Appeals Court Opinion in USA v. Microsoft, June 28, 2001.

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 26 and 27, 2001

Decided June 28, 2001

No. 00-5212

United States of America,
Appellee

v.

Microsoft Corporation,
Appellant

Consolidated with
00-5213

Appeals from the United States District Court
for the District of Columbia
(No. 98cv01232)
(No. 98cv01233)

Richard J. Urowsky and Steven L. Holley argued the causes for appellant. With them on the briefs were John L. Warden, Richard C. Pepperman, II, William H. Neukom, Thomas W. Burt, David A. Heiner, Jr., Charles F. Rule, Robert A. Long, Jr., and Carter G. Phillips. Christopher J. Meyers entered an appearance.

Lars H. Liebeler, Griffin B. Bell, Lloyd N. Cutler, Louis R. Cohen, C. Boyden Gray, William J. Kolasky, William F. Adkinson, Jr., Jeffrey D. Ayer, and Jay V. Prabhu were on the brief of amici curiae The Association for Competitive Technology and Computing Technology Industry Association in support of appellant.

David R. Burton was on the brief for amicus curiae Center for the Moral Defense of Capitalism in support of appellant.

Robert S. Getman was on the brief for amicus curiae Association for Objective Law in support of appellant.

Jeffrey P. Minear and David C. Frederick, Assistants to the Solicitor General, United States Department of Justice, and John G. Roberts, Jr., argued the causes for appellees. With them on the brief were A. Douglas Melamed, Acting Assistant Attorney General, United States Department of Justice, Jeffrey H. Blattner, Deputy Assistant Attorney Gen- eral, Catherine G. O'Sullivan, Robert B. Nicholson, Adam D. Hirsh, Andrea Limmer, David Seidman, and Christopher Sprigman, Attorneys, Eliot Spitzer, Attorney General, State of New York, Richard L. Schwartz, Assistant Attorney Gen- eral, and Kevin J. O'Connor, Office of the Attorney General, State of Wisconsin.

John Rogovin, Kenneth W. Starr, John F. Wood, Elizabeth Petrela, Robert H. Bork, Jason M. Mahler, Stephen M. Shapiro, Donald M. Falk, Mitchell S. Pettit, Kevin J. Arquit, and Michael C. Naughton were on the brief for amici curiae America Online, Inc., et al., in support of appellee. Paul T. Cappuccio entered an appearance.

Lee A. Hollaar, appearing pro se, was on the brief for amicus curiae Lee A. Hollaar.

Carl Lundgren, appearing pro se, was on the brief for amicus curiae Carl Lundgren.

Table of Contents

     Summary   5
          
     I.   Introduction   7
          A.   Background     7
          B.   Overview  10
     II.  Monopolization 13
          A.   Monopoly Power 14
               1.   Market Structure    15
                    a.   Market definition   15
                    b.   Market power   19
               2.   Direct Proof   23
          B.   Anticompetitive Conduct  25
               1.   Licenses Issued to Original Equip-
                              ment Manufacturers  28
                    a.   Anticompetitive effect of the li-
                              cense restrictions  29
                    b.   Microsoft's justifications for the
                               license restrictions    33
               2.   Integration of IE and Windows 36
                    a.   Anticompetitive effect of inte-
                              gration   36
                    b.   Microsoft's justifications for inte-
                              gration   39
               3.   Agreements with Internet Access
                          Providers     40
               4.   Dealings with Internet Content Pro-
                         viders, Independent Software Ven-
                         dors, and Apple Computer 47
               5.   Java 52
                    a.   The incompatible JVM     52
                    b.   The First Wave Agreements     53
                    c.   Deception of Java developers  55
                    d.   The threat to Intel 56
               6.   Course of Conduct   58
          C.   Causation 59
     III. Attempted Monopolization 62
          A.   Relevant Market     63
          B.   Barriers to Entry   65
     IV.  Tying     68
          A.   Separate-Products Inquiry Under the 
                    Per Se Test    70
          B.   Per Se Analysis Inappropriate for this 
                    Case 77
          C.   On Remand 86
     V.   Trial Proceedings and Remedy  90
          A.   Factual Background  91
          B.   Trial Proceedings   95
          C.   Failure to Hold an Evidentiary Hearing  96
          D.   Failure to Provide an Adequate Explana-
                    tion 99
          E.   Modification of Liability     100
          F.   On Remand 103
          G.   Conclusion     106
     VI.  Judicial Misconduct 106
          A.   The District Judge's Communications
                     with the Press     107
          B.   Violations of the Code of Conduct for 
                     United States Judges    113
          C.   Appearance of Partiality 117
          D.   Remedies for Judicial Misconduct and 
                     Appearance of Partiality     120
               1.   Disqualification    120
               2.   Review of Findings of Fact and Con-
                         clusions of Law     123
     VII. Conclusion     125

Before: Edwards, Chief Judge, Williams, Ginsburg, Sentelle, Randolph, Rogers and Tatel, Circuit Judges.

Opinion for the Court filed Per Curiam.

Per Curiam: Microsoft Corporation appeals from judgments of the District Court finding the company in violation of ss 1 and 2 of the Sherman Act and ordering various remedies.

The action against Microsoft arose pursuant to a complaint filed by the United States and separate complaints filed by individual States. The District Court determined that Microsoft had maintained a monopoly in the market for Intel- compatible PC operating systems in violation of s 2; attempted to gain a monopoly in the market for internet browsers in violation of s 2; and illegally tied two purportedly separate products, Windows and Internet Explorer ("IE"), in violation of s 1. United States v. Microsoft Corp., 87 F. Supp. 2d 30 (D.D.C. 2000) ("Conclusions of Law"). The District Court then found that the same facts that established liability under ss 1 and 2 of the Sherman Act mandated findings of liability under analogous state law antitrust provisions. Id. To remedy the Sherman Act violations, the District Court issued a Final Judgment requiring Microsoft to submit a proposed plan of divestiture, with the company to be split into an operating systems business and an applications business. United States v. Microsoft Corp., 97 F. Supp. 2d 59, 64-65 (D.D.C. 2000) ("Final Judgment"). The District Court's re- medial order also contains a number of interim restrictions on Microsoft's conduct. Id. at 66-69.

Microsoft's appeal contests both the legal conclusions and the resulting remedial order. There are three principal aspects of this appeal. First, Microsoft challenges the District Court's legal conclusions as to all three alleged antitrust violations and also a number of the procedural and factual foundations on which they rest. Second, Microsoft argues that the remedial order must be set aside, because the District Court failed to afford the company an evidentiary hearing on disputed facts and, also, because the substantive provisions of the order are flawed. Finally, Microsoft asserts that the trial judge committed ethical violations by engaging in impermissible ex parte contacts and making inappropriate public comments on the merits of the case while it was pending. Microsoft argues that these ethical violations compromised the District Judge's appearance of impartiality, thereby necessitating his disqualification and vacatur of his Findings of Fact, Conclusions of Law, and Final Judgment.

After carefully considering the voluminous record on appeal--including the District Court's Findings of Fact and Conclusions of Law, the testimony and exhibits submitted at trial, the parties' briefs, and the oral arguments before this court--we find that some but not all of Microsoft's liability challenges have merit. Accordingly, we affirm in part and reverse in part the District Court's judgment that Microsoft violated s 2 of the Sherman Act by employing anticompetitive means to maintain a monopoly in the operating system market; we reverse the District Court's determination that Microsoft violated s 2 of the Sherman Act by illegally attempting to monopolize the internet browser market; and we remand the District Court's finding that Microsoft violated s 1 of the Sherman Act by unlawfully tying its browser to its operating system. Our judgment extends to the District Court's findings with respect to the state law counterparts of the plaintiffs' Sherman Act claims.

We also find merit in Microsoft's challenge to the Final Judgment embracing the District Court's remedial order. There are several reasons supporting this conclusion. First, the District Court's Final Judgment rests on a number of liability determinations that do not survive appellate review; therefore, the remedial order as currently fashioned cannot stand. Furthermore, we would vacate and remand the remedial order even were we to uphold the District Court's liability determinations in their entirety, because the District Court failed to hold an evidentiary hearing to address remedies-specific factual disputes.

Finally, we vacate the Final Judgment on remedies, because the trial judge engaged in impermissible ex parte contacts by holding secret interviews with members of the media and made numerous offensive comments about Micro- soft officials in public statements outside of the courtroom, giving rise to an appearance of partiality. Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process. We are therefore constrained to vacate the Final Judgment on remedies, remand the case for reconsideration of the remedial order, and require that the case be assigned to a different trial judge on remand. We believe that this disposition will be adequate to cure the cited improprieties.

In sum, for reasons more fully explained below, we affirm in part, reverse in part, and remand in part the District Court's judgment assessing liability. We vacate in full the Final Judgment embodying the remedial order and remand the case to a different trial judge for further proceedings consistent with this opinion.