Speech by Charles Rule.
Re: DOJ v. Microsoft.
Date: September 2, 1998.
Source: Charles Rule. This document was created by scanning a paper copy, and converting it to HTML.

THE LAST GASP OF A CASE THAT DESERVES TO DIE:
THE DESPERATE STATE OF THE GOVERNMENT'S CASE AGAINST MICROSOFT

Charles F. (Rick) Rule*

Delivered to the National Press Club's "Newsmaker Breakfast"
September 2, 1998

Thank you. It is an honor to talk to you this morning about the government's case against Microsoft. As you know, if Judge Jackson does not grant Microsoft's motion for summary judgment, the trial is scheduled to begin later this month.

Over the last few months, I've had the pleasure of getting to know many of you who have been covering Microsoft. The sobriquet, "legal consultant to Microsoft," has now become permanently attached to me. However, I've been following -- and criticizing -- the government's misguided pursuit of Microsoft for much longer than I've been consulting with Microsoft.

Because of my seven years in the Antitrust Division of the U.S. Department of Justice during the Reagan Administration - the last two-and-a-half as Assistant Attorney General - the media has asked my view of the government's relentless pursuit of Microsoft ever since the FTC started the chase almost nine years ago. Ultimately -- a little less than a year ago - Microsoft retained me as a legal consultant. Despite my change in status, now as nine years ago -- and at every step along the way -- my responses to the media have not changed. The government's pursuit of Microsoft runs counter to the last twenty-years of antitrust case law, reflects bureaucratic hubris, and represents a threat to innovation and consumer welfare.

Today, I want to address you not as a spokesperson for Microsoft -- the company has an outstanding trial team, which will lay out a strong defense of the company in court over the coming weeks. Rather, my remarks reflect my personal views. My perspective is that of an antitrust "lifer," who spent his formative years in the Antitrust Division, and of a devotee of the "Chicago School" of antitrust analysis, who was present at, and maybe even played a small role in, the revolution in antitrust law over the last twenty years. From that perspective, my concerns about U.S. v. Microsoft transcend the case's impact on Microsoft and even its impact on the computer industry -- though the potential impact on them is by itself cause for alarm. Rather, to my mind, the even greater cause for concern is the threat that the government's case poses to the rule of law, to the credibility of antitrust enforcement, and to the long-term interests of consumers.

To understand my concern, one must first recall the disarray into which antitrust had fallen thirty years ago. Enforcement policy back then was largely visceral. Big was bad. The inefficient had to be protected from the "unfair" advantage accruing to the efficient. Policy makers and courts hardly ever stopped to consider whether their decisions followed logically from sound economic principles or what impact those decisions had on consumers. Indeed, to the extent that economics played any role at all, it was economics tinged with antipathy toward capitalism. Conduct that the antitrust enforcers and judges could not understand or with which they were not familiar was condemned. And it became distressingly difficult for businesses to know in advance whether their strategy and conduct was or was not legal.

In short, as the late Professor Phil Areeda noted, it was an era of "inhospitality" to business. As a result, by the 1970s, critics on both the right and left began to cite absurd, virtually unintelligible antitrust rules as a significant factor in the decline of this country's competitiveness and to call for reform, if not outright repeal, of the law.

Antitrust was brought back from the brink and its credibility was restored as a consensus among enforcers and the courts formed around three principles. First, there was agreement that the sole focus of antitrust should be on economic concerns. More specifically, there was a rediscovery that the antitrust laws were designed to promote "consumer welfare," which is to say economic efficiency. Unilateral conduct of one competitor that draws consumers away from other competitors may harm those other competitors - it may even drive them to financial ruin -- but it will rarely hurt the interests of consumers. As a result, the antitrust rules have been narrowed to condemn only conduct that systematically threatens to raise price above, and reduce output below, competitive levels without generating offsetting productive efficiencies. Price-fixing by erstwhile competitors generally presents such a threat; the imposition of restrictions by a manufacturer on its distributors generally does not.

Second, antitrust enforcers and courts developed an awareness of and an appreciation for their own limitations in attempting to improve the functioning of markets. The market is resilient. It tends to reward efficiency and punish inefficiency. The market's track record in limiting and correcting mistakes is much better than the government's. The notion that government bureaucrats can or should try to second-guess and prohibit business decisions in the absence of strong objective evidence of a clear threat to consumer welfare is extremely dangerous.

Third, because we are a country of laws, antitrust rules should be clear and predictable. To the extent the rules are clear, we have a right to expect businesses to follow them. To the extent the rules are not clear, but turn on the whim of enforcers whatever the Washington elite happen to find unsavory at the moment -- the law threatens to chill innovation and risk taking. More fundamentally, vague and inscrutable rules offend basic notions of fairness and due process.

These three principles have worked to restore the respectability of antitrust. Over the last two decades, the principles have guided the courts. And, at least throughout the 1980s, they guided antitrust enforcers. The result was not an abatement of enforcement. To the contrary, well over 200 criminal antitrust indictments and informations that I signed as head of the Antitrust Division - more than any other head of the Division attest to the fact that antitrust enforcement can be aggressive at the same time it is focused and economically sound.

To me, it is these principles that are under attack as a result of the government's case against Microsoft. First, the government has allowed its concern with the fate of individual competitors -- principally Netscape, which is mentioned 130 times in the government's complaint and preliminary injunction motion -- to obscure its perception of the impact of Microsoft's conduct on consumer welfare. Quite frankly, I have yet to meet anyone with even the vaguest comprehension of computer technology who will assert with a straight face that the integration of Internet functionality into an operating system is not efficient and indeed inevitable. But, as the old saying goes, there are none so blind as those - in this case, the antitrust enforcers - who will not see.

Second, the hubris reflected in the government's case against Microsoft is monumental. The government is politically astute enough to deny that it wants to design software. However, actions speak louder than words. The government's attacks on integration and on Microsoft's contracts are redolent of arrogant bureaucrats who think they know better than the business folk in the trenches what is "necessary" to make software efficient and innovative.

Apparently, the government believes that over the long run consumers would be better off if they embraced Netscape's Navigator rather than Internet Explorer. The problem is that, as Internet Explorer's technology has surpassed Netscape's, consumers increasingly have chosen to use Internet Explorer. And if consumers won't make the right decisions on their own, then the government seems determined to use its power to nudge - if not force -consumers to make the "correct" choice.

Third, if anyone out there can figure out what the government believes distinguishes Microsoft's challenged conduct from conduct that would not violate the law, please let me know. What, for example, distinguishes Microsoft's decision to integrate its previously separate graphical user interface into its operating systems which the government acknowledges was lawful - from Microsoft's contemporaneous decision to integrate Internet functionality into the same operating systems - which the government is attacking? More generally, inasmuch as the integration of Internet functionality is efficient and does not interfere with the ability of PC manufacturers or consumers to install and operate third parties' web browsing software on top of Windows 98, why is the integration "exclusionary"? Does the government really expect us to buy its outlandish claim that a few snippets from internal emails written years after the decision to integrate convert otherwise beneficial integration into an antitrust violation? The inescapable conclusion is that the government has decided to substitute the rule of "I know when I see it" for the rule of law.

Since May when the Department and the states filed their complaints against Microsoft, these problems with the case have grown progressively more apparent. What now remains of the case looks ominously like a "big is bad" case from the 1960s.

First, in its haste to get to court, the government filed its complaint before the U.S. Court of Appeals could rule on the government's earlier but parallel effort to use the Microsoft consent decree to block the integration of Internet functionality into Windows 95. Because the heart of the antitrust complaint is a tying claim that is predicated on arguments that are virtually indistinguishable from the arguments on which the government relied in its consent decree case, the failure to wait was risky. Now that the Court of Appeals has totally rejected the government's arguments, that haste looks down right foolish.

No matter what spin the government tries to put on the appellate court's decision, the decision stymies the government's original strategy of attacking the integration of Internet functionality into Windows 98 as per se illegal tying. By sophistically characterizing Internet functionality and Windows 98 as separate products that Microsoft has "tied" together, the government was hoping to persuade the court to condemn the integration without considering its inherent consumer benefits.

The Court of Appeals' decision has thoroughly dashed those hopes. Based on an accurate reading and application of the relevant tying law, the appellate court found that the Internet functionality integrated into Windows 95 was not a product separate from the operating system itself In addition, the court had little difficulty discerning the inherent efficiency of that integration. And even the government acknowledges that Internet functionality is more tightly integrated into Windows 98.

To be sure, the government does argue that the Court of Appeals did not have the benefit of evidence that Microsoft integrated Internet functionality into its operating systems as a response to the competitive threat from Netscape. That argument, however, is at odds with the facts. The government actually raised the question of Microsoft's motivation in the consent decree case, and the timing of Microsoft's decision to include Internet functionality into Windows belies the assertion that the integration was solely a reaction to Netscape. More fundamentally, whether Internet functionality is or is not a separate product turns on objective, not subjective, evidence. The appellate court's analysis was based on the objective relationship between Internet Explorer and the rest of Windows 95 and on the benefits of integration to consumers; Microsoft's subjective motivation was simply not relevant to the analysis.

Second, once the tying claim is removed, all that remains of the government's complaint are the allegations that Microsoft's contracts with PC manufacturers, Internet access providers, and Internet content providers unlawfully excluded competitors -- more specifically Netscape -- from the market. The discovery process, however, has been particularly unkind to these allegations.

The objective evidence simply provides no support for the assertion that Microsoft's contracts have foreclosed Netscape -- or any other seller of web browsing software for that matter -- from the market. The government has never alleged that the integration of Internet functionality into Windows 98 interferes with the ability of PC manufacturers or consumers to install and use Navigator. And, popular opinion to the contrary notwithstanding, the government does not even allege that Microsoft's license of Windows 98 contractually prohibits a PC manufacturer from installing third-party web browsing software on Windows machines. In fact, computer manufacturers are free to install Navigator -- and even to make it the machine's default browser. Based on my personal check of computer retailers this weekend, I found a number of PCs available with Navigator preinstalled. However, it hardly matters because eighty percent or more of browsers in use today were obtained through some distribution channel other than PC manufacturers.

Microsoft's agreements with Internet access providers -- ISPs such as Earthlink and OLSs such as America Online -similarly did not foreclose Netscape from the market. No more than thirty percent of the web browsing software in use today was distributed by Internet access providers. Moreover, there are thousands and thousands of such providers, and Microsoft had agreements with fewer than 20, while Netscape ' maintains relationships with some of the largest, such as @Home and the "Baby Bells." Even those few providers that participate in the Windows Internet Referral Service or that appear in the "Online Services" folder were not prohibited by their agreements with Microsoft from distributing other web browsing software.

Microsoft's "Active Desktop" agreements with less than twenty Internet content providers similarly did not in any sense foreclose Netscape from the market. More than four hundred thousand web sites have links to Netscape's home page, from which the Navigator software can be downloaded; that is more than twice the number of links to Microsoft's home page. Moreover, 99.99 percent of all content on the web can be viewed with any major web browsing software.

Whether considered separately or collectively, Microsoft's agreements do not in any sense foreclose Netscape's ability to reach consumers -- by any measure, and at all times, well over 90 percent of the distribution channels for web browsing software have been available to Netscape. That is why Netscape has been successful in its ongoing distribution of 100 million copies of Navigator pursuant to its "Netscape Everywhere" program. That is also why Netscape's CEO, Jim Barksdale, has said publicly that Windows 98 does not hurt Netscape. And that is why Microsoft is entitled to summary judgment on this essential element of the government's case.

Once you eliminate the tying claim and the claim that Microsoft's contracts were exclusionary, what's left of the government's case? Nothing - at least nothing that even arguably amounts to a violation of the antitrust laws. Now the right thing for the government to do would be to admit that it cannot sustain the claims in its complaint and to dismiss the complaint or at least move to amend it.

Instead, the government has taken to mimicking the tactics of class-action attorneys that the career staff privately used to disparage. Character assassination has become the order of the day. Microsoft may not have engaged in any specific conduct that violates the antitrust laws, but according to the government, that is no longer the issue.

Read between the lines and the government's real concerns are clear: Microsoft is too brash, too aggressive, too successful. The government has decided that big is bad after all. Never mind that the company's success is attributable to and remains dependent on its consistent ability to satisfy the demands of millions of consumers better than the competition. Gates and company are guilty of bad manners. And for that Microsoft must be taught a lesson. The ends are clear, and apparently the government believes that they justify any means necessary.

So for the first time in my memory and notwithstanding strong Antitrust Division tradition to the contrary, the government appears to have launched a campaign of selective leaks and perhaps even violations of the court's protective order, in an effort to besmirch Microsoft's reputation. And, even though the precedent would wreak havoc on the Division's long-term enforcement interests, the Division is merrily supporting an effort to turn the discovery process into a circus by opening depositions in the Microsoft case to the press.

Last but not least, despite almost a decade of continuous investigations of Microsoft and two years of putting together its current case against Microsoft, the government is now frantically scrounging for any additional anti-Microsoft allegations no matter how trivial -- in a last-ditch effort to resuscitate its case. The government, for example, now points to Microsoft's discussions with Intel and Apple, among others, as evidence that Microsoft has engaged in some vague "pattern" of anticompetitive practices -- never mind that such discussions are commonplace in the computer industry and that none of the alleged conduct remotely amounts to a violation of existing antitrust rules.

None of these allegations are new; the government was aware of them when it wrote its original complaint. If the government really thinks they are relevant, why weren't they included in the complaint? Why are they only now being raised? The reason is that the government has become desperate.

As Bob Litan, a former Deputy Assistant Attorney General during this Administration, explained to The Washington Post,

"The government wants to get off the narrow technical arguments ... because it's already lost big in the appeals court. By presenting this evidence about alleged behavior with respect to Apple and Intel, they want to show that engaging in a nitpicky exercise of where the browser and the operating system are integrated is a nerd-like debate. They want to say that you can only settle this issue by looking at Microsoft's behavior in a larger context."

In effect, because the government can't meet the "technical arguments" and "nitpicky exercises" mandated by the antitrust law, it has simply set out to tar Microsoft with a broader, more visceral brush. And if the interests of consumers and innovation, the rule of law, and institutional integrity suffer in the bargain, so be it.

Though reprehensible, these tactics are at least understandable when employed by class action attorneys who make a living by extorting lucrative settlements out of businesses that fear, rightly or wrongly, the irrational decisions of unsophisticated juries. We have the right to expect better from our government. In their heart of hearts, the' government's lawyers may pine for the good old 1960s when big was bad, when logic played little role in antitrust, and when the interests of consumers were no obstacle to unsound enforcement. Fortunately, however, that day has passed.

I am convinced that, as the Court of Appeals decision in the consent decree case reaffirmed, the notion of consumer welfare and the rule of law have become so strongly entrenched in antitrust that they can withstand the wild assaults of even the most desperate antitrust enforcers. As an alumnus of the Antitrust Division, I am less sanguine about the long-term impact all of this will have on the integrity of the institution.

Thank you. I am looking forward to your questions.