." Id.⁽¹³⁾
  For competitors, the applications barrier to entry causes "a vicious cycle. For just as Microsoft's large market share creates incentives for ISVs [independent software vendors] to develop applications first and foremost for Windows, the small or non-existent market share of an aspiring competitor makes it prohibitively expensive for the aspirant to develop its PC operating system into an acceptable substitute for Windows." FF 40 (JA 2258). Accordingly, "there is a strong chance that the new operating system could stall; it would not support the most familiar applications, nor the variety and number of applications, that attract large numbers of consumers." FF 42 (JA 2259).⁽¹⁴⁾

Combating The Middleware Threats

Although an operating system serves as a platform for applications, the terms "OS" and "platform" have distinct meanings. As Microsoft's economist put it, "conceptually, there is a difference, and an important difference," between OSs and platforms. Schmalensee Tr. 6/21/99 am at 19-20 (JA 9462-63). A platform need not drive the computer's hardware directly, so long as it properly functions with an OS that does. And an OS need not provide the APIs that support a particular application, so long as a platform that operates on the OS provides the APIs that allow that program to run.

A "middleware" program is not an operating system; rather, it is platform software that runs on top of an operating system i.e., uses OS interfaces to take advantage of the operating system's code and functionality and simultaneously exposes its own APIs so that applications can run on the middleware itself. An application written to rely exclusively on a middleware program's APIs could run on all OSs on which that middleware runs. FF 68, 29 (JA 2266, 2256); Tevanian ¶ 45 (JA 3113). Applications developers would have incentives to write for widely used middleware; and, if the middleware ran on a variety of operating systems, users would not be reluctant to choose a non-Windows operating system for fear that it would run an insufficient array of applications. FF 29, 68 (JA 2256, 2266); Fisher ¶¶ 86, 89 (JA 13905, 13908-09). As Microsoft acknowledges, if middleware became a leading development platform, operating systems could become "commodities," i.e., essentially fungible, and Windows would lose the benefits of the applications barrier to entry that has protected its monopoly. MS Rev. Prop. FF ¶ 214 (JA 1663).⁽¹⁵⁾

Microsoft "was concerned with middleware" because middleware could weaken the applications barrier and thereby threaten the dominance of Windows. FF 68-78, 29 (JA 2266-68, 2256). Microsoft focused "on two incarnations of middleware that, working together, had the potential to weaken the applications barrier severely without the assistance of any other middleware. These were Netscape's Web browser and Sun's implementation of the Java technologies." FF 68 (JA 2266).⁽¹⁶⁾

The Attempt To Obtain Agreement With Netscape
In December 1994, Netscape first marketed a Web browser called Navigator. A Web browser is "software that, when running on a computer connected to the Internet . . . enables a user to select, retrieve, and perceive resources on the [World Wide] Web." FF 16 (JA 2252); GX 1050 at 505 (JA 14847); Farber ¶ 11 (JA 13882-83). Within months, Navigator was the preeminent Web browser; and Microsoft soon saw it as a threat to the OS monopoly. FF 72 (JA 2267). In May 1995, Microsoft CEO Bill Gates wrote to Microsoft executives that Netscape was "pursuing a multi-platform strategy where they move the key API into the client [the Web browser] to commoditize the underlying operating system." Id.; GX 20 at MS98 0112876.3 (JA 9875). As the court found, "[b]y the late spring of 1995, the executives responsible for setting Microsoft's corporate strategy were deeply concerned that Netscape was moving its business in a direction that could diminish the applications barrier to entry." FF 72 (JA 2267).⁽¹⁷⁾ Microsoft thus decided to eliminate the threat that Navigator would become a viable alternative platform for applications. FF 133, 142 (JA 2281, 2284); GX 521 (JA 14702); Fisher ¶¶ 91-92 (JA 13910-11).
The court found that Microsoft first tried to reach an agreement with Netscape in June 1995, which the court called a "market allocation" agreement, pursuant to which Netscape would have stopped efforts to develop Navigator into "platform-level" (i.e., API-exposing) browsing software for the Windows 95 operating system that was to be released later that summer; in return, Microsoft would refrain from competing with Netscape in developing browsers for other OSs. CL at 45 (JA 2425); FF 79-89 (JA 2268-71); see, e.g., GX 540 at MS98 0010341 (Maritz: "we . . . hoped . . . to leverage a relationship with Netscape . . . whereby they would be prepared to cede the client [browser] to us") (JA 14735).⁽¹⁸⁾
Microsoft "warned" Netscape that timely access to critical technical information about Windows APIs information that Netscape needed to make its browser run well on Windows 95 depended on its acquiescence. FF 82, 84, 90-91 (JA 2269-71).⁽¹⁹⁾ Had Netscape acquiesced in Microsoft's proposal, it would have become "all but impossible" for Navigator or any other browser rival to pose a platform threat to Windows. FF 89 (JA 2271); Fisher ¶ 99, Warren-Boulton ¶ 88 (JA 13912, 3202).
Netscape did not accept Microsoft's proposal. FF 87 (JA 2270-71). In response, Microsoft withheld from Netscape crucial Windows-related technical information that it routinely provided to others, and delayed the provision of necessary APIs, so that "Netscape was excluded from most of the holiday selling season." FF 91 (JA 2271); see also FF 87, 90-92 (JA 2270-72); Barksdale ¶ 114 (JA 2922); GX 241 (JA 14504).⁽²⁰⁾ Compare MS Br. 28-29. Moreover, "[o]nce it became clear to senior executives at Microsoft that Netscape would not abandon its efforts to develop Navigator into a platform, Microsoft focused its efforts on ensuring that few developers would write their applications to rely on the APIs that Navigator exposed." FF 133 (JA 2281).

Denying Netscape Access To Crucial Channels Of Distribution

Microsoft understood that software "[d]evelopers would only write to the APIs exposed by Navigator in numbers large enough to threaten the applications barrier if they believed that Navigator would emerge as the standard software employed to browse the Web." Id.; GX 498 at MS98 0168614 (JA 14662). If Microsoft could demonstrate that Netscape would not become the standard and that Microsoft's browser, Internet Explorer (IE), would meet or exceed Netscape's browser usage share, developers would continue to focus their efforts on the Windows platform. FF 133 (JA 2281).⁽²¹⁾ To protect the applications barrier to entry, therefore, Microsoft embarked on a multifaceted campaign to maximize IE's share of usage and to minimize Navigator's. Id.⁽²²⁾ Between 1995 and 1999, Microsoft spent more than $100 million each year and increased from five or six to more than a thousand the number of developers working on IE, even though the company has given IE away free since its initial release in July 1995. FF 135-39 (JA 2281-83).⁽²³⁾

"Decision-makers at Microsoft worried that simply developing its own attractive browser product, pricing it at zero, and promoting it vigorously would not divert enough browser usage from Navigator to neutralize it as a platform." FF 143 (JA 2284). Thus, rather than confine itself to improving and promoting IE as a competitor to Navigator (see MS Br. 30-32), Microsoft decided "to constrict Netscape's access to the distribution channels that led most efficiently to browser usage": installation by OEMs on new PCs and distribution by Internet access providers (IAPs). FF 143-45 (JA 2284-85); Barksdale ¶¶ 227-30 (JA 2972-74); Schmalensee Tr. 1/19/99 pm at 50 (JA 14181); GX 515 (JA 14697). Users rarely switch from "whatever browsing software is placed most readily at their disposal," usually the browsing software installed on their computer by the OEM or supplied by their Internet access provider when they sign up for Internet service. FF 144-47, 356 (JA 2284-85, 2335).⁽²⁴⁾ Microsoft thus sought to "ensure that, to as great an extent as possible, OEMs and IAPs bundled and promoted Internet Explorer to the exclusion of Navigator." FF 148 (JA 2286); see, e.g., GX 204 (Microsoft recognizing that users will never switch from Navigator unless IE is bundled with Windows), GX 93, GX 510 at MS7 004129 (Microsoft recognizing importance of Internet service providers) (JA 14468, 14404, 14668).

(i)

Excluding Navigator From The OEM Channel

Microsoft's campaign to foreclose Netscape from the OEM channel involved a "massive and multifarious investment" in a "complementary set of tactics": (1) Microsoft "forced OEMs to take Internet Explorer with Windows and forbade them to remove or obscure it," which not only ensured the presence of IE on PC systems, but also "increased the costs attendant to pre-installing and promoting Navigator"; (2) Microsoft "imposed additional technical restrictions to increase the cost of promoting Navigator"; (3) Microsoft offered OEMs valuable consideration for commitments to promote IE to the exclusion of any other browser; and (4) Microsoft "threatened to penalize individual OEMs that insisted on pre-installing and promoting Navigator." FF 241 (JA 2307). The district court found that "Microsoft's campaign to capture the OEM channel succeeded." Id.

(a)

Contractual Restrictions And Coercion Of OEMs

Microsoft knew that it could not win the browser war on the merits, so it set out to impose contractual restrictions on OEMs that interfered with their ability to distribute Navigator. FF 157-58 (JA 2287). Although Microsoft's OEM licenses had required that computer makers not delete or modify any part of what Microsoft defined to be "Windows," that requirement had not been strictly enforced. FF 204 (JA 2297). Beginning in July 1995 with the first Windows 95 contracts, however, Microsoft defined "Windows" to include early versions of IE that were entirely separate from the OS but that Microsoft insisted on distributing with it. FF 158, 175 (JA 2287, 2291). And, unlike its earlier flexible practices, Microsoft prevented unauthorized deletions or modifications by OEMs. FF 204 (JA 2297). Microsoft prohibited OEMs from deleting IE, even though it provided an Add/Remove capability in Windows 95 that it promoted to users precisely for that purpose. FF 165, 175-76 (JA 2288-89, 2291); GX 164, GX 352 (Microsoft Web pages telling users that "IE Uninstalls Easily" and how to do it) (JA 14436, 14581).

Microsoft "knew that the inability to remove Internet Explorer made OEMs less disposed to pre-install Navigator onto Windows 95" because installing Navigator in addition to IE would lead to confusion among some users, consume disk space, and increase testing and support costs to OEMs, which operate at such low margins that three support calls can make a PC sale unprofitable. FF 159, 210 (JA 2287-88, 2298-99).⁽²⁵⁾ The court rejected Microsoft's contrary assertions (see MS Br. 108) that rely on self-contradictory testimony from its witnesses. See, e.g., Kempin Tr. 2/25/99 am at 55, Tr. 2/25/99 pm at 60-64 (Kempin acknowledging Gateway raised concerns about user confusion and greater support costs, and Microsoft recognized that installation of second browser increases OEM costs), Rose Tr. 2/18/99 pm at 45-48 (conceding that loading two applications with similar functions adds to costs, confusion, and complexity) (JA 14244, 14246-50, 14236-39).

Microsoft's restrictions on OEMs went further. Microsoft feared that OEMs might promote the use of Navigator rather than IE by configuring the icons on the initial Windows desktop screen or the "Start" menu entries, or arranging the Windows boot (start-up) sequence. FF 202-03 (JA 2296-97).⁽²⁶⁾ Microsoft thus "threatened to terminate the Windows license of any OEM" that made such changes or added "programs that promoted third-party software to the Windows 'boot' sequence." FF 203 (JA 2297).⁽²⁷⁾ Microsoft also offered OEMs valuable incentives and discounts to promote IE and limit distribution of Navigator. FF 142, 233-34 (JA 2284, 2305-06). Microsoft exploited Compaq's dependency on Windows, for example, to compel Compaq to commit to IE and to "curtail its distribution and promotion of Navigator." FF 232-34 (JA 2305-06); GX 1155 (sealed), 464 (sealed) (JA 17093, 17043). And it penalized IBM and Gateway in various ways when they declined such an alliance. FF 235-38 (JA 2306); GX 257 (Gates email), GX 308 (JA 14511, 14550).

The court found that these licensing and coercive measures, which "guaranteed the presence of Internet Explorer on every new Windows PC system," had no technical justification. FF 158, 175-76 (JA 2287, 2291).⁽²⁸⁾ The forbidden OEM conduct, although facilitating the distribution of Navigator, "would not compromise the quality or consistency of Windows any more than the modifications that Microsoft currently permits." FF 221-23 (JA 2302-03).⁽²⁹⁾ And, because it would not have "removed or altered any Windows APIs," it would not have interfered with the Windows platform or impaired any operating-system function. FF 226 (JA 2304); Warren-Boulton ¶ 180 (JA 3244). "Finally, it is significant that, while all vendors of PC operating systems undoubtedly share Microsoft's stated interest in maximizing consumer satisfaction, the prohibitions that Microsoft imposes on OEMs are considerably more restrictive than those imposed by other operating system vendors." FF 229 (JA 2304); see p. 23 n.40, infra.

Microsoft's OEM restrictions harmed consumers who preferred Windows with Navigator or with no browser at all, harmed the OEMs who wanted to serve the "[m]any consumers [who] desire to separate their choice of a Web browser from their choice of an operating system,"⁽³⁰⁾ and "stifled innovation by OEMs that might have made Windows PC systems easier to use and more attractive to consumers." FF 151, 241, 203 (JA 2286, 2307, 2297).⁽³¹⁾ "By constraining the freedom of OEMs to implement certain software programs in the Windows boot sequence, Microsoft foreclosed an opportunity for OEMs to make Windows PC systems less confusing and more user-friendly, as consumers desired." FF 410 (JA 2349); Tr. 12/16/98 pm at 41-42 (as "direct result" of Microsoft's restrictions, Hewlett-Packard's "support calls went up by approximately ten percent") (Romano Dep.) (JA 14099-100).⁽³²⁾

Computer makers acquiesced in Microsoft's demands because "they had no commercially viable alternative to pre-installing Windows 95 on their PCs." FF 158 (JA 2287); Schmalensee Tr. 1/20/99 am at 33-34 (JA 14184-85); GX 309 (JA 14551). But Microsoft's tactics "soured" its relations with OEMs and reduced the value of Microsoft's products to both end users and OEMs. "Microsoft would not have paid this price had it not been convinced that its actions were necessary to ostracize Navigator from the vital OEM distribution channel." FF 203 (JA 2297).⁽³³⁾ Its effort to enlist the OEMs in its campaign against Netscape "was only profitable to the extent that it protected the applications barrier to entry." FF 141 (JA 2283).⁽³⁴⁾

Indeed, based on Microsoft's extensive "internal correspondence and external communications," the court found that, "[b]efore it decided to blunt the threat that Navigator posed to the applications barrier to entry, Microsoft did not plan to make it difficult or impossible for OEMs or consumers to obtain Windows without obtaining Internet Explorer." FF 156 (JA 2287). Even as late as June 1995, Microsoft was planning only "to include low-level Internet 'plumbing,' . . . but not a browser, with Windows 95." FF 156-57 (JA 2287); GX 125, 124 ("[Windows 95] contains all the plumbing you need to hook up to the net but cool apps like Mosaic [browser] are stuff you need to obtain from 3rd parties") (JA 14411, 14410). "The plan at that point, rather, was to ship the browser in a separate 'frosting' package, for which Microsoft intended to charge." FF 157 (JA 2287)); see, e.g, GX 143 (JA 14431).⁽³⁵⁾ Microsoft reversed course in July 1995 because it concluded that bundling Windows 95 and IE was the "most effective way" to diminish Navigator's threat to the operating system monopoly. FF 157-58 (JA 2287).⁽³⁶⁾ Compare MS Br. 23-24.

(b)

Additional Means To Prevent OEMs From Distributing Navigator

Despite its contractual restraints on OEMs, Microsoft Senior Vice President James Allchin wrote in late 1996 that "I don't understand how IE is going to win." FF 166 (JA 2289); GX 47 (JA 14369). Microsoft had recognized in 1995 that IE "remained markedly inferior to Navigator in the estimation of consumers." FF 134 (JA 2281). By 1996, after $100 million in development expenses were devoted to it, IE was "vastly improved." FF 135 (JA 2281-82). But even by the end of 1997, the number of those "who regarded it as the superior product was roughly equal to those who preferred Navigator." Id. (JA 2282); Schmalensee Tables F-1 to F-3 (JA 4664-69); Tr. 1/20/99 am at 41 (JA 14187); GX 428 at MS7 000366 (sealed) (JA 17001). Microsoft thus believed that it was not "going to win" the browser war simply by "[p]itting browser against browser." FF 166 (JA 2289); GX 47, 48 (JA 14369, 14370).

In January 1997, Allchin complained to Microsoft executive Paul Maritz that "[w]e are not leveraging Windows from a marketing perspective." "[W]e are not investing sufficiently in finding ways to tie IE and Windows together." FF 166 (JA 2289), quoting GX 48 (JA 14370). In Allchin's view, "[t]reating IE as just an add-on to Windows which is cross-platform [means] losing our biggest advantage Windows marketshare." FF 166 (JA 2289), quoting GX 47 (JA 14369). Reporting on a February 1997 study, Microsoft's Christian Wildfeuer agreed with Allchin's assessment: "It seems clear that it will be very hard to increase browser market share on the merits of IE 4 alone. It will be more important to leverage the OS asset to make people use IE instead of Navigator." GX 202 at MS7 004346 (emphasis added) (JA 14462); FF 169 (JA 2290); accord GX 53, 205 (JA 14390, 14469).

"Microsoft's executives believed that the incentives that its contractual restrictions placed on OEMs would not be sufficient in themselves to reverse the direction of Navigator's usage share." FF 160 (JA 2288). They therefore decided to make technical changes in Windows to ensure that removing IE from Windows is difficult and that, in the words of Microsoft executive Brad Chase, "running any other browser is a jolting experience." Id.; GX 684 at MS6 6007119 (JA 14785); see also GX 355 at MS7 003002 (report to Allchin: "An integrated browser [would make] Netscape a non-issue a superfluous product for all but the most committed Netscape user") (JA 14585). Accordingly, unlike Windows 95, Windows 98 did not allow even users to uninstall IE with the Add/Remove feature, even though a major OEM (Gateway) had expressly requested such a feature and even though users remained able to uninstall dozens of other features that Microsoft held out as integrated into Windows 98. FF 170 (JA 2290); Allchin Tr. 2/2/99 pm at 5-12 (JA 8011-18); GX 1073 at MS98 0204593, GX 1366 (JA 14850, 14928). Windows 98 contained a second feature that thwarted Navigator: Microsoft set IE as the default browser on Windows 98 and configured the software so that, even "when a user chooses a browser other than Internet Explorer as the default [by changing the appropriate setting], Windows 98 nevertheless requires the user to employ Internet Explorer in numerous situations that, from the user's perspective, are entirely unexpected." FF 171 (JA 2290).⁽³⁷⁾ That configuration caused "considerable uncertainty and confusion in the ordinary course of using Windows 98" for those "users who choose a browser other than Internet Explorer as their default." Id. "By increasing the likelihood that using Navigator on Windows 98 would have unpleasant consequences for users, Microsoft further diminished the inclination of OEMs to pre-install Navigator onto Windows." FF 172 (JA 2290).

The court found no merit in the various technical rationales put forward by Microsoft for binding IE with Windows 98. Microsoft "could offer consumers all the benefits of the current Windows 98 package by distributing the products separately and allowing OEMs or consumers themselves to combine the products if they wished." FF 191 (JA 2294).⁽³⁸⁾ The court termed "specious" Microsoft's contention that "binding the browser to the operating system is reasonably necessary to preserve the 'integrity' of the Windows platform." FF 193 (JA 2294):

First, concern with the integrity of the platform cannot explain Microsoft's original decision to bind Internet Explorer to Windows 95, because Internet Explorer 1.0 and 2.0 did not contain APIs. Second, concern with the integrity of the platform cannot explain Microsoft's refusal to offer OEMs the option of uninstalling Internet Explorer from Windows 95 and Windows 98 because APIs, like all other shared files, are left on the system when Internet Explorer is uninstalled. Third, Microsoft's contention that offering OEMs the choice of whether or not to install certain browser-related APIs would fragment the Windows platform is unpersuasive because OEMs operate in a competitive market and thus have ample incentive to include APIs (including non-Microsoft APIs) required by the applications that their customers demand. Fourth, even if there were some potential benefit associated with the forced licensing of a single set of APIs to all OEMs, such justification could not apply in this case, because Microsoft itself precipitates fragmentation of its platform by continually updating various portions of the Windows installed base with new APIs.

Id. (JA 2294-95).⁽³⁹⁾ The court further found that other OS providers give OEMs the flexibility to uninstall or not install a browser because it satisfies consumer demand. FF 153 (JA 2286).⁽⁴⁰⁾ Compare MS Br. 24-25. Thus, the court concluded, Microsoft's decision "to bind Internet Explorer to Windows" was intended "to prevent Netscape from weakening the applications barrier to entry, rather than for any pro-competitive purpose." FF 155 (JA 2287).⁽⁴¹⁾

Indeed, rather than having any procompetitive justification, Microsoft's actions harmed consumers. To "combat" Netscape,⁽⁴²⁾ Microsoft decided "to delay the release of Windows 98 long enough so that it could be shipped with Internet Explorer 4.0 tightly bound to it," "'even if OEMs suffer[ed].'" FF 168, 167 (JA 2289-90); GX 50, 53, 357 at GW 026522 (sealed) (JA 14371, 14390, 16983). "Microsoft delayed the debut of numerous features, including support for new hardware devices, that Microsoft believed consumers would find beneficial, simply in order to protect the applications barrier to entry." FF 168 (JA 2290). Binding IE to Windows 98 also harmed consumers because "Windows purchasers who did not want browsing software . . . had to . . . content themselves with a PC system that ran slower and provided less available memory than if the newest version of Windows came without browsing software." FF 410, 173 (JA 2349, 2291).⁽⁴³⁾ And, indeed, "Microsoft has harmed even those consumers who desire to use Internet Explorer, and no other browser," by commingling operating system and browsing-specific routines that "jeopardized the stability and security of the operating system." FF 174 (JA 2291); Farber ¶ 27, Weadock ¶ 32(e) (JA 13886-87, 13970). The court found that Microsoft would not have made those changes in Windows 98 and imposed those harms upon consumers absent its campaign to injure Netscape and thereby protect the applications barrier to entry. FF 409-11 (JA 2349-50).

Microsoft "largely succeeded in exiling Navigator from the crucial OEM distribution channel." FF 239 (JA 2306). By January 1998, Microsoft executive Joachim Kempin was able to report to CEO Bill Gates that Navigator was being shipped through only 4 of the 60 OEM distribution sub-channels, and even then most often in a position "much less likely to lead to usage" than IE's position. Id. (JA 2307); GX 421 at MS7 000680 (JA 14629); Barksdale ¶ 173 (JA 2948-49). By early 1999, "Navigator was present on the desktop of only a tiny percentage of the PCs that OEMs were shipping." FF 239 (JA 2307); Barksdale ¶ 173 (JA 2948-49); Fisher Tr. 1/7/99 am at 8, 11-12 (JA 14102-04).

(ii)

The IAP Channel

Microsoft also embarked on a strategy to foreclose Netscape from the other crucial distribution channel, Internet access providers, which distribute browser software to their customers. FF 242-310 (JA 2307-25). The court found that "Microsoft made substantial sacrifices, including the forfeiture of significant revenue opportunities, in order to induce IAPs," inter alia, "to restrict their distribution and promotion of non-Microsoft browsing software." FF 247 (JA 2308).⁽⁴⁴⁾ Microsoft gave IAPs valuable incentives to promote and distribute IE and to inhibit promotion and distribution of Navigator. FF 243 (JA 2308); see also FF 139 (JA 2283).⁽⁴⁵⁾ Those inhibitions included agreements extracted from IAPs "to refrain from promoting non-Microsoft Web browsing software, and to ensure that they distributed non-Microsoft browsing software to only a limited percentage of their subscribers." FF 244, 289 (JA 2308, 2319); see also FF 245, 258-59 (JA 2308, 2311); Fisher ¶¶ 184-85 (summarizing agreements) (JA 13930-32); see, e.g, GX 1140 (JA 14907). "[T]he inducements that Microsoft offered IAPs at substantial cost to itself . . . did the four things they were designed to accomplish: They caused Internet Explorer's usage share to surge; they caused Navigator's usage share to plummet; they raised Netscape's own costs; and they sealed off a major portion of the IAP channel from the prospect of recapture by Navigator." FF 247, 307-10 (JA 2309, 2324-25).

Microsoft's dealings with America Online, the "largest and most important IAP," FF 272 (JA 2315), illustrate its anticompetitive strategy. As Bill Gates described in an email to Microsoft executives: "We need for them to make our browser available as the browser to existing and new customers. We have to be sure that we don't allow them to promote Netscape as well." FF 280 (JA 2317), quoting DX 1545 (JA 15005). Microsoft carried out Gates's directive by creating an online services (OLS) folder on the Windows desktop and agreeing to give AOL free placement in that folder in exchange for AOL's agreement to promote IE exclusively as a third-party browser; to limit the total number of non-Microsoft browsers shipped to no more than 15% of total shipments; to limit the percentage of subscribers who first access AOL with AOL software shipped with a non-Microsoft browser to no more than 15% of total AOL subscribers; and not to "express[] or imply[] to subscribers or prospective subscribers that they could use Navigator with AOL. Nor did it [even] allow AOL to include, on its default page or anywhere else, instructions telling subscribers how to reach the Navigator download site." FF 289 (JA 2319); GX 804 at AOL 0001738-39 (JA 14817-18).⁽⁴⁶⁾ That deal yielded no revenue for Microsoft and, because it involved valuable promotion on the Windows desktop for AOL, undermined Microsoft's own Internet access service, Microsoft Network, in which Microsoft had invested hundreds of millions of dollars as a competitor to AOL. FF 291 (JA 2320); GX 130 (JA 14413); Tr. 1/13/99 at 703-05 (Silverberg Dep.) (JA 14168-70). Gates himself recognized the necessity of sacrificing profit to protect Microsoft's "core assets," its Windows operating system. FF 285 (JA 2318); see GX 1372 at 112 (JA 14956). The court found that the company's tactics had the anticompetitive consequence of "accomplish[ing] no efficiency . . . [and] encumbering [consumers'] ability to choose between competing browsing technologies." FF 291 (JA 2320); GX 198, 228 at MS98 0113059 (JA 14457, 14478).

By accepting that deal in 1996, AOL committed to distributing and promoting IE "to the virtual exclusion of Navigator." FF 290, 272 (JA 2319, 2315); GX 180, 804 at AOL 0001738-39 (JA 14455, 14817-18). Microsoft thus induced "AOL [to] contravene[] its natural inclination to respond to consumer demand [for Navigator] in order to obtain the free technology, close technical support, and desktop placement offered by Microsoft." FF 294 (JA 2320); Barksdale ¶¶ 134-36 (JA 2932-34); Colburn Tr. 10/28/98 pm at 32, 76-77 (JA 5297, 5341-42).

Microsoft's strategy worked. In January 1998, Cameron Myhrvold reported to Gates that 92% of AOL's then-subscriber base of more than ten million used IE-based software, as compared to 34% a year earlier. FF 296 (JA 2321); GX 424 (sealed) at MS7 000584, 000589 (unsealed), GX 814A (JA 16989, 16994, 14825). "The AOL coup, which Microsoft accomplished only at tremendous expense to itself and considerable deprivation of consumers' freedom of choice, thus contributed to extinguishing the threat that Navigator posed to the applications barrier to entry." FF 304 (JA 2323).

Microsoft obtained similar exclusionary agreements with other major OLSs AT&T WorldNet, Prodigy, and CompuServe in return for financial incentives and placement in the OLS folder. FF 246, 305-06 (JA 2308, 2323-24); Barksdale ¶ 146, Warren-Boulton ¶ 103 (summarizing OLS agreements) (JA 2937, 3210); GX 1213 (sealed), 1148 (sealed), 1134 (JA 16581, 17070, 14885). Microsoft entered into similar agreements with other major IAPs as well, exchanging placement in Microsoft's Internet Referral Server and/or other valuable incentives for IAP agreements not to promote at all and to strictly limit distribution of any browser but IE. FF 253, 256, 258 (JA 2310-11); Fisher ¶¶ 184-85 (JA 13930-32). A Microsoft study indicated that IAPs representing 95% of Internet access users had signed some kind of "IE preferred" agreement. GX 350 (JA 14580); see Barksdale ¶ 129 (JA 2930).

Microsoft's IAP channel restrictions significantly hampered Netscape's ability to distribute Navigator. FF 307-08 (JA 2324); Fisher ¶¶ 191-92 (JA 13933-34). "The IAPs subject to the most severe restrictions comprise fourteen of the top fifteen access providers in North America and account for a large majority of all Internet access subscriptions in this part of the world." FF 308 (JA 2324); GX 211 (JA 14472); see Barksdale ¶ 129 (JA 2930). The court found, based on a study conducted by Microsoft itself, that the restrictions directly affected the usage share of IE. At the end of 1997, IE's weighted average share of shipments by Internet service providers that had agreed to make IE their default browser was 94%, as compared to only 14% for ISPs that were not so constrained. IE's weighted average share of browser usage was more than 60% at the end of 1997 for subscribers to ISPs that had made IE their default browser, but less than 20% for other ISPs. FF 309 (JA 2324); GX 11, 366 (JA 14328, 14599); Fisher ¶ 224 (JA 13938). Microsoft's most severe restrictions, with the most pronounced effect, applied to the two largest Internet access providers, AOL and CompuServe, which as of the end of 1997 had approximately 65% of all subscribers. Fisher ¶ 216 (JA 13937). Among subscribers to AOL and CompuServe, IE's usage share increased 65 points, from 22% to 87%, between January 1997 and August 1998. By contrast, IE's usage share among subscribers to IAPs that were not inhibited by restrictions rose only ten points (from 20% to 30%) over that period. Among all IAP subscribers, including those subject to restrictions, IE usage share rose 27 points (from 22% to 49%). FF 310 (JA 2325). "The differences in the degree of Internet Explorer's success in the three categories reveal the exclusionary effect of Microsoft's interdiction of Navigator in the IAP channel." Id.; see also FF 247 (Microsoft's foreclosure of the IAP channels "significantly hampered the ability of consumers to make their choice of Web browser products based on the features of those products") (JA 2309); Fisher ¶¶ 224, 227-28 (JA 13938-39); GX 4, 1092 (JA 14326, 14853). Compare MS Br. 110.

The court found that "[t]he restrictions on the freedom of IAPs to distribute and promote Navigator were far broader than they needed to be in order to achieve any economic efficiency. This is especially true given the fact that Microsoft never expected Internet Explorer to generate any revenue" in the IAP channel. FF 247 (JA 2308-09); GX 39 at MS6 5005720 (JA 14335). Indeed, the restrictions were not intended to serve any efficiency but rather were imposed because, as one of its executives testified, Microsoft "believed that, if IAPs gave new subscribers a choice between Internet Explorer and Navigator, most of them would pick Navigator." FF 243 (JA 2308); Myhrvold Tr. 2/10/99 am at 62 (JA 14220). The sacrifices made by Microsoft to push distribution of IE "could only have represented rational business judgments to the extent that they promised to diminish Navigator's share of browser usage and thereby contribute significantly to eliminating a threat to the applications barrier to entry." CL at 42 (JA 2422), citing FF 291 (JA 2320); GX 39 at MS6 5005720 (JA 14355).

(iii)

Apple

Microsoft also pressured Apple to make Navigator less readily accessible on Apple PCs and thus "help[] to ensure that developers would not view Navigator as truly cross-platform middleware." CL at 42 (JA 2422). As leverage to obtain Apple's compliance, Microsoft threatened to cancel development of its "Office for Macintosh" software, which, as Microsoft recognized, was critical to Apple's business. GX 263 (email to Gates: the "threat to cancel Mac Office 97 is certainly the strongest bargaining point we have") (JA 14517).⁽⁴⁷⁾ That threat induced Apple to agree: (1) to distribute and promote IE as its default browser on all Mac OS releases; (2) to remove Navigator from the default installation of the Mac OS 8.5, thus making Navigator harder to load for customers who wanted to use it; (3) not to place any non-Microsoft browser on the desktop of any Mac OS upgrade or new Apple PC (making availability of Navigator harder to discover); and (4) not to promote any non-Microsoft browsing software. FF 351-52 (JA 2333-34).⁽⁴⁸⁾ Apple acquiesced in the agreement, not because it viewed IE as a superior browser or because of consumer demand, but "rather because of the in terrorem effect of the prospect of the loss of Mac Office. To be blunt, Microsoft threatened to refuse to sell a profitable product in whose development the company had already invested substantial resources, and which was virtually ready for shipment." FF 355 (JA 2335)⁽⁴⁹⁾; GX 263 (email to Gates citing benefits to finishing substantial work already done on Mac Office) (JA 14517). The court found that "[t]he predominant reason Microsoft was prepared to make this sacrifice, and the sole reason that it required Apple to make Internet Explorer its default browser and restricted Apple's freedom to feature and promote non-Microsoft browsing software, was to protect the applications barrier to entry." FF 355 (JA 2335).

(iv)

ICPs And ISVs

As part of its comprehensive effort to hamper distribution of Navigator and to discourage the development of software that used non-Microsoft technology, Microsoft also targeted independent software vendors (ISVs) and Internet content providers (ICPs). Microsoft contractually required ISVs to use Internet Explorer-specific technologies in return for timely and commercially necessary technical information about Windows, and precluded important ISVs from distributing Navigator with their products. FF 337-40 (JA 2331-32); GX 2071 (JA 14960); see, e.g., GX 2400 (JA 14980). The court determined that Microsoft's agreements with ISVs "represent another area in which it has applied its monopoly power to the task of protecting the applications barrier to entry." FF 340 (JA 2332).

"ICPs create the content that fills the pages that make up the Web. Because this content can include advertisements and links to download sites, ICPs also provide a channel for the promotion and distribution of Web browsing software." FF 311 (JA 2325). As the court found, "[e]xecutives at Microsoft recognized that ICPs were not nearly as important a distribution channel for browsing software as OEMs and IAPs. Nevertheless, protecting the applications barrier to entry was of such high priority at Microsoft that its senior executives were willing to invest significant resources to enlist even ICPs in the effort." Id.; GX 407 at MS6 5005717, GX 473 at MS6 6006248 (JA 14626, 14655). Microsoft entered into contracts that prohibited ICPs from compensating Netscape for promotion of the providers' content and from including download links to Navigator on their sites. FF 332-35 (JA 2330-31); see, e.g., GX 1163 at CNET 000032 (JA 10051); see also Barksdale ¶¶ 181-82, Fisher ¶¶ 134, 195, Harris ¶¶ 76-80 (JA 2952-53, 13924, 13935, 3077-80). Although the court concluded that "there is not sufficient evidence to support a finding that Microsoft's promotional restrictions [with respect to ICPs] actually had a substantial, deleterious impact on Navigator's usage share," FF 332 (JA 2330), it nonetheless determined that "[t]he terms of Microsoft's agreements with ICPs cannot be explained in customary economic parlance absent Microsoft's obsession with obliterating the threat that Navigator posed to the applications barrier to entry." FF 330 (JA 2329).

(v)

Effects Of The Campaign

Microsoft's comprehensive assault on Netscape's ability to distribute Navigator succeeded in eliminating the threat the Navigator browser posed to Microsoft's operating system monopoly. The court found that Microsoft obtained control of the two distribution channels through which "a very large majority of those who browse the Web obtain their browsing software" the OEM and IAP channels. FF 144, 379 (JA 2285, 2341); GX 233 at MS98 0125655, GX 218, 204, 736 (JA 14484, 14475, 14468, 14800). Constricted in using those distribution channels by Microsoft's exclusionary conduct, Navigator was relegated to more costly and significantly less effective modes of distribution. E.g., FF 241, 379, 147, 357 ("The fact that Netscape was forced to distribute tens of millions of copies of Navigator through high-cost carpet-bombing in order to obtain a relatively small number of new users only discloses the extent of Microsoft's success in excluding Navigator from the channels that lead most effectively to browser usage") (JA 2307, 2341, 2285, 2336).⁽⁵⁰⁾ As Microsoft clearly recognizes: "Usage is what matters. Distribution is very unimportant relative to usage." Tr. 6/1/99 pm at 22-23, quoting Chase Dep. (JA 14276-77). Compare MS Br. 45-48.⁽⁵¹⁾ The adverse business effects of these restrictions also "deterred Netscape from undertaking technical innovations that it might otherwise have implemented in Navigator" and that might have attracted consumers and revenues. FF 379 (JA 2341).⁽⁵²⁾

Because of its reduced access to efficient distribution channels, Navigator's share of browser use fell precipitously. "According to estimates that Microsoft executives cited to support their testimony in this trial, and those on which Microsoft relied in the course of its business planning, the shares of all browser usage enjoyed by Navigator and Internet Explorer changed dramatically in favor of Internet Explorer after Microsoft began its campaign to protect the applications barrier to entry." FF 360 (JA 2336). From January 1996 to November 1997, for example, Navigator's share fell from more than 80% to 55%, while IE's increased from 5% to 36%. By late 1998, Microsoft's estimates showed that Navigator and IE had achieved near parity, with Navigator slightly ahead. Id. (JA 2336-37); Warren-Boulton ¶ 146, Fisher ¶ 232 (JA 3228-29, 13940); GX 310, 711 (JA 14553, 14795); see also GX 4, 5, 14 (JA 14326, 14327, 14329).

Moreover, the court found that the trend is clearly in Microsoft's direction. Based on internal Microsoft projections and a forecast on which AOL relied in purchasing Netscape, the court found that Navigator's share was predicted to fall to between 35% and 40% by late 2000. "The most reasonable prediction, then, is that by January 2001, Internet Explorer's usage share will exceed sixty percent while Navigator's share will have fallen below forty percent." FF 373 (JA 2340); GX 711, 515 (JA 14795, 14697). Thus, even though Navigator's installed base of users has increased during the browser war, the "population of browser users is expanding so quickly that Navigator's installed base has grown even as its usage share has fallen." FF 378 (JA 2341). Navigator lost its ability "to becom[e] the standard software for browsing the Web" because "Microsoft had successfully denied Navigator that status." FF 377 (JA 2341).⁽⁵³⁾ See also RX 23 (as of April 2000, IE share was at 69%, Navigator down to 19%) (JA 14991).

That development directly bore on Microsoft's ability to maintain its OS monopoly: The APIs that "Navigator exposes could only attract enough developer attention to threaten the applications barrier to entry if Navigator became or appeared destined to become the standard software used to browse the Web. Navigator's installed base may continue to grow, but Internet Explorer's installed base is now larger and growing faster. Consequently, the APIs that Navigator exposes will not attract enough developer attention to spawn a body of cross-platform, network-centric applications large enough to dismantle the applications barrier to entry." FF 378 (JA 2341).⁽⁵⁴⁾ Microsoft itself recognized the significance of that development. As Microsoft's Kumar Mehta told Brad Chase in February 1998: "the browser battle is close to over. . . We set out on this mission 2 years ago to not let netscape dictate standards and control the browser api's [sic]. All evidence today says they don't." FF 377 (JA 2341); GX 515 at MS98 0203013.

As the court found, Microsoft won that battle not through lawful competitive ingenuity, but through anticompetitive practices. In May 1998, Microsoft recognized that "'IE4 is fundamentally not compelling'" and "'[n]ot differentiated from Netscape v[ersion]4 seen as a commodity.'" FF 375 (JA 2340); GX 173 (JA 14451); Schmalensee Tr. 1/20/99 am at 41 (JA 14187). Thus, "superior quality was not responsible for the dramatic rise [in] Internet Explorer's usage share." FF 375 (JA 2340).⁽⁵⁵⁾ Microsoft's numerous and varied actions against Navigator had no justification except the expectation that the entry or expansion of rivals into the market for Intel-compatible PC operating systems would be blocked or delayed through the preservation of barriers to entry in that market. FF 136-42 (JA 2282-84); CL at 44 (JA 2424).⁽⁵⁶⁾ Its campaign to foreclose the OEM and IAP channels to Netscape required Microsoft to pay out "huge sums of money, and sacrifice[] many millions more in lost revenue every year." FF 139 (JA 2283); see also FF 135-36, 142, 231, 250, 254-55, 261, 295, 317-19 (JA 2281-82, 2284, 2305, 2309, 2310, 2312, 2320, 2326-27); CL at 44 (JA 2424). That campaign was "only profitable to the extent that it protected the applications barrier to entry" and would not have been in Microsoft's business interest except that it preserved the operating system monopoly. FF 141 (JA 2283).⁽⁵⁷⁾

Microsoft's actions not merely deprived Netscape of browser share, but irrevocably weakened it.⁽⁵⁸⁾ As the court specifically found, "Microsoft was not altogether surprised, then, when it learned in November 1998 that Netscape had surrendered itself to acquisition by another company." FF 379 (JA 2341-42). That acquisition, by AOL, was addressed in the court's findings of fact, with the conclusion that "there is presently no indication that AOL will try even after [the January 1, 2001, expiration of its obligation to distribute IE on a preferential basis] to raise Navigator's usage share substantially." FF 380 (JA 2342); see, e.g., Colburn Tr. 6/22/99 am at 6-7, 16 (JA 14316-17, 14319). "Bill Gates himself, who is not one to underestimate threats to Microsoft's business, apparently concluded after reviewing the November 1998 transaction that AOL would not seek to develop a platform that would compete with Microsoft's network-centric interfaces." FF 382 (JA 2342); GX 2241 at MS98 0231890 (JA 14979). "In any event, nothing that happens after January 1, 2001 will change the fact that Microsoft has succeeded in forestalling for several years Navigator's evolution in that direction." FF 383 (JA 2342).

Java
Microsoft also feared another middleware technology, Sun Microsystems' Java. FF 75 (JA 2267).⁽⁵⁹⁾ Java software presented a means for overcoming the applications barrier to entry by enabling developers to write programs that could be ported to different operating systems "with relative ease." FF 387 (JA 2343). Indeed, it was Sun's intention that Java eventually would have the capability to allow developers to write applications that would run on multiple operating systems without any porting at all. Id. Thus, Microsoft was concerned about Java because, as the court found, "a key to maintaining and reinforcing the applications barrier to entry has been preserving the difficulty of porting applications from Windows to other platforms, and vice versa." FF 386 (JA 2343).
Java software has four elements: a programming language; a set of "class libraries," which are Java programs that expose APIs on which developers writing in Java can rely; a compiler that translates the code written by the developer into Java "bytecode"; and "Java virtual machines" (JVMs), programs that translate that Java bytecode into instructions comprehensible to the underlying system. The Java class libraries and JVM together form the "Java runtime environment." FF 73 (JA 2267). If a software program relies "only on APIs exposed by the Java class libraries [it] will run on any PC system" carrying a Java runtime environment, no matter what operating system is on the computer. Therefore, Java applications require porting "only to the extent that those applications rely directly on the APIs exposed by a particular operating system." FF 74 (JA 2267); Gosling ¶¶ 20-30 (JA 13950-56).
In May 1995, Netscape announced that it would include a Sun-compliant Windows JVM with every copy of Navigator, creating the possibility that Sun's Java implementation "would achieve the necessary ubiquity on Windows" to pose a threat to the applications barrier to entry. FF 76, 395 (JA 2268, 2345); Barksdale ¶ 83 ("Programs written in Java can be run on any platform that has a Java virtual machine and Java class libraries, which Navigator does") (JA 2903). Microsoft's determination to cripple cross-platform Java was an important reason for its concern about Navigator. FF 77 (JA 2268); GX 52, 514 at MS7 007509 (JA 14384, 14694). But Microsoft not only restricted distribution of Java through the anticompetitive practices it employed to thwart usage of Navigator; it also took numerous other steps to interfere with the development, distribution, and use of cross-platform Java. Those steps "resulted in fewer applications being able to run on Windows than otherwise" and thus made no business sense except as a means of protecting the applications barrier to entry. FF 407 (JA 2348); GX 1324 (JA 14921); Fisher Tr. 1/7/99 pm at 52 (JA 14109).
First, Microsoft pressured third parties not to support cross-platform Java. Microsoft's avowed aims were not to innovate, or to give consumers a better product, but rather to prevent Sun from creating Java APIs, especially "great" ones offering "cutting edge" developer support, and "especially ones that run well . . . on Windows." FF 406 (JA 2348); GX 518 at MSS 0080075, GX 235 at MS7 027416 (JA 14700, 14502). For example, "[t]o hinder Sun and Netscape from improving the quality of the Windows JVM shipped with Navigator, Microsoft pressured Intel, which was developing a high-performance Windows-compatible JVM, to not share its work with either Sun or Netscape, much less allow Netscape to bundle the Intel JVM with Navigator." FF 396 (JA 2345).⁽⁶⁰⁾ Gates threatened to withhold Microsoft's support for Intel's next generation of microprocessors if Intel supported Sun's Java efforts. FF 404 (JA 2347).⁽⁶¹⁾ Gates told Intel CEO Andrew Grove that Microsoft would agree to withhold support for one of Intel's competitors if Intel would stop assisting Sun with Java multimedia (i.e., software used to create and transmit audio and visual content). FF 406 (JA 2348); GX 290 (JA 14531). Ultimately, Intel stopped its support of Sun. FF 406 (JA 2348).⁽⁶²⁾
Second, Microsoft sought to extinguish the Java threat through technological means that "maximiz[ed] the difficulty with which applications written in Java could be ported from Windows to other platforms, and vice versa." FF 386 (JA 2343). In March 1996, Microsoft obtained a Java license from Sun, which it used "to create its own Java development tools and its own Windows-compatible Java runtime environment." FF 388 (JA 2343). Microsoft's approach allowed applications to access OS features specific to Windows (i.e., to make "native calls") using methods unique to Microsoft. Because they were "custom-built" to Windows specifications, such applications ran faster than applications written to use Sun-compliant methods of access. FF 389 (JA 2343). But "if a Java developer used the Sun method for making native calls, his application would not run on Microsoft's version of the Windows JVM, and if he used Microsoft's native methods, his application would not run on any JVM other than Microsoft's version." FF 390 (JA 2344); Gosling ¶ 58 (JA 13958-61). "Far from being the unintended consequence of an attempt to help Java developers more easily develop high-performing applications, incompatibility was the intended result of Microsoft's efforts." FF 390 (JA 2344); GX 1334 at MSS 0003551 (JA 14925).
Microsoft took other steps to interfere with cross-platform Java. It "designed its Java developer tools to encourage developers to write their Java applications using certain 'keywords' and 'compiler directives' that could only be executed properly by Microsoft's version of the Java runtime environment for Windows." FF 394 (JA 2344); Gosling ¶ 58 (JA 13958-61). Microsoft then shipped its developer tools with the Windows-specific extensions enabled by default and "fail[ed] to warn developers that their use would result in applications that might not run properly with any runtime environment other than Microsoft's and that [it] would be difficult, and perhaps impossible, to port to JVMs running on other platforms." FF 394 (JA 2345); Gosling ¶ 63 (JA 13962). These steps implemented the suggestion of Microsoft's Thomas Reardon in November 1996 that the company "quietly grow" Microsoft's Java developer tools and "assume that people will take more advantage of our classes without ever realizing they are building" applications that would be specific only to Windows and not be portable. FF 394 (JA 2345); GX 1332, GX 259 at MS7 033448 (Microsoft planning memorandum for Java development tools confirms objective: "Kill cross-platform Java by grow [sic] the polluted Java market") (JA 14922, 14514). In those and other ways, the court found that Microsoft took anticompetitive steps to discourage developers from creating Java applications compatible with non-Microsoft JVMs. See FF 401-03 (JA 2346-47). Some of these actions were discontinued in the face of litigation in another court.⁽⁶³⁾
The district court determined that those steps lacked a business purpose except to protect the applications barrier to entry. FF 401, 403 (JA 2347). As the court concluded, "Microsoft has retarded, and perhaps altogether extinguished, the process by which . . . two middleware technologies [Navigator and Java] could have facilitated the introduction of competition" into the market for Intel-compatible PC operating systems. FF 411 (JA 2350).
Intel And Others
Microsoft engaged in yet further threats and coercion to interfere with other firms' plans for developing or promoting platform-level software. For example, Microsoft induced Intel not to continue developing Native Signal Processing (NSP) software that "would endow Intel microprocessors with substantially enhanced video and graphics performance." FF 95 (JA 2272); see also FF 94-103 (JA 2272-74). Microsoft viewed NSP as a threat to the applications barrier to entry because NSP exposed middleware APIs that could make Windows a "commodity." FF 97 (JA 2272); GX 1309, 921 (JA 14917, 14827); McGeady Tr. 11/10/98 pm at 59-60 (JA 5622-23). Microsoft thus told "Intel that if it would stop promoting NSP's interfaces, Microsoft would accelerate its own work to incorporate the functions of the NSP software into Windows . . . At the same time, Microsoft pressured the major OEMs to not install NSP software on their PCs until the software ceased to expose APIs." FF 101 (JA 2273); McGeady Tr. 11/10/98 pm at 43-44 (JA 5606-07). Because Intel needed the cooperation of the OEMs to distribute NSP, Intel decided to "surrender the pace of software innovation to Microsoft" and "agreed to stop promoting its NSP software." FF 101, 103 (JA 2273, 2274); GX 281 (Gates reports in October 1995 the "good news" that "OEMs are listening to us," and that "Intel feels we have all the OEMs on hold with our NSP chill") (JA 14528).⁽⁶⁴⁾ Although Microsoft subsequently incorporated "some of NSP's components into its operating-system products . . . [e]ven as late as the end of 1998 . . . Microsoft still had not implemented key capabilities that Intel had been poised to offer consumers in 1995." FF 101 (JA 2273); McGeady Tr. 11/10/98 pm at 13 (JA 5576).
"Microsoft was not content to merely quash Intel's NSP software." FF 102 (JA 2273). In August 1995, Gates told Intel's Andy Grove that "Intel could not count on Microsoft to support Intel's next generation of microprocessors as long as Intel was developing [any] platform-level software that competed with Windows." Id.⁽⁶⁵⁾ Intel knew that it would have difficulty selling PC microprocessors without Microsoft's cooperation in making them compatible with Windows or if Microsoft told OEMs that it would not support Intel's chips. "Faced with Gates' threat, Intel agreed to stop developing platform-level interfaces that might draw support away from interfaces exposed by Windows." Id. (JA 2274); GX 281 (Gates tells his officers: "If Intel is not sticking totally to its part of the deal let me know") (JA 14528). Microsoft's effort to get Intel to drop the development of platform-level software had no procompetitive justification, and its success foreclosed potentially valuable software innovation that might have benefited consumers. FF 410 (JA 2349); see McGeady Tr. 11/9/98 pm at 36-42, 45-47, 61-62 (JA 14017-23, 14026-28, 14033-34); GX 563 (JA 14740).
The district court chronicled similar dealings in which Microsoft attempted to secure the agreement of other firms to abandon their platform software efforts in return for the opportunity to build a user interface or other "value-added" software on top of Microsoft's platform. These dealings demonstrate "Microsoft's corporate practice to pressure other firms to halt software development that either shows the potential to weaken the applications barrier to entry or competes directly with Microsoft's most cherished software products." FF 93 (JA 2272).⁽⁶⁶⁾ "Microsoft's interactions with Netscape, IBM, Intel, Apple, and RealNetworks all reveal Microsoft's business strategy of directing its monopoly power toward inducing other companies to abandon projects that threaten Microsoft and toward punishing those companies that resist." FF 132 (JA 2281).
As the court summarized the net effect of Microsoft's actions:

Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products. Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest.

FF 412 (JA 2350).⁽⁶⁷⁾

SUMMARY OF ARGUMENT

The district court's judgment rests on the application of settled law to established facts. The core of this case is Microsoft's violation of Section 2 of the Sherman Act through unlawful maintenance of its operating system monopoly. On each of the two required elements, monopoly power and exclusionary conduct, the court properly applied well-established legal standards to the findings of fact proved at trial. See, e.g., Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 480 (1992); Neumann v. Reinforced Earth Co., 786 F.2d 424, 427 (D.C. Cir. 1986). This is a classic case of monopolization "in which a defendant's possession of substantial market power, combined with his exclusionary or anticompetitive behavior, threatens to defeat or forestall the corrective forces of competition and thereby sustain or extend the defendant's agglomeration of power." Eastman Kodak, 504 U.S. at 488 (Scalia, J., dissenting).
Microsoft has monopoly power. The court's finding that Intel-compatible PC operating systems constitute the relevant market is comprehensively supported by evidence showing the absence of commercially realistic substitutes for those operating systems. Its finding of Microsoft's monopoly power in that market rests solidly on Microsoft's persistent, dominant, and increasing market share; the high barriers of entry protecting that share; and the behavior of Microsoft, which would be inexplicable for a non-monopolist. Microsoft does not contest the controlling law, and the court's findings easily survive review under the clear error standard.
Microsoft also engaged in extensive exclusionary conduct. The court's findings carefully distinguished between Microsoft's lawful competition on the merits and Microsoft's unlawful anticompetitive conduct. The court did not hold Microsoft liable for "improved products, increased distribution and lower prices." MS Br. 98. Rather, the court based its determination of liability on the anticompetitive conduct proved at trial, which Microsoft largely ignores. Those anticompetitive actions include: Microsoft's constriction of Netscape's access to the OEM distribution channel through restrictions that excluded Netscape both directly and indirectly; comparable constriction of Netscape's access to the IAP distribution channel; other actions to impede Netscape, including threats to Apple and restrictions on ICPs and ISVs; and coercive and misleading actions to impede Java-based cross-platform applications. The district court found that those actions did not serve any legitimate interest in better, cheaper, or more accessible products. Rather, they forestalled the growth of middleware products Netscape's Navigator and Sun's Java technologies that threatened Microsoft's monopoly, and they decreased, not increased, consumer's choices.
Microsoft's proffered justifications for its anticompetitive actions lack merit. Microsoft makes passing mention of copyright law, but it has neither identified a tenable copyright defense nor established a basis in the record for copyright law to provide immunity for its anticompetitive conduct. Microsoft's primary defense that it did not completely exclude Netscape's access to key distribution channels also fails. The court's findings and settled law make clear that Microsoft cannot escape liability on the ground that its impairment of Netscape's access to those channels, while sufficient to achieve Microsoft's intended monopoly-maintaining effect, nevertheless failed completely to foreclose all access. Nor can the intrinsic uncertainty about whether a particular emerging competitive threat ultimately would succeed in the absence of anticompetitive conduct provide a monopolist like Microsoft with license to attack and destroy the threat before it fully takes hold.
Although the Section 2 monopoly maintenance holding is sufficient to support the judgment, the district court also correctly held that Microsoft unlawfully attempted to monopolize the browser market. See Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993). The June 1995 proposal to Netscape was itself an unlawful attempt. It was an anticompetitive plan to keep Netscape out of a key aspect of competition by having it cede control over platform aspects of Window 95 browsers to Microsoft that would immediately give Microsoft a form of monopoly power. The post-June 1995 campaign of predatory conduct likewise constituted an attempt. Microsoft demonstrated the requisite specific intent: by seeking to gain control over platform aspects of the browser product, by crippling Netscape, and by employing anticompetitive means to become dominant in a market that it believed was characterized by network effects. Its predatory actions created a dangerous probability of success, as shown by its rapid acquisition of 50% of usage, with a clear trend of further increases.
The district court's additional holding that Microsoft violated the Section 1 prohibition on tying is also correct. The only element of tying liability at issue is whether IE and Windows constitute separate products. The findings of fact establish that they do under the separate-demand approach of Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984), which Microsoft does not contest. Microsoft is incorrect, however, that a different result would be reached under the "integration" rationale that this Court applied when interpreting a consent decree in United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998) (Microsoft II). The evidence proved that the early versions of IE and Windows were separate products under Microsoft II, because there was no technological linkage between those versions and Windows. The later versions of IE and Windows are also separate products, because the court's findings establish that there was no efficiency or other justification for Microsoft to refuse to offer a browserless version of Windows. Indeed, Microsoft easily could have produced such a version by employing the familiar techniques in the software industry for removing software functionality. Microsoft's binding of IE to Windows, in short, was pu

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