Memorandum and Order.
(Denying Microsoft's Motion for Summary Judgment).
(Part 2).

Go Back to Previous Section.

III.

"A tying arrangement is an 'agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from another supplier.'" Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 461 (1992) (quoting Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6 (1958)). Such arrangements are "per se" Section I violations, i.e., conclusively unreasonable if proven, when the seller exploits its market power in the tying product market "to force the buyer into the purchase of a tied product that the buyer either did not want at all, or [begin page 14] might have preferred to purchase elsewhere on different terms," Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984),¹⁰ and a "substantial volume of commerce in the tied market" is affected. See Eastman Kodak, 504 U.S. at 462; see also Foster v. Maryland State Says. & Loan Ass'n, 590 F.2d 928, 931 (D.C. Cir. 1978) (arrangement must affect a "not insubstantial" volume of commerce).

"Before an unlawful tying arrangement may properly be found, . . . it must be determined that 'two separate products are in fact involved."' See Foster, 590 F.2d at 931 (quoting Fortner Enters., Inc. v. United States Steel Corp., 394 U.S. 495, 507 (1969)). In the typical case, whether a package consists of one or more "separate" products depends "not on the functional relation" between the components, "but rather on the character of the demand" for them. See Jefferson Parish, 466 U.S. at 19, see also Klamath-Lake Pharm. Ass'n v. Klamath Med. Serv. Bureau, 701 F.2d 1276, 1289 (9th Cir. 1983) ("Products that function together and are sold in combination may still be 'separate' if consumers would prefer to buy them individually at the price necessary to market them separately ... It is the relationship of the producer's selling decision to market demand, not the physical characteristics of the products alone, that determines the existence of legally separable products."). The critical question is whether the bundle consists of products which are "distinguishable in the eyes of buyers." Jefferson Parish, 466 U.S. at 19. Courts generally find two products to exist if there is "sufficient consumer demand so that it is efficient for a firm to provide" them separately, Eastman Kodak, 504 U.S. at 462, even if the products are "functionally linked" so that one is "useless without the other." Id. (quoting Jefferson Parish, 466 U.S. at 19 n.30).

[begin page 15]

Microsoft argues that Jefferson Parish's "demand" test does not apply to cases involving physically integrated products or questions of product design. Microsoft distinguishes Jefferson Parish on the ground that it dealt not with an integrated product, but with a "functionally integrated package of services." See Jefferson Parish, 466 U.S. at 19 (emphasis supplied). Similarly, Eastman Kodak dealt with the question of whether replacement parts and service for Kodak's photocopiers were separate products. See Eastman Kodak, 504 U.S. at 459.

Microsoft advances a theory that courts considering tying claims involving physically integrated products or questions of product design - like the Windows 98/IE combination - have applied a much more deferential standard. Such "technological tying" claims, Microsoft contends, can succeed only if plaintiffs prove that the challenged combination was carried out solely for the purpose of tying two separate products together "rather than to achieve some technologically beneficial result." See Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307, 1330 (5th Cir. 1976). Any other rule, Microsoft argues, "would enmesh the courts with technical and uncertain inquiry into the technological justifiability of functional integration and cast unfortunate doubt on the legality of product innovations -in serious detriment to the industry and without any legitimate antitrust purpose." See Telex Corp. v. IBM, 367 F. Supp. 258, 347 (N.D. Okla. 1973), rev'd on other grounds, 510 F.2d 894 (10" Cir. 1975).

Microsoft's argument has its genesis in a body of case law addressing claims that, in the 1960s and 1970s, IBM illegally tied the central processing unit of its computers to various peripheral devices, such as disk drives. The peripheral devices and the CPUs were originally manufactured and sold separately and connected to each other with cables. As IBM developed new technologies with more compact circuitry, it was able to place many devices in one box along [begin page 16] with the CPU, and to sell the combination as one unit. Naturally, the effect was to injure small manufacturers who were in the business of producing the peripheral devices.

Courts generally concluded that IBM's integrations did not amount to illegal tying, holding that "where a court is dealing with what is physically and in fact a single product," the antitrust laws do "not contemplate judicial dissection of that product into parts and the reconstitution of these parts into a tying agreement." See Telex, 367 F. Supp. at 347 (denying claim that IBM's "Integration of additional memory and control functions" into its CPUs constituted unlawful tying, even though the court found IBM to be a monopolist, and that there was evidence that IBM's actions "were designed to help stem the growth of its plug compatible competition"); see also Innovation Data Processing, Inc. v. IBM, 585 F. Supp. 1470, 1476 (D.N.J. 1984) (integration of "dump-restore" utility into mainframe operating system held to be "a lawful package of technologically interrelated components"), ILC Peripherals Leasing Corp. v. IBM, 448 F. Supp. 228 (N.D. Cal. 1978) (disk drive and head/disk assembly ("HDA") combination lawful), aff'd per curiam sub nom., Memorex Corp. v. IBM 636 F.2d 1l88 (9th Cir. 1980). So long as the evidence demonstrated that the challenged integration "represented technological advancements," the courts generally held that IBM's decision to integrate additional functionality into its CPUs could not "be fairly regarded as predatory within the contemplation of antitrust policy." Telex, 367 F. Supp. at 342.

In a more recent case, the Ninth Circuit considered a tying challenge to Kodak's decision to simultaneously introduce its "110 Instamatic" camera, a new film and developing process, and the equipment necessary to process the new film. See Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534 (9th Cir. 1983). One of Kodak's competitors in the photofinishing [begin page 17] business alleged an unlawful tying arrangement because "the 110 system was incompatible with then existing photographic products and photofinishing equipment." Id. at 544. The Ninth Circuit rejected the claim, "even if... effective use of any one of the new products necessitates purchase of some or all of the others." Id. at 543. "Any other conclusion,'' the court reasoned, "would unjustifiably deter the development and introduction of those new technologies so essential to the continued progress of our economy" Id.

In the IBM cases, plaintiffs unsuccessfully challenged IBM's right to bundle two technologically related products. The allegations in the present case differ from the IBM allegations in one critical respect: plaintiffs allege that Microsoft did not just bundle IE into Windows 98, but took the further step of contractually prohibiting OEMs from unbundling the two (assuming that IE could be "unbundled" from the operating system, a disputed issue of fact).¹¹   In contrast, in the Telex case, there was no forced tie of memory and control functions, The integration was "wholly optional," 367 F. Supp. at 347, and IBM continued to offer the two products separately. Id. Similarly, in Innovation Data Processing, IBM continued to license the utility program and the operating system separately as well as together, at the user's option. 585 F. Supp. at 1475.¹²   And Foremost Pro Color did not involve the bundling of products at all, [begin page 18] but rather Kodak's development of new technological formats that rendered competitors' complements incompatible. "The development and introduction" of those formats, "standing alone" (without any contractual requirement that users take the products together) was deemed not to amount to tying. See Foremost Pro Color, 703 F.2d at 542 (emphasis supplied).¹³

Unlike the IBM plaintiffs, neither the U.S. nor the States challenges Microsoft's fight to bundle IE and Windows. Instead, they challenge the contractual prohibitions against unbundling, and Microsoft's refusal to offer what plaintiffs allege are two products separately. The cases Microsoft cites in opposition are not inconsistent with the teaching of Jefferson Parish and Eastman Kodak that it is for the market (and not Microsoft) to determine whether the bundling is desirable. See also Berkey Photo, Inc.v. Eastman Kodak Co., 603 F.2d 263, 287 (2d Cir. 1979) ("[N]o one can determine with any reasonable assurance whether one product is 'superior' to another The only question that can be answered is whether there is sufficient demand for a particular product to make its production worthwhile, and the response, so long as the free choice of consumers is preserved, can only be inferred from the reaction of the market."). The market can make that determination only if two bundled products are also offered in their unbundled form, as they were in the IBM cases.

[begin page 19]

In short, this Court is not convinced that either the IBM cases or Foremost Pro Color dictate that Microsoft's licensing practices should be evaluated by a more lenient standard than the one articulated by the Supreme Court in Jefferson Parish and Eastman Kodak, simply because the case involves "physically integrated products or questions of product design," as Microsoft puts it.¹⁴   Despite the Court's misgivings, however, the D.C. Circuit clearly appears to have adopted Microsoft's proposed "technological tying" standard in reversing this Court's Order preliminarily enjoining Microsoft from requiring OEMs to take IE as a condition of licensing Windows 95. See United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998) ("Microsoft"), rev'g United States v. Microsoft Corp., 980 F. Supp. 537 (D.D.C. 1997). While that decision was ostensibly limited to interpreting specific terms of the Consent Decree, see Microsoft, 147 F.3d at 950 n. 14, the analysis was, in the Court of Appeals' eyes, "consistent with tying law." Id. at 950.

In cases challenging technical integrations, the Court of Appeals wrote, the ultimate issue is whether the "integrated design offers benefits when compared to a purchaser's combination of corresponding stand-alone functionalities." Id. at 949. Noting what it views as the "limited competence of courts to evaluate high-tech product designs and the high cost of error" in making [begin page 20] such evaluations, the Court of Appeals cautioned that courts should be "wary of second-guessing the claimed benefits of a particular design decision." Id. at 950 n. 13. Courts should reject any challenge to an integrated product design, the court opined, if there is "a plausible claim" that the integration "brings some advantage." Id. at 950.

The Court of Appeals went on to articulate a framework for determining whether an integration amounts to a single product for purposes of evaluating a tying claim. "[I]ntegration may be considered genuine if it is beneficial when compared to a purchaser combination." Id. at 949. And "in making this inquiry," a court should not "embark on [a] product design assessment," id., but rather, "[a] court's evaluation of a claim of integration must be narrow and deferential." Id. at 949-50. An integrated product should pass muster if there are "facially plausible benefits to its integrated design." Id. at 950. The court noted, however, that manufacturers should not be permitted "to Metaphorically 'bolt' two products together," i.e., place two separate products in a single package "for an anticompetitive purpose (or for no purpose at all)." Id. at 949 & n. 12; see also X Phillip E. Areeda et al., Antitrust Law ¶ 1746b, at 227 (1996) ("The main test is whether the items operate better when bundled by the defendant than when linked by the end user.").

The Court of Appeals expressed its "tentative" view, id. at 953, that the Windows 95/IE combination amounted to a "genuine" integration, but expressly left to a more fully developed factual record the final determination of whether Microsoft's claims of "technological benefits" could be substantiated. Id. at 951 n. 15, 952. Because numerous issues of material fact remain in dispute as the record presently stands, the Court will deny Microsoft's motion for summary judgment on the tying claims. [begin page 21] Microsoft argues that the Windows/IE integration offers users a myriad of benefits. It asserts, for example, that the integrated design allows users to move "seamlessly" from a Web site to a floppy disk to a CD-ROM to a local area network with a single mouse click, thus making computers easier for consumers to use. But plaintiffs contend that "a comparable browsing experience can be achieved by the combination of Windows 98 and a competing browser." Sibley Decl. ¶ 35.

Microsoft also claims that "IE technologies" in Windows not only permit access to the Internet, but also provide numerous "system services" that are "not directly related to Web browsing" that "enhanc[e] the functionality of a wide variety of applications." See Microsoft, 147 F.3d at 951. Because that functionality resides on the operating system, ISVs are freed from the need to develop and include it as part of their products. In response, plaintiffs contend that "the ability to browse the web using IE can be removed and replaced with a competing browser in such a way that the consistency of the Windows platform for ISVs would not be frustrated in any appreciable manner." Sibley Decl. ¶ 34.

Microsoft also asserts that IE technologies perform numerous functions in Windows that are totally "unrelated to Web browsing." Microsoft, 147 F.3d at 951. For example, IE technologies supply a new user interface in Windows that adopts the navigational paradigms of the Web, including "back" and "forward" buttons, lists of "favorite" sources of information and a "history" of recently-accessed information. Microsoft also claims that IE technologies are essential to the Windows 98 "Help" system, which requires an HTML "interpreter" to display the content of "Help" files and to provide easy user access from "Help" to updated on-line resources. Furthermore, Microsoft asserts, IE technologies in Windows 98: (1) provide support for multiple [begin page 22] video monitors; (2) invoke a "Disk Cleanup Wizard" to free up hard disk space by deleting unnecessary files; and (3) invoke a Windows Update feature that permits users to download Windows updates from a Microsoft Web site, Whether or not those functions actually rely on technology provided by the browser, and whether they could be-just as efficiently provided by a competing browser, is unclear on the record as it presently stands.

In any event, whether or not the "integration brings benefits does not," the Court of Appeals made clear, "end the inquiry." Microsoft, 147 F.3d at 951. "It is also necessary that there be some reason Microsoft, rather than the OEMs or end users, must bring the functionalities together." Id. (citing X Phillip E. Areeda et al., Antitrust Law ¶ 1746b, at 227; ¶ 1747, at 229 (1996)). Without the benefit of a factual record that this Court had expected the special master to develop, the D.C. Circuit expressed its preliminary belief that "if Microsoft presented [OEMs] with an operating system and a stand-alone browser application, rather than with the interpenetrating design of Windows 95 and IE 4, the OEMs could not combine them in the way in which Microsoft has integrated IE 4 into Windows 95." Microsoft, 147 F.3d at 952 (emphasis supplied). That conclusion applies even more forcefully to Windows 98, Microsoft argues, where IE technologies are even more deeply integrated into the OS. Whether it is so remains to be seen.

Plaintiffs disagree- While they concede that IE provides "a small number of Internet oriented updates that are not available through the installation of Internet Explorer, as distributed separately from the operating system," see Mem. of the U.S. in Supp. of Mot. for Prelim. Inj. at 43 n. 41, plaintiffs nevertheless contend that "the browsing functionality in Windows 98 is almost [begin page 23] entirely equivalent to that provided when Internet Explorer 4.01 is installed on top of Windows 95." Id. (citing C. Jones (Microsoft) Dep. at 34:2-8).

To summarize, the Court cannot determine whether Windows and IE are "separate products" until it becomes clear what are the synergistic benefits' that are unique to the Windows/lE combination, i.e., benefits that could not be obtained by combining another browser with Windows. Moreover, it is unclear exactly how the integration is more beneficial when compared to a combination effected by an OEM or an ultimate consumer. Finally, the Court must determine whether Microsoft "metaphorically 'bolt[ed]' two products together," "for an anticompetitive purpose (or for no purpose at all)." See Microsoft, 147 F.3d at 949 & n. 12, Plaintiffs cite Microsoft documents describing the bundling as motivated by a desire to thwart browser competition and to "weld" the products together to achieve that goal. See, e.g., B. Veghte 2/8/97 e-mail (SJ Opp'n Ex. 19).

To succeed on their tying claims, however, plaintiffs must do more than prove that Windows and IE are separate products. They must also show that Windows (the alleged tying product) is conditioned on the purchase of IE, and that the conditioning affects a "substantial volume of commerce" in the browser market. See Eastman Kodak, 504 U.S. at 462; Foster, 590 F.2d at 93 1. Microsoft contends that neither of those elements can be proved.

In order to prove the requisite "conditioning," plaintiffs must prove that licensees "might have preferred" not to license a browser, or to license it "elsewhere on different terms," Jefferson Parish, 466 U.S. at 12, and that Microsoft "coerces the abdication of [licensees'] independent judgment" as to the relative merits of competing browsers. See Times-Picayune Publ'g Co. v. United States, 345 U.S. 594, 605 (1953); see also Service & Training, Inc. v. Data Gen. Corp., [begin page 24] 963 F.2d 680, 684 (4th Cir, 1992) ("The purpose of the inquiry into consumer demand is to determine whether there are customers who would, absent an illegal agreement, purchase the tied product without the tying product, and the tying product without the tied product."). Plaintiffs allege that Microsoft's goal was to "make people use IE instead of Navigator" by "leverag[ing] the [operating system]." See C. Wildfeuer 2/24/97 e-mail (emphasis supplied) (PI Ex. 23).

Microsoft argues that plaintiffs cannot satisfy the "conditioning" requirement of the tying test, because no OEM has been forced to purchase a separate product, IE technologies are included in a single royalty paid by OEMs for Windows 98. But as Professor Areeda has pointed out, "the tie may be obvious, as in the classic form, or somewhat more subtle, as when a machine is sold or leased at a price that covers 'free' servicing." See IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 760b6, at 51 (1996). Whether Microsoft invoices OEMs separately for Windows and IE or collects a single royalty of the same amount, it compels OEMs to take (and, one way or the other, to pay for) the entire package of software.

Microsoft also disputes plaintiffs' claims that the Windows/IE combination affects a not insubstantial amount of commerce in the browser market. It argues that neither the design of Windows 98 nor the Windows licensing agreements appreciably impacts Netscape's ability to distribute its browser. OEMs are free to preinstall Netscape Navigator as an add-on (so long as they do not disturb IE) and several leading OEMs apparently do so.

But plaintiffs maintain that while OEMs may preinstall Netscape's browser (leaving IE itself in place, with no other icons or folders larger than IE's), the reality is that many OEMs hesitate to do so, mainly because they believe that too many icons and layers cause customer confusion, which could increase product support costs. OEMs bear the burden of providing [begin page 25] technical support for the software they preinstall, a fact that creates a disincentive for preinstalling duplicative titles in a single product category. Furthermore, preinstalling two browsers would double the necessary product testing for OEMs. In fact, Microsoft has actually cited these factors itself to dissuade some OEMs from loading a second browser on their computers. See J. Kempin 10/2/97 Dep. at 37. And Joachim Kempin, Microsoft's Senior Vice President of OEM Sales, agrees that OEMs "should be" concerned about installing two browsers on their machines. See id. at 31.

The volume of foreclosed commerce necessary to satisfy the tying standard need only be "substantial enough in terms of dollar-volume so as not to be merely de minimis." Fortner Enters.. Inc. v. United States Steel Corp., 394 US. 495, 501 (1969) ($190,000 not an insubstantial amount, even though only a very small percentage of the market); see also Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1341, 1347 (9th Cir. 1984) (citing Fortner). While plaintiffs do not cite a dollar value or a percentage of the market that is allegedly foreclosed, the facts are sufficiently in dispute to at least raise a genuine issue for trial. Furthermore, where, as here, products in the tied product market (browsers) are potential "partial substitutes" for the tying product, antitrust concerns are heightened because tying agreements not only reduce competition in the tied market, but also reinforce market power in the tying market. See X Phillip E. Areeda et al., Antitrust Law ¶ 1747 a-c, at 230-33 (1996); see also Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792, 795 (1st Cir. 1988).

Go to Next Section.