[Federal Register Volume 59, Number 160 (Friday, August 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20216]
[[Page Unknown]]
[Federal Register: August 19, 1994]
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DEPARTMENT OF JUSTICE
Proposed Final Judgment and Competitive Impact Statement; United
States of America vs. Microsoft Corporation
Notice is hereby given pursuant to the Antitrust Procedures and
Penalties Act, 15 U.S.C. Sec. 16(b)-(h), that a proposed Final
Judgment, Stipulation, and Competitive Impact Statement have been filed
with the United States District Court for the District of Columbia in
United States vs. Microsoft Corporation, Civ. No. 94-1564 (SS). The
proposed Final Judgment is subject to approval by the Court after the
expiration of the statutory 60-day public comment period and compliance
with the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b)-
(h).
The Complaint alleges that Microsoft uses exclusionary and
anticompetitive contracts to market certain of its personal computer
operating system software products. By these contracts Microsoft has
unlawfully maintained its monopoly of personal computer operating
systems and has unreasonably restrained trade thereby violating
Sections 1 and 2 of the Sherman Act, as amended, 15 U.S.C. Secs. 1, 2.
The proposed Final Judgment not only bans Microsoft's unlawful
practices, but also contains additional provisions which are
prophylactic in nature, and are intended to ensure that the
anticompetitive effects of those practices are not replicated through
use by Microsoft of other exclusionary practices.
The proposed Final Judgment includes four categories of limitations
on Microsoft's contracting practices. First, it limits the duration of
license agreements for operating system software between Microsoft and
personal computer manufacturers. Microsoft is prohibited from entering
into any such license with a term exceeding one year, except that a
license may include a term permitting the computer manufacturer to
renew the agreement for up to one additional year on the same terms and
conditions as those applicable in the original license period.
Second, the proposed Final Judgment restricts the manner in which
Microsoft may charge royalties for the distribution of its operating
system software with personal computers. Microsoft may not enter into
any ``per processor'' license (i.e., license requiring the computer
manufacturer to pay a royalty for each computer shipped with a
specified microprocessor). Microsoft's revenue from a license may not
be calculated on anything other than a per copy basis (i.e., royalty
for each unit of Microsoft operating system software licensed, sold or
distributed) or a per system basis (i.e., a royalty for each computer
system bearing a particular model name or number). Should Microsoft
enter into a per system agreement with a licensee it must provide a
statement, the text of which is set forth in the Final Judgment,
advising the licensee of its rights under the license.
Third, the proposed Final Judgment bans Microsoft from entering
into license agreements that prohibit or restrict a personal computer
manufacturer from licensing, selling, or distributing competing
operating system products. Microsoft may neither condition the
licensing of its operating systems on the licensing or use of other
products, nor may it enter into any license containing a minimum
commitment, nor may it use lump sum pricing.
Fourth, the proposed Final Judgment places limits on Microsoft's
use of non-disclosure agreements for its operating system products.
Microsoft is prohibited from entering into any non-disclosure agreement
whose duration extends beyond (a) the commercial release of the covered
product, (b) any prior public disclosure of information covered by the
agreement authorized by Microsoft, or (c) one year from the date of
disclosure of information covered by the agreement to a person subject
to the non-disclosure agreement, whichever comes first. Also, non-
disclosure agreements may not restrict persons subject to the agreement
from developing software products that will run on competing operating
systems, provided that such development does not entail the disclosure
or use of Microsoft proprietary information during the term of the
agreement. Nor may any non-disclosure agreement restrict the activities
of persons subject to the agreement to whom no information covered by
the agreement has been disclosed.
Computer manufacturers that currently have licenses that are
inconsistent with any provision of the Final Judgment may, without
penalty, terminate the license or negotiate with Microsoft to amend the
inconsistent provisions. Otherwise, Microsoft may enforce the license,
subject to the following restrictions: (a) if the license is a per
processor license, it must be treated as a per system license; and (b)
Microsoft may not enforce prospectively any minimum commitment.
Public comment is invited within the statutory 60-day comment
period. Such comments, and the responses thereto, will be published in
the Federal Register and filed with the Court. Written comments should
be directed to Richard L. Rosen, Chief, Communications & Finance
Section, Antitrust Division, Room 8104, 555 Forth Street NW.,
Washington, D.C. 20001 (202-514-5621). Copies of the Complaint,
proposed Final Judgment and Competitive Impact Statement are available
for inspection in Room 3233 of the Antitrust Division, Department of
Justice, Tenth Street and Pennsylvania Avenue NW., Washington. D.C.
20530 (202-633-2481) and at the office of the Clerk of the United
States District Court for the District of Columbia, Third Street and
Constitution Avenue NW., Washington, D.C. 20001.
Copies of any of these materials may be obtained upon request and
payment of a copying fee.
Mark C. Schechter,
Deputy Director of Operations, Antitrust Division.
In The United States District Court For The District of
Columbia, United States of America, Plaintiff, v. Microsoft
Corporation, Defendant. Civil Action No. 94-1564, Judge Charles R.
Richey
July 15, 1994.
Complaint
(For Violations of Sections 1 & 2 of the Sherman Act)
The United States of America, acting under the direction of the
Attorney General of the United States, brings this civil action to
prevent and restrain the defendant Microsoft Corporation
(``Microsoft'') from using exclusionary and anticompetitive contracts
to market its personal computer operating system software. By these
contracts, Microsoft has unlawfully maintained its monopoly of personal
computer (``PC'') operating systems and has unreasonably restrained
trade.
Virtually all major PC manufacturers find it necessary to offer
Microsoft operating systems on most of their PCs. Microsoft's monopoly
power allows it to induce these manufacturers to enter into
anticompetitive, long-term licenses under which they must pay royalties
to Microsoft not only when they sell PCs containing Microsoft's
operating systems, but also when they sell PCs containing non-Microsoft
operating systems.
These anticompetitive contracts help Microsoft maintain its
dominance in the PC operating system market. By inhibiting competing
operating systems' access to PC manufacturers, Microsoft's exclusionary
contracts slow innovation and deprive consumers of an effective choice
among competing PC operating systems.
These contracts outlined below constitute illegal monopolization
and unlawful restraints of trade, and the United States seeks this
Court's order declaring Microsoft's anticompetitive contracts illegal
and otherwise remedying the unlawful effects of Microsoft's
anticompetitive conduct.
Jurisdiction, Venue and Commerce
1. This Court has jurisdiction over this matter pursuant to Section
4 of the Sherman Act, 15 U.S.C. Sec. 4, and 28 U.S.C. Secs. 1331, 1337.
2. Venue is proper in this district under Section 12 of the Clayton
Act, 15 U.S.C. Sec. 22, and under 28 U.S.C. Sec. 1391 because defendant
Microsoft transacts business and is found within this district.
3. Microsoft sells and licenses operating systems for PCs
throughout the United States and the world. Microsoft delivers copies
of its operating systems to PC manufacturers and retail customers
across state lines and international borders. Thus, Microsoft is
engaged in, and its activities substantially affect, interstate and
foreign commerce. The major developers of other PC operating systems
are exclusively U.S. companies.
The Defendant Microsoft and Its Products
4. Microsoft is a corporation organized and existing under the laws
of the State of Washington, with its principal place of business
located at One Microsoft Way, Redmond, Washington.
5. Microsoft develops, licenses, sells and supports several types
of software products for PCs, including ``operating systems'' and
``applications.''
6. PC operating systems control the operation of a computer by
managing the interaction between the computer's microprocessor, memory
and attached devices such as keyboards, display screens, disk drives,
and printers. A PC operating system functions as the ``central nervous
system'' of the PC. PC operating system software is designed to work
with specific microprocessors, the integrated circuits that function as
the ``brain'' of the computer.
7. Most of the personal computers in the world today use the x86
class of microprocessors, originally designed by Intel Corporation. The
x86 class includes Intel 286, 386, 486, and Pentium microprocessors, as
well as microprocessors manufactured by other companies that use a
substantially similar architecture and instruction set. Unless
otherwise specified, the term ``PC'' refers to personal computers that
use the x86 class of microprocessors.
8. In 1980, Microsoft licensed from another company a PC operating
system which it modified and introduced in 1981 as the Microsoft Disk
Operating System (``MS-DOS''). According to Microsoft's 1993 Annual
Report, as of June 30, 1993, approximately 120 million PCs in the world
utilized MS-DOS.
9. In 1985, Microsoft introduced a more sophisticated PC operating
system product it calls ``Windows.'' Windows has a ``graphical user
interface'' which allows users to give instructions by pointing and
clicking on their computer screen with a ``mouse'' or other similar
device. Windows also allows users to run more than one application at a
time. All versions of Windows released to date require the presence of
an underlying operating system, either MS-DOS or a close substitute.
Microsoft estimates that over 50 million PCs now use Windows.
10. Applications are software programs that work ``on top of'' PC
operating systems to enable users to perform a broad range of
functions. Applications communicate through the PC operating system
with the computer's hardware. Commonly used applications include word
processors and spreadsheets, such as WordPerfect, Lotus 1-2-3, and
Quattro Pro among others. At least 50,000 applications now run on MS-
DOS and over 5,000 have been written to run on Windows. Microsoft sells
a variety of its own very successful and profitable applications.
11. Microsoft markets its PC operating system primarily through
original equipment manufacturers (``OEMs''), which manufacture PCs. It
also markets through independent, non-exclusive distributors. Microsoft
has agreements with virtually all of the major microcomputer OEMs.
12. Microsoft generally distributes MS-DOS only to OEMs. To retail
customers, Microsoft generally offers only upgrades for MS-DOS. In the
first half of 1994, the share of Windows units sold by Microsoft
through the OEM channel was approximately 80%.
The Relevant Market and Microsoft's Monopoly Power
13. The relevant product market is personal computer operating
systems for the x86 class of microprocessors (hereinafter the ``PC
operating system market''). Because operating systems written for other
microprocessors will not work on machines with an x86 class
microprocessor, OEMs who sell x86 machines and customers who buy such
machines cannot use other operating systems.
14. The relevant geographic market is the world.
15. Microsoft has monopoly power in the relevant market and has had
monopoly power since at least the mid-1980s. For almost a decade
Microsoft has retained an extremely high market share--consistently in
excess of 70%.
16. Substantial barriers to entry and expansion exist in the
relevant market. One barrier to entry and expansion is the considerable
time and expense required to develop, test, and market a new PC
operating system. Other interrelated barriers to entry and expansion
include:
a. the absence of a variety of high quality applications that run
on a new operating system, and the difficulty of convincing independent
software vendors (``ISVs'') to develop such applications;
b. the lack of a sizable installed base of users; and
c. the difficulty in convincing OEMs to offer and promote a non-
Microsoft PC operating system, particularly one with a small installed
base and relatively few applications designed to run on it.
17. These barriers magnify and reinforce each other because the
value of an operating system to a consumer is directly related to two
factors: the availability of a variety of high quality applications
that run on that system, and the number of users who use that operating
system and thus are able to share information and work with the system
without additional training. ISVs, in turn, tend to develop
applications for operating systems with a large installed base of
users, and consumers gravitate towards operating systems with a large
base of applications.
18. Microsoft's anticompetitive contracting practices described
below significantly increase the already high barriers to entry and
expansion facing competitors in the PC operating system market. These
practices reduce the likelihood that OEMs will license and promote non-
Microsoft PC operating systems, make it more difficult for Microsoft's
competitors to persuade ISVs to develop applications for their
operating systems, and impede the ability of a non-Microsoft PC
operating system to expand its installed base of users.
Microsoft's Exclusionary and Anticompetitive OEM Licenses Foreclose
Access to the OEM Channel by Microsoft's PC Operating System
Competitors
19. In 1980, IBM agreed to license the original version of MS-DOS
from Microsoft for IBM's PC, which experienced considerable success.
Other OEMs also used MS-DOS in order better to emulate the IBM PC.
Microsoft quickly dominated and gained a monopoly in the market for PC
operating systems. It then entered into a series of exclusionary and
anticompetitive contract terms to maintain its monopoly.
20. Because of Microsoft's monopoly position in the marketplace,
OEMs believe that they must offer MS-DOS and Windows to their
customers. Profit margins in the computer hardware industry are very
thin and OEMs want to obtain MS-DOS and Windows at the lowest possible
cost. Microsoft has induced many OEMs to execute anticompetitive ``per
processor'' contracts for MS-DOS and Windows, even though many would
prefer to preserve their freedom to offer PCs with non-Microsoft
operating systems.
Microsoft's Licenses Impose a Penalty or Tax Paid to Microsoft on OEMs'
Use of Non-Microsoft PC Operating Systems
21. Microsoft's licenses impose a penalty or ``tax'' paid to
Microsoft upon OEMs' use of competing PC operating systems. ``Per
processor'' licenses require OEMs to pay a royalty for each computer
the OEM sells containing a particular processor (e.g., an Intel 386
microprocessor) whether or not the OEM has included a Microsoft
operating system with that computer.
22. Microsoft's per processor contracts penalize OEMs, during the
life of the contract, for installing a non-Microsoft operating system.
OEMs that have signed per processor contracts with Microsoft are
deterred from using competitive alternatives to Microsoft operating
systems.
The Contract Length of Microsoft's Anticompetitive Per Processor
Contracts Magnifies Its Exclusionary Effects
23. Microsoft further impedes PC operating system competitors by
executing long-term contracts with major OEMs, and by requiring minimum
commitments and crediting unused balances to future contracts, which
effectively extends the contract term and makes it economically
unattractive for an OEM to install a non-Microsoft operating system.
24. Microsoft's exclusionary licenses are often for a duration of
three years or more--a period of time equal to, or exceeding, the
product life cycle of most PC operating system products. Microsoft
often extends the term of its OEM licenses through amendment. Thus,
Microsoft's anticompetitive per processor contracts can extend to
beyond five years.
Microsoft's Exclusionary Contracts Foreclose Other PC Operating System
Vendors From a Substantial and Critically Important Segment of the
Market
25. Access to the OEM channel is critical to the success of a
competing operating system. The overwhelming majority of PCs are sold
with a pre-installed operating system. Thus, to reach the ultimate
consumer of an operating system, it is important that competitors have
access to OEMs. Operating system vendors, as well as OEMs, confirm that
successful entry is extremely difficult in the absence of ``proper
support'' in the OEM channel in the form of public commitments to sell
a new operating system.
26. Since 1988, Microsoft has induced major OEMs to execute per
processor contracts, many of which extend for several years. These OEMs
are critical to the success of a new operating system entrant; it would
be virtually impossible for a new entrant to achieve commercial success
solely through license agreements with small OEMs that are not covered
by Microsoft's per processor agreements. According to Microsoft, in
fiscal year 1993, per processor agreements accounted for an estimated
60% of Microsoft's MS-DOS sales to OEMs and 43% of Window sales to
OEMs.
27. Competing operating system developers, finding the largest OEMs
contractually bound by Microsoft's exclusionary licenses, are
disadvantaged in their efforts to bring to the consumer less expensive
and/or better quality operating system products.
28. The effect of Microsoft's licensing practices has been to
exclude competitors by unreasonable and anticompetitive means and to
lessen competition in the relevant market. Microsoft's practices deter
OEMs from entering into licensing agreements with competing operating
system providers, discourage OEMs who agree to sell non-Microsoft
operating systems from promoting those products, and raise the price of
computers sold with competing operating systems, thereby depressing the
demand and restricting the output of these products. Microsoft's
licensing practices have effectively foreclosed a substantial share of
the relevant market; they are exclusionary, anticompetitive, and not
justified by legitimate business considerations.
Microsoft's Anticompetitive Non-Disclosure Agreements
29. ISVs develop applications, which motivate consumers to purchase
PCs. Microsoft has sought to have several commercially important ISVs
and their employees agree to non-disclosure agreements that would
restrict their ability to work with competing PC operating systems as
well as restrict their ability to develop competitive products.
30. Microsoft moved to impose these restrictions in connection with
its ``beta tests'' of its new operating system, the next version of
Windows, code-named Chicago. Microsoft anticipates commercially
releasing Chicago in late 1994 or early 1995. Beta tests of new
versions of an operating system, which are conducted prior to the
commercial release of that new version, help both Microsoft and the
ISVs.
31. For the ISVs, the beta tests provide, among other things,
critical information about the interfaces in the operating system that
connect with applications--information which the ISVs need to write
applications that run on the operating system. Early access to the beta
tests is especially valuable to the ISVs if they are to be able to
release their applications within a short time after the commercial
release of a new Microsoft operating system, such as Chicago.
32. For Microsoft, the beta tests enable ISVs, informed experts,
and selected members of the media to provide important feedback about
the advantages ad drawbacks of the operating system. In addition, the
demand for Microsoft's operating systems depends to a significant
extent on the availability of applications designed to work with it.
Accordingly, it is in Microsoft's interest to provide ISVs early access
to beta tests.
33. At the same time, because Microsoft necessarily must disclose
certain confidential information during the course of the beta tests,
it has legitimate interests in maintaining that confidentiality. In the
past, Microsoft has protected its interests through non-disclosure
agreements that prohibit those participating in the beta tests from
disclosing such confidential information.
34. In connection with its beta tests of Chicago, however,
Microsoft sought to impose on certain leading software companies far
more restrictive non-disclosure agreements than it had previously used.
The terms of these non-disclosure agreements would preclude developers
at these companies from working with operating system companies, other
competitors of Microsoft, and competing technologies for an
unreasonably long period of time.
The Anticompetitive Effects of Microsoft's Conduct
35. Microsoft's exclusionary contracting practices have had the
effect of excluding competitors on a basis other than competition on
the merits and have thereby allowed Microsoft illegally to perpetuate
its monopoly in the PC operating system market.
36. Through the unlawful acts and practices described above
Microsoft has harmed competition, consumers and innovation:
a. Microsoft has unlawfully maintained a monopoly in the PC
operating system market.
b. Microsoft's exclusionary conduct has significantly impeded the
ability of rival operating systems to compete in the PC operating
system market. Competitors find it more difficult to convince OEMs to
offer and/or promote their product and must incur greater marketing
expenses to penetrate the market. Microsoft raised hurdles to fair
competition even higher through unreasonably restrictive non-disclosure
agreements.
c. Microsoft's exclusionary licenses deprive rival PC operating
systems of a significant number of sales that they might otherwise
secure. These lost sales impede the ability of PC operating systems to
develop an installed base sufficient to convince OEMs to bundle the new
system with their hardware, to convince ISVs to write applications that
run on the new system, and to convince users that the system is, and
will remain, a viable alternative to the existing MS-DOS and Windows
standard.
d. Microsoft's conduct also substantially lengthens the period of
time required for competitors to recover their development costs and
earn a profit, and increases the risk that an entry attempt will fail.
In combination, all of these factors deter entry by competitors and
thus harm competition.
37. The harm to competition caused by Microsoft's unlawful conduct
harms consumers. OEMs that do offer customers a choice of operating
systems may charge customers a higher price for PCs with non-Microsoft
operating systems in order to be able to pay the double royalty
necessitated by the Microsoft per processor agreements. Thus, users who
do not receive a Microsoft operating system are still, indirectly,
paying Microsoft.
38. In addition, Microsoft's unlawful conduct has deterred the
development of competing operating systems, depriving consumers of a
choice of systems with possibly superior features. Similarly, the
slower growth of competing operating systems has slowed the development
and diffusion of applications designed to work on non-Microsoft
operating systems and has limited choices of consumers and users of
PCs.
39. Those injured by Microsoft's conduct will continue to suffer
such injury unless the relief prayed for herein is granted.
First Claim for Relief--Sherman Act Sec. 2
40. Plaintiff realleges and incorporates herein by reference the
allegations set forth in paragraphs 1 through 39 above.
41. By engaging in the acts and practices described above,
Microsoft has monopolized the market for PC operating systems in the
United States.
42. Such conduct constitutes monopolization in violation of Section
2 of the Sherman Act, 15 U.S.C. Sec. 2.
Second Claim for Relief--Sherman Act Sec. 1
43. Plaintiff realleges and incorporates by reference the
allegations set forth in paragraphs 1 through 39 above.
44. The licensing agreements and unnecessarily restrictive non-
disclosure agreements described above constitute contracts and
combinations which unreasonably restrain trade in the market for PC
operating systems, which affect interstate trade and commerce, in
violation of Section 1 of the Sherman Act, 15 U.S.C. Sec. 1.
Prayer for Relief
Wherefore, Plaintiff Prays For Relief As Follows:
1. That the Court adjudge and decree that Microsoft has monopolized
the interstate trade and commerce in the market for PC operating
systems in violation of Section 2 of the Sherman Act.
2. That the Court adjudge and decree that Microsoft has entered
into unlawful contracts and combinations which unreasonably restrain
the trade in interstate commerce in PC operating systems, in violation
of Section 1 of the Sherman Act.
3. That Microsoft and all persons, firms and corporations acting on
its behalf and under its direction or control be permanently enjoined
from engaging in, carrying out, renewing or attempting to engage, carry
out or renew, any contracts, agreements, practices, or understandings
in violation of the Sherman Act.
4. That plaintiff have such other relief that the Court may
consider necessary or appropriate to restore competitive conditions in
the markets affected by Microsoft's unlawful conduct.
5. That the plaintiff recover the cost of this action.
Dated: July 15, 1994.
Anne K. Bingaman,
Assistant Attorney General.
Robert E. Litan,
Mark C. Schechter,
Richard L. Rosen,
James D. Bates,
Assistant U.S. Attorney, Chief, Civil Division, District of Columbia,
Washington, DC 20001.
Samuel R. Miller,
Donald J. Russell,
Joyce Bartoo,
Robert J. Zastrow,
Richard L. Irvine,
Peter A. Gray,
Justin M. Dempsey,
Gilad Y. Ohana,
Lawrence M. Frankel,
Attorneys, Antitrust Division, U.S. Department of Justice, 555 4th
Street NW., (202) 514-2401.
United States District Court for the District of Columbia,
United States of America, Plaintiff vs. Microsoft Corporation,
Defendant. Civil Action No. 94-1564, July 15, 1994.
Stipulation
It is stipulated by and between the undersigned parties, by their
respective attorneys, that:
1. The Court has jurisdiction over the subject matter of this
action and over each of the parties hereto, and venue of this action is
proper in the District of Columbia.
2. The parties consent that a Final Judgment in the form hereto
attached may be filed and entered by the Court, upon the motion of any
party or upon the Court's own motion, at any time after compliance with
the requirements of the Antitrust Procedures and Penalties Act (15
U.S.C. 16), and without further notice to any party or other
proceedings, provided that Plaintiff has not withdrawn its consent,
which it may do at any time before the entry of the proposed Final
Judgment by serving notice thereof on the Defendant and by filing that
notice with the Court; and
3. Defendant agrees to be bound by the provisions of the proposed
Final Judgment pending its approval by the Court. If the Plaintiff
withdraws its consent or if the proposed Final Judgment is not entered
pursuant to this Stipulation, this Stipulation shall be of no effect
whatsoever, and the making of this Stipulation shall be without
prejudice to any party in this or in any other proceeding.
Dated This 15th day of July 1994.
For The Plaintiff The United States Of America.
Anne K. Bingaman,
Assistant Attorney General, Antitrust Division, U.S. Department of
Justice.
For The Defendant Microsoft Corporation.
William H. Neukom,
Senior Vice President, Law and Corporate Affairs, Microsoft
Corporation.
In the United States District Court for the District of the
District of Columbia. United States of America, Plaintiff, v.
Microsoft Corporation, Defendant. Civil Action No. 94-1564 (SS).
Competitive Impact Statement.
Received: July 27, 1994, Clerk, U.S. District Court, District of
Columbia.
Competitive Impact Statement
Pursuant to Section 2(b) of the Antitrust Procedures and Penalties
Act, 15 U.S.C. Sec. 16(b)-(h), the United States submits this
Competitive Impact Statement relating to the proposed Final Judgment
submitted for entry with the consent of defendant Microsoft Corporation
in this civil antitrust proceeding.
Nature and Purpose of the Proceeding
On July 15, 1994, the United States filed a civil antitrust
Complaint to prevent and restrain Microsoft Corporation (``Microsoft'')
from using exclusionary and anticompetitive contracts to market its
personal computer operating system software, in violation of Sections 1
and 2 of the Sherman Act, 15 U.S.C. 1, 2. As alleged in the Complaint,
Microsoft has used these contracts to restrain trade and to monopolize
the market for operating systems for personal computers using the x86
class of microprocessors, which comprise most of the world's personal
computers. As used herein, ``PC'' refers to personal computers that use
this class of microprocessor.
The Complaint alleges that Microsoft has used its monopoly power to
induce PC manufacturers to enter into anticompetitive, long-term
licenses under which they must pay Microsoft not only when they sell
PCs containing Microsoft's operating systems, but also when they sell
PCs containing non-Microsoft operating systems. These anticompetitive,
long-term licenses have helped Microsoft to maintain its monopoly. By
inhibiting competing operating systems' access to PC manufacturers,
Microsoft's exclusionary licenses slow innovation, raise prices, and
deprive consumers of an effective choice among competing PC operating
systems.
The Complaint also alleges that in connection with pre-release
testing of a new Microsoft operating system code-named ``Chicago,''
Microsoft sought to impose unreasonably restrictive and anticompetitive
non-disclosure agreements on a number of leading developers of
applications software products. These non-disclosure agreements would
have unreasonably restricted the ability of software developers to work
with competing operating systems or to develop competitive products or
technologies.
The Complaint seeks to prevent Microsoft from continuing or
renewing any of the anticompetitive practices alleged to violate the
Sherman Act, and thus to provide fair opportunities for other firms to
compete in the market for PC operating systems.
The United States and Microsoft have agreed that the proposed Final
Judgment may be entered after compliance with the Antitrust Procedures
and Penalties Act.\1\ Entry of the Final Judgment will terminate this
civil action, except that the Court will retain jurisdiction for
further proceedings that may be required to interpret, enforce, or
modify the Judgment, or to punish violations of any of its provisions.
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\1\The proposed Final Judgment that was filed with the Complaint
on July 15, 1994 contained several omissions and inconsistencies in
the numbering of paragraphs and subparagraphs. With the Defendant's
consent, a corrected version of the Final Judgment is being filed
with this Competitive Impact Statement. See Attachment. Paragraph
and sub-paragraph numbers in this Competitive Impact Statement refer
to the numbers used in the corrected version of the Final Judgment.
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Description of the Practices Involved in the Alleged Violations
If this case were to proceed to trial, the United State would prove
the following:
Microsoft develops, licenses, sells, and supports several types of
software products for personal computers, including operating systems
and applications. An operating system is software that controls the
basic operations of the personal computer. Applications software, such
as word processing programs and spread sheets, runs ``on top of'' an
operating system to enable the computer to perform a broad range of
useful functions. Operating systems are designed to work with specific
microprocessors, the integrated circuits that function as the ``brain''
of the computer. Most of the personal computers in the world today use
the x86 class of microprocessors, originally designed by Intel, and now
including microprocessors manufactured by other companies that use a
substantially similar architecture and instruction set. Original
equipment manufacturers (``OEMs'') that sell PCs and customers who buy
such machines cannot use operating systems written for other
microprocessors.
In 1981, Microsoft introduced a PC operating system called the
Microsoft Disk Operating System (``MS-DOS''), the original version of
which Microsoft licensed to IBM for use in IBM's PC. As IBM's PC
experienced considerable commercial success, other OEMs also used MS-
DOS in order better to emulate the IBM PC. In 1985, Microsoft
introduced ``Windows,'' a more sophisticated PC operating system
product designed for use in conjunction with MS-DOS. Windows allowed
users to give instructions with a ``mouse'' or similar device and also
to run more than one application at a time. Microsoft quickly gained a
monopoly in the market for PC operating systems worldwide. For almost a
decade, Microsoft's market share has consistently exceeded 70%.\2\
---------------------------------------------------------------------------
\2\In 1993, Microsoft's MS-DOS operating system constituted
approximately 79% of the operating systems sold to PC manufacturers.
PC-DOS accounted for approximately 13% of such sales, OS/2
constituted approximately 4%, DR-DOS constituted approximately 3%,
and Unix operating systems constituted approximately 1%. A chart
showing these market shares is attached as Exh. 1.
---------------------------------------------------------------------------
Development, testing, and marketing of a new PC operating system
involves considerable time and expense. A new operating system faces
additional barriers to entry, including the absence of a variety of
high quality applications to run on the system; the small number of
people trained on and using the system, which discourages customers
from buying it and software companies from writing applications to run
on it; and, since the overwhelming majority of PCs are sold with a pre-
installed operating system, the difficulty of convincing OEMs to offer
and promote the system.
Microsoft has used exclusionary and anticompetitive contract terms
to maintain its monopoly. OEMs believe that a substantial portion of
their customers will want a PC with MS-DOS and Windows, and therefore
feel that they must be able to offer their customers MS-DOS and
Windows. With thin profit margins, OEMs want to obtain these products
at the lowest possible cost.
Beginning in 1988, and continuing until July 15, 1994, Microsoft
induced many OEMs to execute anticompetitive ``per processor''
licenses. Under a per processor license, an OEM pays Microsoft a
royalty for each computer it sells containing a particular
microprocessor, whether the OEM sells the computer with a Microsoft
operating system or a non-Microsoft operating system. In effect, the
royalty payment to Microsoft when no Microsoft product is being used
acts as a penalty, or tax, on the OEM's use of a competing PC operating
system. Since 1988, Microsoft's use of per processor licenses has
increased. In fiscal year 1993, per processor licenses accounted for an
estimated 60% of MS-DOS sales to OEMs and 43% of Window sales to
OEMs.\3\ Collectively, the OEMs who have such per processor contracts
are critical to the success of competing operating system vendors, but
those OEMs effectively are foreclosed to Microsoft's competitors.
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\3\Per processor licenses accounted for an increasing proportion
of Microsoft's operating system sales in the 1988-1993 period.
Twenty per cent of all units of MS-DOS that were sold to OEMs in FY
1989 were sold pursuant to per processor licenses. That percentage
increased to 22% in FY 1990; 27% in FY 1991; 50% in FY 1992; and to
60% in FY 1993. A chart showing this increasing use of per-processor
licenses is attached as Exh. 2.
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Microsoft has further foreclosed the OEM channel through the use of
long-term contracts with major OEMs, some expiring as long as five
years from their original negotiation date. In some cases, these
contracts have left OEMs with unused balances on their minimum
commitments, which Microsoft can allow to be used if the contract is
extended, but which would be forfeited if the OEM does not extend the
contract. These practices have allowed Microsoft to extend the
effective duration of its OEM contracts, further impeding the access of
PC operating system competitors to the OEM channel.
In addition to using anticompetitive OEM licenses, Microsoft has
also employed anticompetitive restrictions in certain of its non-
disclosure agreements (``NDAs''). Microsoft anticipates commercially
releasing Chicago, the next version of Windows, in late 1994 or early
1995. In preparation for its release, Microsoft has allowed certain
third parties, including independent software vendors (``ISVs'') who
write applications, to have access to pre-release versions of Chicago,
a process known in the software industry as ``beta testing.'' This
permits Microsoft to receive feedback from the beta testers, and the
ISVs to begin writing applications for Chicago prior to its release.
In connection with beta testing Chicago, Microsoft employed, as it
has in prior beta tests, NDAs prohibiting disclosure of confidential
information. In this instance, however, Microsoft sought to impose on
certain leading software companies far more restrictive NDAs than it
had previously used. These NDAs would have precluded developers from
working on competitive products and technologies for an unreasonably
long period of time.
Through these practices, Microsoft has excluded competitors by
unreasonable and anticompetitive means, thereby lessening competition
and maintaining a monopoly in the PC operating system market.
Microsoft's licensing practices deter OEMs from entering into licensing
agreements with operating system rivals and discourage OEMs who agree
to sell non-Microsoft operating systems from promoting those systems.
By depriving rivals of a significant number of sales that they might
otherwise secure, Microsoft makes it more difficult for its rivals to
convince ISVs to write applications for their systems, for OEMs to
offer and promote their systems, and for users to believe that their
systems will remain viable alternatives to MS-DOS and Windows.
Microsoft's exclusionary contracts harm consumers. OEMs that sign
Microsoft's exclusionary licenses but offer consumers a choice of
operating systems may charge a higher price, in order to cover the
double royalty, for PCs using a non-Microsoft operating system. Even
consumers who do not receive a Microsoft operating system still pay
Microsoft indirectly. Thus, Microsoft's licensing practices have raised
the cost of personal computers to consumers.
Microsoft's conduct also substantially lengthens the period of time
required for competitors to recover their development costs and earn a
profit, and thereby increases the risk that an entry attempt will fail.
In combination, all these factors deter entry by competitors and thus
harm competition. By deterring the development of competitive operating
systems, Microsoft has deprived consumers of a choice of potentially
superior products. Similarly, the slower growth of competing operating
systems has retarded the development of applications for such systems.
Explanation of the Proposed Final Judgment
The proposed Final Judgment will end Microsoft's unlawful practices
that restrain trade and perpetuate its monopoly power in the market for
PC operating systems. In addition, the proposed Final Judgment contains
provisions that are remedial in nature and designed to assure that
Microsoft will not engage in the future in exclusionary practices
designed to produce the same or similar effects as those set forth in
the Complaint.
In particular, Sections IV (A), (C), and (F) prohibit Mirosoft's
use of the specific exclusionary practices alleged in the complaint--
``per processor'' contracts, lengthy terms, and minimum commitments--
that foreclose competing PC operating system vendors from much of the
OEM channel. Sections IV (K)-(L) prohibit the use of anticompetitive
non-disclosure agreements in conjunction with Mirosoft's distribution
of pre-commercial releases of operating system software products.
Sections IV (B), (E), (G), and (H) impose prohibitions that go beyond
the alleged exclusionary practices in order to ensure that Microsoft's
future contracting practices--not challenged here because not yet
used--do not unreasonably impede competition. Sections IV (J) and (M)
are designed to bring existing contracts into immediate compliance with
the proposed Final Judgment.
Scope of the Final Judgment
The injunctions in Section IV generally apply to ``covered
products'' which are defined, in Section II(A), as the binary code of
MS-DOS 6.22; Microsoft Windows 3.11; Windows for Workgroups 3.11;
predecessor versions of those products; the product currently code-
named ``Chicago'' (the planned successor to Microsoft Windows 3.11);
and other successor versions of or products marketed as replacements
for the aforementioned products. This definition includes all
Microsoft's PC operating system products in which the defendant
currently possesses a substantial degree of market power. The
definition does not encompass and specifically excludes, Windows NT
Workstation and Windows NT Advanced Server, neither of which has a
significant share of a relevant market at this time.
The definition of ``covered product'' was drafted with the
recognition that Microsoft will continue to modify its operating system
products throughout the duration of the Final Judgment. The
prohibitions in the decree will apply to the successor and replacement
products of those existing operating system products that have
substantial market power. The decree will govern the licensing of such
products if they are made available as stand-alone products to OEMs
pursuant to license agreements, or as unbundled products that perform
operating system software functions now embodied in the specifically
listed existing products. Moreover, the decree will govern the
licensing of successor versions of or products marketed as replacements
for MS-DOS 6.22, Microsoft Windows 3.11, Windows for Workgroups 3.11,
and ``Chicago,'' even if such successor or replacement products could
also be characterized as successors or replacements of operating system
software products that are not covered, such as windows NT Workstation
or Windows NT Advanced Server.
Prohibition of the Licensing Violations
The three anticompetitive factors of Microsoft's license agreements
that are challenged in the complaint--the excessive duration of those
agreements, the requirement of royalty payments on a ``per processor''
basis, and large minimum commitments--are addressed principally in
Sections IV(A), IV(C) and (IV)(F) of the Final Judgment.
Duration: Section IV(A) limits the duration of Microsoft's license
agreements with OEMs to one year, with OEMs having the option to renew
a license for one additional one year term on the same terms and
conditions as in the first year. This limitation on the duration of
license agreements, along with the safeguards provided in Section
IV(G), will ensure that vendors of competing operating systems will
have regular and frequent opportunities to attempt to market their
products to OEMs. Absent such opportunities, Microsoft's competitors
might be unable to reach the level of market penetration needed for
profitable operation in a reasonable period of time, even if they are
offering products that are deemed superior by those customers who have
an opportunity to buy them.
Per Processor Licenses: Section IV(C) prohibits the use of per
processor licenses.\4\ Section II(K) defines per processor licenses as
licenses that require the OEM to pay a royalty for all personal
computer systems that contain specified microprocessors. As noted
above, the requirement to pay a royalty to Microsoft on the sale of a
PC that has a non-Microsoft operating system is comparable, in its
economic effect, to the imposition of a ``tax'' on the competing
operating system. Per processor licenses are also very similar to
exclusive dealing or requirements contracts; the OEM in effect is
obtaining the right to use Microsoft's operating system, and is paying
an operating system royalty, for all of its operating system
``requirements'' for use on PCs using the designated microprocessors.
---------------------------------------------------------------------------
\4\Section IV(J)(1) converts all per processor licenses to per
system licenses, except those models which an OEM excludes, which
will thereafter be subject to the limitations imposed on Microsoft
by Section IV(G).
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Minimum Commitments: Section IV(F) will bar Microsoft from entering
into any license agreement containing a minimum commitment.\5\ While
minimum commitments are not in and of themselves illegal, they can be
used to achieve a similar effect as that accomplished through per
processor licenses or exclusive dealing contracts. If the minimum
commitment is greater than the number of units of Microsoft software
that the OEM expects or would otherwise desire to use at any time
during the term of the contract, the minimum commitment creates a
disincentive for an OEM to make incremental purchases of non-Microsoft
operating systems. In that context, the minimum commitment also
operates in effect to require a royalty payment to Microsoft, even for
PCs that use a non-Microsoft operating system. This effect will be
ended by Section (IV)(F).
---------------------------------------------------------------------------
\5\Section IV(J)(2) prohibits Microsoft from prospectively
enforcing minimum commitments in existing license agreements.
---------------------------------------------------------------------------
Restoring Competition to the Market Through Prophylactic Additional
Relief
The proposed Final Judgment not only bans Microsoft's unlawful
practices, but also contains additional provisions which are
prophylactic in nature, and are intended to ensure that the
anticompetitive effects of those practices are not replicated through
use by Microsoft of other exclusionary practices.
Microsoft Prohibited From Limiting OEM Sales of Competing Operating
System Products: Section IV (B) bars Microsoft from entering into
license agreements that prohibit or restrict an OEM from licensing,
selling, or distributing competing operating system products. In
addition, Section IV (E) prohibits Microsoft from expressly or
impliedly conditioning its licenses of operating systems on the
licensing, purchase, use or distribution not only of other covered
products, but also any other Microsoft product, or non-Microsoft
product. Without these provisions Microsoft could force OEMs to
purchase covered products and thus accomplish anticompetitive effects
similar to those achieved through its unlawful licensing practices, or
attempt to extend or protect its monopoly in any covered product by
conditioning its licensing, purchase or use of other products.
Microsoft Limited to Per Copy and Per System Licenses: Sections IV
(D) and IV (G) require Microsoft to use either ``per copy'' or ``per
system'' licenses. Per copy licenses, if used in conjunction with pro-
competitive volume discounts, pose few competitive concerns. Per system
licenses, if not carefully fenced in, could be used by Microsoft to
accomplish anticompetitive ends similar to ``per processor'' licenses.
However, if an OEM easily can designate models not subject to a per
system license, it can use non-Microsoft operating systems on those
models without incurring a royalty obligation to Microsoft. If an OEM
need not pay a royalty to Microsoft for anything but the number of
copies of the Microsoft operating system that it actually uses, that
OEM will not be deterred from licensing, purchasing or using competing
operating system products.
Restriction on Per System Licenses: The Final Judgment also places
restrictions on the use of per system licenses to ensure that they are
not used in an exclusionary manner. In particular, Section IV (G)
specifies that per system licenses must allow the licensee to create
``new systems'' that can be sold without incurring a royalty obligation
to Microsoft if they do not utilize a Microsoft product. Under Section
IV (G), an OEM need only designate a new model name or number to create
a ``new system.'' Microsoft may not require the OEM even to notify
Microsoft of the creation of a new system; nor may Microsoft impose
requirements relating to the marketing or advertising of a new system,
or penalize an OEM for creating a new system. Section IV (G)(4)
requires Microsoft to notify within 30 days following entry of this
Final Judgment all existing OEM licensees under per system licenses and
all OEM licensees with per processor licenses who choose to let them to
be converted to per system licenses (a provision discussed below) of
their rights to create new systems that will not be subject to any
existing per system license. This notice provision ensures that
existing licensees promptly know of their rights to avoid royalty
payments under per system contracts if they choose to create new
systems.
Microsoft Prohibited From Using Lump Sum Pricing: Section IV (H)
also serves a prophylactic function, prohibiting the use of lump sum
pricing in license agreements for covered products. As defined in
Section II (F), lump sum pricing is any royalty payment that does not
vary with the number of copies of the covered product (under per copy
licenses) or the number of personal computer systems (under per system
licenses) that are licensed, sold, or distributed by the OEM. This
restriction, like the prohibitions on minimum commitments and
requirements contracts, restricts conduct that could be used by
Microsoft to achieve effects comparable to the effects of the conduct
challenged by the government, and for that reason is enjoined.\6\
---------------------------------------------------------------------------
\6\If a license agreement established a minimum commitment
greater than the OEM's requirements for operating systems (an
agreement that would be prohibited under this decree), the minimum
commitment would constitute, in effect, a lump sum payment.
Regardless of the number of copies distributed by the OEM, its
royalty payment to Microsoft would not vary. A lump sum pricing
arrangement imposed by a monopolist that allowed unlimited use of
the licensed product for a single fee calibrated to the anticipated
total operating system needs of a particular OEM would also produce
a similar economic effect as a requirements contract or a per
processor license: the OEM would owe the same royalty to Microsoft
whether it chose to use a Microsoft operating system on all of the
PCs it sold, or only on some of the PCs it sold, and would, in
effect, ``pay twice'' if it chose to purchase a non-Microsoft
operating system for some of its PCs.
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Neither Section IV (H) nor any other provision of the proposed
Final Judgment prohibits the use of royalty rates, including rates
embodying volume discounts, agreed upon in advance with respect to each
individual OEM, each specific version or language of a covered
products, and each designated personal computer system model. Nothing
in the Final Judgment, however, in any way sanctions Microsoft
structuring any volume discount whose purpose or effect is to impose de
facto requirements contracts or exclusive arrangements on the OEM. As
discussed below in connection with alternatives to the proposed Final
Judgment, given Microsoft's monopoly power in operating systems, such
practices can violate the antitrust laws.
Transition Rules
In the Stipulation consenting to the entry of the proposed Final
Judgment, Microsoft agreed to abide by the provisions of the proposed
Final Judgment immediately upon the filing of the Complaint, i.e., as
of July 15, 1994. Among other things, the transition provisions
described herein will require Microsoft to abide by the foregoing
limitations and prohibitions when entering into any license agreements
with OEMs after July 15, 1994. Certain additional provisions of the
proposed Final Judgment also apply to existing license agreements that
are inconsistent with the proposed Final Judgment's requirements for
new license agreements.
Under Section IV (I), existing OEM licensees may terminate or
negotiate with Microsoft to amend their agreements to make them
consistent with the requirements of the Final Judgment.
Section IV (J) provides that if an OEM chooses not to exercise
either of these options, Microsoft must abide by the following rules.
First, under Section IV (J)(1), a per processor license must be treated
as a ``per system'' license' OEM models that contain the
microprocessor(s) specified in such a per processor license will be
considered to be covered by the ``per system'' license unless the OEM
opts in writing to exclude such model from coverage. As already noted,
OEMs may freely sell PCs with non-Microsoft operating systems, and
avoid any obligation to pay royalties to Microsoft under a per system
license, simply by designating such PCs as a new system with a separate
model number or name. Second, under Section IV (J)(2), Microsoft may
not enforce any minimum commitment in an existing license agreement.
These provisions further two consistent goals. Opportunities for
competition in the PC operating system market are fostered by a rapid
end to the unlawful practices embodied in existing licenses. At the
same time, the transition rules avoid creating hardships for OEMs by
not unnecessarily disrupting established commercial relationships with
Microsoft. Indeed, OEMs are not required to terminate or amend their
existing contracts with Microsoft; the choice to do so is theirs alone.
Microsoft, however, may not enforce the per processor or minimum
commitment features of any existing contract. Providing OEMs with this
choice minimizes the costs of the transition from existing license
agreements that are inconsistent with the decree to new license
agreements, while ensuring that any unavoidable transition costs be
borne largely by Microsoft.
To ensure that existing licensees learn of their rights under the
proposed Final Judgment, Section IV (M) requires Microsoft to provide a
copy of the Final Judgment to all OEMs with which it has license
agreements, except for those who have licenses only under Microsoft's
Small Volume Easy Distribution program or the Delivery Service Partner
program.
Non-Disclosure Agreements
Finally, the proposed Final Judgment contains provisions that
prevent Microsoft from imposing unlawfully restrictive NDAs on
developers of applications software.
Sections IV(K)(l) limits the duration of any NDA to the earliest of
(a) the commercial release of the product covered by the NDA, (b) an
earlier public disclosure of the information covered by the NDA, or (c)
one year after the information is disclosed to the person subject to
the NDA. Section IV(K)(2) provides that NDAs may not restrict subject
parties from developing software products that will run on competing
operating systems, if such development does not entail the use or
disclosure of Microsoft proprietary information during the term of the
NDA.
In combination, these provisions recognize that whatever
Microsoft's legitimate interest in protecting the confidentiality of
proprietary information covered by the NDAs, the need for any such
protection must be balanced against the competitive consequences of any
restriction imposed on others concerning disclosure and use of the
information. The proposed Final Judgment ensures that any NDA imposed
by Microsoft will not extend beyond the point that the information has
been released to the public or has otherwise been in the hands of
parties for more than one year.
Section IV(L) requires that the form of all standard NDAs must be
approved by a Microsoft corporate officer, and that non-standard
language in an NDA relating to matters covered in Section (K) must be
approved by a Microsoft senior attorney. These provisions are designed
to ensure that NDAs will be reviewed by company officials mindful of
the requirements of the Final Judgment.
Enforcement
Section V of the proposed Final Judgment establishes standards and
procedures by which the Department of Justice may obtain access to
documents and information from Microsoft related to its compliance with
the Final Judgment.
In particular, Section V(D) contains provisions under which the
Department can obtain information and documents relating to any
Undertaking by or Decision against Microsoft arising from parallel
antitrust proceedings of the Directorate-General for Competition of the
European Commission (``DG-IV''). This provision will allow the
Department to coordinate its monitoring and enforcement of compliance
of the Final Judgment with DG-IV's monitoring and enforcement of
parallel provisions contained in an Undertaking with DG-IV signed by
Microsoft on July 15, 1994.
Duration
Section VI of the proposed Final Judgment provides that the Final
Judgment will expire on the seventy-eighth month after its entry.
Jurisdiction will be retained by the Court to conduct further
proceedings relating to the Final Judgment, as specified in Section VI.
Remedies Available to Potential Private Litigants
Section 4 of the Clayton Act, 15 U.S.C. Sec. 15, provides that any
person who has been injured as a result of conduct prohibited by the
antitrust laws may bring suit in federal court to recover three times
the damages suffered, as well as costs and reasonable attorney's fees.
Entry of the proposed Final Judgment will neither impair nor assist the
bringing of such actions. Under the provisions of Section 5(a) of the
Clayton Act, 15 U.S.C. Sec. 16(a), the Judgment has no prima facie
effect in any subsequent lawsuit that may be brought against the
defendant in this matter.
Procedures Available for Modification of the Proposed Judgment
As provided by the Antitrust Procedures and Penalties Act, any
person believing that the proposed Final Judgment should be modified
may submit written comments to Richard L. Rosen, Chief, Communications
and Finance Section, United States Department of Justice, Antitrust
Division, 555 4th Street N.W., Room 8104, Washington, D.C. 20001,
within the 60-day period provided by the Act. These comments, and the
Department's responses, will be filed with the Court and published in
the Federal Register. All comments will be given due consideration by
the Department of Justice, which remains free to withdraw its consent
to the proposed Final Judgment at any time prior to entry. If the
Department does not withdraw its consent to the proposed Final
Judgment, it will file with the Court a Certificate of Compliance after
the requirements of the Antitrust Procedures and Penalties Act have
been satisfied. The Court then must determine whether the proposed
decree is in the public interest, pursuant to Section 5(e) of the
Clayton Act, 15 U.S.C. Sec. 16(e).\7\
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\7\In making this public interest determination, ``[t]he
balancing of competing social and political interests affected by a
proposed antitrust consent decree must be left, in the first
instance, to the discretion of the Attorney General. The court's
role in protecting the public interest is one of insuring that the
government has not breached its duty to the public in consenting to
the decree. The court is required to determine not whether a
particular decree is the one that will best serve society, but
whether the settlement is `within the reaches of the public
interest.''' United States v. Bechtel Corp., 648 F.2d 660, 666 (9th
Cir.), cert. denied, 454 U.S. 1083 (1981) (citations and internal
quotations omitted). Accord United States v. Western Electric Co.,
993 F.2d 1572, 1576 (D.C. Cir. 1993); United States v. American Tel.
and Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982), aff'd sub nom.
Maryland v. United States, 460 U.S. 1001 (1983).
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Alternatives to the Proposed Final Judgment
In addition to the remedies provided in the proposed Final
Judgment, the Department also considered whether to require limitations
on the manner in which Microsoft could structure volume discount
pricing arrangements for covered products. While the Department
recognizes that volume discount pricing can be and normally is pro-
competitive, volume discounts also can be structured by a seller with
monopoly power (such as Microsoft) in such a way that buyers, who must
purchase some substantial quantity from the monopolist, effectively are
coerced by the structure of the discount schedule (as opposed to the
level of the price) to buy all or substantially all of the supplies
they need from the monopolist. Where such a result occurs, the
Department believes that the volume discount structure would unlawfully
foreclose competing suppliers from the marketplace--in this case,
competing operating systems--and thus may be challenged.
The Department ultimately concluded that it would not require
provisions in the Final Judgment to attempt to proscribe in advance the
various means by which Microsoft could attempt to structure volume
discounts as a means to thwart competition rather than as a means of
promoting competition. The Department reached this conclusion because
it does not have evidence that Microsoft has, to date, in fact
structured its volume discounts to achieve anticompetitive ends. The
Department did, however, communicate to Microsoft its concern and
stated its intent to initiate an investigation and antitrust
enforcement proceeding, if warranted, should Microsoft adopt
anticompetitive volume discount structures in its future license
agreements. Given the procompetitive impact of the provisions of the
proposed Final Judgment, the normally procompetitive nature of volume
discount pricing, and the absence of any evidence that Microsoft has
used volume discounting in an anticompetitive manner to date, the
Department believes that this resolution is appropriate on the record
at this time.
Another alternative to the proposed Final Judgment would be a full
trial of this case. The Department of Justice believes that such a
trial would involve substantial cost to the United States and is not
warranted since the proposed Final Judgment provides all of the relief
that the United States seeks in its Complaint and includes substantial
additional prophylactic measures as well.
Determinative Materials and Documents
No materials or documents of the type described in Section 2(b) of
the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b), were
considered in formulating the proposed Final Judgment.
Dated: July 27, 1994.
Respectfully submitted,
Anne K. Bingaman,
Assistant Attorney General, Antitrust Division.
Donald J. Russell,
U.S. Department of Justice, Antitrust Division, Communications &
Finance Section, Judiciary Center Building, 555 Fourth Street, N.W.,
Washington, DC 20001, (202) 514-5814.
United States District Court for the District of Columbia,
United States of America, Plaintiff, v. Microsoft Corporation,
Defendant. Civil Action No. 94-1564 (SS)
Final Judgment
Whereas Plaintiff, United States of America, having filed its
Complaint in this action on July 15, 1994, and Plaintiff and Defendant,
by their respective attorneys, having consented to the entry of this
Final Judgment without trial or adjudication of any issue of fact or
law; and without this Final Judgment constituting any evidence or
admission by any party with respect to any issue of fact or law;
Now, Therefore, before any testimony is taken, and without trial or
adjudication of any issue of fact or law, and upon consent of the
parties, it is hereby
Ordered, Adjudged and Decreed as follows:
I. Jurisdiction
This Court has jurisdiction of the subject matter of this action
and of the person of the Defendant, Microsoft Corporation
(``Microsoft''). The Complaint states a claim upon which relief may be
granted against the Defendant under Sections 1 and 2 of the Sherman
Act, 15 U.S.C. Secs. 1, 2.
II. Definitions
(A) Covered Product(s) means the binary code of (1) MS-DOS 6.22,
(2) Microsoft Windows 3.11, (3) Windows for Workgroups 3.11, (4)
predecessor versions of the aforementioned products, (5) the product
currently code-named ``Chicago,'' and (6) successor versions of or
replacement products marketed as replacements for the aforementioned
products, whether or not such successor versions or replacement
products could also be characterized as successor versions or
replacement products of other Microsoft Operating System Software
products that are made available (a) as stand-alone products to OEMs
pursuant to License Agreements, or (b) as unbundled products that
perform Operating System Software functions now embodied in the
products listed in subsections (1) through (5). The term ``Covered
Products'' shall not include ``Customized'' versions of the
aforementioned products developed by Microsoft; nor shall it apply to
Windows NT Workstation and its successor versions, or Windows NT
Advanced Server.
(B) Customized means the substantial modification of a product by
Microsoft to meet the particular and specialized requirements of a
final customer of a computer system. It does not include the adaptation
of such a product in order to optimize its performance in connection
with a Personal Computer System manufactured by an OEM.
(C) Duration means, with respect to a License Agreement, the period
of time during which an OEM is authorized to license, sell or
distribute any of the Covered Products.
(D) A License Agreement means any license, contract, agreement or
understanding, or any amendment thereto, written or oral, express or
implied, pursuant to which Microsoft authorizes an OEM to license, sell
or distribute any Covered Product with its Personal Computer System(s).
(E) A Minimum Commitment means an obligation of an OEM to pay
Microsoft a minimum amount under a License Agreement, regardless of
actual sales.
(F) Lump Sum Pricing means any royalty payment for a Covered
Product that does not vary with the number of copies of the Covered
Product that are licensed, sold or distributed by the OEM or of
Personal Computer Systems distributed by the OEM.
(G) New System means a system not included or designated in a Per
System License.
(H) NDA means any non-disclosure agreement for any pre-commercial
release of a Covered Product that imposes any restriction on the
disclosure or use of any such pre-commercial release of any Covered
Product or any information relating thereto.
(I) OEM means an original equipment manufacturer or assembler of
Personal Computer Systems or Personal Computer System components (such
as motherboards or sound cards) or peripherals (e.g., printers or mice)
that is a party to a License Agreement.
(J) Per Copy License means any License Agreement pursuant to which
the OEM's royalty payments are calculated by multiplying (1) the number
of copies of each Covered Product licensed, sold or distributed during
the term of the License Agreement, by (2) a per copy royalty rate
agreed upon by the OEM and Microsoft, which rate may be determined as
provided in Section IV (H).
(K) Per Processor License means a License Agreement under which
Microsoft requires the OEM to pay Microsoft a royalty for all Personal
Computer Systems that contain the particular microprocessor type(s)
specified in the License Agreement.
(L) Per System License means a License Agreement under which
Microsoft requires the OEM to pay Microsoft a royalty for all Personal
Computer Systems which bear the particular model name(s) or number(s)
which are included or designated in the License Agreement by the OEM to
Microsoft, at the OEM's sole option and under the terms and conditions
as set forth herein.
(M) Personal Computer System means a computer designed to use a
video display and keyboard (whether or not the video display and
keyboard are actually included) which contains an Intel x86, or Intel
x86-compatible microprocessor.
(N) Operating System Software means any set of instructions, codes,
and ancillary information that controls the operation of a Personal
Computer System and manages the interaction between the computer's
memory and attached devices such as keyboards, display screens, disk
drives, and printers.
III. Applicability
This Final Judgment applies to Microsoft and to each of its
officers, directors, agents, employees, subsidiaries, successors and
assigns; and to all other persons in active concert or participation
with any of them who shall have received actual notice of this Final
Judgment by personal service or otherwise.
IV. Prohibited Conduct
Microsoft is enjoined and restrained as follows:
(A) Microsoft shall not enter into any License Agreement for any
Covered Product that has a total Duration that exceeds one year
(measured from the end of the calendar quarter in which the agreement
is executed).
Microsoft may include as a term in any such License Agreement that
the OEM may, at its sole discretion, at any time between 90 and 120
days prior to the expiration of the original License Agreement, renew
such License Agreement for up to one additional year on the same terms
and conditions as those applicable in the original license period.
The License Agreement shall not impose a penalty or charge of any
kind on an OEM for its election not to renew all or any portion of a
License Agreement. In the event that an OEM does not exercise the
option to renew a License Agreement as provided above, and a new
License Agreement is entered between Microsoft and the OEM, the arm's
length negotiation of different terms and conditions, specifically
including a higher royalty rate(s), will not by itself constitute a
penalty or other charge within the meaning of the foregoing sentence.
The Duration of any License Agreement with an OEM not domiciled in
the United States or the European Economic Area that will not be
effective prior to regulatory approval in the country of its domicile
may be extended at the option of Microsoft or the OEM during the time
required for any such regulatory approval.
License Agreement provisions that do not bear on the licensing or
distribution of the Covered Products may survive expiration or
termination of the License Agreement.
(B) Microsoft shall not enter into any License Agreement that by
its terms prohibits or restricts the OEM's licensing, sale or
distribution of any non-Microsoft Operating System Software product.
(C) Microsoft shall not enter into any Per Processor License.
(D) Except to the extent permitted by Section IV (G) below,
Microsoft shall not enter into any License Agreement other than a Per
Copy License.
(E) Microsoft shall not enter into any License Agreement in which
the terms of that agreement are expressly or impliedly conditioned
upon:
(1) the licensing of any other Covered Product, Operating System
Software product or other product (provided, however, that this
provision in and of itself shall not be construed to prohibit Microsoft
from developing integrated products); or
(2) the OEM not licensing, purchasing, using or distributing any
non-Microsoft product.
(F) Microsoft shall not enter into any License Agreement containing
a Minimum Commitment. However, nothing contained herein shall prohibit
Microsoft and any OEM from developing non-binding estimates of
projected sales of Microsoft's Covered Products for use in calculating
royalty payments.
(G) Microsoft's revenue from a License Agreement for any Covered
Product shall not be derived from other than Per Copy or Per System
Licenses, as defined herein. In any Per System License:
(1) Microsoft shall not explicitly or implicitly require as a
condition of entering into any License Agreement, or for purposes of
applying any volume discount, or otherwise, that any OEM include under
its Per System License more than one of its Personal Computer Systems;
(2) Microsoft shall not charge or collect royalties for any Covered
Product on any Personal Computer System unless the Personal Computer
System is designated by the OEM in the License Agreement or in a
written amendment. Microsoft shall not require an OEM which creates a
New System to notify Microsoft of the existence of such a New System,
or to take any particular actions regarding marketing or advertising of
that New System, other than creation of a unique model name or model
number that the OEM shall use for internal and external identification
purposes. The requirement of external identification may be satisfied
by placement of the unique model name or model number on the machine
and its container (if any), without more. The OEM and Microsoft may
agree to amend the License Agreement to include any new model of
Personal Computer System in a Per System License. Nothing in this
clause shall be deemed to preclude Microsoft from seeking compensation
from an OEM that makes or distributes copies of a Covered Product in
breach of its License Agreement or in violation of copyright law;
(3) The License Agreement shall not impose a penalty or charge on
account of an OEM's choosing at any time to create a New System.
Addition of a New System to the OEM's License Agreement so that Covered
Products are licensed for distribution with such New System and
royalties are payable with respect thereto shall not be deemed to
constitute a penalty or other charge of any kind within the meaning of
the foregoing sentence;
(4) All OEMs with existing Per System Licenses, or Per Processor
Licenses treated by Microsoft under Section IV (J) as Per System
Licenses, will be sent within 30 days following entry of this Final
Judgment in a separately mailed notice printed in bold, boxed type
which shall begin with the sentence ``You are operating under a
Microsoft Per System License,'' and shall continue with the language
contained in the first four quoted paragraphs below. All new or amended
Per System Licenses executed after September 1, 1994 shall contain a
provision that appears on the top half of the signature page in bold,
boxed type shall begin with the sentence ``This is a Microsoft Per
System License,'' and which shall continue with the language contained
in the first four quoted paragraphs below.
``As a Customer, you may create a `New System' at any time that
does not require the payment of a royalty to Microsoft unless the
Customer and Microsoft agree to add it to the Licensing Agreement.''
``Any New System created may be identical in every respect to a
system as to which the Customer pays a Per System royalty to
Microsoft provided that the New System has a unique model number or
model name for internal and external identification purposes which
distinguishes it from any system the Customer sells that is included
in a Per System License. The requirement of external identification
may be satisfied by placement of the unique model name or model
number on the machine and its container (if any), without more.''
``If the customer does not intend to include a Microsoft
operating system product with a New System, the Customer does not
need to notify Microsoft at any time of the creation, use or sale of
any such New System, nor does it need to take any particular steps
to market or advertise the New System.''
``Under Microsoft's License Agreement, there is no charge or
penalty if a Customer chooses at any time to create a New System
incorporating a non-Microsoft operating system. If the Customer
intends to include a Microsoft operating system product with the New
System, the Customer must so notify Microsoft, after which the
parties may enter into arm's length negotiation with respect to a
license to apply to the New System.''
In the case of OEMs with Per Processor Licenses treated as Per
System Licenses pursuant to Section IV (J), the notice shall include
the following paragraph at the beginning of the notice:
``All models covered by your Per Processor License are now
treated as subject to a Per System License. You may exclude any such
model from being treated as subject to a Per System License by
notifying Microsoft in writing. Such notice to Microsoft must
include the model designation to be excluded from the Per System
License. Such exclusion shall take effect on the first day of the
calendar quarter next following Microsoft's receipt of such
notice.''
(H) Microsoft may not use any form of Lump Sum Pricing in any
License Agreement of Covered Product(s) executed after the date of this
Final Judgment. It is not a violation of this Final Judgment for
Microsoft to use royalty rates, including rates embodying volume
discounts, agreed upon in advance with respect to each individual OEM,
each specific version or language of a Covered Product, and each
designated Personal Computer System model subject to the License
Agreement.
(I) OEMs that currently have a License Agreement that is
inconsistent with any provision of this Final Judgment may, without
penalty, terminate the License Agreement or negotiate with Microsoft to
amend the License Agreement to eliminate such inconsistent provisions.
An OEM desiring to terminate or amend such a License Agreement shall
give Microsoft ninety (90) days written notice at any time prior to
January 1, 1995.
(J) If an OEM has a License Agreement that is inconsistent with any
provision of this Final Judgment, Microsoft may enforce that License
Agreement subject to the following:
(1) if the License Agreement is a Per Processor License, Microsoft
shall treat it as a Per System License for all existing OEM models that
contain the microprocessor type(s) specified in the License Agreement
except those models that the OEM opts in writing to exclude and such
exclusion shall take effect on the first day of the calendar quarter
net following Microsoft's receipt of such notice, and
(2) Microsoft may not enforce prospectively any Minimum Commitment.
(K) Microsoft shall not enter into any NDA:
(1) whose duration extends beyond (a) commercial release of the
product covered by the NDA, (b) an earlier public disclosure authorized
by Microsoft of information covered by the NDA, or (c) one year from
the date of disclosure of information covered by the NDA to a person
subject to the NDA, whichever comes first; or
(2) that would restrict in any manner any person subject to the NDA
from developing software products that will run on competing Operating
System Software products, provided that such development efforts do not
entail the disclosure or use of any Microsoft proprietary information
during the term of the NDA; or
(3) that would restrict any activities of any person subject to the
NDA to whom no information covered by the NDA has been disclosed.
(L) The form of standard NDAs will be approved by a Microsoft
corporate officer and all non-standard language in NDAs that pertains
to matters covered in Section (k) above will be approved by a Microsoft
senior corporate attorney.
(M) Within thirty (30) days of the entry of this Final Judgment,
Microsoft will provide a copy of this Final Judgment to all OEMs with
whom it has License Agreements at that time except for those with
licenses solely under the Small Volume Easy Distribution (SVED) program
or the Delivery Service Partner (DSP) program.
V. Reporting
(A) To determine or secure compliance with this Final Judgment,
duly authorized representatives of the Plaintiff shall, upon written
request of the Assistant Attorney General in charge of the Antitrust
Division, on reasonable notice given to Defendant at its principal
office, subject to any lawful privilege, be permitted:
(1) Access during normal office hours to inspect and copy all
books, ledgers, accounts, correspondence, memoranda and other documents
and records in the possession, custody, or control of Defendant, which
may have counsel present, relating to any matters contained in this
Final Judgment.
(2) Subject to the reasonable convenience of Defendant and without
restraint or interference from it, to interview officers, employees, or
agents of Defendant, who may have counsel present, regarding any
matters contained in this Final Judgment.
(B) Upon written request of the Assistant Attorney General in
charge of the Antitrust Division, on reasonable notice given to
Defendant at its principal office, subject to any lawful privilege,
Defendant shall submit such written reports, under oath if requested,
with respect to any matters contained in this Final Judgment.
(C) No information or documents obtained by the means provided by
this Section shall be divulged by the Plaintiff to any person other
than a duly authorized representative of the Executive Branch of the
United States government, except in the course of legal proceedings to
which the United States is a party, or for the purpose of securing
compliance with the Final Judgment, or as otherwise required by law.
(D) Defendant shall produce to plaintiff, within forty-five (45)
days, any documents provided to the Directorate-General for Competition
of the European Commission (``DG-IV'') in connection with its
monitoring or securing of compliance with any Undertaking by or
Decision against Microsoft that relates to Microsoft's licensing of any
Covered Product. In addition, Defendant shall not object to disclosure
to Plaintiff by DG-IV of any other information provided by defendant to
DG-IV, or to cooperation between DG-IV and Plaintiff in the enforcement
of this Judgment, provided that Microsoft shall receive in advance a
detailed description of the information to be provided and the
Plaintiff will accord any Microsoft information received from DG-IV the
maximum confidentiality protection available under applicable law.
Specifically, Plaintiff will treat Microsoft information that it
receives from DG-IV as ``confidential business information'' within the
meaning of the Freedom of Information Act, 5 U.S.C. Sec. 552, with
Microsoft deemed a ``submitter'' of the information under the statute.
Plaintiff shall take precautions to ensure the security and
confidentiality of Microsoft information provided in electronic form.
(E) If at the time information or documents are furnished by
Defendant to Plaintiff, Defendant represents and identifies in writing
the material in any such information or document to which a claim of
protection may be asserted under Rule 26(c)(7) of the Federal Rules of
Civil Procedure, and Defendant marks each pertinent page of such
material ``Subject to claim of protection under Rule 26(c)(7) of the
Federal Rules of Civil Procedure,'' then ten days notice shall be given
by Plaintiff to Defendant prior to divulging such material in any legal
proceeding (other than a grand jury proceeding) to which Defendant is
not a party.
VI. Further Elements of Judgment
(A) This Final Judgment shall expire on the seventy eighth month
after its entry.
(B) Jurisdiction is retained by this Court over this action and the
parties thereto for the purpose of enabling any of the parties thereto
to apply to this Court at any time for further orders and directions as
may be necessary or appropriate to carry out or construe this Final
Judgment, to modify or terminate any of its provisions, to enforce
compliance, and to punish violations of its provisions.
VII. Public Interest
Entry of this Final Judgment is in the public interest.
Entered:---------------------------------------------------------------
United States District Judge
----------------------------------------------------------------------
Page 15 of the Final Judgment
Section VII Public Interest
Entered and United States District Judge should be printed as is.
This is not an omission.
Cynthia Preston,
Office of Operations.
[FR Doc. 94-20216 Filed 8-18-94; 8:45 am]
BILLING CODE 4410-01-M
