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Business Law: Antitirust Essay, Research Paper


Thesis Statement: Technological advancement will restructure business law in America.

I. Antitrust Law

A. What is it?

B. Antitrust evolution

1. Sherman Act of 1890

2. Clayton Act of 1914

3. Federal Trade Commission Act of 1914

4. Tunney Act of 1974

II. The United States VS Microsoft

A. The case against Microsoft

1. predatory pricing

2. Standard Oil analogy

B. Microsoft?s defense

1. AOL was gunning for Microsoft

2. Do antitrust laws pertain to today?s technology

III. Findings of Fact and Conclusions of Law

A. The Honorable Thomas Penfield Jackson

1. Section Two of the Sherman

2. Section One of the Sherman Act

3. The State Law Claims

IV. Counsel for the Defense

A. Argument

1. Plaintiffs failed to prove an unlawful tying arrangement in violation of Section One of the Sherman Act

2. Plaintiffs failed to prove that Microsoft entered into unlawful exclusive dealing agreements in violation of Section One of the Sherman Act

3. Microsoft had no duty to pre-disclose information

V. In My Opinion

A. Let?s rethink the law

27 June, 2000

Because the field of Business Law is so great, this paper will examine a single aspect of Business Law, that of antitrust action. Specifically, as it is applied to Microsoft, antitrust litigation is raising eyebrows in both the legal and business worlds.

There is a hue and cry that antitrust laws as they exist today have outlived their usefulness when applied to cyber commodities and artificial intelligence. This paper will present those opposing viewpoints and attempt to answer the question: are laws wrought in the industrial age applicable to today?s technology? And if so, is the antitrust challenge to Microsoft the tip of the iceberg in Business Law reformation?

Antitrust Law

Antitrust law attempts to ensure that market competition is protected from an organization or cartel with a monopoly on a given product. Much of antitrust enforcement tries to create a balance between the benefits of coordination and consolidation, such as efficiencies that reduce price or improve quality, and the detriments of market power that can lead to higher prices or reduced innovation.

Corporate trusts grew rapidly in the US from 1880 to 1905, creating the atmosphere for President Theodore Roosevelt to launch his now famous trust busting campaigns. The era of antitrust legislation stems from the Sherman Act of 1890. The antitrust laws were based on the constitutional power of Congress to regulate interstate commerce. It declared illegal every contract, combination, or conspiracy in restraint of interstate and foreign trade. The Sherman Act makes monopolization illegal. The two elements of monopolization are: “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of the power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident.” 1 The Sherman Act was designed to eliminate restraints on trade and competition. It is the main source of antitrust law.

While the Sherman Act provided protection against monopolies, Congress determined that it wasn?t quite comprehensive in its? self. It was supplemented in 1914 by the Clayton Antitrust Act, which prohibited exclusive sales contracts, inter-corporate stockholdings, and unfair price-cutting to freeze out competitors. The Clayton Act of

Seal Straugh

1914 makes price discrimination illegal, forbids tying arrangements involving only goods and makes anti-competitive mergers and acquisitions illegal. The Sherman and Clayton Antitrust Acts were made to promote competition between companies making similar products.2 To assure the effectiveness of these laws, the Federal Trade Commission Act of 1914 established the body of overseers that govern unfair and unlawful trade practices. The provision surrounding unfair price cutting was strengthened under the terms of the Robinson-Patman Act of 1936. 3

There have been many amendments to these laws over the years. An early federal success came with the Supreme Court decision of 1911 that forced the giant Standard Oil Company to split up into independent entities.4 Antitrust action declined in the 1920s, but was vigorously resumed in the 1930s under President Franklin D. Roosevelt. Antitrust legislation held firm for several decades. The Tunney Act of 1974 established public notice and judicial oversight procedures regarding consent decrees entered into by the government to settle antitrust cases. 5 antitrust enforcement was again de-emphasized in the 1980s under Presidents Reagan and Bush.

The growth of huge conglomerates that control multiple companies has hindered the enforcement of antitrust legislation. With growing unpopularity, antitrust laws have been criticized for hindering the ability of US corporations to compete internationally. There has also been extreme impact on US shores. The Microsoft Antitrust Suit has not only rocked the company, but the entire computer industry, the stock market, and the US justice system as well.

The United States VS Microsoft

Back in 1975, an intense, visionary man who co-owned a small firm in a budding industry imagined a future where people at every desk in all the offices would have a small computer on which they would use his software. That man was Bill Gates; the company was Microsoft. However even Mr. Gates did not foresee a future in which the chief antitrust prosecutor of the United States and his counterparts in the governments of 20 U.S. states would sue him for charging prices that are too low. In recent comments, Mr. Gates has revealed his na?vet? about the antitrust laws. He seems to have assumed that they were pro-consumer, and he saw his company doing things that helped consumers, even the least technical of consumers, log on to the digital age. 6

The Justice Department charged Microsoft with engaging in anti-competitive and exclusionary practices designed to maintain its monopoly in personal computer

operating systems and to extend that monopoly to internet browsing software on May 18, 1998. Twenty state Attorneys General and the District of Columbia filed a similar action. They alleged Microsoft illegally abused its “Windows” monopoly power to curtail and eliminate competition, force computer manufacturers to take its separate Internet “browser” and other applications, and deny consumers who buy personal computers the benefits of a free, open and competitive market.

“This action will protect innovation by ensuring that anyone who develops a software program will have a fair opportunity to compete in the marketplace,” said Joel I. Klein, assistant attorney general of the Antitrust Division. “The lawsuit we filed today seeks to put an end to Microsoft’s unlawful campaign to eliminate competition, deter innovation, and restrict consumer choice. In essence, what Microsoft has been doing, through a wide variety of illegal business practices, is leveraging its Windows operating system monopoly to force its other software products on consumers. Inventors and investors cannot and will not develop and market innovative software programs if they know that Microsoft can use its Windows monopoly to block the distribution of their programs and to force consumers to buy Microsoft’s competing products.” 7

The reality, however, is that one of antitrust action?s major uses has been to penalize successful competitors. Sometimes the suits are brought by federal enforcers of antitrust laws. More often they are brought by bitter losers in the competitive process. According to Georgetown University’s Steven Salop, a top antitrust official in the Carter administration’s Federal Trade Commission, and New York University’s Lawrence J. White, chief economist in the Justice Department’s Antitrust Division under Ronald Reagan, the second most common kind of private antitrust suit is one brought by rivals.8 Competitors are unlikely to bother suing rivals that keep their output low and prices high. Microsoft is the ultimate competitor, setting the price of its browser, Internet Explorer, at zero. Microsoft’s main competitor in the browser market, Netscape, was upset at such low-price competition and applauded the Clinton administration’s lawsuit.

It appeared as though Microsoft was leveraging its Windows operating system monopoly to create a new browser monopoly. That may not be the case, as appearances deceive. Until about 40 years ago, the standard economic argument was that a monopoly could be extended from Product A to Product B by requiring purchasers of A to buy B. But as antitrust scholar and former federal judge Robert Bork showed in his 1978 book, The Antitrust Paradox, this seldom works, because charging a premium for B reduces the price that can be charged for A.

Mr. Bork explicitly rejected the government’s reasoning. He wrote: “This is not a case about ‘leveraging’ or ‘tie-ins,’ as it is frequently described, even by government lawyers who understand the case.” 9 So what is the lawsuit about? Mr. Bork says Microsoft is engaged in predatory pricing, giving its browser away to knock Netscape out of the market.

However, economists have shown that predatory pricing doesn’t typically make sense, because the losses are often larger to the predator than to the prey and because, once the predator raises prices, anyone who has bought the prey’s assets at fire-sale prices becomes a low-cost competitor. The most famous allegation of predatory pricing was made against John D. Rockefeller and Standard Oil of New Jersey.10 None the less, in a 1958 article in the Journal of Law and Economics, University of Washington economist John S. McGee concluded, after studying the transcript of Standard Oil’s 1911 trial, that there was no evidence that Standard was guilty of such tactics.

In any case, the standard economic argument about extending monopolies is inapplicable to Microsoft’s case. Microsoft doesn’t charge anything for Product B, Internet Explorer. Of course, the company benefits from giving it away. Microsoft wants to make it easy for computer manufacturers to install the browser so that PC buyers will use Windows applications instead of software written for Netscape Navigator and will use goods and services sold over the Internet by Microsoft and its partners. Is this monopolistic? No more so than a shopping mall owner’s providing free parking and then collecting higher rents from retailers that value the increased shopping.

In buying Netscape, was AOL gunning for Microsoft? For months, Microsoft Corp. thought it had a late-breaking piece of evidence that would save the software giant from the government’s antitrust noose: The three-way deal announced late last year among America Online, Netscape Communications, and Sun Microsystems. The alliance proved that Microsoft faced formidable competition, Microsoft lawyers contended. 11

There was great anticipation in the courtroom on June 14 when Microsoft recalled AOL Senior Vice-President David Colburn to the stand as a hostile rebuttal witness. For hours, Microsoft attorney John Warden pressed Colburn to concede that AOL had secret plans all along to take on Microsoft in the Internet browser business. But by the end of the day, the line of questioning

didn’t seem to help Microsoft’s case

appreciably. Even U.S. District Judge Thomas Penfield Jackson told Warden in a bench discussion that he didn’t quite see the value of the new testimony. Jackson

suggested that, since Colburn hadn’t seen some of the key documents that Warden was putting before him, that Microsoft might want to call a witness who was familiar with them. That would be AOL chief executive Steve Case, a prospect that failed to enthrall Microsoft, since Case was already on record saying that he never intended to compete with Microsoft.

Colburn had testified earlier for the government that AOL chose Microsoft’s Internet Explorer browser for its online service because Microsoft offered something that Netscape couldn’t, promotional space on the dominant Windows operating system desktop. As part of the deal, AOL was allowed to provide only limited promotion of rival Netscape’s Internet browser. But all the while that Colburn was testifying last October, AOL was in hush-hush negotiations to buy Netscape and its browser business. The deal was announced last November. Warden tried to make the point that AOL intended to dump its near-exclusive promotion and distribution of Microsoft’s browser and substitute its own Netscape product once its contract with Microsoft expired in the year 2000.

On Sept. 20,1999, an E-mail from Case indicated that the company was seriously mulling the possibility of dumping Internet Explorer at some point. Case wondered if buying Netscape and committing to migrate to their browser instead would help Microsoft to pull AOL from Windows 98. “My main point is we shouldn’t assume we need to or want to maintain IE as primary browser,” Case wrote. “Maybe that’s the right answer, but maybe not — we should push down on all possibilities before deciding.” 12

However, government attorney David Boies stood up and cited rules that he said required Warden to read the E-mail’s response. Jackson then ordered Warden to read the response by AOL President Robert Pittman. Pittman’s response alluded to Microsoft’s power in the marketplace which made it infeasible for AOL to make a change any time soon: “I do think MSFT is too strong to throw them out of the tent — they can hurt us if they think they have no other option.” 13 Indeed, Colburn stuck to his story that the “consensus for a long time” within the company was to stay with Microsoft’s browser until the contract expired. And that’s what the company has done.

One internal AOL E-mail did bolster Warden’s argument that AOL intended to take on Microsoft. The Sept. 13 E-mail by AOL’s Scott Pearson laid out the “basic strategic rationale” for the deal: “Extend [AOL's] control over the desktop…for the consumer, small business, and enterprise…. Ultimately make the [AOL] and [Netscape] clients, riding on the browser, the effective [operating system] used by most PCs.” But

Colburn insisted that Pearson wasn’t involved deeply in the details and that he was just “playing traffic cop” to make sure that all the pieces of the deal were analyzed. 14

Warden also submitted an internal AOL document from Nov. 3 that described how the company should portray the AOL-Netscape-Sun deal to Wall Street and the press. According to the document, AOL was well aware that the public would perceive the deal as an attempt by AOL to take on Microsoft in hand-to-hand combat. Unfortunately, the document worked as much against Microsoft as for it, since it notes that the “timing of the acquisition alone could very well end up institutionalizing an Apollo [code-name for AOL] v. Microsoft competition." The document also notes that "our primary purpose in acquiring Odyssey [code-name for Netscape] is not its browser [at least in the short term)]" 15

In November of 1999, House Majority Leader Dick Armey made the following comments regarding reports that the Justice Department anti-trust division will take action against Microsoft:

"The contemplated anti-trust action against Microsoft is the kind of government

micro-management every other nation in the world is rejecting.

"This is not about choosing sides in the high tech industry. Such an arbitrary use of unchecked power could send shock waves throughout the economy, as the unprecedented nature of the government's intervention weighs on the mind of every new investor. All entrepreneurs are threatened when the Justice Department launches an all out assault on creativity and success.

"The President clearly thinks government knows best. But who knows more about competition: a few lawyers in a Washington bureaucracy, many of whom have never held a job in the private sector, or the thriving entrepreneurs in today's high-tech industries, many of whom started out in their own garages and have now created millions of jobs?

"At the same time the Administration contemplates stunting innovation and creativity, they are desperately seeking answers to the year 2000 computer problem, which threatens everything from cutting off Social Security checks to grounding all air travel. How ironic that this Administration is preparing to hamstring the very innovation necessary to avoid the massive potential chaos the nation will face on January 1, 2000.

"Is the President really ready to blow up his 'bridge to the 21st century?'" 16

Just as important, the complaint is really about the past. At issue is the claim that Microsoft requires vendors using Windows 95 to install Microsoft's Internet Explorer. This, according to the claim, is an improper use of Microsoft's market power. Currently, an Internet browser and the underlying operating system may be purchased separately. Technology, however, is moving fast and the browser and the desktop are merging. Windows 98 aims to make them indistinguishable. The era of a stand-alone browser company is over due.

The Department of Justice's antitrust investigation of alleged abuses by Microsoft misapplies outmoded laws and regulations of the analog era on the digital economy. Microsoft is a success because it understands the economic realities wrought by Moore's Law - that the number of components that can be packed on a computer chip doubles every two years while the price stays the same.17 Justice should stay out of this high-tech battle for two reasons: It is not equipped to regulate innovation and dynamic change, and this complaint is really about the past, not the future.

Invoking antitrust jurisprudence is particularly ill suited for analyzing Microsoft and the connected computing industry. The laws are hopelessly ill equipped to comprehend the nature of the digital economy. The Sherman and Clayton Acts were crafted to address the static era of massive, long-lasting industrial infrastructure and mass durable-goods markets. The existing law does not address a dynamic economy where markets and market leadership can arise and disappear within 18 months or less. Moore's Law and the Law of the Installed Base (that when technological change occurs, whoever has an installed base of customers is at greater risk than a new entrant is) require a new approach.18

Findings of Fact and Conclusions of Law

The suite against Microsoft that began with allegations of monopoly in 1997 was decided by the Honorable Thomas Penfield Jackson in the United States Supreme Court. Justice Jackson handed down his Memorandum and Order along with the Final Judgement on June 7, 2000. Charging documents stated that Microsoft was in violation of the Sherman Act, Sections 1 and 2, as well as various state laws. Finding in the favor of the plaintiffs, Justice Jackson determined that? ?a proposed form of final judgment ? would mandate both conduct modification and structural reorganization by the defendant when fully implemented.?19 The Memorandum continues to cite the Microsoft claims that the proposed remedies were "draconian" and "unprecedented."

Indeed, Microsoft felt that additional discovery was warranted and that a second trial be held. Owing to a delay of five months by the court in its entry of the Conclusion

of Law, and the enlistment of mediation, however, the Court rejected Microsoft?s stand. Microsoft took the position that it was surprised by the decision and needed ample time to act on the Court?s Order. Since Microsoft?s cases had been before the Court and occupied much of its attention for the past two years, Justice Jackson felt that additional delay was unmerited. Despite Microsoft?s continuing protests that none were committed, Microsoft had been found guilty of antitrust violations, following a full trial. 20

The Court was convinced, for several reasons, that a final - and appealable - judgment should be entered quickly. It also reluctantly came to the conclusion, for those same reasons, that a structural remedy is mandatory. The Court?s position is simply this, ?Microsoft as it is presently organized and led is unwilling to accept the notion that it broke the law or accede to an order amending its conduct.?21

In the Court?s Finding of Fact and Conclusions of Law document, it stated that

Microsoft doesn?t recognize or concede that any of its business practices violated the Sherman Act. Microsoft officials stated publicly that the company has done nothing wrong and that it will be vindicated on appeal. There is a substantial body of public opinion, which holds to a similar view. That assertion is now being put to the test. If this is indeed the case then this should be addressed by an appeal court as soon as possible, in order to confirm the opinion of Microsoft?s innocence and to intervene in any modification and reconstruction activities before they become irreversible.

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