United States v. Microsoft Corp. is the antitrust case brought in 1998 by the United States and a group of States against Microsoft. In June 2001 the United States Court of Appeals for the District of Columbia Circuit, sitting en banc, affirmed in part the district court’s holding that Microsoft had unlawfully maintained a monopoly in the market for Intel-compatible PC operating systems, reversed the finding of attempted monopolisation of the browser market, remanded the tying claim, and vacated the order to split the company in two.[1] Among the conduct held unlawful were restrictions in Microsoft’s Windows licences for original equipment manufacturers (OEMs). On remand the United States and several States settled with Microsoft, and the resulting Final Judgment of November 2002, which regulated Microsoft’s OEM licensing, was upheld by the D.C. Circuit in 2004.[2][3]
Background
On 18 May 1998 the United States and a group of State plaintiffs filed separate complaints, soon consolidated, alleging antitrust violations by Microsoft.[1] On 3 April 2000 the district court concluded that Microsoft had maintained a monopoly in Intel-compatible PC operating systems in violation of section 2 of the Sherman Act, had attempted to monopolise the browser market, and had illegally tied Windows and Internet Explorer in violation of section 1. On 7 June 2000 it entered a final judgment requiring Microsoft to propose a divestiture plan separating an operating systems business from an applications business.[1]
The dispute
On the licensing issues, the district court had condemned provisions in Microsoft’s Windows licences that prohibited OEMs from removing desktop icons, folders or Start menu entries, from altering the initial boot sequence, and from otherwise altering the appearance of the Windows desktop.[1] Having an OEM pre-install a browser was one of the two most cost-effective ways of distributing browsers, and the district court found that these restrictions prevented many OEMs from distributing browsers other than Internet Explorer.[1]
Microsoft’s position was that the restrictions were justified because it was “exercising its rights as the holder of valid copyrights”, that the restrictions prevented OEMs from altering Windows in ways that would undermine its value as a stable and consistent platform, and that Netscape could still distribute its browser by other means.[1]
Decision or outcome
D.C. Circuit, 2001. The court held that the OEM licence restrictions were anticompetitive and, with one exception, unjustified. It described Microsoft’s main copyright argument as one that “borders upon the frivolous” and stated that intellectual property rights “do not confer a privilege to violate the antitrust laws”, quoting the Federal Circuit.[1] The exception was the prohibition on OEMs automatically launching a substitute user interface at the end of the first boot; the court agreed that a shell that prevents the Windows desktop from ever being seen is a drastic alteration of Microsoft’s copyrighted work. Microsoft had not substantiated its claim that the other alterations reduced the value of Windows, and the court held that all the other OEM restrictions at issue violated section 2.[1]
Overall the court affirmed in part and reversed in part the monopoly maintenance holding, reversed the attempted monopolisation holding, and remanded the tying claim. It vacated the remedial order in full, both because some liability findings did not survive and because the district court had not held an evidentiary hearing on remedies, and it ordered the case reassigned to a different judge because the trial judge’s contacts with the media gave rise to an appearance of partiality.[1]
Final Judgment, 2002. On remand the United States and certain States entered into a settlement with Microsoft, which the district court approved after proceedings under the Tunney Act.[3] The Final Judgment signed by Judge Colleen Kollar-Kotelly on 12 November 2002 prohibited retaliation against OEMs that develop or distribute competing software or ship PCs that boot more than one operating system. It required that Microsoft not terminate a Covered OEM’s Windows licence without first giving written notice of the reasons and at least thirty days to cure, and that Windows be provided to Covered OEMs “pursuant to uniform license agreements with uniform terms and conditions”, with royalties set on a published schedule. Covered OEMs were the 20 OEMs with the highest worldwide volume of Windows licences. The judgment was to expire on its fifth anniversary unless extended.[2] The Department of Justice lists a Modified Final Judgment of 2006 and a Second Modified Final Judgment of 2009.[4]
D.C. Circuit, 2004. On 30 June 2004 the D.C. Circuit affirmed the remedial order challenged by Massachusetts and affirmed the order approving the consent decree as in the public interest.[3]
Significance for software licensing and SAM practice
The case is mainly about competition law, but its licensing holding is direct: the court treated specific clauses of a software licence, those limiting what a licensee could remove, add or promote, as exclusionary conduct.[1] The remedy then shaped licence terms for the largest PC manufacturers, including uniform agreements, published royalties and a notice and cure period before termination.[2] For the European proceedings against Microsoft in the same period, see Microsoft v Commission; for later complaints about Microsoft’s licensing, see Microsoft cloud licensing complaints.
Lessons learned
- Copyright does not shield licence terms from antitrust law. The court rejected Microsoft’s claim of an unfettered right to use its intellectual property as it wished, saying that such use can give rise to liability just as use of personal property can.[1] Restrictive clauses from a dominant vendor may be open to challenge.
- Use restrictions are assessed by their effect. The court upheld the one restriction that protected the integrity of Windows and struck down those that only protected Microsoft’s market position.[1] When reviewing restrictions on modifying or configuring software, distinguish product-integrity terms from terms that limit the use of competing products.
- Remedies become contract terms. The Final Judgment required uniform OEM licence terms, a published royalty schedule and a thirty-day cure period before termination.[2] Such obligations are time-limited: the 2002 judgment had a five-year term unless extended.[2]