The Microsoft Trial: 1998-2001

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The Microsoft Trial: 1998-2001

Defendant: Microsoft Corporation
Offenses Charged: Violations of the Sherman Antitrust Acts. Two counts under Section 1: exclusive dealing and unlawful tying; two counts under Section 2: monopoly maintenance in the operating systems market, and attempted monopolization of the Internet browser market
Chief Defense Lawyers: Bill Neukom, John Warden
Chief Prosecutors: David Boies and lawyers of the U.S. Department of Justice
Judge: Thomas Penfield Jackson
Place: Washington, D.C.
Dates of Trial: October 1998-July 2001
Verdict: Guilty of violating antitrust laws
Penalty: Microsoft to be broken into two companies, and conduct restrictions imposed, pending outcome of appeals

SIGNIFICANCE: The United States government's prosecution of America's largest and most successful computer software company for violations of the antitrust laws was the most important and controversial use of these laws by the Department of Justice in the latter part of the twentieth century.

The origins and growth of the Microsoft Corporation had become the stuff of legend in America by the end of the twentieth century. Founded in 1975 by Bill Gates and his friend Paul Allen when the former left Harvard University as a sophomore, it rapidly outpaced all its competitors in the computer software business. By 1988 it was the world's largest software company; by 1998 its Windows operating system was to be found in 90 percent of the personal computers in America, and 50 percent of all homes possessed one. That same year, Microsoft's profits of nearly $4.5 billion were double those of General Motors, the world's largest corporation.

In May 1998 the U.S. Department of Justice charged Microsoft with four counts of violating the Sherman Act: two under Section 1, exclusive dealing and unlawful "tying"; and two under section 2, monopoly maintenance in the operating systems market, and attempted monopolization of the Internet browser market. Congress passed the Sherman Act in 1890 as a result of an upsurge of public opinion against the arrogance and power of corporate "trusts." The domain of the law was expanded by the Clayton Antitrust Act of 1914, and in that year Congress created the Federal Trade Commission (FTC) and empowered it to conduct ongoing policing of unfair trade practices. The use of the acts against Microsoft has been likened to their use to achieve the breakup of the monopoly held by the Standard Oil Company in the first decade of the twentieth century and the voluntary breakup of the telephone monopoly in the 1980s. Antitrust law, however, has become complex and controversial since its application. By its very nature, it involves the making of fine distinctions between the legitimate consequences of an aggressively competitive spirit, so highly valued in an entrepreneurial market economy, and practices which subvert or eliminate the environment of free competition which is essential to the capitalist system.

FrC Begins Investigation of
Microsoft in 1990

The 1998 decision to prosecute Microsoft is perhaps best seen as a major escalation of the U.S. government's regulatory engagement with the company which had begun in 1990 when the FTC launched an investigation, into the company's business practices. As a result of that investigation, the Justice Department and Microsoft signed a consent decree in July 1994 by which the government agreed to drop its antitrust action; and Microsoft agreed to cease certain specific practices related primarily to the type of licensing agreements and royalty payment contracts that it had entered into with computer manufacturers. Microsoft, however, denied all charges of illegally exercising monopoly powers, and Bill Gates was successful in insisting that the agreement, which has been criticized as having been vaguely worded, contained a clause that allowed the company to develop integrated products, "a condition which was to become a crucial element in Microsoft's vigorous rejection of the 1998 charges. In February 1995 Federal District Court judge Stanley Sporkin ruled the consent decree to be an "ineffective remedy" to constrain Microsoft, but he was overruled within months by the U.S. Court of Appeals, which reinstated the consent decree and replaced Judge Sporkin with Judge Thomas Penfield Jackson as the judge administering it.

Department of Justice Decides to Prosecute

In October 1997 the Justice Department filed a motion charging Microsoft with violating the consent decree by "tying" Internet Explorer, its own Internet browser software, into its popular operating system, Windows 95, thus forcing computer makers to choose its browser. Microsoft's response was that this was an "integrated product" permitted by the consent decree. Judge Jackson issued a preliminary injunction ordering Microsoft to separate Internet Explorer from Windows. At about the same time the Justice Department retained David Boies to lead a prosecution against Microsoft. Boies had an outstanding reputation as a lawyer and successful litigator; particularly relevant to this case was his experience in successfully representing IBM against government antitrust action in the 1970s and 1980s. In the early months of 1998, the Department of Justice engaged in protracted negotiations with Microsoft in an attempt to arrive at an out-of-court settlement, but Microsoft was intransigent, and when the talks collapsed, the Justice Department and 20 states filed suit under the Sherman Act on May 18. An additional factor in the decision to take the antitrust action was a brief filed by antitrust lawyers, who, working with representatives of leading companies in the various arms of the computer industry, had presented the Justice Department with a 200-page document outlining the damaging effects of Microsoft's anti-competitive practices.

Microsoft Raked at Trial

Working to an unexpected and accelerated schedule decreed by Judge Jackson, which also limited each side to twelve witnesses, the trial opened a year earlier than had been anticipated on October 19, 1998, in the same federal courtroom in which Judge John Sirica had presided over the Watergate trials twenty years earlier. David Boies opened the presentation of the government's case, making extensive use of a lengthy videotaped deposition given by Bill Gates. Boies would return frequently to segments of this tape as he examined his witnesses. As Boies presented it, the testimony not only showed Gates making statements which he apparently knew were false, particularly about his lack of knowledge of the activities of other companies, but also revealed a pattern of prevarication and obfuscation that Boise claimed displayed an arrogant contempt for the requirements of federal law. Boies suggested that this disregard for the law permeated the corporate culture of Microsoft and that this atmosphere was created by the attitude and behavior of the company's founder, Bill Gates. The government's witnesses testified for the next two months. They included senior executives of other businesses in the computer industry, many of them celebrated pioneers in the new technology: Jim Barksdale of Netscape, Avie Tevanian of Apple Computers, and Steve McGeady of Intel.

Microsoft's defense began in January 1999. It's first witness was an economist, Professor Richard Schmalensee of the Massachusetts Institute of Technology, whose task was to support Microsoft's position that it did not hold a monopoly. Court observers felt that Boies effectively showed Schmalensee to have held contradictory opinions in recent publications and statements regarding competition in the computer industry, which weakened his testimony. Most of the other witnesses were Microsoft executives and employees who testified to the more arcane aspects of software technology, particularly as it related to Microsoft's claim that Internet Explorer was an integral part of Windows. Boies displayed great skill as a cross-examiner, in at least one instance reducing the Microsoft witness to pleading with the judge to be allowed to re-prepare his demonstration.

Towards the end of February, as Microsoft neared the end of its presentation Judge Jackson's remarks from the bench indicated that he felt that Microsoft's defense had collapsed. At the end of March, while the trial was in recess in preparation for rebuttals, Judge Jackson announced that he would divide his conclusion of the case into two parts: the first, "findings of fact"; the second, "conclusions of law." This was seen as a way of exerting pressure on Microsoft to arrive at a settlement, but although negotiations went on throughout the rebuttal stage, no agreement was arrived at, and the findings of fact were published on November 5, 1999. In a document of more than 200 pages, Judge Jackson declared Microsoft to be a monopolist which had "harmed consumers in ways that are immediate and easily discernible" and had been shown to be willing to "use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products"; its success in hurting such companies had deterred investment in technologies and businesses which exhibited any potential of threatening Microsoft.

Mediation Fails; Microsoft Is Ordered Broken Up

Judge Jackson then took another unexpected step: he announced that he was initiating a formal mediation process and that he had recruited Judge Richard Posner to act as the mediator. A former law professor at the University of Chicago, Posner had joined the Seventh Circuit Court of Appeals in 1981. A prolific author, he had a formidable reputation as a scholar of antitrust law. Although there would be 18 drafts of an agreement between the parties over the next several months, Microsoft refused to accept the government's terms, and the mediation collapsed in April 2000. Judge Jackson then delivered his findings of law, ruling against Microsoft on three of the four charges, the only favorable finding being on the "exclusive dealing" charge under Section 1. On May 24 Judge Jackson affirmed the government's proposal for the breakup of Microsoft into two companies, one restricted to operating systems, and the other to applications software. There was also an extensive list of conduct constraints. The federal Court of Appeals immediately announced that it would hear the anticipated appeal en banc —that is, with all justices sitting (three recused themselves). Judge Jackson then took the unusual step of invoking the 1974 Antitrust Expediting Act to request the U.S. Supreme Court to take up review of the case directly. However, in September 2000, the Supreme Court rejected this request, sending the case back to the Court of Appeals.

On June 28, 2001, the U.S. Court of Appeals for the District of Columbia vacated Judge Jackson's order to break-up Microsoft. The Court of Appeals upheld several findings of fact, including that the company violated federal antitrust laws. But the unanimous decision cited Judge Jackson's conduct as the reason for vacating his decision that Microsoft should be broken into two smaller companies. The court said that Jackson's secret interviews with members of the media and several offensive comments about Microsoft in public statements outside of the courtroom gave the appearance of partiality on Jackson's part. The Court of Appeals remanded the case back to a lower court for reassignment to a different judge.

—David I. Petts