[Senate Hearing 107-772]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-772
 
                       THE MICROSOFT SETTLEMENT: 
                          A LOOK TO THE FUTURE
=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           DECEMBER 12, 2001

                               __________

                          Serial No. J-107-53

                               __________

         Printed for the use of the Committee on the Judiciary










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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts     ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware       STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin              CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin       JON KYL, Arizona
CHARLES E. SCHUMER, New York         MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois          JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington           SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina         MITCH McCONNELL, Kentucky
       Bruce A. Cohen, Majority Chief Counsel and Staff Director
                  Sharon Prost, Minority Chief Counsel
                Makan Delrahim, Minority Staff Director
















                         C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     9
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     4
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     7
Kyl, Hon. Jon., a U.S. Senator from the State of Arizona.........    81
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     1
McConnell, Hon. Mitch, a U.S. Senator from the State of Kentucky.    10
Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama....   111

                                WITNESS

James, Charles A., Assistant Attorney General, Antitrust 
  Division, Department of Justice, Washington, D.C...............    11

                         QUESTIONS AND ANSWERS

Responses of Daniel J. Bryant, Assistant Attorney General, Office 
  of Legislative Affairs to questions submitted by Senator Hatch.    24
Responses of Jay L. Himes to questions submitted by Senator Leahy    32
Responses of Jay L. Himes to questions submitted by Senator Hatch    36
Responses of Jay L. Himes to questions submitted by Senator 
  DeWine.........................................................    37
Response of Jay L. Himes to a question submitted by Senator Kohl.    42

                       SUBMISSIONS FOR THE RECORD

Association for Competitive Technology, Jonathan Zuck, President, 
  Washington, D.C., statement....................................    42
Barksdale, James L., Barksdale Group, Menlo Park, California, 
  letter and attachment..........................................    47
Bork, Robert H., Washington, D.C., letter........................    57
Catfish Software, Inc., Jerry Hilburn, President and Founder, San 
  Diego, California, statement...................................    59
Computing Technology Industry Association, Washington, D.C., 
  statement......................................................    60
Consumer Federation of America, Mark N. Cooper, Director of 
  Research, Washington, D.C., statement..........................    66
Digital Data Resources, Inc., Mark Havlicek, President, Des 
  Moines, Iowa, statement........................................    73
EarthLink, Inc., Dave Baker, Vice President for Law and Public 
  Policy, Atlanta, Georgia, statement............................    73
Himes, Jay L., Chief, Antitrust Bureau, Office of the Attorney 
  General, State of New York, New York, New York.................    75
Lessig, Laurence, Esq., Stanford Law School, Stanford, 
  California, statement..........................................    82
Kertzman, Mitchell E., Chief Executive Officer, Liberate 
  Technologies, San Carlos, California, statement................    87
Microsoft Corporation, Charles F. Rule, Counsel, Fried, Frank, 
  Harris, Shriver & Jacobson, Washington, D.C., statement........    89
Nader, Ralph, Washington, D.C., letter and attachments...........    99
Red Hat, Inc., Matthew J. Szulik, President and CEO, Durham, 
  North Carolina, statement......................................   109
Sorrell, Hon. William H., Attorney General, State of Vermont, 
  Montpelier, Vermont, letter....................................   113



















             THE MICROSOFT SETTLEMENT: A LOOK TO THE FUTURE

                              ----------                              


                      WEDNESDAY, DECEMBER 12, 2001

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:08 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Patrick J. 
Leahy, Chairman of the Committee, presiding.
    Present: Senators Leahy, Kohl, Cantwell, Hatch, Kyl, 
DeWine, Sessions, and McConnell.

OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM 
                      THE STATE OF VERMONT

    Chairman Leahy. Good morning. I just want to do a little 
housekeeping here. I want to make sure the Chairman and Ranking 
Member of the Antitrust Subcommittee are here, Senator Kohl and 
Senator DeWine, both of whom have done a superb job for years 
in handling antitrust matters.
    I told Senator DeWine earlier, and this will probably cause 
a recall petition from the Republican Party in Ohio, what a 
terrific job he did as Chairman and then what a terrific job 
Senator Kohl has done as Chairman on antitrust matters, and 
pointing out that they are issues of great complexity and great 
importance to everybody here in the Senate.
    I have looked at the proposed settlement the Department of 
Justice and nine States have transmitted to the district court 
that is a plan for the conclusion of what has been really 
landmark antitrust litigation. But now it has got to pass the 
legal test set out in the Tunney Act if it is going to gain 
court approval, and that test is both simple and broad. It 
requires an evaluation of whether the proposed settlement is in 
the public interest.
    There is significant difference of opinion over how well 
the proposed settlement passes this legal test. In fact, the 
States participating in the litigation against Microsoft are 
evenly split. Nine States joined in the proposed settlement and 
nine non-settling States presented the court with an 
alternative remedy.
    As the courts wrangle with the technical and complex legal 
issues at stake in this case, this Committee is conducting 
hearings to educate ourselves, but also to educate the public 
about what this proposed settlement really means for our high-
tech industry and for all of us who use computers at work and 
at school and at home.
    Scrutiny of the proposed settlement by this Committee 
during the course of the Tunney Act proceeding is particularly 
important. The focus of our hearing today is to examine whether 
the proposed settlement is good public policy and not to go 
into the legal technicalities. The questions raised here and 
views expressed may help inform the court. I plan, with Senator 
Hatch, to forward to the court the record of this hearing for 
consideration as the courts goes about the difficult task of 
completing the Tunney Act proceedings and the remedy sought by 
the non-settling States.
    I am especially concerned that the district court take the 
opportunity seriously to consider the remedy proposal of the 
non-settling States, and to consider it before she makes her 
final determination on the other parties' proposed settlement. 
The insights of the other participants in this complicated and 
hard-fought case are going to be valuable additions to the 
comments received in the Tunney Act proceeding. I would hope 
they would help inform the evaluation whether the settlement is 
in the public interest, a matter which for many people is still 
an open question.
    The effects of this case extend beyond simply the choices 
available in the software marketplace. The United States has 
long been the world leader in bringing innovative solutions to 
software problems, in creating new tools and applications for 
use on computers and the Web, and in driving forward the flow 
of capital into these new and rapidly growing sectors of the 
economy.
    This creativity is not limited just to Silicon Valley. I 
think of my own home area, Burlington, Vermont. It ranks 
seventh in the Nation in terms of patent filings. Burlington is 
38,000 people and it is in a county of about 130,000 people. 
This is not per-capita; this is actual filings--seventh in the 
Nation.
    Whether the settlement proposal will help or hinder this 
process and whether the high-tech industries will play the 
important role they should in our Nation's economy is a larger 
issue behind the immediate effects of this proposal.
    With that in mind, I intend to ask the representatives of 
the settling parties how their resolution of this conflict will 
serve the ends that the antitrust laws require. Our courts have 
developed a test for determining the effectiveness of a remedy 
in a Sherman Act case. The remedy must end the anticompetitive 
practices, it must deprive the wrongdoer of the fruits of the 
wrongdoing,and it must ensure that illegality never recurs. The 
Tunney Act also requires that any settlement of such a case 
serve the public interest.
    Now, these are all high standards, but they are reasonable 
ones and people have dealt with them for years. In this case, 
the D.C. Circuit, sitting en banc and writing unanimously, 
found that Microsoft had engaged in serious exclusionary 
practices, to the detriment of their competitors, and thus to 
all consumers. So we have to satisfy ourselves that these 
matters have been addressed and redressed, or if they have not, 
why not.
    I have noted my concern that the procedural posture of this 
case not jeopardize the opportunity of the non-settling States 
to have their day in court, and not deprive the district court 
of the value of their views on appropriate remedies in a timely 
fashion.
    In addition, I have two basic areas of concern about the 
proposed settlement. First, I find many of the terms of the 
settlement to be either confusingly vague, subject to 
manipulation, or, worse, both. Mr. Rule raised an important and 
memorable point when he last testified before this Committee in 
1997 during the very important series of hearings that were 
convened by Senator Hatch on competition in the digital age, 
hearings that helped shape a lot of thinking in the Senate.
    Testifying about the first Microsoft-Justice Department 
consent decree, Mr. Rule said, ``Ambiguities in decrees are 
typically resolved against the Government. In addition, the 
Government's case must rise or fall on the language of the 
decree; the Government cannot fall back on some purported 
`spirit' or `purpose' of the decree to justify an 
interpretation that is not clearly supported by the language.'' 
So we take seriously such counsel. We would worry if ambiguity 
in the proposed settlement would jeopardize its enforcement.
    Second, I am concerned that the enforcement mechanism 
described in the proposed decree lacks the power and the 
timeliness necessary to inspire confidence in its 
effectiveness. Particularly in light of the absence of any 
requirement that the decree be read in broad remedial terms, it 
is especially important that we inquire into the likely 
operation of the proposed enforcement scheme and its 
effectiveness.
    Any lawyer who has litigated cases--and, Mr. James, that 
would certainly include you--and any business person knows how 
distracting litigation of this magnitude can be. We all 
appreciate the value that reaching an appropriate settlement 
can have not only for the parties, but also for consumers who 
are harmed by anticompetitive conduct, and the economy.
    I am the first one to say we would like some finality so 
that everybody involved, all parties, can know what the 
standards are and all consumers can know what they are. Because 
of that, I don't come to this hearing pre-judging the merits of 
this proposed settlement, but instead as one who is ready to 
embrace a good settlement that puts an end to the merry-go-
round of Microsoft litigation over consent decrees.
    The serious questions that have been raised about the 
scope, enforceability and effectiveness of this proposed 
settlement leave me concerned that if it is approved in its 
current form, it may simply be an invitation for the next 
chapter of litigation.
    I want an end to this thing. I think everybody wants an end 
to it, but we want an end to it where we know what the rules 
are going to be. If we don't know what the rules are going to 
be, as sure as the sun rising in the east we are going to face 
these issues again. On this point, I share the concern of Judge 
Robert Bork, who warns in his written submission that the 
proposed settlement ``contains so many ambiguities and 
loopholes as to make it unenforceable and likely to guarantee 
years of additional litigation.''
    So I look forward to hearing from the Department of Justice 
and the other witnesses here. I will put into the record a 
series of letters: one, a letter to myself and Senator Hatch 
from James Barksdale; another, a letter to Assistant Attorney 
General James from Senator Hatch; a letter from Senator Hatch 
from Assistant Attorney General James; letters to myself and 
Senator Hatch from Robert Bork; a letter to myself from Ralph 
Nader, with two enclosures; written testimony of Catfish 
Software, Inc; and written testimony of Mark Havlicek of 
Digital Data Resources, Inc.
    I yield to Senator Hatch, who did such superb hearings on 
this whole issue earlier.

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE 
                            OF UTAH

    Senator Hatch. Well, thank you, Mr. Chairman. As you know, 
we conducted a series of hearings, as you have mentioned, in 
this Committee in 1997 and 1998 to examine the policy 
implications of the competitive landscape of the then 
burgeoning high-tech economy and industry, which was about to 
explode with the advent of the Internet.
    Those hearings focused on competition in the industry, in 
general, and more specifically on complaints that Microsoft had 
been engaged in anticompetitive behavior that threatened 
competition and innovation, to the detriment of consumers. Our 
goal was, and I believe today, is to determine how best to 
preserve competition and foster innovation in the high-
technology industry.
    Although the Committee and I, as its Chairman, was then 
criticized by some, I strongly believed then and continue to 
believe now that in a robust economy involving new 
technologies, effective antitrust enforcement today would 
prevent the need for heavy-handed Government regulation of 
business tomorrow.
    My interest in the competitive marketplace in the high-
technology industry was animated by my strong opposition to 
regulation of the industry, whether by government or by one or 
few companies. As we may remember, the hearings before the 
Judiciary Committee developed an extensive record of 
Microsoft's conduct and evidenced various efforts by the 
company to maintain and extend its operating system monopoly. 
These findings, I would note, were reaffirmed by a unanimous 
and ideologically diverse Court of Appeals. The Microsoft case 
and its ultimate resolution present one of the most important 
developments in antitrust law in recent history, certainly in 
my memory.
    As I have emphasized before, having a monopoly is not 
illegal under our laws. In fact, in a successful capitalistic 
system, striving to be one should be encouraged, as a matter of 
fact. However, anticompetitive conduct intended to maintain or 
extend this monopoly would harm competition and could possibly 
be violative of our laws.
    I believe no one would disagree that the D.C. Circuit 
Court's decision reaffirmed the fundamental principle that a 
monopolist, even a monopolist in a high-tech industry like 
software, must compete on the merits to maintain its monopoly, 
which brings us to today's hearing. We are here to examine the 
policy implications of the proposed settlement in the 
Government's antitrust litigation against Microsoft.
    Mr. Chairman, rather than closing the book on the Microsoft 
inquiry, the proposed settlement appears to be only the end of 
the latest chapter. The settling parties are currently in the 
middle of the so-called Tunney Act process before the court, 
and the non-settling parties have chosen to further litigate 
this matter and last week filed their own proposed settlement. 
This has been a complex case with significant consequences for 
Microsoft, high-tech entrepreneurs, and the American public as 
well.
    The proposed settlement between Microsoft, the Justice 
Department, and nine of the plaintiff State attorneys general 
is highly technical. We have all been studying it and its 
impact with great interest. Each of us has heard from some, 
including some of our witnesses here today, that the agreement 
contains much that is very good. Not surprisingly, we have also 
heard and read much criticism of the settlement. These are 
complex issues, and I would hope today's hearing will 
illuminate the many questions that we have.
    I should note that about 2 weeks ago I sent a set of 
detailed and extensive questions about the scope, 
interpretation, and intended effects of the proposed settlement 
to the Justice Department, naturally seeking further 
information on my part.
    First, I want to commend the Department for getting the 
responses to these questions to me promptly. We received them 
yesterday. I think the questions, which were made public, and 
the Department's responses could be helpful to each member in 
forming an independent and fair analysis of the proposed 
settlement.
    To that end, and for the benefit of the Committee, Mr. 
Chairman, I would like to make both the questions and the 
Department's answers part of the record for this hearing. So I 
would ask unanimous consent that they be made part of the 
record.
    As I noted in my November 29th letter to the Department, I 
have kept an open mind regarding this settlement and continue 
to do so. I have had questions regarding the practical 
enforceability of the proposed settlement and whether it will 
effectively remedy the unlawful practices identified by the 
D.C. Circuit and restore competition in the software 
marketplace.
    I am also cognizant of both the limitation of the claims 
contained in the original Justice Department complaint by the 
D.C. Circuit, as well as the standards for enforcement under 
settled antitrust law. I believe that further information 
regarding precisely how the proposed settlement will be 
interpreted, given D.C. Circuit case law, is necessary to any 
full and objective analysis of the remedies proposed therein. I 
hope that this hearing will result in the development of such 
information that would supplement the questions that I have put 
forth to the Department.
    Mr. Chairman, one important and critical policy issue that 
I would hope we can address today and that I would like all of 
our witnesses to consider, as they wait to be empaneled so that 
they can discuss, is the difficult issue of the temporal 
relation of antitrust enforcement in new high-technology 
markets.
    It cannot be overemphasized that timing is a critical issue 
in examining conduct in the so-called ``new economy.'' Indeed, 
the most significant lesson the Microsoft case has taught us is 
this fact. The D.C. Circuit found this issue noteworthy enough 
to discuss in the first few pages of its opinion, and I will 
quote from the unanimous court:
    ``[w]hat is somewhat problematic...is that just over 6 
years have passed since Microsoft engaged in the first conduct 
plaintiffs allege to be anticompetitive. As the record in this 
case indicates, 6 years seems like an eternity in the computer 
industry. By the time a court can assess liability, firms, 
products, and the marketplace are likely to have changed 
dramatically. This, in turn, threatens enormous practical 
difficulties for courts considering the appropriate measure of 
relief in equitable enforcement actions.'' The court goes on to 
say, ``Innovation to a large degree has already rendered the 
anticompetitive conduct obsolete (although by no means 
harmless).''
    Now, this issue is one that is relevant for this Committee 
to consider as a larger policy matter, as well as how it 
relates to this case and the proposed settlement we are 
examining today.
    Let me just say that one of the things that worries me is 
what are the enforcement capabilities of this settlement 
agreement? It was only a few years before these matters arose 
that Microsoft had agreed to a consent, a conduct decree that 
many feel they did not live up to. I think it is a legitimate 
issue to raise as to how will the agreement that the Justice 
Department has worked out with Microsoft and nine of the 
plaintiffs be enforced if anticompetitive conduct continues.
    In that regard, let me just raise Mr. Barksdale's letter, 
which I believe you put into the record.
    Chairman Leahy. I did, I did.
    Senator Hatch. Well, let me just raise it because he does 
make some interesting comments in his letter and I can read 
them, I think they might be at least part of opening up the 
questions in this matter. I will just quote a few paragraphs.
    He says, ``These developments have stiffened my resolve to 
do all I can to ensure that competition and consumer choice are 
reintroduced to the industry. It is vitally important that no 
company can do to a future Netscape what Microsoft did to 
Netscape from 1995 to 1999. It is universally recognized that 
the 1995 consent decree was ineffective. I respectfully submit 
that the Proposed Final Judgment, PFJ, which is the subject of 
the hearing, will be even less effective, if possible, than the 
1995 decree in restoring competition and stopping 
anticompetitive behavior. Accordingly, Senator Leahy, I am 
going to follow your suggestion that I help the Committee 
answer one of the central questions. If the PFJ had been in 
effect all along, how would it have affected Netscape? More 
important, how will it affect future Netscapes?''
    He describes the impact on future Netscapes as follows, and 
let me just read a couple of paragraphs in this regard. ``As 
discussed in the attached document, the unambiguous conclusion 
is that if the PFJ agreed upon last month by Microsoft and the 
Department of Justice had been in existence in 1994, Netscape 
would have never been able to obtain the necessary venture 
capital financing. In fact, the company would not have come 
into being in the first place. The work of Mark Andreesen's 
team at the University of Illinois in developing the Mosaic 
browser would likely have remained an academic exercise. An 
innovative, independent browser company simply could not 
survive under the PFJ, and such would be the effect on any 
company developing in the future technologies as innovative as 
the browser was in the mid-1990's.''
    He goes on to characterize whether or not Microsoft could 
have developed this itself, but let me just read the last few 
paragraphs of this letter.
    ``If the PFJ provisions are allowed to go into effect, it 
is unrealistic to think that anybody would ever secure venture 
capital financing to compete against Microsoft. This would be a 
tragedy for our Nation. It makes a mockery of the notion that 
the PFJ is `good for the economy' unquote. If the PFJ goes into 
effect, it will subject an entire industry to dominance by an 
unconstrained monopolist, thus snuffing out competition, 
consumer choice, and innovation in perhaps our Nation's most 
important industry. And, worse, it will allow them to extend 
their dominance to more businesses such as financial services, 
entertainment, telecommunications, and perhaps many others. 
Four years ago, I appeared before the Committee and was able to 
demonstrate, with the help of the audience, that Microsoft 
undoubtedly had a monopoly. Now, it has been proven in the 
courts that Microsoft not only has a monopoly, but they have 
illegally maintained that monopoly through a series of abusive 
and predatory actions. I submit to the Committee that Microsoft 
is infinitely stronger in each of their core businesses than 
they were 4 years ago, despite the fact that their principal 
arguments have been repudiated 8-0 by the Federal courts. I 
hope you will keep these thoughts in mind during your 
hearings.'' Then he said, ``A more detailed analysis of my 
views follows.''
    Well, the importance of that letter is basically Barksdale 
was one of the original complainants against Microsoft and was 
one of the very important witnesses before this Committee in 
those years when we were trying to figure what we are doing 
here. I don't think you can ignore that, and so these questions 
have to be answered that he raises, plus the questions that I 
have given as well.
    So you have put that letter in the record?
    Chairman Leahy. I have, and also I understood you wanted 
those letters that you had to Mr. James. Those are also part of 
the record.
    Senator Hatch. I appreciate it.
    Let me just say, Mr. Chairman, I am grateful that you are 
continuing the Committee's important role in high-technology 
policy matters, as I would expect you to do because I know that 
you take a great interest in these matters, as does, I think, 
every individual person on the Committee.
    I certainly look forward to hearing our witnesses today, 
and I am going to keep an open mind on where we are going here. 
Hopefully we can resolve these matters in a way that is 
beneficial to everybody, including those who are against 
Microsoft and Microsoft itself.
    Thank you, Mr. Chairman.
    Chairman Leahy. Thank you.
    Senator Kohl?

 STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF 
                           WISCONSIN

    Senator Kohl. Mr. Chairman, we thank you for holding this 
hearing here today.
    This is a crucial time for competition in the high-tech 
sector of our economy. After spending more than 3 years 
pursuing its groundbreaking antitrust case against Microsoft, 
the Government has announced a settlement. But the critical 
question remains, will this settlement break Microsoft's 
stranglehold over the computer software industry and restore 
competition in this vital sector of our economy? I have serious 
doubts that it will.
    An independent Federal court, both the trial court and the 
Court of Appeals, found that Microsoft broke the law and that 
its violation should be fixed. This antitrust case was as big 
as they come. Microsoft crushed a competitor, illegally tried 
to maintain its monopoly, and stifled innovation in this 
market.
    Now, after all these years of litigation, of charges and 
counter-charges, this settlement leaves us wondering, did we 
really accomplish anything. Or in the words of the old song, 
``is that all there is?'' Does this settlement obey the Supreme 
Court mandate that it must deny the antitrust violator the 
fruits of its illegal conduct?
    It seems to me and to many, including nine of the States 
that joined the Federal Government in suing Microsoft, that 
this settlement agreement is not strong enough to do the job, 
to restore competition to the computer software industry. It 
contains so many loopholes, qualifications, and exceptions that 
many worry that Microsoft will easily be able to evade its 
provisions.
    Today, for the vast majority of computer users, the first 
thing they see when they turn on their machine is the now 
familiar Microsoft logo, placed on the Microsoft start menu, 
and all of their computer operations take place through the 
filter of Microsoft's Windows operating system. Microsoft's 
control over the market is so strong that today more than 95 
percent of all personal computers run on the Windows operating 
system, a market share high enough to constitute a monopoly 
under antitrust law.
    Its share of the Internet browsing market is now over 85 
percent, and it reported a profit margin of 25 percent in the 
most recent quarter, a very high number in challenging economic 
times. Microsoft has the power to dictate terms to 
manufacturers who wish to gain access to the Windows operating 
system and the ability to leverage its dominance into other 
forms of computer software. And Microsoft has never been shy 
about using its market power.
    Are we today really confident that in 5 years this 
settlement will have had any appreciable impact on these facts 
of life in the computer industry? I am not.
    We stand today on the threshold of writing the rules of 
competition in the digital age. We have two options. One option 
involves one dominant company controlling the computer desktop 
facing minor restraints that expire in 5 years, but acting as a 
gatekeeper to 95 percent of all personal computer users. The 
other model is the flowering of innovation and new products 
that resulted from the breakup of the AT&T telephone monopoly 
nearly 20 years ago. From cell phones to faxes, from long-
distance price wars to the development of the Internet itself, 
the end of the telephone monopoly brought an explosion of new 
technologies and services that benefit millions of consumers 
everyday. We should insist on nothing less in this case.
    In sum, any settlement in this case should make the market 
for computer software as competitive as the market for computer 
hardware is today. While there is nothing wrong with settling, 
of course, we should insist on a settlement that has an 
immediate, substantial and permanent impact on restoring 
competition in this industry.
    I thank our witnesses for testifying today and we look 
forward to hearing your views.
    Chairman Leahy. Thank you.
    Senator DeWine?

STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF 
                              OHIO

    Senator DeWine. Mr. Chairman, thank you very much for 
holding this very important hearing concerning the Department 
of Justice's Proposed Final Judgment in its case against 
Microsoft.
    Mr. Chairman, as we examine this judgment and attempt to 
imagine what it will mean for the future of competition in this 
market, we must keep in mind the serious nature of this case. 
According to the D.C. Circuit Court, Microsoft did, in fact, 
violate our antitrust laws. Their behavior hurt the competitive 
marketplace. This is something that we must keep in mind as we 
examine the Proposed Final Judgment.
    This hearing is particularly important at this time because 
Federal law does require the District Court to examine the 
proposed settlement and determine if it is, in fact, in the 
public interest. Federal law clearly allows the public to be 
heard on such matters. I believe that this forum today will 
further that process of public discussion.
    The Court of Appeals in this case, relying on established 
Supreme Court case law, explained what an appropriate remedy in 
an antitrust case such as this one must seek to accomplish. It 
should unfetter the market from anticompetitive conduct, 
terminate the illegal monopoly, and deny the defendant the 
fruits of its violations. It is important, Mr. Chairman, that 
we examine whether the proposed decree would, in fact, 
accomplish these goals.
    There seems to be a great deal of disagreement about what 
the competitive impact of the decree will be. While the 
proposed settlement correctly, I believe, focuses primarily on 
the market for middleware, there has been a great deal of 
concern raised about the mechanism for enforcing such a 
settlement. Specifically, I think we need to discuss further 
whether the public interest would be better served with a so-
called special master or some sort of other administrative 
mechanism, or whether the Justice Department could be more 
effective enforcing the decree on its own.
    In addition to the Department of Justice's Proposed Final 
Judgment, we also have the benefit of another remedies proposal 
that has been submitted to the court by nine States that did 
not join with the Antitrust Division's proposal. I would like 
to hear from our witnesses about the role they believe this 
alternative proposal should play in the ongoing Tunney Act 
proceedings.
    As I mentioned earlier, Mr. Chairman, the Court of Appeals 
directed that any remedy should seek to deny Microsoft the 
fruits of its illegal activities. One clear benefit Microsoft 
derived from its violations was the effective destruction of 
Netscape as a serious competitor and a decrease in Java's 
market presence. It is obviously impossible to go back in time 
and resurrect the exact market structure that existed, but it 
is important to discuss how the proposed settlement deals with 
this problem.
    I would also like to note for the record that Microsoft 
will be represented today by one of their outside counsels, 
Rick Rule, rather than an actual employee of the company. Mr. 
Rule is an outstanding antitrust lawyer. He is well qualified 
to testify on this issue and we certainly look forward to 
hearing his testimony today.
    However, Mr. Chairman, I must say that I am disappointed 
that Microsoft chose not to send an actual officer of the 
company because it does not appear to represent, frankly, the 
fresh start that I think we were all hoping to begin today.
    Finally, I would like to thank you, Mr. Chairman, Ranking 
Member Hatch, and Antitrust Subcommittee Chairman Kohl for all 
of your hard work in putting this hearing together and all of 
your work on this issue generally over the last few years.
    I look forward to the testimony of our witnesses today and 
to the Committee's continuing oversight of this very important 
issue.
    Chairman Leahy. Mr. James, there is a vote on the floor. I 
think there are two or three minutes left in the roll call 
vote. We are going to suspend while we go to vote, but I 
think----
    Senator McConnell. Mr. Chairman, I have a really brief 
statement. Could I make that before you adjourn?
    Chairman Leahy. You can.

  STATEMENT OF HON. MITCH MCCONNELL, A U.S. SENATOR FROM THE 
                       STATE OF KENTUCKY

    Senator McConnell. Let me just say that this hearing and 
the accompanying media spectacle indicate the Microsoft case is 
the subject of significant public interest and debate. Some 
argue that the case itself should never have been filed to 
begin with, and now after nearly 4 years of litigation, 
Microsoft, the Department of Justice and nine States have 
reached a settlement.
    I just want to commend the parties for their tireless 
effort and countless hours spent in reaching the compromise. 
Settlement is nearly always preferable to litigation, and 
regulation by the market is nearly always better than 
regulation by litigation, or the Government for that matter.
    As far as what the public thinks, just this week a 
nationwide survey indicated that the U.S. Government and 
Microsoft agreed to settle the antitrust case. However, nine 
State AGs argued that the antitrust case against Microsoft 
should continue. Which statement do you agree with?
    The U.S. economy and consumers would be better off if the 
issue were settled as soon as possible: 70 percent. The court 
should continue to investigate whether Microsoft should be 
punished for its business activities: 24 percent. Not that the 
public is always determinative, but I thought that would be an 
interesting observation to add.
    Thank you very much, Mr. Chairman.
    Chairman Leahy. Mr. James, I think you would note from the 
comments that they sort of go across the board here. The 
majority of people favor a settlement, but I must say that I 
don't think the majority of people favor any settlement; they 
favor a good settlement, and that is what the questions will be 
directed at and that is why nine attorneys general have 
expressed concern. Nine agreed with the settlement, nine 
disagreed with the settlement. These are all very good, very 
talented people. So in your testimony when we come back, you 
have heard a number of the questions that have been raised and 
we look forward to you responding to them.
    We will stand in recess while we vote.
    [The Committee stood in recess from 10:40 a.m. to 11:14 
a.m.]
    Chairman Leahy. I should note for the record that Mr. James 
has served as the Assistant Attorney General for the Antitrust 
Division since June 2001. He previously served as Deputy 
Assistant Attorney General for the Antitrust Division for the 
first Bush administration from 1989 to 1992. He served as 
Acting Assistant Attorney General for several months in 1992, 
then was head of the antitrust practice at Jones, Day, Reavis 
and Pogue, in Washington.
    Not knowing what the Senate schedule might be, Mr. James, 
we will put your whole statement in the record, of course. I 
wonder if you might summarize it, but also with some reference 
to the charge made in the letter to Senator Hatch and myself by 
Mr. Barksdale, who said had these been the ground rules, he 
never would have been able to get Netscape off the ground. Had 
these been the ground rules at the time they started Netscape, 
they never would have been able to create Netscape. If that is 
accurate, of course, then we have got a real problem.
    So, Mr. James, it is all yours.

  STATEMENT OF CHARLES A. JAMES, ASSISTANT ATTORNEY GENERAL, 
  ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.

    Mr. James. Thank you, Senator Leahy, and good morning to 
you and members of the Committee. I am pleased to appear before 
you today to discuss the proposed settlement of our still 
pending case against Microsoft Corporation.
    With me today are Deborah Majoras, my deputy, and Phil 
Malone, who has been the lead staff lawyer on the Microsoft 
case from the very beginning. I note their presence here 
because they were the ones who responded to the judge's order 
that we negotiate around the clock and I think they have 
recovered now.
    As you know, on November 2 the Department and nine States 
entered into the proposed settlement. We are in the midst of 
the Tunney Act period and that will end at the end of January, 
at which point the district court will determine whether the 
settlement is in the public interest. We think that it is.
    I am somewhat limited in what I can say about the case 
because of the pendency of the Tunney Act proceeding. But, of 
course, I am happy to discuss this with the Committee for the 
purpose of public explication.
    When thinking about the Microsoft case, from my perspective 
it is always important to distinguish between Microsoft, the 
public spectacle, and Microsoft, the actual legal dispute. We 
look, in particular, to what the Department alleged in its 
complaint and how the court ruled on those allegations.
    The Antitrust Division's complaint had four counts: 
attempted monopolization of the browser market, in violation of 
Section 2; individual anticompetitive acts and a course of 
conduct to maintain the operating system monopoly, in violation 
of Section 2 of the Sherman Act; tying the own browser to the 
operating system, in violation of Section 1; and exclusive 
dealing, in violation of Section 1.
    I would note that a separate monopoly leveraging claim 
brought by the States was thrown out prior to trial, and that 
the States at one time had alleged in their complaint 
monopolization of the Microsoft Office market. That was 
eliminated by the States through an amendment.
    There was, of course, a trial before Judge Jackson, at the 
conclusion of which Judge Jackson found for the Government on 
everything but exclusive dealing. He ordered Microsoft to be 
split into separate operating system and applications 
businesses after a 1-year transitional period under interim 
conduct remedies.
    On appeal, however, only the monopoly maintenance claim 
survived unscathed. The attempted monopoly claim was dismissed. 
The tying claim was reversed and remanded for further 
proceedings under a much more rigorous standard. And the remedy 
was vacated, with the court ordering remedial hearings before a 
new judge to address the fact that the liability findings had 
been, in their words, ``drastically curtailed.''
    Even the monopoly maintenance claim was cut back in the 
Court of Appeals decision. The Court of Appeals found for 
Microsoft on some of the specific practices and ruled against 
the Government on the so-called course of conduct theory of 
liability.
    I recount all of this history to make two basic points that 
I think are important as we discuss the settlement. First, the 
case, even as initially framed by the Department of Justice, 
was a fairly narrow challenge. It was never a direct assault on 
the acquisition of the operating system monopoly itself.
    Second, and perhaps much more important, the case that 
emerged from the Court of Appeals was much narrower still, 
focusing exclusively on the middleware threat to the operating 
system monopoly and specific practices--not a course of conduct 
found to be anticompetitive.
    The Court of Appeals decision determined the reality of the 
case as we found it in the Department when I first arrived 
there in June, as you noted. The conduct found to be unlawful 
by the court was the sole basis for relief.
    It is probably worth talking just briefly about the 
monopoly maintenance claim. The complaint alleges that 
Microsoft engaged in various anticompetitive practices to 
impede the development of rival Web browsers and Java. These 
products came to be known as middleware and were thought to 
pose a threat to the operating system monopoly because they had 
the potential to become platforms for other software 
applications. The court noted that the middleware threat was 
nascent; that is to say that no one could predict when, if 
ever, enough applications would be written to middleware for it 
to significantly displace the operating system monopoly.
    A few comments about the settlement itself. In general 
terms, our settlement has several important points that we 
think fully and demonstrably remedy the middleware issues that 
were at the heart of the monopoly maintenance claim.
    In particular, our decree contains a very broad definition 
of middleware that specifically includes the forms of platform 
software that have been identified as potential operating 
system threats today and likely to emerge as operating system 
threats in the future. It prohibits in the broadest terms the 
types of contractual restrictions and exclusionary arrangements 
the Court of Appeals found to be unlawful. It fences in those 
prohibitions with appropriate non-discrimination and non-
retaliation provisions, and it creates an environment in which 
middleware developers can create programs that compete with 
Microsoft on a function-by-function basis through a regime of 
mandatory API documentation and disclosure.
    In the most simple terms, we believe our remedy will permit 
the development and deployment of middleware products without 
fear of retaliation or economic disadvantage. That is what we 
believe and what the court found that consumers actually lost 
through Microsoft's unlawful conduct, and that is what we think 
consumers will gain through our remedy.
    With specific reference to what Mr. Barksdale said, if I 
may, I have not reviewed Mr. Barksdale's letter. I know that in 
this particular situation, with so much at stake in this 
particular settlement, I have seen lots of hyperbolic 
statements. I certainly wouldn't necessarily characterize his 
in that vein without having read it in some detail.
    I would note, however, that----
    Chairman Leahy. Mr. James, we are going to give you an 
opportunity to do that because I want you to look at it. You 
can feel free to call it hyperbolic or however, but I would ask 
that you and your staff look at his letter, which does raise 
some serious questions, and I would like to see what response 
you have for the record.
    Mr. James. I would be happy to do so. And with that, I 
would be happy to answer your questions.
    [The prepared statement of Mr. James follows.]

  Prepared Statement of Charles A. James, Assistant Attorney General, 
      Antitrust Division, Department of Justice, Washington, D.C.

    Mr. Chairman and members of the Subcommittee, I am pleased to 
appear before you today to discuss the Department's still-pending 
antitrust enforcement action against Microsoft Corporation.
    On November 2, 2001, the Department stipulated to entry of a 
proposed consent decree that would resolve the case. Nine states joined 
in the proposed settlement.\1\ We are in the midst of the 60-day public 
comment period under the Tunney Act, after which we will file a 
response to the comments, and the district court will rule on whether 
the proposed consent decree is in the public interest. Nine other 
states, and the District of Columbia, have not signed the proposed 
consent decree.
---------------------------------------------------------------------------
    \1\ New York, Ohio, Illinois, Kentucky, Louisiana, Maryland, 
Michigan, North Carolina, and Wisconsin
---------------------------------------------------------------------------
    The Department's position regarding the proposed settlement is set 
forth in documents filed in the pending Tunney Act proceeding. Because 
of the pendency of the proceeding, and the somewhat remote possibility 
that the case will return to litigation, I am somewhat limited in what 
I can say about the case and settlement. Nonetheless, I am happy to 
appear before you today to dicuss in general terms how the settlement 
promotes the public interest by resolving the allegations sustained by 
the court of appeals.
    When we in the Department address the MIcrosoft case, it is 
important for us to ignore the media spectacle and clash-of-the-titans 
imagery and focus instead on the actual legal dispute presented to the 
court. In discussing the case and the proposed consent decree, it is 
important to keep in mind not only what the Department alleged in our 
complaint, but how the courts--in particular, the D.C. Circuit--ruled. 
As a result of the appeals court's ruling, the case is in many 
important respects considerably narrower than the one the Department 
originally brought in the spring of 1998 and narrower still than Judge 
Jackson's ruling in June of 2000.
    I would like to take a few minutes to refocus attention on the 
legal allegations charged in the complaint, how those allegations were 
resolved in the courts, and the remedies in the proposed consent decree 
presently undergoing Tunney Act review. I believe these proposed 
remedies fully and demonstrably resolve the monopoly maintenance 
finding that the D.C. Circuit affirmed.
    The complaints filed by the Department, the states, and the 
District of Columbia alleged: (1) that Microsoft had engaged in a 
series of specific anticompetitive acts, and a course of 
anticompetitive conduct, to maintain its monopoly position in the 
market for operating systems designed to run on Intel-compatible 
personal computers, in violation of Section 2 of the Sherman Act; (2) 
that Microsoft had attempted to monopolize the web browser market, also 
in violation of Section 2; (3) that Microsoft had illegally tied its 
web browser, Internet Explorer, to its operating system, in violation 
of Section 1; and (4) that Microsoft had entered into exclusive dealing 
arrangements that also violated Section 1. A separate monopoly 
leveraging claim advanced by the state plaintiffs was dismissed prior 
to trial. After a full trial on the merits, the district court 
ultimately sustained the first three claims, while finding that the 
exclusive dealing claim had not been proved.
    The D.C. Circuit, however, significantly narrowed the case, 
affirming the district court's finding of liability only as to the 
monopoly maintenance claim, and even there only as to a smaller number 
of specified anticompetitive actions. Of the twenty anticompetitive 
acts the court of appeals reviwed, it reversed with respect to eight of 
the acts that the district court had sustained as elements of the 
monopoly maintenance claim. Additionally, the D.C. Circuit reversed the 
lower court's finding that Microsoft's ``course of conduct'' separately 
violated Section 2 of the Sherman Act. It reversed the district court's 
ruling on the attempted monopolization and tying claims, remanding the 
tying claim for further proceedings under a much more difficult rule of 
reason standard. And, of course, it vacated the district court's final 
judgment that had set forth the break-up remedy and interim conduct 
remedies.
    The antitrust laws do not prohibit a firm from having a monopoly, 
but only from illegally acquiring or maintaining a monopoly through 
interference with the competitive efforts of rivals. There has never 
been any serious contention that Microsoft acquired its operating 
system monopoly through unlawful means, and the existence of the 
operating system monopoly itself was not challenged in this case.
    With regard to the monopoly maintenance claim, the court of appeals 
upheld the conclusion that Microsoft had engaged in unlawful 
exclusionary conduct by using contractual provisions to prohibit 
computer manufacturers from supporting competing middleware products on 
Microsoft's operating system; by prohibiting consumers and computer 
manufacturers from removing Microsoft's middleware products from the 
desktop; and by reaching agreements with software developers and third 
parties to exclude or disadvantage competing middleware products--all 
to protect Microsoft's monopoly in the operating system market.
    The Department proved that Microsoft had engaged in these 
anticompetitive practices to discourage the development and deployment 
of rival web browsers and Java technologies, in an effort to prevent 
them from becoming middleware threats to its operating system monopoly. 
Netscape had gained a respectable market share as a technology for 
navigating the then-burgeoning Internet, and Netscape proponents were 
touting the prospect of a new world of Internet computing that would 
make operating systems less relevant. Netscape touted its web browser 
as a new category of software that came to be known as ``middleware,'' 
a form of software that, like Microsoft's Windows operating system, 
exposed a broad range of applications program interfaces (``APIs'') to 
which software developers could write applications. This created the 
potential that--if Netscape Navigator continued to gain market share 
and could run on operating systems other than Microsoft's, and if large 
numbers of software developers wrote applications programs to it--
computer users would have viable competitive alternatives to Microsoft.
    The middleware threat was nascent. That is, as both the district 
court and the court of appeals acknowledged, it was a potential threat 
to the operating system monopoly that had not yet become real. It could 
not be predicted when, if ever, enough applications programs would be 
written to middleware products for middleware to singificantly displace 
Microsoft operating systems. Microsoft took this nascent middleware 
threat to its operating system monopoly seriously. The trial record 
disclosed a corporate preoccupation with thwarting Netscape and 
displacing Netscape's Navigator with Microsoft's Internet Explorer as 
the prevailing web browser. This campaign featured a host of strong-arm 
tactics aimed at various computer manufacturers, Internet access 
providers, and independent software developers. Even the decision to 
integrate its own browser into the operating system--in effect, giving 
it away for free--had an element of impeding the growth of Netscape and 
once was described as taking away Netscape's oxygen. Microsoft took 
similar actions against Java technologies. Among other things, 
Microsoft required software developers to promote its own version of 
Java technology exclusively and threatened developers if they assisted 
competing Java products.
    The district court ruled not only that Microsoft had engaged in 
various specified illegal exclusionary practices, but that these acts 
were part of an overall anticompetitive course of conduct. The D.C. 
Circuit agreed as to some of the specified practices, while ruling that 
others--for example, Microsoft's practice of preventing computer 
manufacturers from substituting their own user interfaces over the 
Windows interface supplied by Microsoft--were justified and thus 
lawful. The D.C. Circuit also rejected the course-of-conduct theory, 
under which Microsoft's specific practices could be viewed as parts of 
a broader, more general monopolistic scheme, ruling that Microsoft's 
practices must be viewed individually.
    Following the appellate court's instructions, we, in considering a 
possible remedy, focused on the specific practices that the court had 
ruled unlawfull. We took as a starting point the district court's 
interim conduct remedies. Those remedies, however, were based on a much 
wider range of liability findings than had been affirmed on appeal. 
Accordingly, they had to be tailored to the findings that had actually 
been affirmed. Further, because the interim conduct remedies were 
designed to apply only as a stop-gap until the district court's 
divestiture order was implemented, we broadened them in important 
respects to more fully address the remedial objectives of arresting the 
anticompetitive conduct, preventing its recurrence, and restoring lost 
competition to the marketplace. Finally, we updated the remedies to 
strengthen their long-term effectiveness in the face of the rapid 
technological innovation that continues to characterize the computer 
industry--so that they will be relevant to the Windows XP operating 
system world and beyond.
    Under the proposed consent decree, Microsoft will be required to 
disclose to other software developers the interfaces used by 
Microsoft's middleware to interoperate with the operating system, 
enabling other software developers to create competing products that 
emulate Microsoft's integrated functions. Microsoft will also have to 
disclose the protocols that are necessary for software located in a 
server computer to interoperate with Windows on a PC.
    Microsoft will have to permit computer manufacturers and consumers 
to substitute competing middleware software on the desktop. It will be 
prohibited from retaliating against computer manufacturers or software 
developers for supporting or developing certain competing software. To 
further guard against possible retaliation, Microsoft will be required 
to license its operating system to key computer manufacturers on 
uniform terms for five years.
    Microsoft will be prohibited from entering into agreements 
rerquiring the exclusive support or development of certain Microsoft 
software, so that software developers and computer manufacturers can 
continue to do business with Microsoft while also supporting and 
developing rival middleware products. And Microsoft will be required to 
license any intellectual property to computer manufacturers and 
software developers necessary for them to exercise their rights under 
the proposed decree, including, for example, using the middleware 
protocols disclosed by Microsoft to interoperate with the operating 
system.
    Any assumption that, had we litigated the remedy, we were certain 
to have secured all of this relief and possibly more misses the mark. 
The middleware definition, for example, was a very complex issue and 
would have been hard fought in a litigated remedy proceeding. The term 
had no generally accepted industry or technical meaning. At the time of 
trial, the term was used to describe software programs that exposed 
APIs. But in today's world, by virtue of the extensive degree to which 
software programs interact with each other, a very broad range of 
programs--large and small, simple and complex--expose APIs. At the same 
time, middleware had to be defined more broadly than the browser, or it 
would not provide sufficient protection for the potential sources of 
competition that might emerge. So we developed a definition of 
middleware, designed to encompass all technologies that have the 
potential to be middleware threats to Microsoft's operating system 
monopoly. It captures, in today's market, Internet browsers, e-mail 
client software, networked audio/video client software, and instant 
messaging software. On a going-forward basis, it also provides 
guidelines for what types of software will be considered middleware for 
purposes of the decree in the future. These guidelines are critical 
because, while it is important that future middleware products be 
captured by the proposed decree, those products will not necessarily be 
readily identified as such.
    The proposed decree protects competition in the middleware market 
through a variety of affirmative duties and prohibition, which I listed 
a minute ago. By requiring disclosure of a broad range of interfaces 
and protocols that will secure interoperability for rival software and 
servers, broadly banning exclusive dealing, giving computer 
manufacturers and consumers extensive control of the desktop and 
initial boot sequence, and prohibiting a broad range of retaliatory 
conduct, the proposed decree will require Microsoft to fundamentally 
change the way in which it deals with computer manufacturers, Internet 
access providers, software developers, and others.
    These prohibitions had to be devised keeping in mind that Microsoft 
will continue for the foreseeable future to have a monopoly in the 
operating systems market. While we recognized that not all forms of 
collaboration between Microsoft and others in the industry are 
anticompetitive, and that some actually benefit competition, we drafted 
the non-discrimination and non-retaliation provisions broadly enough to 
prevent Microsoft from using its monopoly power to apply 
anticompetitive pressure in this fashion.
    We concluded, particularly in light of intervening technological 
developments in the computer industry, that the remedial objective of 
restoring lost competition had to mean something different than 
attempting to restore Netscape and Java specifically to their previous 
status as potential nascent threats to Microsoft's monopoly. Attempting 
to turn back the hands of time would likely prove futile and would risk 
sacrificing important innovations that have moved the industry beyond 
that point. So we focused instead on the market as it exists today, and 
where it appears to be heading over the next few years, and devised a 
remedy to recreate the potential for the emergence of competitive 
alternatives to Microsoft's operating system monopoly through 
middleware innovations. With a reported 70,000-odd applications 
currently designed to run on Windows, the applications barrier to entry 
is quite formidable. The most effective avenue for restoring the 
competitive potential of middleware, we concluded, was to ensure that 
middleware developers had access to the technical information necessary 
to create middleware programs that could compete with Microsoft in a 
meaningful way--that is, by requiring Microsoft to disclose the APIs 
needed to enable competing middleware developers to create middleware 
that matches Microsoft's in efficiency and functionality.
    API disclosure had apparently been a very difficult obstacle to 
resolution of the case at every stage. There had never been any 
allegation in the case that Windows was an essential facility, the 
proprietary technology for which had to be openly shared in the 
industry. So we are very pleased that we were able to secure this 
crucial provision in the proposed decree.
    Similarly, the proposed decree goes beyond the district court's 
order in requiring Microsoft to disclose communications protocols for 
servers if they are embedded in the operating system, thereby 
protecting the potential for server-based applications to emerge as a 
competitive alternative to Microsoft's operating systems monopoly. 
Although the issue of Microsoft's potential use of its monopoly power 
to inhibit server-based competition was barely raised and never 
litigated in the district court, we believed it was an important 
concern to resolve in the final negotiations.
    The proposed decree also requires Microsoft to create and preserve 
``default'' settings, such that certain of Microsoft's integrated 
middleware functions will not be able to override the selection of a 
third-party middleware product, and requires Microsoft to create add/
delete functionality to make it easier for computer manufacturers and 
users to replace Microsoft middleware functionality with independently 
developed middleware. These are other important respects in which, in 
light of intervening technological changes, the proposed decree goes 
beyond the relief contemplated in the district court's interim relief 
order. By giving middleware developers the means of creating fully 
competitive products, requiring the creation of add/delete 
functionality, and making it absolutely clear that computer 
manufacturers can, in fact, replace Microsoft middleware on the 
desktop, the decree will do as much as possible to restore the nascent 
threat to the operating system monopoly that browsers once represented.
    The proposed decree contains some of the most stringent enforcement 
provisions ever contained in any modern consent decree. In addition to 
the ordinary prosecutorial access powers, backed up by civil and 
criminal contempt authority, this decree has two other aggressive 
features. First, it requires a full-time, on-site compliance team--
complete with its own staff and the power to hire consultants--that 
will monitor compliance with the decree, report violations to the 
Department, and attempt to resolve technical disputes under the 
disclosure provisions. The compliance team will have complete access to 
Microsoft's source code, records, facilities, and personnel. Its 
dispute resolution responsibilities reflect the recognition that the 
market will benefit from rapid, consensual resolution of issues 
whenever possible, more so than litigation under the Department's 
contempt powers. The dispute resolution process complements, but does 
not supplant, ordinary methods of enforcement. Complainants may bring 
their inquiries directly to the Department if they choose.
    The decree will be in effect for five years. It also contains a 
provision under which the term may be extended by up to two additional 
years in the event that the court finds that Microsoft has engaged in 
repeated violations. Assuming that Microsoft will want to get out from 
under the decree's affirmative obligations and restrictions as soon as 
possible, the prospect that it might face an extension of the decree 
should provide an extra incentive to comply.
    Our practice with regard to enforcement is never influenced by the 
extent to which we ``trust'' a defendant. Rather, a decree must stand 
on its own as an enforcement vehicle to ensure effective relief and 
must contain enforcement provisions sufficient to address its inherent 
compliance issues. In this case, those compliance issues are complex, 
as the decree seeks to address Microsoft's interactions with firms 
throughout the computer industry. Under the circumstances, I believe 
the extraordinary nature of the decree is warranted.
    Some have criticized the decree for not going far enough. Some have 
asked why we did not continue to pursue divestiture as a possible 
remedy. We had several reasons. First, the court of appeals made it 
clear that it viewed the break-up remedy with skepticism, to put it 
mildly. The court ruled that on remand the district court must consider 
whether Microsoft is a unitary company--i.e., one that could not easily 
be broken up--and whether plaintiffs established a significant causal 
connection between Microsoft's anticompetitive conduct and its dominant 
position in the market for operating systems--a finding not reached by 
the prior judge.
    Second, the legal basis for the structural separation the 
Department had been seeking was undercut by the failure to sustain the 
two claims that had challenged Microsoft's right to compete outside its 
operating system monopoly by integrating new functions into Windows, 
the attempted monopolization claim and the tying claim. The former was 
dismissed, and the latter was remanded under a much more difficult 
rule-of-reason standard. The court of appeals ruled that, albeit with 
some limits, Microsoft could lawfully integrate new functions into the 
operating system and use the advantages flowing from its knowledge and 
design of the operating system to compete in downstream markets.
    Third, and more generally, the relief in a section 2 case must have 
its foundation in the offending conduct. The monopoly maintenance 
finding, as modified by the court of appeals, and without the ``course-
of-conduct'' theory, would not in our view sustain a broad-ranging 
structural remedy that went beyond what was necessary to address 
Microsoft's unlawful responses to the middleware threat to its 
operating system monopoly. Indeed, our new district judge, Judge 
Kollar-Kotelly, stated in open court that she expected our proposed 
remedy to reflect the fact that portions of our case had not been 
sustained.
    Finally, from a practical standpoint, even assuming that we could 
have eventually secured a breakup of Microsoft--a very dubious 
assumption in light of what the court of appeals and Judge Kollar-
Kotelly have stated--the time it would have taken to continue 
litigating the break-up and the inevitable appeals could easily have 
delayed relief for another several years. By taking structural relief 
off of the table at the outset of the remedy proceeding on remand, we 
were able to get favorable procedural rulings that were essential to 
moving quickly to a prompt resolution.
    More generally, a number of critics have suggested ways in which we 
could have further constrained Microsoft's conduct in the marketplace--
either by excluding it from markets outside the operating system 
market, restricting it from integrating functions into its products or 
collaborating with others, or requiring it to widely share its source 
code as an open platform. While it is certainly true that restrictions 
and requirements of this sort might be desirable and advantageous to 
Microsoft's competitors, they would not necessarily be in the interest 
of competition and consumers overall; many would reduce consumer choice 
rather than increase it. Moreover, to the extent these restrictions go 
beyond what is needed to remedy proven antitrust violations, they are 
not legitimate remedial goals. The objectives of civil antitrust 
enforcement are remedial, and they focus on protecting and restoring 
competition for the benefit of consumers, not on favoring particular 
competitors.
    As to more complex questions regarding whether the decree has 
properly covered all the elements that will be needed for full relief, 
questions of that nature are entirely appropriate and hopefully will be 
raised and addressed in the Tunney Act process.
    But I believe the decree, by creating the opportunity for 
independent software vendors to develop competitive middleware products 
on a function by-function basis, by giving computer manufacturers the 
flexibility to place competing middleware products on Microsoft's 
operating system, and by preventing retaliation by Microsoft against 
those who choose to develop or use competing rniddleware products, 
fully addresses the legitimate public goals of stopping Microsoft's 
unlawful conduct and restoring competition lost on its account.
    Mr. Chairman, a vigorously competitive computer software industry 
is vital to our economy, and the Department is committed to ensuring 
that it remains competitive. I hope that my testimony has helped 
members of the Committee more fully understand why the Department is 
completely satisfied that the proposed consent decree now before the 
district court will provide a sufficient and effective remedy for the 
anticompetitive conduct in which Microsoft has been found to have 
engaged in violation of the Sherman Act. I would be happy to answer any 
questions you or other members of the Committee may have.

    Chairman Leahy. Did you have more that you wanted to say on 
the letter?
    Mr. James. No, sir. I am happy to respond to what you folks 
want to talk about.
    Chairman Leahy. The Department of Justice has been involved 
in litigation against Microsoft for more than 11 years. I am 
one of those who had hoped throughout that that the parties 
might come to some conclusion. I think that if you can have a 
fair conclusion, it is in the best interests of the consumers, 
the Government, Microsoft, competitors, and everybody else. I 
have no problem with that, but that presupposes the right kind 
of settlement.
    Over the course of those 11 years, the parties entered into 
one consent decree that just ended up with a whole lot more 
litigation over the terms of that consent decree. I mention 
that because you take this settlement and it is already being 
criticized by some for the vagueness of its terms and its 
loopholes. Judge Robert Bork warned, and I think I am quoting 
him correctly, ``It is likely to guarantee years of additional 
litigation.''
    Now, what kind of assurances can you give or what kind of 
predictions can you give that if this settlement is agreed to 
by the court that we are going to see an end to this litigation 
and we are going to have a stop to this kind of merry-go-round 
of Microsoft litigation concerning compliance or even the 
meanings of the consent decree?
    I notice a lot of people in this room on both sides of the 
issue. I have a feeling that they are here solely because of 
their interest in Government and not because the meter is 
running. A lot of us would like to see this thing end, but why 
do you feel that this settlement is so good that that is going 
to end?
    Mr. James. Senator, that is certainly a legitimate question 
and I understand the spirit in which it is asked. One of the 
reasons that we have so many antitrust lawyers, and perhaps why 
there are so many of them in this room, is that firms with 
substantial market positions very often are the subject of 
appropriate antitrust scrutiny. So it is with Microsoft and so 
it should be.
    Our settlement here is a settlement that resolves a fairly 
complex piece of litigation. By its terms it is going to be a 
complex settlement, inasmuch as it does cover a broad range of 
activities and has to look into the future prospectively in a 
manner that benefits consumers. And some of that consumer 
benefit certainly will come from the development of competing 
products. Some of that consumer benefit, however, will come 
from competition from Microsoft as it moves into other 
middleware products, et cetera.
    We think that the terms of the decree are certainly 
enforceable. I think so much of what have been called loopholes 
are things that are carve-outs necessary to facilitate pro-
competitive behavior. We certainly think that the enforcement 
power embodied in this decree--an unprecedented level of 
enforcement power with three tiers--is sufficient to let the 
Department of Justice do its job.
    Chairman Leahy. But keep in mind that usually in these 
kinds of decrees, if it is not specifically laid out, the 
courts tend to decide the vague questions against the 
Government, not for the Government. Fortune Magazine said even 
the loopholes have loopholes--a pretty strong statement from a 
very pro-business magazine. The settlement limits the types of 
retaliation Microsoft can take against PC manufacturers that 
want to carry or promote non-Microsoft software, but some would 
say that it gives a green light to other types of retaliation.
    Now, why doesn't the settlement ban all types of 
retaliation? The Court of Appeals said twice that if you 
commingle the browser and operating system code, you violate 
Section 2 of the Sherman Act. The proposed settlement contains 
no prohibition on commingling code. There is no provision 
barring the commingling of browser code and the operating code. 
So you have got areas where they can retaliate. You don't have 
the barring of this commingling of code.
    I mean, are Fortune Magazine, Judge Bork and others 
justified in thinking there are a few too many loopholes here, 
notwithstanding the levels of enforcement?
    Mr. James. Let me take your points in order. First, on the 
subject of retaliation, retaliation is a defined term in this 
decree. It is a term that we are using to define a sort of 
conduct that Microsoft can engage in when it engages in 
ordinary commercial transactions.
    I don't think that there is any basis in the bounds of this 
case to prohibit Microsoft from engaging in any form of 
collaborative conduct with anyone in the computer industry. 
Certainly, the types of collaborative conduct that are 
permitted, the so-called loopholes, are the type of conduct 
that is permitted under standard Supreme Court law embodied in 
decisions like Broadcast Music and NCAA, and also embodied in 
the Federal Trade Commission-Department of Justice joint 
venture guidelines as sanctioned forms of conduct. So we think 
that antitrust lawyers certainly can understand these types of 
issues and we think the courts can understand these types of 
issues.
    Secondly, with regard to your more particular point about 
commingling code, it is the case that the Court of Appeals, 
following upon the district court decision, found that 
Microsoft had engaged in an act of monopolization in that it 
commingled code for the purpose of preventing the Microsoft 
browser from being removed from the desktop. That is the 
finding of the Court of Appeals.
    Now, in the process of going through my preparation for 
this hearing, I went back and looked at the Department of 
Justice's position with regard to this. Throughout the course 
of the case, and even in the contempt proceeding involving the 
former tying claims, it has always and consistently been the 
Department of Justice's contention that it did not want to 
force Microsoft to remove code from the operating system. They 
have said that over and over again in every brief that has been 
filed in this case.
    What the Department of Justice wanted was an appropriate 
functionality that would give consumers the choice between 
middleware products. That is exactly the remedy that we have 
here and we think it is an effective remedy. We have gone 
beyond that particular aspect of this remedy by including in 
our decree a specific provision that deals with the questions 
of defaults--that is, the extent to which a non-Microsoft 
middleware product can take over and be invoked automatically 
in place of a Microsoft middleware product. That is something 
that was not in the earlier decrees. It is a step beyond what 
was included in Judge Jackson's order.
    We think that we have addressed the product integration 
aspects of the Microsoft monopoly maintenance claim in exactly 
the terms that the Department has always pursued with regard to 
this particular issue, and we are completely satisfied with 
that aspect of the relief.
    Chairman Leahy. Well, I have a follow-up on that, as you 
probably expect, but my time is up and I want to yield to 
Senator DeWine. Actually, I have a follow-up on the 
retaliation, also, but I do appreciate your answer.
    Senator DeWine?
    Senator DeWine. Thank you, Mr. Chairman.
    Mr. James, this case has been certainly very controversial 
and inspired a great deal of discussion regarding the 
effectiveness of the antitrust laws, especially within the 
high-tech industry.
    Netscape, for example, vocally opposed Microsoft during 
this litigation. Many of Netscape's complaints really were 
validated by the courts, and yet Netscape ended up losing the 
battle. This sort of result has led some to question whether 
our antitrust laws can be effective in this particular 
industry.
    I personally believe that the antitrust laws are essential 
to promoting competition within the industry and throughout the 
country, but I would like to hear what your views are on this 
subject. What lessons do you think this case teaches us in 
regard to that and what do we say to people like Netscape?
    Mr. James. Well, it is certainly the case that our judicial 
system very often can provide a crude tool for redressing 
particular issues quickly. I would note that this particular 
case was litigated on a very fast track and the people at the 
Department of Justice are to be commended for pushing this case 
along at the speed that it is has taken, considering the 
comparable speed of other cases.
    I think, however, that the case stands for an important 
proposition, and that is that the Department of Justice is up 
to meeting the challenge, that it has the tools at its disposal 
to investigate unlawful conduct, to understand and appreciate 
the implications of what complex technical matters involve, to 
bring the resources to bear in order to litigate these cases to 
a successful conclusion, and, where appropriate, to reach a 
settlement that is in the public interest.
    One of the things that I think is an important issue to 
note here is that there is certainly a time difference between 
litigating a matter of original liability and litigating a 
matter involving compliance with a term of a decree.
    We think that the enforcement powers that are involved here 
are appropriate ones. We think that enforcement by the 
Department of Justice is the appropriate way to proceed in 
these matters, and we are confident that this provides the best 
mechanism for dealing with a complex matter in complex 
circumstances.
    Senator DeWine. One provision of the Proposed Final 
Judgment requires Microsoft to allow computer manufacturers to 
enable access to competing products. However, for a product to 
qualify for these protections, it must have had a million 
copies distributed in the United States within the previous 
year. This would seem to me to run contrary to the traditional 
antitrust philosophy of promoting new competition.
    Why are these protections limited to larger competitors?
    Mr. James. I am actually glad you asked that question, 
Senator, because that is one of the prevailing misconceptions 
of the decree. The provisions of the decree that require 
Microsoft to allow an OEM to place a middleware product on the 
desktop apply without regard to whether or not that product has 
been distributed by one million people. That is an absolute 
requirement.
    The million-copy distribution provision relates solely to 
the question of when Microsoft must undertake these affirmative 
obligations to create defaults, for example, for a middleware 
product to provide other types of assistance to someone who has 
developed that product.
    The fact of the matter is that this is something that 
requires a great deal of work, particularly these complex 
matters of setting defaults, which are very important to the 
competitive circumstances here. And it would be very difficult 
to impose upon Microsoft the responsibility for making these 
alterations to the operating system and making them automatic 
for every subsequent release of the operating system in the 
case of any software company that just shows up and says, ``I 
have a product that competes.''
    But I want to be very clear here, Senator. An OEM can place 
every qualifying middleware product on the desktop immediately, 
without regard to this one-million threshold.
    Quite frankly, in today's world, one million copies 
distributed is not a substantial matter. I think in the last 
year I might have gotten a million copies of AOL 5.0 in the 
mail. So I don't think that that is really a very large 
impediment.
    Senator DeWine. Let me ask one last question. You have 
mentioned that a number of provisions in the settlement go 
beyond the four corners of the case, but Microsoft agreed to 
these conditions anyway.
    What are they, and what is the goal of these provisions?
    Mr. James. Well, I think one of the most important ones is 
the default provision. As of the time of our original case, 
these middleware products were operated in a fairly simple way. 
You clicked on to that product, you invoked that product, and 
then you used it in whatever way was appropriate.
    In today's world, software has changed. We see what they 
call a more seamless user interface, user experience, and it is 
necessary for people to operate deeply within the operating 
system on an integrated basis. There were allegations that 
Microsoft overrode consumer choice in these default mechanisms 
in the case.
    With regard to each and every one of those instances 
alleged by the Justice Department, the Justice Department lost. 
The court found for Microsoft. Notwithstanding that, as a 
matter of fencing in and improving the nature of this decree, 
we have included in it the subject of defaults.
    Another important area, I think, is the question of server 
interoperability, and that is a very, very important issue we 
see going forward. If you go back and read the complaint in 
this case, you will find that the word ``server'' almost never 
appears. There are no specific allegations that go to this 
issue. We thought this was an important alternative platform 
issue. We thought it was important to stretch for relief in 
this case, and we got relief that is very effective as people 
go into an environment of more distributed Web processing. So 
we think that is a very powerful thing.
    I think these are two issues that the Department of Justice 
would have had a very, very difficult time sustaining in court, 
to the extent the court was inclined to limit us to the proof 
that we put forward. So I think that these are very positive 
manifestations of the settlement.
    Senator DeWine. Thank you, Mr. Chairman.
    Chairman Leahy. We are checking one thing, and I mention 
this to Senator Kohl, Senator Sessions, and Senator Cantwell, 
who have been here waiting to ask questions. We are finding out 
from the floor. We have been notified that there may have been 
a move, as any Senator has a right to do under our Senate 
rules, to object to Committees meeting more than two hours 
after the Senate goes in session.
    We are on the farm bill and appropriations and other 
essential matters, so that I have been told that a Senator has 
objected, as every Senator has a right to do, to us continuing. 
As a result, because the Senators say they want us to 
concentrate on what is going on on the Senate floor, we have to 
respect the rules of the Senate. I do, and I am going to have 
to recess this hearing at this time.
    I am going to put into the record the statements of all 
those who have come here to testify.
    Senator Hatch and I will try to find a time we might 
reconvene this hearing, because both Senator Hatch and I feel 
this is a very important hearing.
    The record will be open for questions that might be 
submitted. I apologize to everybody. We did not anticipate 
this. But with 100 Senators, every so often somebody exercises 
that rule. I would emphasize Senators have the right to 
exercise that rule, especially when we are in the last 3 weeks 
of the session. I think we are going to break for Christmas 
Day, but we are in the last 3 weeks of the session, and I think 
the Senator invoking the rule wants to make sure all Senators 
pay attention to the work on the floor.
    Senator Hatch. Mr. Chairman?
    Senator Sessions. Mr. Chairman?
    Chairman Leahy. We really are technically out of time, but 
Senator Hatch?
    Senator Hatch. Mr. Chairman, we are out of time. Any 
Senator can invoke the two-hour rule and a Senator has done 
that. Fortunately, I think it was against the Finance Committee 
markup today, but we reported out the bill anyway right within 
the time constraint. That is where I went.
    Both Senator Leahy and I apologize to the witnesses who 
have put such an effort into being here today because this is 
an important hearing. These are important matters to both 
sides--to all sides, I should say; there are not just two sides 
here. These matters have a great bearing on just how positively 
impactful the United States is going to be in these areas.
    So I hope that we can reconvene within a relatively short 
period of time and continue this hearing because it is a very, 
very important hearing. We apologize to you that this has 
happened, but as Senator Leahy has said, a Senator can do that.
    Chairman Leahy. Well, it is out of our hands, but I would 
note that normally I would have recessed it until tomorrow, but 
tomorrow we are using this time for an executive Committee 
meeting of the Judiciary Committee to do, as we have done many 
times already, to vote out a large number of judges.
    So with that, we stand in--Jeff, I am sorry.
    Senator Sessions. Just, Mr. Chairman, a matter of 
procedure. I am troubled by what I understand to be a decision 
to send this transcript to the court as an official document 
from Congress in the middle of a litigation that is ongoing.
    I would think that anybody's statement that they gave could 
be sent to the court. Any Senator can write a letter to the 
court. I haven't studied it fully, but just as a practitioner, 
it troubles me to have a meddling----
    Chairman Leahy. That record is open to anybody who wants to 
send anything in. Senator Hatch and I have made that decision 
and that will be the decision of the Committee.
    Senator Sessions. I would be recorded as objecting.
    Chairman Leahy. Of course, I understand.
    We stand adjourned.
    [Whereupon, at 11:43 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]
    [Additional material is being retained in the Committee 
files.]
                         QUESTIONS AND ANSWERS

     Responses of Daniel J. Bryant to questions from Senator Hatch

    Question 1. An earlier decision by the Court of Appeals, United 
States v. Microsoft Corp., 147 F.3d 935 (D.C.Cir. 1998) (``Microsoft 
II''), relating to the interpretation of an earlier consent decree with 
Microsoft, has been interpreted by some as expressing the view that 
judges should not be involved in software design, and that the 
government simply has no business telling Microsoft or any other 
company what it can include in any of its products. In its most recent 
decision, however, the Court of Appeals said that to the extent that 
the decision in Microsoft II completely disclaimed judicial capacity to 
evaluate high-tech product design, it cannot be said to conform to 
prevailing antitrust doctrine. See United States v. Microsoft Corp., 
253 F.3d 34 (D.C. Cir. 2001) (``Microsoft III''). Is the law clear that 
the Department does have a responsibility to assess the competitive 
implications of software design, in bringing antitrust enforcement 
actions? And, if so, does the Department have the necessary technical 
expertise and resources to perform such an evaluation?
    Answer. In exercising its responsibility to enforce the antitrust 
laws, the Department routinely confronts complex issues, including 
economic and technical issues regarding software design. The Department 
has both the resources and capability to address such issues, as they 
affect enforcement matters, through internal means and, where 
appropriate, the retention of outside experts.

    Question 2. To foster competition in ``middleware'' the PFJ 
requires disclosure of APIs and similar information, but it then limits 
this provision only to those instances where disclosure would be for 
``the sole purpose of interoperating with a Windows Operating System 
Product.'' Except for the limitation, this provision is almost exactly 
like a comparable provision in Judge Jackson's interim consent decree. 
Why did the Department decide to add this limitation to the PFJ, and 
what effect will the inclusion of the limitation have on restoring 
competition? Please explain the competitive significance of web-based 
services, and whether the PH guarantees interoperability with the 
servers that operate those web-based services?
    Answer. The insertion of ``for the sole purpose of interoperating 
with a Windows Operating System Product'' in Section III.D. of the 
proposed Final Judgment simply clarifies that the APIs must be used for 
the purpose intended under the settlement (and as intended in Judge 
Jackson's order)--ensuring that developers of competing middleware 
products will have full access to the same information that Microsoft 
middleware uses to interoperate with the Windows operating system. That 
is, the disclosure is not intended to permit misappropriation of 
Microsoft's intellectual property for other uses. The insertion of this 
clause will not change the provision's ability to restore competition 
in any way.
    The concept of ``web-based'' services is constantly evolving as 
companies find new ways. to use the Internet. The ultimate competitive 
significance of such services remains to be determined. The 
Department's case addressed the topic of web-based services only with 
respect to the middleware threat to the operating system. Section 
III.E. of the proposed Final Judgment ensures that software developers 
will have full access to, and be able to use, the communication 
protocols necessary for server operating system software located on a 
server computer to interoperate with the functionality embedded in the 
Windows operating system.

    Question 3. The Department has concluded that the PFJ is in the 
``public interest,'' as required by the Tunney Act. Are you aware of 
any other case where a Tunney Act ``public interest'' determination has 
occurred with respect to a settlement where the underlying liability on 
the merits already has been affirmed by the Court of Appeals? To what 
extent should the scope of the District Court's deference to the 
Antitrust Division under the Tunney Act he affected by a Court of 
Appeals prior affirmance of Sherman Act liability?
    Answer. The Department is not aware of a case where a court has 
made a Tunney Act ``public interest'' determination with respect to a 
settlement where the underlying liability on the merits already had 
been affirmed by the Court of Appeals. Beyond the Department's position 
set forth in its submissions to the Court, it would be inappropriate 
for the Department to comment on the appropriate scope of the Court's 
discretion because the Court's review of the proposed Final Judgment is 
pending under the Tunney Act.

    Question 4. The Court of Appeals remanded the remedy issue because, 
among other reasons, the District Court failed to demonstrate how 
divestiture relief was designed to `` `unfetter [the] market from 
anticompetitive conduct,'.  .  . to `terminate the illegal monopoly, 
deny to the defendant the fruits of its statutory violation, and ensure 
that there remain no practices likely to result in monopolization in 
the future' '' Microsoft III, 253 F.3d at 103 (quoting Ford Motor Co. 
V. United States, 405 U.S. 562, 577 (1972), United States v. United 
Shoe Mach. Corp., 391 U.S. 244, 250 (1968)). Please describe how the 
PFJ meets this standard dictated by the appellate court. (a) How does 
the PFJ ``terminate the monopoly'' Microsoft was found by the Appellate 
Court to have unlawfully maintained over PC operating system software? 
(b) How does the PFJ ``deny to Microsoft the fruits of its Section 2 
violation?'' and (c) How does the PFJ ``ensure that there remain no 
practices likely to result in monopolization in the future?''
    Answer. In the two cases quoted above, the monopoly in question was 
obtained by unlawful means. It was never alleged in this case, however, 
that Microsoft unlawfully obtained its operating system monopoly. 
Further, as the Court of Appeals noted, ``the District Court expressly 
did not adopt the position that Microsoft would have lost its position 
in the OS market but for its anticompetitive behavior.'' U.S. v. 
Microsoft, 253 F.3d 34, 107 (D.C. Cir. 2001). The Court of Appeals also 
went on to hold that: ``[s]tructural relief, which is `designed to 
eliminate the monopoly altogether .  .  . require[s] a clear indication 
of a significant causal connection between the conduct and creation or 
maintenance of the market power.' Absent such causation, the antitrust 
defendant's unlawful behavior should be remedied by `an injunction 
against continuation of that conduct.' '' Id. at 106 (quoting 3 
AREEDA&HOVENKAMP, ANTITRUST LAW para.653b, at 91-92, and para.650a, at 
67). The injunctive relief in this case, with no allegation Microsoft 
unlawfully obtained its operating system monopoly, is designed to stop 
the unlawful conduct, prevent its recurrence and restore lost 
competition in the market. See Microsoft, 253 F.3d at 103 (quoting Ford 
Motor Co. v. United States, 405 U.S. 562, 577 (1972) and United States 
v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968)).
    The proposed Final Judgment stops the offending conduct by 
enjoining the unlawful actions that the District Court and the Court of 
Appeals sustained. The proposed Final Judgment enjoins exclusive and 
unlawful dealing, gives computer manufacturers and consumers extensive 
control of the desktop and initial boot sequence, ensures that 
developers can develop products that interoperate with the Windows 
operating system, and prohibits a broad range of retaliatory conduct. 
The proposed Final Judgment prevents the recurrence of the conduct 
identified as unlawful by addressing the broad range of potential 
strategies Microsoft might deploy to impede the emergence of competing 
middleware products. The proposed Final Judgment also seeks to restore 
lost competition posed by the potential middleware threat to 
Microsoft's operating system monopoly by requiring Microsoft to, among 
other things: (i) disclose APIs that will give independent software 
developers the opportunity to match Microsoft's middleware 
functionality; (ii) allow computer manufacturers and users to replace 
Microsoft middleware with independently developed middleware; and (iii) 
create and preserve ``default'' settings that will ensure that 
Microsoft's middleware does not over-ride the selection of third-party 
middleware products.

    Question 5. Are there findings by the appellate court against 
Microsoft that are not addressed by the PFJ? If so, what were the 
reasons why the Department chose not to address these findings?
    Answer. The proposed Final Judgment addresses each of the Court of 
Appeals' findings, and even goes beyond them.

    Question 6. The Court of Appeals held that it was illegal for 
Microsoft to bind products together with Windows by ``commingling 
code'' because this practice helped Microsoft unlawfully maintain its 
desktop operating system monopoly. The Court concluded that code 
commingling has an ``anticompetitive effect'' by deterring OEMs from 
pre-installing rival software, ``thereby reducing the rivals' usage 
share and, hence, developers' interest in rivals' APIs as an 
alternative to the API set exposed by Microsoft's operating system.'' 
Microsoft III, 153 F.3d at 66. How does the PFJ prevent Microsoft from 
future unlawful commingling of non-Windows code with Windows?
    Answer. The proposed Final Judgment addresses these issues by 
requiring Microsoft to redesign its operating system to include an 
effective add/remove function for all Microsoft middleware products and 
to permit competing middleware to take on a default status that will 
override middleware functions Microsoft has integrated into the 
operating system. The proposed Final Judgment does not contain an 
absolute prohibition on Microsoft commingling code within Windows, and 
the Department does not interpret the Court of Appeals decision as 
requiring such relief.

    Question 7. You have said that Microsoft ``won the right to sell 
integrated products,'' and that ``the tying claim was eliminated by the 
appeals court.'' (Business Week, November 19, 2001, p. 116). Other 
observers, however, argue that the Court of Appeals simply vacated the 
per se findings of a tying law violation and remanded that issue for 
consideration under a ``rule of reason'' standard? Why did the 
Department conclude that the tying claim was ``eliminated'' and not 
simply remanded to be retried under a different standard? What are the 
circumstances, if any, under which the court or the Department could 
find it impermissible for Microsoft to ``integrate'' a product with its 
Windows operating system?
    Answer. The Court of Appeals reversed the per se tying claim and 
remanded it to the lower court for adjudication under a more rigorous 
legal standard. The Court also held that if the Department pursued the 
tying claim on remand it would be precluded from arguing any theory of 
harm relying on a precise definition of browsers or barriers to entry, 
even though the government would have the burden of showing an 
anticompetitive effect in the browser market. The Court of Appeals also 
invited an extensive and complex analysis of pricing, noting that other 
operating system manufacturers included Web browsers in their operating 
systems, and requiring the plaintiffs to show that any anticompetitive 
effects outweighed the procompetitive effects. In light of the Court's 
decision and the desire to achieve prompt relief for consumers without 
protracted litigation and appeals, the Department and the state 
plaintiffs decided not to pursue the tying claim.
    Given the continuing pendency of this litigation and the 
possibility that these issues may arise in other contexts, it is not 
appropriate for the Department to speculate under what circumstances 
Microsoft's conduct would be impermissible.

    Question 8. The CIS acknowledges that the ``users rarely switched 
from whatever browsing software was placed most readily at their 
disposal.'' It has been suggested that the most effective way to 
restore competition and to prevent future misconduct would be to 
require Microsoft to sell a product that is simply an operating system 
without all of the various applications that are now incorporated into 
Windows. Without such a requirement, the argument goes, consumers would 
be forced to procure two products if they choose to use a non-Microsoft 
version of a product that has been included in the operating system--
Microsoft's version and the competitor's version. If Microsoft 
middleware is preinstalled with Windows, how do you think the adoption 
rate by users of non-Microsoft middleware will be affected? Did the 
Department consider including in the PFJ a requirement that Microsoft 
sell a version of Windows that is solely an operating system without 
other applications bundled with it?
    Answer. The Department did consider, and ultimately, reject a 
remedy that would have required Microsoft to sell a version of its 
operating system that did not contain some or all of the applications 
that it typically includes with the Windows operating system. First, 
this relief would have been most appropriate to remedy the tying and 
attempted monopolization liability (which were not sustained by the 
Court of Appeals), rather than for monopoly maintenance. Second, the 
remedy would reduce consumer choice rather than increase it. The 
proposed Final Judgment provides computer manufacturers the option of 
featuring, and end users the option of selecting, alternative 
middleware products, which they may choose to use or replace. Even if 
Microsoft middleware is preinstalled on the computer, computer 
manufacturers will have the ability to remove access to it and replace 
it with independently developed middleware. In this way, competition 
for consumer patronage of middleware products, unfettered by artificial 
restrictions by Microsoft, will determine adoption rates.

    Question 9. Some observers claim the Court of Appeals found that 
Microsoft's technological tying, particularly its ``commingling of 
code,'' was a1 illegal act of monopolization under Section 2 of the 
Sherman Act, but that there was insufficient evidence to determine that 
the same conduct violated Section 1. Do you agree with this? Does the 
PFJ provide a remedy for such misconduct? In your analysis, does the 
failure to find that the conduct violated Section 1 obviate the need to 
provide a remedy for the violation the court found under Section 2?
    Answer. The Court of Appeals observed some overlap between the 
tying claim and the code integration issues under the monopoly 
maintenance claim. However, as the Court of Appeals noted, the District 
Court concluded that tying and commingling are two different things--
``[a]lthough the District Court also found that Microsoft commingled 
the operating system-only and browser-only routines in the same library 
files, it did not include this as a basis for tying liability despite 
plaintiffs' request that it do so.'' U.S. v. Microsoft, 253 F.3d 34, 85 
(D.C. Cir. 2001). The Department believes that the proposed Final 
Judgment effectively addresses the integration issues of the monopoly 
maintenance claim by requiring Microsoft to redesign its operating 
system to include an effective add/remove function for all Microsoft 
middleware products and to permit competing middleware to be featured 
in its place, as well as take on a default status that will, if the 
consumer chooses, override middleware functions Microsoft has 
integrated into the operating system.

    Question 10. Some Wall Street analysts have opined that the PFJ 
imposes no obligation on Microsoft to change its business practices or 
redesign its products. Instead, these analysts have concluded, the PFJ 
seeks to restore competition by permitting OEMs to add products to 
Microsoft's desktop. Is this view of the PFJ accurate? Is it the 
Department's position that OEMs are in the best economic position to 
restore competition in personal computing? If so, what is the basis for 
that position? Are there other entities that might be in a position to 
help restore competition?
    Answer. The Department fundamentally disagrees with this 
characterization of the proposed Final Judgment. The proposed Final 
Judgment will require Microsoft to fundamentally change the way in 
which it deals with computer manufacturers, Internet access providers, 
software developers and others within the computer industry with regard 
to the manner in which it designs, sells, and shares information 
regarding its operating system. The proposed Final Judgment does not 
reflect a position by the Department that computer manufacturers are 
the only distribution outlet for software or that they are the only 
ones in a position to help restore competition. In fact, consumers 
increasingly obtain software in various distribution channels apart 
from computer manufacturers. Rather, certain provisions in the proposed 
Final Judgment focus on computer manufacturers because the restrictions 
on computer manufacturers to distribute software was a primary focus of 
the case and the Court of Appeals concluded that computer manufacturers 
were a critical distribution channel for Windows, as well as for 
middleware and other software applications.

    Question 11. A significant portion of the Microsoft III opinion was 
devoted to Microsoft's conduct vis-a-vis Java technology. The Court 
found Microsoft unlawfully used distribution agreements to forestall 
competition with middleware manufacturers. See, e.g., Microsoft III, 
253 F.3d at 74-78. The court found these agreements to be 
anticompetitive because they ``foreclosed a substantial portion of the 
field for .  .  . distribution and because, in so doing, they protected 
Microsoft's monopoly from a middleware threat'' Id. at 76. Does the PFJ 
addressees such practices?
    Answer. The proposed Final Judgment addresses such conduct by 
prohibiting Microsoft from entering into agreements that require 
software developers and other industry participants to exclusively 
distribute, promote, use or support a Microsoft middleware or operating 
system product, and by prohibiting Microsoft from retaliating against 
software developers who support competing middleware products.

    Question 12. The Supreme Court has said that in an antitrust 
remedy, ``it is not necessary that all of the untraveled roads to that 
[unlawful] end be left open and that only the worn one be closed.'' 
International Salt Co. v. United States, 332 U.S. 392, 401 (1947). The 
Court also has made clear that injunctive relief which simply forbid[s] 
a repetition of the illegal conduct is not sufficient under Section 2, 
because defendants ``could retain the full dividends of their 
monopolistic practices and profit from the unlawful restraints of trade 
which they had inflicted on competitors.'' Schine Chain Theaters, Inc. 
v. United States, 334 U.S. 110, 128 (1948). Are the standards 
enunciated by the Court in International Salt and Schine Chain Theatres 
applicable in the Microsoft case? If so, would you identify provisions 
in the PFJ that satisfy these standards?
    Answer. The obligations imposed on Microsoft in the proposed Final 
Judgment go considerably beyond merely stopping, and preventing the 
recurrence of, the specific acts found unlawful by the Court of 
Appeals. Specifically, the proposed Final Judgment goes further by: (i) 
applying a broad definition of middleware products, which goes well 
beyond the Web browser and Java technologies that were the focus of the 
Department's case, to include all of the technologies that have the 
potential to be middleware threats to Microsoft's operating system 
monopoly, including e-mail clients, media players, instant messaging 
software and future middleware developments; (ii) requiring the 
disclosure or licensing of middleware interfaces and server 
communications protocols not previously disclosed to ensure that non-
Microsoft middleware and server software can interoperate with 
Microsoft's operating system; (iii) ensuring that computer 
manufacturers and consumers have extensive control of the desktop and 
initial boot sequence; (iv) broadly banning certain exclusive dealing, 
retaliation and discrimination by Microsoft beyond the practices 
affirmed as anticompetitive by the Court of Appeals; (v) requiring 
Microsoft to license its operating system to key computer manufacturers 
on uniform terms; (vi) requiring Microsoft to license intellectual 
property to computer manufacturers and software developers necessary 
for them to exercise their rights under the proposed settlement; and 
(vii) implementing a panel of three independent, on-site, full-time 
experts to assist in enforcing the proposed Final Judgment.

    Question 13. The Supreme Court also has held that a Section 2 
monopolization remedy ``must break up or render impotent the monopoly 
power found to be in violation of the Act.'' United States v. Grinnelll 
Corp., 384 U.S. 563, 577 (1966). Does the PFJ ``render impotent'' 
Microsoft's Windows monopoly and, if so, how?
    Answer. In the case against Microsoft there has never been any 
contention that Microsoft obtained its operating system monopoly 
through unlawful means. Instead, the allegation sustained by the Court 
of Appeals was that Microsoft engaged in specific unlawful acts, not a 
course of conduct, to maintain its monopoly in violation of Section 2. 
Because relief in a Section 2 case must have its foundation in the 
offending conduct, the Department's view was that the monopoly 
maintenance finding, as modified by the Court of Appeals, and without 
the ``course-of-conduct'' theory, did not sustain a broad-ranging 
remedy, such as a ``break up'' of Microsoft's operating system 
monopoly, that went beyond what was necessary to address Microsoft's 
unlawful responses to the middleware threat. Thus, the proposed Final 
Judgment does not seek such break-up relief.

    Question 14. There has been considerable discussion about 
Microsoft's Windows XP product, with some critics arguing that 
Microsoft is repeating the same technical binding, bundling and 
monopoly maintenance tactics found by the court to be unlawful when 
used in the past against Microsoft's competitors. If true, this 
allegation would be significant, given the appellate court's 
instruction ``that there remain no practices likely to result in 
monopolization in the future,'' Microsoft III, 253 F.3d at 103 (quoting 
United States v. United Shore Mach. Corp., 391 U. S. 244, 250 (1968)). 
Some critics have also charged that Microsoft's broad .NET strategy is 
an effort to build upon the fruits of Microsoft's past unlawful conduct 
and remake the Internet as a Microsoft-proprietary Internet. Does the 
PFJ apply to Windows XP or to Microsoft's .NET strategy? If not, why 
has the Department decided not to apply the settlement to these 
products? Can competition in the operating system be restored without 
addressing these products?
    Answer. With the monopoly maintenance claim as the only surviving 
basis for relief, the proposed Final Judgment must focus on middleware 
or middleware-type threats to the operating system, not Microsoft's 
participation in other markets in a way unrelated to the conduct by 
Microsoft found unlawful by the Court of Appeals. The proposed Final 
Judgment expressly applies to Windows XP and any successors during the 
term of the judgment (see definition of Windows Operating System 
Product). It also applies to a wide variety of current and future 
Microsoft middleware products. What has been labeled.NET is a 
relatively new, diverse initiative by Microsoft in the market. As parts 
of.NET come more fully to fruition, they will be evaluated under the 
proposed Final Judgment, as would any other software. For instance, 
parts of the.NET strategy are likely to be middleware, such as instant 
messaging clients. To the extent.NET software or conduct implicates the 
anticompetitive acts raised in the case, it would be addressed under 
the proposed Final Judgment or otherwise by the Department.

    Question 15. Many of the provisions of the PFJ appear to assume 
that OEMs will act to aggregate operating system software and assume 
the role of desktop design and software packaging in the PC 
distribution chain. According to many observers, however, there simply 
is no financial incentive for OEMs to do anything but accept the full 
Microsoft software package. What is the Department's position on this 
issue? Was any consideration given to reports that OEMs did not take 
advantage of an offer by Microsoft this past summer to replace icons in 
the Windows Xf desktop?
    Answer. During the trial, the Department showed, and the Court of 
Appeals found, that computer manufacturers are a key distribution 
channel for Windows, as well as for middleware and other software 
applications. Further, even before the proposed Final Judgment was 
executed, computer manufacturers were entering into agreements with 
non-Microsoft middleware suppliers to place their products on the 
Windows operating system. With the implementation of the proposed Final 
Judgment, which provides computer manufacturers with greater freedom 
with respect to replacing Microsoft middleware products, computer 
manufacturers should have even greater incentives to do so. The powers 
extend well beyond the limited rights Microsoft afforded when Windows 
XP was introduced this past summer. The true test will occur as the 
uncertainty surrounding the case is removed by the proposed Final 
Judgment, when the proposed Final Judgment's anti-retaliation and anti-
discrimination terms are in place, and when new middleware products 
emerge on the market.

    Question 16. The Court of Appeals affirmed that Microsoft's conduct 
with respect to Java, in which the Court found it to engage in a 
``campaign to deceive [Java] developers'' and ``polluted'' the Java 
standard in order to defeat competition to its operating system 
monopoly violated Section 2 of the Sherman Act. The Court held 
``Microsoft's conduct related to its Java developer tools served to 
protect its monopoly of the operating system in a manner not 
attributable either to the superiority of the operating system or to 
the acumen of its makers, and therefore was anticompetitive. 
Unsurprisingly, Microsoft offers no procompetitive explanation for its 
campaign to deceive developers. Accordingly, we conclude this conduct 
is exclusionary, in violation of Section 2 of the Sherman Act.'' 
Microsoft III, Slip Op. p. 101. As you know, the lower court decree 
included a provision designed to prevent deliberate sabotaging of 
competing products by Microsoft. Does the PFJ restrict Microsoft's 
ability to modify, alter, or refuse to support computer industry 
standards, including Java, or to engage in campaigns to deceive 
developers of competitor platform, middleware or applications software?
    Answer. The proposed Final Judgment does not expressly restrict 
Microsoft's ability to modify, alter, or refuse to support computer 
industry standards, or engage in campaigns to deceive software 
developers. The Department chose not to include the referenced 
provision because the term originally included in Judge Jackson's order 
allowed Microsoft to take steps to change its operating system that 
would interfere with third-party's middleware to interoperate as long 
as Microsoft informed the third party of the change and what, if 
anything, could be done to fix the problem. This would have, in effect, 
given Microsoft a license to interfere with competing middleware as 
long as it simply notified the competing developer. In addition, this 
provision would have been difficult for the Department to enforce in 
this case because of the constant changes Microsoft makes to its 
operating system, which while potentially procompetitive, may have the 
unintentional consequence of affecting a competing product's 
interoperability. Therefore, implementing this provision would have 
resulted in unnecessary compliance disputes.
    The proposed Final Judgment hinders Microsoft's ability to 
disadvantage competing middleware developers by making the means by 
which middleware products interoperate with the operating system more 
transparent. The proposed Final Judgment requires Microsoft to now 
disclose those APIs that its middleware products use to interoperate 
with the operating system. Disclosure of these APIs will make it harder 
for Microsoft to interfere with competing middleware. Further, to the 
extent computer industry standards are implemented in communications 
protocols, as often occurs, Microsoft must license those protocols in 
accordance with Section III.E., including any modifications or 
alterations to the industry standard protocols. When the industry 
standard is implemented between a Microsoft middleware product, such as 
its Java Virtual Machine, and the operating system, Microsoft must 
disclose that interface.

    Question 17. The Court of Appeals found that Microsoft violated 
Section 2 of the Sherman Act by entering into an exclusive contract 
with Apple that required Apple to install Internet Explorer as the 
Macintosh browser. Microsoft III, 252 F.3d at 72-74. Many observers 
accuse Microsoft of having forced Apple to enter into the contract by 
threatening to withhold the porting of Microsoft Office to the 
Macintosh operating system. Does the PFJ prohibit Microsoft from 
threatening to withhold development of Microsoft Office with respect to 
other platforms, such as hand-held devices, set-top boxes, and phones? 
If no, why did the Department choose not to address this concern in the 
PFJ?
    Answer. The proposed Final Judgment would prohibit Microsoft from 
threatening to withhold the development of Microsoft Office for other 
platforms, such as handheld devices, set-top boxes and phones, if it 
did so because the software or hardware developer was developing, 
using, distributing, promoting or supporting any software that competes 
with Microsoft's middleware or operating system products (or any 
software that runs on any software that competes with Microsoft's 
middleware or operating system products), or because the developer 
exercises any of the options or alternatives provided for under the 
proposed Final Judgment.

    Question 18. You have been quoted as saying that various software 
and computer services companies are in the process of purchasing space 
on the desktop from Microsoft. (Business Week, November 19, 2001, p. 
116). In the Department's view, is the space on the desktop on 
computers manufactured by the OEMs owned by Microsoft or should that 
space be the property of the computer manufacturers?
    Answer. Whether the space on the desktop is owned by Microsoft or 
is the property of the computer manufacturers does not impact the 
effectiveness of the proposed Final Judgment in remedying the 
anticompetitive conduct by Microsoft. The Department does not have a 
view as to whether the space on the desktop should be viewed as the 
property of Microsoft or the computer manufacturers. The Department 
does have the view that Microsoft middleware and competing middleware 
should compete for the space, and the proposed Final Judgment ensures 
that this competition occurs.

    Question 19. The CIS suggests the Department has embraced the goal 
of encouraging competitive development of ``middleware'' in order that 
such middleware can become the type of platform software that could 
challenge the operating system monopoly. The settlement requires 
Microsoft to allow OEMs to remove consumer ``access'' to the company's 
``middleware.'' It has been observed, however, that since the code for 
Microsoft's ``middleware'' is commingled with Windows, OEMs are only 
allowed to remove the icon for a middleware application. The CIS seems 
to acknowledge that Microsoft understood that software developers would 
only write to the APIs exposed by Navigator in numbers large enough to 
threaten the applications barrier to entry if they believe that 
Navigator would emerge as the standard software employed to browse the 
web. Can you explain why you believe third-party application developers 
would write applications to non-Microsoft APIs if the Microsoft 
middleware APIs as well as the Windows APIs will be present on over 95% 
of the personal computers sold?
    Answer. The proposed Final Judgment will require Microsoft to do 
more than simply allow for the removal of its middleware icons. It 
requires that Microsoft allow end users and computer manufacturers to 
remove other means of access to, and override automatic invocations of, 
Microsoft middleware products and replace them with independently 
developed middleware products. Therefore, regardless of whether some 
portion of the Microsoft middleware code remains, end users and 
computer manufacturers can remove access to such middleware and replace 
it with alternative middleware. As the trial demonstrated, actual usage 
of a middleware product by the consumer, and not simply the presence of 
the product's code on the computer, has competitive significance. The 
marketplace, however, will determine whether any particular middleware 
product becomes sufficiently ubiquitous. This will ensure that 
competing middleware products will have the opportunity to compete for 
placement on the personal computer and that consumers will have a 
choice.

    Question 20. Concerns have been raised about the consequences of 
several ``provisos'' that have been included in the PFJ. For example, 
Section III. H.3 prohibits Microsoft from denying consumers the choice 
of using competing applications, but a proviso to this language states 
that Microsoft can challenge a consumer's decision to choose an 
application other than its own after 14 days and encourage the consumer 
to switch back to the Microsoft product. What does the Department 
believe will be the impact of the messages that Microsoft will be able 
to send to consumers on their own computers? Are other companies 
permitted to send comparable messages to consumers who choose to 
utilize Microsoft products? Finally, why did the Department choose a 
period of 14 days as opposed to some other period of time?
    Answer. It is incorrect that the proposed Final Judgment allows 
Microsoft to ``challenge'' a consumer's decision to select a non-
Microsoft middleware product. Some end users prefer to have icons 
readily available on the desktop; others prefer a ``clean desktop.'' In 
Windows XP, Microsoft has a Clean Desktop Wizard, which asks a user 
whether he or she would like to have unused icons (whether for 
Microsoft products or other products) taken off the desktop and placed 
in a folder, where they can still be easily accessed. The proposed 
Final Judgment allows Microsoft to continue providing this cleanup 
function, which the user can choose to take advantage of or not. The 
impact will be that end users can exercise choice. The proposed Final 
Judgment requires Microsoft to wait 14 days before it seeks 
confirmation from the end user because this will ensure that end users 
have a meaningful opportunity to determine which products, if any, they 
want to keep on the desktop.

    Question 21. Under Sections III.H and VLN, a competing middleware 
application receives protection under the PFJ, but this protection 
applies only if the competitor ships at least one million units over 
the course of a year. Why did the Department choose that particular 
number? Did the Department give consideration to the argument that 
small innovators, who may be in the initial stages of product 
development and sales, might be in need of greater protection than a 
company capable of selling more than one million units?
    Answer. The one million copies figure is implicated only in the 
operative provision contained in Section III.H. of the proposed Final 
Judgment and only to a very limited extent in Section III.D. Section 
III.H. requires N4icrosoft to include in Windows an effective add/
remove function to allow end users and computer manufacturers to enable 
or remove access to Microsoft and non-Microsoft middleware products, 
and to permit non-Microsoft middleware products to take on a default 
status that will override middleware functions Microsoft has integrated 
into the operating system. Distribution of only one million copies, 
rather than sales, installation or usage, is a relatively minor 
threshold in the software industry today, and including this limited 
qualification in Section III.H. will ensure that Microsoft's 
affirmative obligations under these provisions will not be triggered by 
minor, or even nonexistent, products that have not established a 
competitive potential in the market and that might even be unknown to 
Microsoft development personnel. The one million copies figure applies 
in even a more limited fashion to Section III.D. That section requires 
Microsoft to disclose to software and hardware developers, computer 
manufacturers and others in the industry certain APIs and other 
technical information that Microsoft's middleware products use to 
interoperate with the Windows operating system. The one million copy 
limitation applies only to disclosures of interfaces for future 
middleware that has not yet been developed or even conceived. The 
Department considered the competitive impact of smaller innovators. In 
fact, the proposed Final Judgment provides protection for nascent 
middleware products by prohibiting Microsoft from retaliating or 
discriminating against them, regardless of the number of copies that 
they distribute.

    Question 22.[The letter skips this question.]

    Question 23. Section 111.13 of the PH prohibits Microsoft from 
engaging in discriminatory pricing of its desktop operating system with 
OEMs. Does the PH also prohibit use of this same kind of discriminatory 
pricing against server operating systems and other non-Windows 
software?
    Answer. The proposed Final Judgment does not require Microsoft to 
use uniform terms and conditions when licensing its server operating 
system or other non-Windows software.

    Question 24. The interim decree proposed by Judge Jackson included 
a provision precluding Microsoft from taking knowing action to disable 
or adversely affect the operation of competing middleware software. 
Does the PFJ contain a comparable provision? If not, what was the 
Department's rationale for not including this prohibition in the 
proposed settlement?
    Answer. The proposed Final Judgment does not contain an express 
provision precluding Microsoft from taking knowing action to disable or 
adversely affect the operation of competing middleware products. As 
explained more fully in response to question 16, the Department chose 
not to include this type of provision because it would have given 
Microsoft a license to interfere with competing middleware as long as 
it simply notified the competing developer. In addition, it would have 
been difficult for the Department to enforce the provision because of 
the constant changes Microsoft makes to its operating system. Many of 
these changes would have been known by Microsoft to have the unintended 
consequence of affecting a competing product's interoperability. 
Instead, the proposed Final Judgment contains provisions that require 
Microsoft to provide competing middleware with APIs needed to 
interoperate with the Windows operating system.

    Question 25. Why did the Department choose not to present evidence 
to the District Court on current PC operating system market 
developments, including changes in the Internet browser market share 
since the trial began? Did the Department undertake an investigation of 
current market developments to determine the impact of the PFJ on the 
existing market realities? For example, was there an analysis of the 
impact of the proposed settlement on Microsoft's proposed future 
products and services?
    Answer. Judge Kollar-Kotelly had scheduled an evidentiary hearing 
on remedy to take place in 2002. The Department would have had the 
opportunity to present evidence to the Court at that time. There was no 
opportunity to present evidence to the Court at air earlier date. .
    The Department conducted an ongoing evaluation of market 
developments and the impact of the proposed Final Judgment on existing 
market realities. One result of this evaluation was to broaden the 
definition of middleware to include new potential threats to the 
operating system, including e-mail clients, media players, instant 
messaging software and future middleware developments. The Department 
also analyzed the impact of the Court of Appeals' decision and the 
proposed Final Judgment on Microsoft's future products and services.

    Question 26. The CIS suggests that the District Court's role under 
the Antitrust Procedures and Penalties Act is limited to reviewing the 
remedy in relationship to the violations that the United States has 
alleged in its complaint. See CIS at p. 67. Yet the authorities cited 
for that proposition appear to be cases that were settled before trial. 
Some observers argue that in this case the District Court should review 
the settlement in relationship to the Court of Appeals ruling rather 
than to the violations alleged in the original complaint. Does the 
Department agree with that assessment?
    Answer. Beyond the Department's position set forth in its 
submissions to the Court, the Department cannot comment on the 
appropriate review by the Court because the Court's review of the 
proposed Final Judgment is pending under the Tunney Act.

    Question 27. Has the Department undertaken any studies to determine 
the effectiveness of its prior consent decree with Microsoft in 
restoring competition? How do you believe prior obstacles to 
enforcement of consent decrees with Microsoft are addressed in the PFJ?
    Answer. The Department has not conducted a formal study on the 
effectiveness of the prior consent decree with Microsoft. In its 
ongoing evaluation of the effectiveness of the proposed Final Judgment, 
however, the Department did consider the prior consent decree with 
Microsoft. There has been no determination by a court of obstacles to 
enforcement of consent decrees with Microsoft. Moreover, the proposed 
Final Judgment in this case contains some of the most stringent 
enforcement provisions contained in a modern consent decree. In 
addition to the ordinary prosecutorial access powers, the proposed 
Final Judgment requires an independent, full-time, on-site technical 
compliance team and a provision under which the term of the judgment 
may be extended by up to two years in the event the Court finds 
serious, systemic violations.

    Question 28. Do you believe that current antitrust law is 
sufficient to guarantee not only competition but timely enforcement in 
areas such as the software industry?
    Answer. The Department believes that the current antitrust laws are 
sufficient to guarantee not only competition, but timely enforcement in 
high-tech areas, such as the software industry.

    Question 29. What steps, if any, should be taken, legislatively or 
otherwise, to ensure that the Department has the proper economic and 
technological resources to enforce the law in the software industry?
    Answer. The Department does not believe that any changes to the 
antitrust laws are needed to ensure that the Department has the proper 
economic and technological resources to enforce the law in the software 
industry or other high-tech areas. The Department should continue to 
have the adequate resources to enforce the laws as long as 
appropriately funded by the Congress.
    * * * *
    Please do not hesitate to contact us if we can be of assistance on 
this or any other matter.

                                

      Responses of Jay L. Himes to Questions from by Senator Leahy

    Question 1. A number of states are still litigating this case 
against Microsoft, and have submitted a remedy proposal to the district 
court. That proposal is stronger in significant respects than your 
proposed settlement. For example, they propose a court-appointed 
special master with the authority to gather evidence and conduct 
hearings as part of the enforcement mechanism.
    (a) Do you believe that the more stringent provisions sought by the 
litigating states are not in the public interest?
    (b) Did you consider restrictions similar to those sought by the 
non-settling parties or did you think that Microsoft would not agree to 
them?
    Answer. (a) Estimating the impact on the public interest of one set 
of provisions said to be ``more stringent'' than another set of 
provisions, and reducing that impact by the costs associated with 
trying to achieve the ``more stringent'' provisions, is not readily 
accomplished, and such a process may be fairly susceptible to 
differences of opinion.
    The Litigating States have proposed a final judgment (the 
``LSPFJ'') in continuing litigation to which New York, among others, is 
a party, and in which New York may be called on to express positions 
relating to the remedy sought. Therefore, I do not believe it 
appropriate to comment on specific provisions in the LSPFJ.

    (b) In participating in negotiations that led to the Revised 
Proposed Final Judgment, dated November 6, 2001 (the ``PFJ''), I acted 
on behalf of all the plaintiff states (including the District of 
Columbia) in the cases brought against Microsoft. Rules of law 
constrain me, as a representative of only one of the plaintiffs in the 
Microsoft cases, from disclosing the contents of communications among 
the plaintiffs regarding particular remedial provisions considered 
during the negotiations period that led to the PFJ. However, in the 
negotiations between the plaintiffs and Microsoft during this period, 
some of the provisions included in the LSPFJ (or similar provisions) 
were put forth but not acceptable to Microsoft, or were put forth but 
withdrawn as part of the negotiating process that culminated in the 
PFJ.

    Question 2. The Court of Appeals found that Microsoft's deception 
of Java developers and ``pollution of the Java standard'' constituted 
exclusionary practices in violation of Section 2 of the Sherman Act, 
and eliminated its competitive presence in the desktop realm. Unlike 
Navigator, Java may still be a viable competitive force, in other 
arenas. What provision, if any, in the settlement agreement prohibits 
Microsoft from repeating such an act?
    Answer. The Court of Appeals' decision held that Microsoft violated 
section 2 of the Sherman Act by providing Java developers with tools 
that resulted in the developers writing programs that ran on the 
version of Java developed by Microsoft, but not on the version of Java 
developed by Sun, and that Microsoft knowingly failed to disclose this 
fact to the Java developers. United States v. Microsoft, 253 F.3d 34, 
76-77 (D.C. Cir. 2001). If Microsoft engaged in comparable conduct with 
respect to software that competes with Microsoft Platform Software, or 
with any software that runs on any software that competes with 
Microsoft Platform Software, Sec. III-F of the PFJ is likely to reach 
such conduct. ``Retaliation'' prohibited by Sec. III-F properly 
includes the scenario in which: (a) a person referred to in Sec. III-F 
is (for example) developing software that is intended to work with an 
operating system that competes with Windows, or that is a middleware 
product; and (b) Microsoft, knowing that, provides that person with 
tools that Microsoft knows will result in software that is compatible 
with Windows, but not compatible with the competing operating system or 
middleware product under development.

    Question 3. As I understand the proposed settlement, Microsoft need 
only disclose APIs and documentation to middleware developers when 
Microsoft itself has a competing product. Some critics say this would 
allow Microsoft to determine the pace of innovation on the desktop by 
simply deciding not to develop or market competing products until it is 
ready with its own product--or until it has swallowed up a likely 
competitor. Allowing Microsoft, in essence, to determine the pace of 
desktop innovation would not aid the software industry generally, and 
not benefit consumers. How do you respond to this criticism?
    Answer. The premise underlying this question is incorrect. In many 
circumstances--indeed, perhaps the large majority of the probable 
circumstances--Microsoft's obligations to disclose and document APIs 
under Sec. III-D arise whether or not there exists in the marketplace a 
middleware product that competes with one released or developed by 
Microsoft itself. Further, in those circumstances where Microsoft might 
not have an obligation to document and disclose APIs, business 
constraints on Microsoft should make the risk that it might use 
nondisclosure to attempt to determine the pace of invocation more 
theoretical than real.
    First, ``Microsoft Middleware''--the triggering term for purposes 
of API disclosure and documentation--currently includes (by virtue of 
the definitional reference to ``Microsoft Middleware Product'') ``the 
functionality provided by Internet Explorer, Microsoft's Java Virtual 
Machine, Windows Media Player, Windows Messenger, Outlook Express and 
their successors in the Windows Operating System Product [collectively, 
``Sec. VI-K(1) Middleware''].'' (PFJ Sec. VI-L, K; emphasis added) 
These are the most important types of middleware in existence today, 
and API disclosure and documentation is required whether or not another 
company has developed a competing product.
    Second, the ``successor'' element of the part of the Microsoft 
Middleware Product definition quoted above should assure API disclosure 
and documentation for middleware subsequently developed by Microsoft 
whenever that subsequently developed middleware uses a more than 
insubstantial part of any of the Sec. VI-K(1) Middleware in existence 
today. Again, another company need not market a competing product in 
order to trigger Microsoft's disclosure obligations.
    If the ``successor'' element of the Microsoft Middleware Product 
definition does not apply, then the circumstance envisioned by this 
question could, in theory, arise. However, the likelihood of this 
circumstance resulting in Microsoft determining the pace of innovation 
at the PC level does not seem substantial.
    As one scenario implicitly posited by this question: (a) Microsoft 
might contemplate a new, presumably significant, middleware product for 
which there is no comparable product in the 'marketplace; and (b) 
Microsoft refrains from developing the product, or from releasing it 
after its development because, by hypothesis, Microsoft seeks to 
determine the pace of industry innovation. This scenario seems unlikely 
because it assumes that Microsoft would voluntarily chose to forego the 
very ``first mover'' advantages that companies in the software industry 
typically seek to capture. The intangible benefits that could arise 
from trying to control the pace of innovation would not seem 
sufficiently great to warrant giving up the opportunity to be the first 
to introduce a significant new product, while taking the risk that 
another company will be able to seize the first mover advantages even 
without API disclosure and documentation.
    Netscape, after all, introduced its Navigator browser before 
Microsoft offered one and achieved a significant usage share by virtue 
of being first in the marketplace. Thereafter, Microsoft attacked 
Navigator's success by the various anti-competitive conduct at the 
heart of the DOJ and States' cases. The notion that Microsoft would 
risk this very situation all over again by choosing to forego 
introducing a significant new middleware product seems remote. 
Furthermore, it is not clear how a judicial decree could address this 
particular scenario. It simply would not be practicable to order that 
Microsoft must develop new middleware products and then disclose and 
document their APIs so that others in the marketplace could develop 
competing products.
    A second alternative scenario implicitly posited by this question--
one where there is a new and significant middleware product in the 
marketplace--seems even less probable. On this second scenario, the 
business risks that Microsoft would face if it refrained from 
developing or releasing a competing product would be even greater than 
in the first scenario. Microsoft would, indeed, be giving up the first 
mover advantages to another company in an effort to thwart the pace of 
innovation by not making the API disclosure and documentation that 
could benefit the marketplace product. Meanwhile, the developer of the 
marketplace product would have the opportunity to devise the means to 
enable its product either to work well enough on Windows to make the 
product successful in the market, or to make the product work on 
another piece of software that already works well on Windows. (Again, 
that was what Netscape did when it introduced its browser.) So, 
Microsoft would plainly act at its business peril if it chose such a 
course of action.

    Question 4. A loophole seems to be created by the exception to the 
requirement of APIs and documentation disclosure. Microsoft is supposed 
to disclose APIs, documentation, and communications protocols to permit 
interoperability of middleware and servers with Windows operating 
systems. But Microsoft does not need to disclose such information if it 
would, in Microsoft's opinion, compromise the security of various 
systems, which are very broadly defined. What do you say to the critics 
who fear that this loophole may swallow the API disclosure requirement?
    Answer. I believe this is a misconception. The provision to which 
this question relates is PFJ Sec. 111J(1), which applies, to begin 
with, only to enumerated categories of software: ``anti-piracy, 
antivirus, software licensing, digital rights management, encryption or 
authentication systems.'' Further, for these enumerated categories of 
software, the exception from disclosure itself covers only ``portions 
of APIs or Documentation or portions or layers of Communications 
Protocols the disclosure of which would compromise the security of a 
particular installation or group of installations'' of this software. 
This narrow exception is limited to specific end-user implementations 
of security items, commonly referred to by such terms as ``keys, 
authorization tokens or enforcement criteria.'' The disclosure 
exception embodied by Sec. III-J(1) is not only very narrow, but also 
essential to preserving the security of the software systems involved.

    Question 5. The non-settling states' proposed remedy requires 
Microsoft to release technical information necessary for middleware to 
be able to interoperate with Windows as soon as Microsoft gives its own 
developers that information. The proposed settlement only requires such 
disclosure when Microsoft puts out a major test version of a new 
Windows release. Presumably promotion of competition is the animating 
idea behind this provision, so why did you not insist that other non 
Microsoft developers have this information at the same time Microsoft 
developers did?
    Answer. This timing provision, part of Sec. III-D, is intended to 
ensure that non-Microsoft developers and others have disclosure in 
advance of the actual commercial releases of the relevant Microsoft 
software so that these third parties can make sure that their own 
competing products function on and interoperate with Windows. If 
disclosure is made too early in the product development process, non-
Microsoft software developers may devote time and resources to writing 
potentially compatible software, while Microsoft may, as part of its 
normal product development process, change the software under 
development in ways that could have the effect of mooting all or part 
of the efforts of the non-Microsoft developer. The timing of disclosure 
takes these considerations into account.

    Question 6. In 1995 the Department of Justice and Microsoft entered 
into a Consent Decree. Two years later the Department sued Microsoft 
for contempt of the Decree when Microsoft and the Department disagreed 
over the meaning and correct interpretation of certain provisions of 
the Decree, including the meaning of the word ``integrate'' as that 
term was used in the Decree. Given the prior litigation between the 
Department and Microsoft over the proper interpretation of the 1995 
Consent Decree, do you agree that Microsoft and the settling plaintiffs 
should have a common, explicitunderstanding of the meaning and scope of 
this proposed Final Judgment before it is entered?
    Answer. Parties should have a common understanding of the meaning 
and scope of the terms of an agreement, including a consent decree and 
in particular the PFJ, as of the time that they accept the terms of 
that agreement.

    Question 7. Do you agree that the meaning and scope of the proposed 
Final Judgment as agreed upon by the settling plaintiffs and Microsoft 
should be precise, unambiguous and fully articulated so that the public 
at large can understand and rely on your mutual understanding of the 
Judgment?
    Answer. I consider it most important that the terms of the PFJ be 
sufficiently clear that persons conversant in the business and its 
terminology--as opposed to the public at large--can understand the PFJ, 
and govern their affairs accordingly. I believe that the PFJ 
accomplishes this goal.

    Question 8. If Microsoft were to disagree with the settling 
plaintiffs' interpretation of one or more important provisions of the 
proposed Final Judgment, would you consider that to be a potentially 
seriousproblem?
    Answer. If Microsoft were to disagree with the settling plaintiffs' 
``interpretation'' (which I take to be synonymous with 
``understanding'') of one or more important provisions of the PFJ, that 
could be a potentially serious problem, depending on such matters as: 
(a) the degree of disagreement; (b) whether the disagreement promoted 
or retarded the purposes of the provision involved; (c) whether 
Microsoft's understanding retarded the purposes of the provision 
involved; (d) whether Microsoft intended to conform its conduct only to 
its own understanding of the provision; (e) whether the disagreement 
was soluble under the provisions governing the activities of the 
Technical Committee under the PFJ or under any other part of PFJ; and 
(f) the practical or foreseeable effect of the disagreement, if not 
resolved, in the real world.

    Question 9. Do you agree that it would be highly desirable to 
identify any significant disagreement between Microsoft and the 
settling plaintiffs over the correct interpretation of the proposed 
Final Judgment now, before the Judgment is entered by the Court, rather 
than through protracted litigation as in the case of the 1995 Consent 
Decree?
    Answer. If there were a disagreement over the terms of the PFJ 
between Microsoft and the settling plaintiffs--and if that disagreement 
could be termed ``significant,'' after taking into account sorts of 
considerations referred to in response to question 8--it would be 
desirable to identify that disagreement.

    Question 10. Does the Competitive Impact Statement set forth the 
settling plaintiffs' definitive interpretation of its proposed Final 
Judgment with Microsoft?
    Answer. The Competitive Impact Statement (``CIS'') is a document 
that the United States Department of Justice prepared and filed 
pursuant to 15 U.S.C. Sec. Sec. 16(b)-(h). Although the document was 
not filed on behalf of New York, I am not aware of any views expressed 
by DOJ in the CIS that differ in a material respect from mine. I would 
not, however, characterize the CIS as a ``definitive interpretation'' 
of the PFJ, both because I do not understand what that expression 
refers to in this context, and because, in any event, the PFJ 
necessarily is best understood (or ``interpreted'') and applied with 
reference to a specific fact setting, involving specific conduct.

    Question 11. Has Microsoft informed the settling plaintiffs that it 
has any disagreement with the interpretation of the Final Judgment as 
set forth in the Competitive Impact Statement?
    Answer. As suggested above in response to Question 10, I am 
uncertain whether the CIS is appropriately described as an 
``interpretation'' of the PFJ. However, Microsoft has not expressed to 
me any disagreement with the contents of the CIS; nor have I been told 
that Microsoft has expressed any such disagreement to any other 
settling plaintiff.

    Question 12. Can the public at large rely upon the Competitive 
Impact Statement as the definitive interpretation of the nature and 
scope of Microsoft's obligations under the Final Judgment?
    Answer. The CIS is a document required to be filed by DOJ. For the 
reasons noted in response to question 10, I would not refer to the CIS 
as ``the definitive interpretation of the nature and scope of 
Microsoft's obligations'' under the PFJ.

    Question 13. If the public cannot rely on the interpretation of the 
proposed Final Judgment as set forth in the Competitive Impact 
Statement, then what is the mutually understood and agreed-upon 
interpretation of the meaning and scope of Microsoft's obligations 
under the Final Judgment?
    Answer. Microsoft's obligations under the settlement are set forth 
in the PFJ, the terms of which are to be interpreted in accordance with 
their general meaning in the industry. In addition, the parties that 
negotiated the settlement believe that there is a ``mutual 
understanding'' of the meaning and scope of the terms of the PFJ. 
Moreover, although the CIS is not a ``definitive interpretation'' of 
the settlement, as noted above, to my knowledge Microsoft has not 
indicated to any settling plaintiff any disagreement with the terms of 
that document.

                                

       Responses of Jay L. Himes to questions from Senator Hatch

    Question 1. I realize that you support the Proposed Settlement on 
the basis that it compares favorably to the set of remedies that many 
predict have resulted from further litigation. However, setting that 
aside for the moment, could you tell us what particular merit--if any--
you see in the Remedial Proposals filed by the non-settling states?
    Answer. The Litigating States have proposed the LSPFJ in continuing 
litigation to which New York, among others, is a party, and in which 
New York may be called on to express positions relating to the remedy 
sought. Therefore, I do not believe it appropriate to comment on 
specific provisions in the LSPFJ or on the LSPFJ generally.

    Question 2. Please expand specifically on the pros and cons of the 
various proposals for alternative enforcement mechanisms that were 
considered and rejected in the settlement discussions. In particular 
could you give us your view of the provision, contained in the non-
settling parties' Remedial Proposal, that would provide for a special 
master?
    Answer. The enforcement section of the PFJ (Sec. IV) includes: (a) 
relatively common ``visitation'' provisions empowering the DOJ and 
State enforcers to undertake enforcement activity (Sec. IV-A); (b) the 
establishment of an internal compliance officer at Microsoft with 
specified powers and responsibilities (Sec. IV-C and parts of Sec. IV-
D)--also a relatively common type of provision; and (c) the creation of 
what is referred to in the PFJ as the ``Technical Committee'' or 
``TC,'' which is charged with the responsibility to assist the 
governments' enforcement activity. (Sec. IV-B and parts of Sec. IV-D) 
In my written testimony, I said that the PFJ contains ``an enforcement 
mechanism that we believe is unprecedented in any antitrust case,'' and 
that is ``probably the strongest ever crafted in an antitrust case.'' 
(Testimony of Jay L. Himes, dated December 12, 2001, pp. 12, 14) In 
expressing that view, I had in mind the enforcement provisions in 
general, and particularly the addition of TC to the more common 
enforcement provisions found in the PFJ. Since the PFJ was announced in 
early November 2001, no one has called to my attention any antitrust 
case where a court adopted an enforcement mechanism comparable in 
strength to the one that DOJ and the Settling States negotiated.
    Most of the negotiations concerning the enforcement section related 
to what became the TC provisions. Therefore, I will focus my remarks on 
this aspect of the PFJ, bearing in mind that the TC is only part of the 
total enforcement mechanism.
    From my point of view (and I reiterate that I am speaking here only 
on behalf of New York), the central elements of this part of the 
enforcement mechanism, which I sought to achieve, were the following:
          (a) the creation of a body outside of the government 
        enforcers, which would augment the resources of, and would have 
        as its mission assisting, DOJ and the States in enforcement,
          (b) the on-site presence of this body at Microsoft;
          (c) the conferral of expansive powers on this body to assist 
        the enforcement effort; and
          (d) the payment of this enforcement effort by Microsoft, 
        together with provisions designed to discourage Microsoft from 
        challenging expenses incurred.
    A review of the Sec. IV of PFJ shows that, despite the need for 
negotiations with Microsoft, we secured each of the four central 
elements that I have described. The TC will be composed of persons with 
software expertise, who will have extensive, on-site authority to 
assist in enforcement of and compliance with the PFJ, and who will be 
independent of Microsoft.
    The negotiations also resulted in adding provisions to the TC 
mechanism. For example:
    1. The TC has a voluntary dispute resolution function, which could 
be thought of as going beyond typical law enforcement activity. (PFJ 
Sec. IV-D) This function is designed to facilitate resolving issues 
that may arise under the PFJ in an expeditious fashion. The basic 
object here is to help assure that the PFJ achieves the marketplace 
effects that it is intended to achieve.
    2. The PFJ directs that ``[n]o work product, findings or 
recommendations of the TC may be admitted in any enforcement proceeding 
before the Court,'' and that ``no member of the TC shall testify'' in 
any proceeding regarding any matter relating to the PFJ. (PFJ Sec. IV-
D(4)(d)) These provisions are designed, in part, to reduce the need 
that Microsoft might otherwise feel to call on its attorneys 
immediately to become involved whenever the TC makes a request to speak 
with Microsoft employees, or to obtain documents or other information. 
These provisions are also designed to recognize that the extensive 
access to information afforded to the TC under the PFJ should be used 
only to further the TC's enforcement and dispute resolution functions, 
and not to assist non-parties in other cases brought against Microsoft.
    In my written testimony to the Committee, I noted that the 
limitation on admission of TC material into evidence should not have a 
great impact. (Testimony of Jay L. Himes, dated December 12, 2001, p. 
14) That is so because government enforcement officials still will be 
able to use the TC's work. Moreover, Sec. IV(A)(2) of the PFJ gives DOJ 
and the Settling States independent access to Microsoft documents 
(including source code), and employees. That authority, together with 
the TC's work, should enable the government enforcers, working with 
their experts, promptly to evaluate and replicate the TC's work for use 
in judicial proceedings.
    Beyond this, I am constrained to reiterate that the Litigating 
States have proposed the LSPFJ in continuing litigation to which New 
York, among others, is a party, and in which New York may be called on 
to express positions relating to the remedy sought. Therefore, I do not 
believe it appropriate to comment on the special master provisions in 
the LSPFJ.

    Question 3. Please explain, from the perspectives of the settling 
State plaintiffs, whether and how the Proposed Settlement sufficiently 
protects against Microsoft leveraging its monopoly power in operating 
systems into the Internet-based services market and the server market?
    Answer. The ``server/client interop'' provision of the PFJ--
Sec. III-E--will prevent Microsoft from incorporating into Windows 
features or functionality with which its own server software can 
interoperate, and then refusing to make available information about 
those features or functions that non-Microsoft servers need in order to 
have the same opportunities to interoperate with Windows. Thus, 
Sec. III-E is designed to prevent Microsoft from using its Windows 
monopoly to gain advantages in the communications line between PCs and 
servers, which are not available to non-Microsoft servers. This is 
accomplished by mandating disclosure of Communications Protocols. The 
ultimate objective is to encourage developers to write middleware 
operating at the server level, which can provide functionality to PCs, 
and which may, in turn, erode the applications barrier to entry that 
protects Microsoft's Windows operating system monopoly at the PC level.
    The district court dismissed the States' monopoly leveraging claim 
in its 1998 summary judgment ruling, and that ruling was not the 
subject of the appeal to the D.C. Circuit from the final judgment 
entered in June 2000. Accordingly, the possible ``leveraging'' of 
Microsoft's monopoly power in PC operating systems into ``the Internet-
based services market and the server market'' involves matters that are 
not readily regarded as within either the scope of liability 
established by the D.C. Circuit or within the appropriate remedy in the 
case remanded by the Court of Appeals.

                                

       Responses of Jay L. Himes to questions from Senator DeWine

    Question 1. The term of the proposed settlement is only five years, 
while many other antitrust consent decrees last for ten years. It has 
been suggested that a shorter time period is justified because this 
industry changes rapidly and a longer decree may not be warranted after 
five years. Given that the Department of Justice has the ability to go 
to the court and seek to modify a consent decree or terminate it if 
market conditions warrant such a change, why not impose a longer period 
of enforcement, and then decide later if it needs to be modified or 
abandoned?
    Answer. The term of the decree is appropriate in light of the 
rapidly changing character of the industry and the facts of this 
particular case. The alternative described in this question--a longer 
decree that could, on application to the court, be shortened based on 
market conditions--is not a common approach.

    Question 2. As the Court of Appeals in this case noted, the Supreme 
Court has indicated that a remedies decree in an antitrust case must 
seek to ``unfetter a market from anticompetitive conduct,'' ``terminate 
the illegal monopoly, deny to the defendant the fruits of its statutory 
violation, and ensure that there remain no practices likely to result 
in monopolization in the future.'' Do you believe that this is the 
appropriate standard to use? If so, does the proposed final judgment 
deny Microsoft the fruits of its illegal acts? Specifically, can you 
discuss whether Microsoft has been denied the fruits of its effort to 
maintain a monopoly in the operating system?
    Answer. The PFJ has been submitted in a continuing litigation in 
which New York may be required to take positions. Therefore, I do not 
believe it appropriate to comment on issues of law that may arise in 
this ongoing litigation.
    As to the second part of this question, I regard the ``fruits'' of 
Microsoft's monopoly maintenance activity to be the fortification of 
the applications barrier to entry that protects Microsoft's Windows 
monopoly at the PC level. Through a variety of different means--
including conduct prohibitions, Windows pricing obligations, and 
affirmative design and disclosures obligations--the PFJ seeks to deny 
that fortification to Microsoft.

    Question 3. The proposed settlement has some prohibitions against 
Microsoft retaliating against computer manufacturers that place 
competing software on their computers--these provisions are intended to 
allow manufacturers to offer non-Microsoft products if they choose. I 
understand that Microsoft currently offers incentives to computer 
manufacturers if they can get computers to ``boot up'' quickly. Some 
believe that computer manufacturers will not want to slow down the 
start-up time by placing additional software on the computer because 
they will risk losing the incentive payment. Does the proposed 
settlement deal with this problem.
    Answer. Based on my understanding, this should not be a meaningful 
problem. The types of middleware likely to be installed by OEMs should 
not have a material effect on the speed of the boot sequence. If 
Microsoft were to condition incentives on boot up standards that were 
so onerous as to discourage OEMs from installing competing middleware, 
that would suggest that the express purpose of the program is 
pretextual. Microsoft's conduct would constitute prohibited retaliation 
under Sec. III-A.

    Question 4. The Appellate Court noted that the applications barrier 
protects Microsoft's operating system monopoly. The Court stated that 
this allows Microsoft the ability to maintain its monopoly even in the 
face of competition from potentially ``superior'' new rivals. In what 
manner do you believe the proposed settlement addresses the 
applications barrier?
    Answer. Please see the second paragraph of my response to question 
2 from Senator DeWine.

    Question 5. Some believe that unless Microsoft is prevented from 
commingling operating system code with middleware code, competitors 
will not be able to truly compete in the middleware market. Because the 
code is commingled, the Microsoft products cannot be removed even if 
consumers don't want them. This potentially deters competition in at 
least two respects. First, as the Appellate Court found, commingling 
deters computer manufacturers from pre-installing rival software. And 
second, it seems that software developers are more likely to write 
their programs to operate on Microsoft's middleware if they know that 
the Microsoft middleware will always be on the computer whereas 
competing products may not be. Even if consumers are unaware that code 
is commingled, shouldn't we be concerned about the market impact of 
commingling code? What is the upside of allowing it to be commingled, 
and on the other hand, what concerns are raised by removing the code?
    Answer. I do not read the D.C. Circuit's decision as finding that 
commingling of code, standing alone, deters OEMs from pre-installing 
rival software. I also doubt that commingling code in the Windows 
operating system is, in itself, of competitive significance vis-a-vis 
the consumer. Rather, as the liability trial demonstrated, the 
consumer's actual usage of middleware--not simply the presence of the 
product's software code on the computer--has competitive significance. 
Thus, so far as I am aware, throughout this case both DOJ and the 
States did not argue that there was a need for Microsoft (or OEMs) to 
remove Windows software code in order to give choice to consumers. 
Accordingly, removing the visible means of end-user access to Microsoft 
middleware as a means of customizing the operating system, while not 
requiring that software code itself be removed, remediates the concerns 
expressed.
    As to the benefits and costs of removing code, I reiterate that the 
Litigating States have proposed the LSPFJ in continuing litigation to 
which New York, among others, is a party, and in which New York may be 
called on to express positions relating to the remedy sought. 
Therefore, I do not believe it appropriate to comment on specific 
provisions in the LSPFJ.
    I will, nevertheless, offer my own personal views generally on the 
subject of whether or not to remove software code.
    The principal benefit from non-removal of Windows code is that the 
code remains available if an enduser prefers to use the Microsoft 
product, instead of using the competing middleware installed by an OEM. 
That end-user may then choose to ``undo'' the OEM's installation 
decision with a minimum of effort. At the same time, I am not persuaded 
that there is a significant upside to requiring software code to be 
removed. As noted above, the presence or absence of software code on a 
PC probably is not, standing alone, competitively significant. Further, 
computer hardware capability is, today, sufficiently great that 
removing code is not likely to improve PC performance insignificant 
respects. Also, even if code were removed it could be readily restored 
via downloading the code over the Internet, as well as by reinstalling 
it using a CD. The ease with which a download can be accomplished is 
likely to increase over time.
    On the other hand, there are costs to removing code. Removal would 
require an engineering effort to identify specific places where the 
Windows operating system can be said to end, and middleware (or 
conceivably other applications) can be said to begin. The remaining 
operating system, and the code removed, would then need to be subjected 
to a battery of tests to make sure that both performed the way that 
they were intended to perform, and in fact previously performed, absent 
the removal. That could be a formidable task, depending on (among other 
things) the significance of the code removed and the number and type of 
non-Microsoft applications written to it. Moreover, any effort to 
remove code could implicate the court in reviewing difficult issues of 
software engineering, design and performance.

    Question 6. Many believe that this settlement proposal merely 
requires Microsoft to stop engaging in illegal conduct, but does little 
in the way of denying Microsoft the benefits of its bad acts. First, 
how would you answer these critics? Is this just a built-in reality of 
civil antitrust remedies, i.e., that they don't aim to punish? And 
second, do you believe the remedy here is strong enough to dissuade 
other potential monopolists from engaging in the type of conduct in 
which Microsoft engaged?
    Answer. My written testimony describes the various ways in which I 
believe the PFJ will promote competition in the computer and computer 
software industries. As noted above, I also believe that the PFJ denies 
Microsoft the fortification of the applications barrier to entry that 
Microsoft sought, by its anticompetitive conduct, to erect. I therefore 
believe that the PFJ offers a strong, effective remedy to the conduct 
that the Court of Appeals found to be unlawful. I similarly believe 
that the PFJ will have the effect of deterring other potential 
antitrust violators.

    Question 7. Nine states didn't join with the Department of 
Justice's proposed final judgment because they didn't believe it 
adequately addressed competitive problems. These states recently filed 
their own remedy proposals. These states assert that one fruit of 
Microsoft's illegal conduct is Microsoft's dominant share of the 
internet browser market. They propose to deny Microsoft this benefit of 
its violations by requiring it to open-source the code for Internet 
Explorer. What do you believe the competitive impact of such action 
would be?
    Answer. The Litigating States have proposed the LSPFJ in continuing 
litigation to which New York, among others, is a party, and in which 
New York may be called on to express positions relating to the remedy 
sought. Therefore, I do not believe it appropriate to comment on 
specific provisions in the LSPFJ.

    Question 8. Given Microsoft's monopoly power in the operating 
system, some believe that merely allowing computer manufacturers to 
place competing software and icons on the operating system will not 
impede Microsoft's ability to capture a dominant share of any product 
that it binds to its operating system. Do you believe that media 
players, instant messaging services, and other companies products will 
be able to compete with similar MS products that are bound to the 
operating system?
    Answer. Yes. I believe that the PFJ will give developers of 
competing middleware the information needed to enable them to design 
software that works well with Windows, and that other parts of the PFJ 
will empower OEMs to add competing middleware to Windows. Further, the 
PFJ includes extensive provisions that will enable competing middleware 
to be substituted into the operating system in lieu of Microsoft 
middleware.

    Question 9. Many have criticized the proposed final judgment saying 
it has loopholes in it that will allow Microsoft to continue operating 
as it has done in the past. For example, the proposed final judgment 
clearly seeks to prevent Microsoft from retaliating against computer 
manufacturers that install competing software onto the computer. 
However, because the provisions are limited to specific practices or 
types of software, and apply only to ``agreements'' between Microsoft 
and computer manufacturers, many believe that Microsoft will find 
alternative methods of controlling the practices of computer 
manufacturers. Do you believe competition would be better served if 
Microsoft were broadly prohibited from retaliating against computer 
manufacturers?
    Answer. I believe that the PFJ does broadly prohibit Microsoft from 
retaliating against OEMs. Section III-A, in pertinent part, provides 
that:
          ``Microsoft shall not retaliate against an OEM by altering 
        Microsoft's commercial relations with that OEM, or by 
        withholding newly introduced forms of non-monetary 
        Consideration (including but not limited to new versions of 
        existing forms of non-monetary Consideration) from that OEM, 
        because it is known to Microsoft that the OEM is or is 
        contemplating:
                  1. developing, distributing, promoting, using, 
                selling, or licensing any software that competes with 
                Microsoft Platform Software or any product or service 
                that distributes or promotes any Non-Microsoft 
                Middleware;
                  2. shipping a Personal Computer that (a) includes 
                both a Windows Operating System Product and a non-
                Microsoft Operating System, or (b) will boot with more 
                than one Operating System; or
                  3. exercising any of the options or alternatives 
                provided for under this Final Judgment.
    If an OEM seeks, for example, to add competing middleware to 
Windows, and Microsoft knows of that intention, any ``alteration]'' of 
Microsoft's ``commercial relations'' with that OEM--regardless of the 
means or products used to alter those commercial relations--implicates 
the non-retaliation protections of Sec. III-A. So too would Microsoft's 
failure to offer that OEM ``newly introduced forms of non-monetary 
Consideration.'' ``Consideration,'' in this context, is itself broadly 
defined and embraces, in non-monetary form:
          ``provision of preferential licensing terms; technical, 
        marketing, and sales support; enabling programs; product 
        information; information about future plans; developer support; 
        hardware or software certification or approval; or permission 
        to display trademarks, icons or logos.''
    (PFJ Sec. VIC)
    If Microsoft were to engage in any such acts, there would be a 
presumption of wrongful retaliation against the OEM. The burden would 
be on Microsoft to justify its conduct under a limited exception 
provided for in the PFJ to permit pro-competitive activity.
    It is important to note as well that, retaliation, for purposes of 
Sec. III-A, is not limited to Microsoft's use of any particular 
software as a retaliation device. Instead, it is the change in any 
commercial relation between Microsoft and the OEM--however 
accomplished--that is important.
    Also, insofar as the PFJ restricts certain ``agreements'' made by 
Microsoft (see, e.g., PFJ Sec. Sec. III-C(6), F(2), G), the term 
``agreement'' is not defined, and, therefore, takes on its ordinary 
usage in the antitrust context. Thus, under the PFJ, the term 
``agreement'' reaches all contracts, combinations, concerts of action 
or understandings--whether written or oral, and whether express or 
implied--that the antitrust laws ordinarily reach.

    Question 10. The Court of Appeals ruled that Microsoft's practices 
which undermined the competitive threat of Sun's Java technology was an 
antitrust violation. The remedy proposed by the states that do not 
support the DOJ's proposed settlement would require Microsoft to 
distribute Java with its browser as a means of restoring Java's 
position in the market. Do you believe this would be beneficial to 
competition? What does the proposed final judgment do to restore this 
competition?
    Answer. The PFJ should enable OEMs to add Java to Windows, free 
from the risk of retaliation from Microsoft, if the OEMs believe that 
there is consumer demand for that software.
    The Litigating States have proposed the LSPFJ in continuing 
litigation to which New York, among others, is a party, and in which 
New York may be called on to express positions relating to the remedy 
sought. Therefore, I do not believe it appropriate to comment on 
specific provisions in the LSPFJ.

    Question 11. Definition U. of the Proposed Final Judgment appears 
to allow Microsoft to determine in its sole discretion what constitutes 
the operating system. The Court of Appeals left open the possibility of 
a tying case against Microsoft. Will this provision essentially 
foreclose any opportunity of bringing a tying claim against Microsoft? 
Why do you give Microsoft the ability to make this determination?
    Answer. Definition U defines the term ``Windows Operating System 
Product'' for purposes of the PFJ only. Nothing in the PFJ confers on 
Microsoft immunity from any antitrust liability that would otherwise 
arise in the absence of the decree. Therefore, Microsoft's conduct in 
adding software to Windows will remain subject to possible antitrust 
challenge on various grounds, one of which is unlawful tying.
    In my personal view, giving Microsoft the ability to determine the 
contents of the Windows Operating System Product for purposes of the 
PFJ was consistent with the notion that OEMs could add competing 
middleware to Windows, and that removal of Windows software code by 
either Microsoft or OEMs was not required.
    Parenthetically, let me emphasize that, under the PFJ, consequences 
to Microsoft can arise by virtue of its including software code in 
Windows. For example, code included in Windows can also meet the 
requirements of the Microsoft Middleware and Microsoft Middleware 
Product definitions. To that extent, code that is part of Windows can 
trigger the provisions of the PFJ obligating Microsoft to make API 
disclosure and to afford configuration options. Similarly, the 
``server/client interop provision''--Sec. III-E--requires Microsoft to 
disclose and license any Communications Protocols used by any part of 
Windows to interoperate natively with a Microsoft server. So, including 
code in Windows can trigger these Microsoft obligations as well.

    Question 12. It has been indicated that one motivation for entering 
into this settlement was to provide immediate relief and avoid lengthy 
court proceedings. At the same time, many of the provisions of the 
settlement don't become active for up to 12 months after the settlement 
is enacted. Given your belief that relief should be immediate, why wait 
so long for these provisions to become active?
    Answer. Under the PFJ, Microsoft is required to include in Windows 
an effective add/remove function to allow OEMS and end-users to enable 
or remove access to Microsoft and non-Microsoft middleware, as well as 
to permit non-Microsoft middleware to ``override'' (i.e., become the 
default for) middleware functions that Microsoft has integrated into 
the operating system. Microsoft also is required to disclose and 
document the APIs between Windows and Microsoft middleware. Lead time 
is necessarily to enable Microsoft to make the changes to Windows that 
are needed to discharge its obligations under the PFJ.
    The 12 month period that I believe is referred to in this question 
relates both to: (a) the ``API disclosure provision''--Sec. III-D--
which obligates Microsoft to disclose and document APIs between 
'Microsoft Middleware and a Windows Operating System Product; and (b) 
the ``operating system configuration'' provision--Sec. III-H--which 
ensures that OEMs will be able to choose to offer and promote, and 
consumers be able to choose to use, Non-Microsoft Middleware Products. 
Microsoft needed time to identify all the APIs subject to Sec. III-D, 
and to create the documents associated with disclosing these APIs. The 
period given to do this is ``the earlier of the release of Service Pack 
1 for Windows XP or 12 months after the submission'' of the PFJ to the 
Court. (Sec. III-D; emphasis added) The first service pack for a new 
operating system is typically released within a few months. But 
recognizing the additional burdens on Microsoft arising from the PFJ, a 
12 months maximum period was agreed to.
    For a new version of the Windows Operating System Product, 
Sec. III-D requires Microsoft to make disclosure ``in a Timely 
Manner.'' This latter term is defined to refer to the time that 
``Microsoft first releases a beta test version of a Windows Operating 
System Product that is distributed to 150,000 or more beta testers.'' 
(PFJ Sec. VI-R) As noted in my response to question 5 by Senator Leahy, 
this particular time period is based on a point in the product 
development process at which the software product design probably will 
be sufficiently far along as to enable independent software developers 
to devote the time and resources to writing potentially compatible 
software with limited risk that Microsoft product changes could moot 
such efforts.
    Similarly, for a new Windows Operating System Product, Sec. III-H 
obligates Microsoft to make the necessary operating system changes 
based on the ``Microsoft Middleware Products which exist seven months 
prior to the last beta test version (i.e., the one immediately 
preceding the first release candidate) of that Windows Operating System 
Product.'' The purpose of this time period is to ``freeze,'' as of a 
particular point in time, the group of Microsoft Middleware Products 
for which Microsoft must incorporate default settings into the Windows 
design. There has to be a specific point in time as of which Microsoft 
is permitted to identify the middleware for which it needs to make 
design accommodations, an assessment that itself needs to take into 
account the group of NonMicrosoft Middleware in the marketplace. (This 
is so because the term Microsoft Middleware Product depends, in certain 
circumstances, on the existence of a Non-Microsoft Middleware Product 
of similar functionality. PFJ Sec. VI-K(2)(6)(ii).) It simply would not 
be realistic or fair to require Microsoft to base these design 
considerations on an ever-changing universe of nonMicrosoft middleware.

    Question 13. One provision of the proposed final judgment requires 
Microsoft to allow consumers or computer manufacturers to enable access 
to competing products. However, it appears that III.H. of the 
Stipulation and VI.N. indicate that for a product to qualify for these 
protections it must have a million copies distributed in the United 
States within the previous year. This seems to run contrary to the 
traditional antitrust philosophy of promoting new competition. Is this 
in fact the case? And if so, why are these protections limited to 
larger competitors?
    Answer. The term Non-Microsoft Middleware Product is used (among 
other places) to identify software products that may be installed in 
lieu of a Microsoft Middleware Product, as provided in Sec. III-H. One 
element of the definition of Non-Microsoft Middleware Product requires 
that one million copies be distributed in the United States within the 
previous year. This requirement refers only to copies distributed, not 
to copies sold, installed or used, and should not be difficult to meet, 
given the numerous distribution channels available today, including PC 
user-initiated download requests. This element is intended to strike a 
balance between triggering Microsoft's affirmative obligations--
including the API disclosures required by Sec. III-D and the creation 
of the mechanisms required by Sec. III-H--and the competitive potential 
of minor products that have not established a meaningful presence in 
the market and that might even be unknown to Microsoft development 
personnel.

                                

        Response of Jay L. Himes to a question from Senator Kohl

    Question. Mr. Himes, as you know, nine of your fellow states that 
originally joined you and the federal government in suing Microsoft 
have refused to consent to this settlement, and, just last Friday, 
proposed additional remedies. Why did these other states split ranks 
with you and the federal government? Would you be willing to consider 
modifications to this proposed settlement in order to gain their 
assent?
    Answer. In participating in the negotiations that led to of the 
PFJ, I acted on behalf of all the plaintiff States (including the 
District of Columbia) in the cases brought against Microsoft. Rules of 
law constrain me, as a representative of only one of the plaintiffs in 
the Microsoft cases, from disclosing the contents of communications 
among the plaintiff States regarding possible courses of action, or the 
reasons for them, prior to the point that individual plaintiff States 
decided whether or not to accept the PFJ. Moreover, I do not believe it 
appropriate for me to speculate or offer my own interpretation of the 
reasons that nine plaintiff States decided not to accept the PFJ.
    With respect to possible modifications of the PFJ, if the 
Litigating States and Microsoft jointly sought the involvement of New 
York in a process designed to modify the PFJ, we would of course 
participate in such an effort.

                       SUBMISSIONS FOR THE RECORD

  Statement of Jonathan Zuck, President, Association for Competitive 
                      Technology, Washington, D.C.

                              introduction
    Good morning, Mr. Chairman and members of the Committee. I am 
Jonathan Zuck, President of the Association for Competitive Technology, 
or ACT. On behalf of our member companies, it is my sincere honor to 
testify before this Committee today. As a professional software 
developer and technology educator, I am grateful for this opportunity 
and appreciate greatly your interest in learning more about the effects 
of the proposed settlement entered into by the United States Department 
of Justice (DOJ), nine state attorneys general and Microsoft on our 
industry. ACT is a national, Information Technology (IT) industry 
group, founded by entrepreneurs and representing the full spectrum of 
technology firms. Our members include household names such as 
Microsoft, e-Bay and Orbitz. However, the vast majority of our members 
are small and midsize business, including software developers, IT 
trainers, technology consultants, dot-coms, integrators and hardware 
developers located in your states. The majority of ACT members cannot 
hire lawyers and lobbyists or fly to Washington to have their views 
heard. Therefore, they look to ACT to represent their interests. To be 
sure, to meet the needs of our broad constituency, we don't always 
agree with our members, even Microsoft, on some policy issues.
    I have a great deal of respect and sympathy for the plight of these 
small technology companies, because I spent over fifteen years running 
similar companies. During this time, I've managed as many as 300 
developers, taught over a hundred classes, and worked on some 
interesting projects. I was responsible for a loan evaluation 
application for Freddie Mac, an automated Fitness Report application 
for the Navy and a Regional Check Authentication system for the 
Department of Treasury. I have built software oil multiple platforms 
include DOS. DR-DOS, OS/2 and Windows using tools from many vendors 
including Microsoft, Oracle, Sybase, Powersoft, IBM, Borland and 
others. I remain active as a technologist and last year designed a 
system to get to your corporate data wirelessly. I have also delivered 
keynotes and other presentations at technical conferences around the 
world.
    While ACT members vary in their size and businesses, they share a 
common desire to maintain the competitive character of today's vibrant 
technology sector that has been responsible for America's ``new 
economy.'' Unfortunately, for the last three years, the tens of 
thousands of small businesses in the IT industry have been virtually 
ignored during the government's investigation and prosecution of 
Microsoft.
    I believe the settlement, on balance, is good not only for the bulk 
of the IT industry, but for consumers as well. Voters also see the 
value in the settlement. Voter Consumer Research conducted polls of 
1,000 eligible voters last month in Utah and Kansas that are quite 
telling. In Utah and Kansas, when asked if their state attorney general 
should pursue the case after the DOJ settlement had been reached, the 
respondents said, by a 6 to 1 margin, that they should not.
    As one of the ``techies'' on this panel, I look forward to getting 
into more ``real life'' effects of the proposed settlement to prove 
this point.
    With that backdrop, my testimony today is focused on describing how 
the settlement will foster competition for thousands of America's small 
IT companies and how that, in turn, will benefit consumers.
                       the state of our industry
    Before we discuss life in a post Microsoft settlement world, I must 
speak to present-day competition and innovation. I want to begin by 
stating unequivocally that, counter to the protestations of some 
``experts,'' competition in the IT industry is alive and well. One 
demonstrable example is amount of capital investment by Venture 
Capitalists (VCs) and where that money is headed. Despite the recent 
downturn, VCs are still looking for the next ``billion dollar deal.'' I 
know because I have worked with many of them. I won't get into the 
negative impact this ``homerun or nothing'' strategy has had on our 
industry but suffice it to say, billion dollar deals do not come from 
investing in mature markets with limited growth potential and large 
existing players. Billion dollar deals only come from investing in new 
markets with unlimited growth potential and those do not include office 
productivity software market or even the general PC software market. 
Indeed, a recent survey of VC's conducted by the DEMOletter, showed 
that nearly a third of those surveyed will invest over $100 million in 
start-ups in 2002 and that nearly 20 per cent are planning to invest up 
to $250 million.\1\ The sectors of the IT industry receiving this money 
include software and digital media.\2\ These are precisely the sectors 
that would benefit from this settlement. Suggestions that opposing the 
settlement would encourage VC's to change their stripes are ridiculous.
---------------------------------------------------------------------------
    \1\ DEMOletter, December 2001, at 5-6.
    \2\ Id., at 5.
---------------------------------------------------------------------------
    In fact, the information technology world is experiencing a shift 
away from desktop computing and toward other devices such as personal 
digital assistants (PDA's), cell phones, set top boxes/game consoles, 
web terminals and powerful servers that connect them all. In all these 
growth markets, competition is very strong even though Microsoft is 
present. As of the third quarter of this year, more than 52 percent of 
all PDA's were shipped with the Palm operating system while only 18 
percent carried a Microsoft operating system according to Gartner. With 
cell phone manufacturers rushing to integrate PDA functionality, there 
is are several large players including Symbian (a joint venture between 
Nokia, Motorola, Ericsson, Matsushita [Panasonic], and Psion), Palm, 
Linux and Research in Motion's Blackberry operating system. In the game 
console/set-box arenas, Microsoft is just entering the picture with 
established companies like Sony and Nintendo standing on large 
installed user bases.
    The server market is probably the best example of this growing 
competition. According to IDC, Linux's worldwide market share of new 
and upgraded operating systems for servers was 27 percent in 2000. It 
was second only to Microsoft, which stood at 42 percent. IDC predicts 
predicted Linux's market share will expand to 41 percent by 2005, while 
Microsoft's will only grow to 46 percent. Things should only become 
more competitive with IBM putting a billion dollars into its Linux push 
this year. The vigorous competition in this space proves in the absence 
of government intervention, companies like Linux can thrive.
                       benefits of the settlement
    As the members of the Committee are doubtlessly aware, on November 
2, 2001 the DOJ and Microsoft tentatively agreed on a settlement (or 
consent decree) designed to end the federal antitrust suit. Soon 
thereafter, nine states attorneys general signed off on a revised 
settlement. The proposed settlement succeeds in striking a difficult 
compromise between the ``drastically altered'' finding of liability 
adopted by the Court of Appeals and the wishes of Microsoft competitors 
and critics for crippling sanctions against the company.\3\ Remarkably, 
the negotiators have worked out a settlement proposal that, while 
entirely satisfying to none, includes something for everyone.
---------------------------------------------------------------------------
    \3\ United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001) at 
102.
---------------------------------------------------------------------------
    A number of Microsoft competitors and their advocates have 
suggested that this agreement is flawed in that it ``does not prevent 
Microsoft from leveraging its monopoly into other markets.'' This 
argument is based on an unfounded fear that Microsoft will attempt to 
monopolize other markets such as instant messaging and digital media. 
Undermining this argument is the fact that the Court of Appeals found 
unanimously that Microsoft did not use its monopoly in the browser (or 
middleware) market.\4\ The bottom line is that the settlement was 
focused on addressing the allegedly anticompetitive conduct of the past 
and preventing similar conduct in the future. It is entirely consistent 
with the basic tenet of antitrust law, which is to protect consumers 
and competition, not competitors.
---------------------------------------------------------------------------
    \4\ The Court of Appeals noted ``Because plaintiffs have not 
carried their burden on either prong, [of an attempted monopolization 
analysis] we reverse without remand.'' Id., at 63.
---------------------------------------------------------------------------
    With that understanding, it is important to address the benefits 
the industry and consumer will derive from implementation of the 
proposed settlement. ACT believes that the benefits of the settlement 
can be classified as follows:
          1. Increased flexibility for Original Equipment Manufacturers 
        (OEMs)
          2. Increased flexibility for third party IT companies
          3. Greater consumer choice
          4. Effective enforcement
    I will discuss each benefit in turn, paying particular attention to 
the positive effects on competition in our industry.
1. Increased flexibility for Original Equipment Manufacturers (OEMs)
          OEMs play a pivotal role in ``supply chain'' of delivering a 
        rich computing experience for consumers. They provide 
        independent software vendors (ISVs), many of whom are small IT 
        companies, a valuable conduit by which to sell their wares 
        directly to consumers by vying for space on the computer 
        desktop. Thus, it is critical that OEMs have the flexibility to 
        meet market demands by negotiating with ISVs for this type of 
        placement. This practice is known as ``monetizing the desktop'' 
        and is consistent with market-based competition. Under the 
        proposed settlement, OEMs will have the flexibility to develop, 
        distribute, use, sell, or license any software that competes 
        with Windows or Microsoft ``middleware \5\'' without 
        restrictions or any kind of retaliation from Microsoft.\6\ 
        Reinforcing this flexibility, the settlement prohibits 
        Microsoft from even entering into agreements that obligate OEMs 
        to any exclusive or fixed-percentage arrangements.\7\ This 
        allows OEMs to negotiate with an array of ISVs through the use 
        of any number of incentives. Moreover, OEMs obtain some control 
        over the desktop space for such things as icons and 
        shortcuts.\8\ Another critical element allowing the OEMs to 
        create a competitive playing field is that they have the 
        ability to have nonMicrosoft operating systems (e.g., Linux) 
        and other Internet Access Providers (LAP) offerings (e.g., 
        alternative Internet connections such as AOL) launch at boot-
        up.\9\
---------------------------------------------------------------------------
    \5\ ``Microsoft Middleware Product'' is a defined term, while 
inconsistent with common industry usage, has the meaning of ``the 
functionality provided by Internet Explorer, Microsoft's Java Virtual 
Machine, Windows Media Player, Windows Messenger, Outlook Express and 
their successors in a Windows Operating System Product.'' Revised 
Proposed Final Judgment, Section VI.K.
    \6\ Id., Section III.A.
    \7\ Id., Section III.G.
    \8\ Id., Section III.C.
    \9\ Id., Section III.C.
---------------------------------------------------------------------------
2. Increased flexibility for third party IT companies
          Like OEMs, ISVs and Independent Hardware Vendors (IHVs) gain 
        the flexibility to develop, distribute, use, sell, or license 
        any software that competes with Windows or Microsoft middleware 
        without restrictions or any kind of retaliation from 
        Microsoft.\10\ The importance of this fact cannot be 
        overstated. ISVs and IHVs, especially the thousands of small 
        and mid-size companies in these categories, make up a bulk of 
        the IT industry and will be able to utilize this flexibility to 
        innovate and deliver ``consumer critical'' products such as 
        instant messaging and digital media to consumers.
---------------------------------------------------------------------------
    \10\ Id., Section III.F.
---------------------------------------------------------------------------
          The ISVs and IHVs will obtain advance disclosure of Windows 
        APIs, communications protocols, which will increase the 
        quantity and quality of competitive product offerings.\11\ As 
        with OEMs, Microsoft will be barred from thwarting competition 
        by entering into agreements that obligate ISVs, IHVs, IAPs, or 
        ICPs to any exclusive or fixed-percentage arrangements.\12\ It 
        should be noted that the settlement restricts some freedoms in 
        crafting contracts with Microsoft, and thus may discourage some 
        companies that might otherwise like to sign on to ``dance'' 
        with Microsoft. However, it also protects other companies from 
        any efforts by Microsoft to prevent them from teaming up with 
        Microsoft's competitors like Sun Microsystems or AOL.
---------------------------------------------------------------------------
    \11\ Id., Sections III.D., III.E.
    \12\ Id., Sections III.G., III.F.
---------------------------------------------------------------------------
3. Greater consumer choice
          Nothing is as important to our industry as giving consumers, 
        or end users, the freedom to choose what products and services 
        they want or need. To this end, the settlement ensures that 
        consumers will have the ability to enable or remove access to 
        Microsoft or non-Microsoft middleware, or substitute a non-
        Microsoft middleware product for a Microsoft middleware product 
        for a Microsoft middleware product.\13\ Microsoft's detractors 
        have generated much commotion with the notion that removal of 
        icons or ``automatic invocations'' is not enough, and that to 
        give consumers ``real'' choice, underlying code would have to 
        be removed. This is nonsensical for two reasons. First, it is a 
        known fact that removal of visible access (e.g., an icon) to 
        middleware or an application is a very effective means of 
        getting the end user to forget about it. Think about how many 
        icons reside on the average user's desktop that serve to 
        ``remind'' him of what product to use for a certain task. It is 
        a simple case of ``out of sight, out of mind.'' Second, it is 
        also a known fact that removal of the underlying does nothing 
        to enhance consumer choice, and actually could destabilize the 
        platform, increasing costs to consumer software developers who 
        could no longer count on programming interfaces within the 
        Windows operating system. The net result of these provisions is 
        that consumers will be in the position to pick the products 
        they consider to best meet their needs--whether it be 
        downloading music, sharing pictures over the Web, or chatting 
        with friends via instant messaging applications.
---------------------------------------------------------------------------
    \13\ Id. III.H.
---------------------------------------------------------------------------
          Another myth propagated by Microsoft's competitors is that 
        Microsoft gets to reset the desktop to its preferred 
        configuration 14 days after the consumer buys it no matter what 
        steps the OEM or the consumer have actually taken to try to 
        exercise the choice to use a non-Microsoft product. This is 
        absolutely false. The desktop would not be reset and consumers 
        will always retain choice. For example, consumers can choose 
        among the OEM's configuration, their own configuration and 
        Microsoft's configuration.
4. Effective Enforcement
          The final element of the settlement that will ensure 
        competition is the enforcement provisions. Microsoft must 
        license its intellectual property to the extent necessary for 
        OEMs and other IT companies to exercise any of the flexibility 
        provided in the agreement.\14\ In an unprecedented move, the 
        decree creates a jointly appointed Technical Committee (TC) to 
        monitor compliance.\15\ The TC will have three members and 
        unspecified staff, and be granted unfettered access to 
        Microsoft staff and documents. While the TC is a better 
        enforcement mechanism than having to apply to a court for each 
        software design element, it is not without some flaws. For 
        example, there are no restrictions on how the TC can be 
        utilized as a tool by Microsoft's competitors to delay shipment 
        of an operating system or middleware product. While this may 
        cause Microsoft some heartburn if it is used for such delay, it 
        will be a fatal malady to the thousands of small and mid-size 
        ISVs, IHVs, training firms and consultants that depend on a 
        timely product launch. I am not a lawyer, so I can only propose 
        a practical solution to this problem. Perhaps the competitors 
        (or anyone else with the view that Microsoft is not complying 
        with the consent decree) should be required to bring their 
        problems to the TC at specified times during the development 
        life cycle. This would prevent ``last minute'' delays.
---------------------------------------------------------------------------
    \14\ Id., Section III.I.
    \15\ Id., Section IV.B.
---------------------------------------------------------------------------
          Finally, Microsoft is required to implement an internal 
        Compliance Officer to be responsible for handling complaints 
        and compliance issues.\16\ This is yet another safeguard that 
        aggrieved parties can use to ensure Microsoft's compliance with 
        the consent decree.
---------------------------------------------------------------------------
    \16\ Id., Section IV.C.
---------------------------------------------------------------------------
          Unfortunately these provisions are not enough to satiate some 
        bent on seeing that this settlement never gets approved. For 
        example, they question why the settlement lasts for only 5 
        years rather than the customary 10. This inquiry fails to 
        acknowledge the realities of the IT industry and the speed at 
        which we innovate. One need only think about the number and 
        types of products that have emerged since 1998 to see why 
        applying static conduct restrictions are out of step with our 
        industry and provide no added value. Further, I believe seeking 
        extended application of the settlement only exposes a bias 
        against Microsoft
    Because of the significant impact on our industry, I must also 
address the additional remedies proposed by the nine state attorneys 
general who did not sign the consent decree. While their aim to 
``restore competition'' is a valid and important antitrust principle--
as long as it is limited to the elimination of competitive barriers--
their proposal ignores the Court of Appeals ruling and runs counter to 
established antitrust jurisprudence. The DOJ settlement agreement was 
wise to avoid the dangerous temptation to redesign and regulate market 
outcomes. I'll point out two defects of the state's proposal. First, 
requiring that Windows ``must carry'' Java does nothing for consumers 
who can download it with one click and only serves to thwart 
competition by giving Sun Microsystems a special government-mandated 
monopoly with which other middleware companies will have to compete. 
While I believe ``must-carry'' provisions are inherently 
anticompetitive, if the attorneys general were really trying to stand 
on principle they would have to ask for the same provisions for other 
middleware providers as well. Second, requiring Microsoft to port its 
Office product to Linux is tantamount to making it a ``ward of the 
state.'' There are already several office productivity suites available 
to users of Linux and some are even free. It would stand to reason that 
if attorneys general are actually interested in removing any 
``applications barrier to entry'' that may exist, they should force the 
developers of ALL popular software products to port them to Linux. It 
is clear that from the extreme nature of these proposals that the 
settlement must encompass all reasonable mechanisms to restore 
competition. The respondents to the Voter Consumer Research polls 
mentioned above also question the need for the far-reaching remedies 
that would hamper Microsoft's ability to innovate. In Utah for example, 
nearly 70% of voters believe that Microsoft's products have helped 
consumers and over 80% of these voters feel that that Microsoft has 
benefited the computer industry. These numbers beg the question: 
Where's the harm that would justify the nine state's harsh remedies.
Conclusion
    For ACT member companies, the IT industry and for me, it has been a 
very long three and a half years. This settlement reflects a balanced 
resolution to this litigation and a welcome end to the uncertainty that 
has hung over our industry at a time when certainty is what we need 
most. It addresses the anticompetitive actions articulated by a 
unanimous Court of Appeals. I believe Assistant Attorney Charles James 
when he said ``This settlement .  .  . has the advantages of immediacy 
and certainty.''\17\ It my sincere hope that the District Court will 
approve the settlement at the conclusion of the public comment period. 
There is no doubt in my mind that it is in the public interest to do 
so.
---------------------------------------------------------------------------
    \17\ Remarks of Assistant Attorney Charles James, Department of 
Justice press conference, November 2, 2001.
---------------------------------------------------------------------------
    Again, I thank the Committee for the opportunity to include the 
views of ACT's member companies at this important hearing.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



                                

             Statement of Robert H. Bork, Washington, D.C.

    Dear Chairman Leahy and Senator Hatch:
    The Proposed Final Judgment (PFJ) in U.S. v. Microsoft is a 
woefully inadequate end to more than 11 years of investigation and 
litigation against Microsoft Corporation. There is no longer a debate 
over Microsoft's liability under the antitrust laws. Microsoft has been 
found liable before the District Court. Microsoft lost its appeal to 
the United States Court of Appeals for the District of Columbia Circuit 
sitting en banc in a 7-0 decision. Microsoft's petition for a rehearing 
before the Court of Appeals was refused. Microsoft's petition for 
certiorari before the Supreme Court was also denied. The courts have 
decided that Microsoft possesses monopoly power and has used that power 
unlawfully to protect its monopoly.
    The case now turns back to the District Court for review under the 
Antitrust Procedures and Penalties Act--the so-called Tunney Act. Under 
the Tunney Act the Court must reach an independent judgment on whether 
or not the settlement is in the ``public interest.'' The District Court 
finds itself in an interesting posture in that in the 30 years since 
the Tunney Act was enacted, it has never been applied in a case which 
has been litigated and affirmed. What is unique about the application 
of the Tunney Act in U.S. v. Microsoft is that rather than some 
ambiguous ``public interest'' standard, the District Court will now be 
obligated to reach a decision on whether or not the settlement 
corresponds to the clear guidance of the Court of Appeals.
    The court of appeals set out a simple standard for measuring the 
legal sufficiency of any remedy selected in the Microsoft litigation: 
the remedy must ``seek to `unfetter [the] market from anticompetitive 
conduct,' *  *  * to `terminate the illegal monopoly, deny to the 
defendant the fruits of its statutory violation, and ensure that there 
remain no practices likely to result in monopolization in the future.' 
'' United States v. Microsoft Corp., 253 F.3d 34, 103 (D.C. Cir. 2001) 
(``Microsoft III'') (quoting Ford Motor Co. v. United States, 405 U.S. 
562, 577 (1972), and United States v. United Shoe Machinery Corp., 391 
U.S. 244, 250 (1968)). The Court of Appeals was very deliberate in its 
handling of this case, and its finely crafted opinion manifestly chose 
its words and precedents with care. In citing the Ford Autolite and 
United Shoe cases, the D.C. Circuit underscored the clear guidance of 
the Supreme Court in monopolization cases.
    The D.C. Circuit provided equally straightforward guidance in 
explaining Microsoft's liability for illegal monopolization. At the 
core of the case was Microsoft's successful campaign to eliminate the 
dual threats of Netscape's Navigator web browser and the Java 
programming language. Both Navigator and Java were ``platform threats'' 
to Microsoft's underlying operating system. Both Navigator and Nava 
served as ``middleware.'' ``Middleware'' means that these programs 
exposed applications programming interfaces (APIs) so that third party 
applications developers could write applications to Navigator and Java 
in lieu of the underlying Windows operating system. And because both 
Navigator and Java ran on operating systems other than Windows they 
fundamentally threatened the Windows operating system, Microsoft's core 
source of monopoly power. The D.C. Circuit could not have been clearer 
on these points. See Microsoft III, 253 F.3d at 53-56. 60. At a minimum 
any proposed settlement must effectively remedy this problem.
    Unfortunately, the remedy accepted by the Antitrust Division of the 
Justice Department ignores most of the key findings by both the Court 
of Appeals and the District Court. The PFJ falls far short of the 
standards for relief clearly articulated by the Court of Appeals and 
the United States Supreme Court. The PFJ includes provisions that 
potentially make the competitive landscape of the software industry 
worse. And, the PFJ contains so many ambiguities and loopholes as to 
make it unenforceable, and likely to guarantee years of additional 
litigation.
    That the PFJ will hamper Microsoft's illegal behavior not at all is 
shown by the reactions of the investment community:
    ``We have review the Settlement Agreement between MSFT and the DOJ 
.  .  . the states (and to a lesser degree the DoJ) had talked tough 
and set expectations for a knock-out victory, and now must accept 
criticism that they walked away with too little concessions from 
Microsoft.'' Goldman Sachs, 11/2/01
    ``As we have stated before, we believe a settlement is a best case 
scenario for Microsoft. And, this settlement in particular seems like a 
win for Microsoft being that it would preserve Microsoft's ability to 
bundle its Internet assets with Windows XP and future operating 
systems--a plus for the company. In fact, it appears that Internet 
assets such as Passport are untouched. Also, as is typical with legal 
judgments, this settlement is backward looking, not forward looking. In 
other words, it looks at processes in the past, but not potential 
development of the future.'' Morgan Stanley, 11/02/01
    ``The deal .  .  . appears to be `more, better, and faster' than we 
expected in a settlement deal between Microsoft and DoJ. The deal will 
apparently require few if any changes in Windows XP and leave important 
aspects of Microsoft's market power intact.'' Prudential Financial, 11/
01/01
    ``With a dramatic win last week, Microsoft appears to be on its way 
to putting the U.S. antitrust case behind it. The PFJ between the 
Department of Justice and Microsoft gives little for Microsoft's 
competitors to cheer about. .  .  . There is very little chance that 
competitors could prove or win effective relief from violation of this 
agreement, in our view.'' Schwab Capital Markets, 11/6/01
    This takes on particular importance given the state of the software 
market. Since the end of the trial before the District Court the market 
has changed substantially:
   Microsoft's monopolies are stronger in each of its core 
        markets with both the Windows operating system and the Office 
        suite now higher than 92 percent and 95 percent, respectively;
   Microsoft has achieved a new monopoly in web browsers;
   Competitive forces that may have existed in the past--most 
        notably the Linux operating system--now clearly pose no threat 
        to Microsoft's monopoly; and
   Microsoft has made clear it intends to further protect and 
        extend its monopoly through a series of initiatives including, 
        Hailstorm (web-services); Windows XP, and .NET.
    Some policy makers have adopted the view that settling this case 
could somehow revive the slowing U.S. economy. This is an absurd 
proposition. The problem with the PC sector today is that demand has 
slowed and prices for PC hardware have plummeted (as opposed to 
Microsoft's software which has effectively increased in price). It is 
simply incorrect to equate slowing PC demand with Microsoft's legal 
problems. Also, we are unaware of any economic theory that suggests 
that monopolies maintained by predatory conduct--as opposed to 
competition and innovation--can spur economic growth. As the Precursor 
Group recently pointed out: ``investor lament about the lack of 
broadband and the absence of killer applications is the `other side of 
the coin' to investor glee with the market power and profits of 
incumbent Bell, Cable, and Microsoft monopolies .  .  . having legal 
monopolies on the major access points to the Internet is unlikely to 
maximize innovation and growth that investors are counting on.''
    The briefing memorandum offered in support of these views documents 
general problems with the PFJ and specific section-by-section analysis 
of the PFJ's provisions. However, this memorandum is meant to be 
illustrative--not comprehensive--to give policy makers a preview of the 
issues to be examined under the Tunney Act. The Antitrust Division and 
Microsoft will continue to insist that the PFJ sufficiently remedies 
the issues in the case.
    Yet these arguments simply cannot be squared with the fact that 
every independent investment analyst and industry analyst has concluded 
that this remedy will have no material impact on Microsoft's business.
    Policy makers also need to pay attention to the precedent this case 
establishes. In settling the most important antitrust case in decades 
through a remedy that will have not impact on the current or future 
competitive landscape, and absolutely no deterrent effect on the 
defendant, the Department of Justice has effectively repealed a major 
segment of the nation's antitrust laws. Moreover, any potential witness 
with knowledge of anticompetitive conduct in a monopolized market has 
to weigh the potential benefit of his or her testimony against the 
likely response of the defendant monopolist. The DOJ's proposed 
meaningless remedy would insure that no witness would ever testify 
against Microsoft in any future enforcement action.
    The PFJ, in short, places this defendant in a position of 
effectively being above the antitrust laws, and does so by surrendering 
the government's victory in the District Court and the unanimous seven-
member Court of Appeals. That is a result that should not be 
countenanced.

                                

 Statement of Jerry Hilburn, President and Founder, Catfish Software, 
                      Inc., San Diego, California

    I am very pleased to provide a written statement for your hearing 
on ``The Microsoft Settlement: A Look to the Future.'' Thank you, 
Chairman Leahy and Members of the Committee, for the opportunity to 
deliver a small businessperson's perspective on the case before this 
distinguished group.
    I would like to tell you my point of view on the Microsoft case. I 
am a small businessman in San Diego, California. Catfish Software, Inc. 
started operations in 1994 providing network services and custom 
database applications for small business. In 1998, Catfish Software 
launched an E-mail Application Services branch providing double opt-in 
mail list service and web-based customer support applications and 
today, Catfish Software provides support to 300+ companies reaching 
2,000,000+ subscribers of its software services.
    One of my firm's top competitors is Microsoft's bCentral. So you 
may ask why I speak in favor of the Microsoft settlement.
    Businesses large and small have mortgaged their futures against the 
impact of the terrorist war. Some smaller businesses--technology and 
otherwise--have already found themselves strangled by a lack of 
consumer demand and by slowdowns in corporate and consumer spending. 
Most of us are finding it is time to shore up resources and protect our 
assets from the impact of the war.
    In this time of so much uncertainty, we need the promise of a 
brighter day and the knowledge that the government--from the federal 
level on down--is doing everything possible to invigorate our flagging 
economy.
    Competition and consumer preference should decide the direction of 
the marketplace and meanwhile, the government should not rush to 
intervene in the New Economy. The last thing our economy needs at this 
time is the burden of remedies which do nothing but slow the pace of 
development and limit the choices of consumers.
    The Justice Department handled this case admirably, and the 
settlement they agreed upon is sound. The settlement outlines how 
Microsoft can operate, but more importantly it provides some assurances 
to an industry that has been on unstable ground lately.
    Microsoft's ability to design and produce new software in turn 
creates opportunities for small and medium-sized developers to write 
applications which operate on a Windows-based platform.
    As the old saying goes, a high tide floats all ships. Calls for 
break-up of the company did not help the already tenuous situation. And 
when Microsoft looked like it might be pulled under, the Nasdaq was hit 
as well as the stocks of many high-tech companies.
    But when announcements of the settlement were made public around 
the beginning of November 2001, everyone got a nice little bump. 
Consumers and other technology entrepreneurs were hopeful that this 
case could be put to bed and that the tech sector could get back to 
business.
    This litigation that has been an albatross around all our necks for 
so long--and ending the string of lawsuits associated with it--will 
have a positive effect on the tech economy. With a little luck, that 
will ripple out to America's economy as a whole.
    With so many technologies poised to enter the marketplace, 
Microsoft and many others, including Catfish Software are looking for 
ways to enhance the computing experience. The Internet has become a 
center of most everyone's daily lives--from toddlers typing their first 
strokes with learning games to seniors learning how to send and receive 
e-mail. Untapped markets and unimagined ideas abound, but we must not 
harness the creativity or the ability of software firms to bring those 
products to bear in the marketplace.
    The olive branch of settlement was extended, and it is a solution 
that is good for the economy and good for the tech industry. Allow us 
the opportunity to get back to work and earn money with our products 
and ideas once again.
    This concludes my testimony. Once again, I thank the Committee and 
its distinguished Members for the opportunity to provide written 
testimony on this important issue.

                                

Statement of the Computing Technology Industry Association, Washington, 
                                  D.C.

                         statement of interest
    The Computing Technology Industry Association (CompTIA) is the 
world's largest trade association in the information technology and 
communications sector. CompTIA represents over 8,000 hardware and 
software manufacturers, distributors, retailers, Internet, 
telecommunications, IT training and other service companies in over 50 
countries. The overwhelming majority of CompTIA members are resellers--
companies that resell software and hardware to consumers, businesses, 
or other resellers. These resellers are vendor-neutral and their 
objective is to be able to sell whatever products their customers wish 
to buy. In that sense they believe that antitrust laws should focus 
primarily on consumer impact rather than competitor impact. Microsoft 
is a member of CompTIA as are many of Microsoft's competitors.
    In 1998, CompTIA's Board of Directors adopted a formal policy 
statement on antitrust. That statement supports sensible antitrust 
enforcement that is based on demonstrable economic effects in the 
marketplace. CompTIA believes that market forces typically correct any 
temporary market imperfections and that government regulators should 
only intervene in the technology marketplace when there is overwhelming 
evidence of a substantial and pervasive market failure. Pursuant to its 
policy statement, CompTIA has written and spoken frequently on 
antitrust issues of relevance to the technology sector. In June 1998, 
CompTIA filed an amicus brief in the Intel v. Intergraph litigation in 
the U.S. Court of Appeals for the Federal Circuit. In that case CompTIA 
urged the court to reject a lower court's finding that antitrust 
allegations could be a basis for ordering a company to disclose its 
valuable intellectual property.
    CompTIA filed an amicus brief in the United States Court of Appeals 
for the District of Columbia Circuit in the United States v. Microsoft 
case in November 2000. The amicus brief urged the Court of Appeals to 
reverse the District Court's order breaking Microsoft into two separate 
companies and further urged the Court of Appeals to reverse the 
liability findings against Microsoft. The basis for CompTIA's 
participation as amicus and submission of this testimony to the 
Committee is its interest in the overall health and prosperity of the 
technology sector.
    The antitrust case against Microsoft and the final remedies that 
will be imposed upon Microsoft have a direct effect on the overall 
health and prosperity of the technology sector. First, because 
Microsoft is such a large and important participant in the technology 
industry, any remedy that affects the company's operations necessarily 
affects the industry, Microsoft's vendors, and all companies that rely 
on Microsoft products. A remedial order that goes beyond the issues in 
the case may have a significantly detrimental effect upon innovation 
and growth in the industry. Second, the precedent established in this 
case has important ramifications for future activities in the 
technology sector. Overly restrictive sanctions imposed upon Microsoft 
may act to inhibit competitive behavior by other companies throughout 
the industry thereby deterring conduct that promotes innovation and 
technological development.
                              introduction
    On November 6, 2001 the United States Department of Justice and 
nine States entered into a Proposed Final Judgment with the Microsoft 
Corporation that resolves the antitrust charges brought by those 
governmental entities against the company. In the days after the 
settlement was announced, the nine non-settling States and the District 
of Columbia expressed their intention to continue litigation against 
Microsoft in an effort to convince the United States District Court 
that more extensive remedies should be ordered. On December 7, 2001 the 
non-settling States filed their remedy proposal with the District 
Court.
    This testimony analyzes the Court of Appeals opinion, the November 
6, 2001 Proposed Final Judgment, and the non-settling States' remedy 
proposal and arrives at the following conclusions:
   The U.S. Court of Appeals June 28, 2001 opinion reaffirmed 
        that the central goal of the U.S. antitrust laws is not to 
        protect competitors from competition nor is it to penalize a 
        defendant. The central goal of the antitrust laws is to promote 
        competition in order to enhance consumer welfare.
   In order to support its remedy in the remand proceeding now 
        before the District Court, the Court of Appeals opinion 
        requires that the government show a significant causal 
        connection between Microsoft's anticompetitive conduct and 
        actual injury to competition and consumers in the marketplace. 
        If the government fails to prove a causal connection, then the 
        remedy imposed can be no more broad than an order enjoining the 
        specific anticompetitive conduct at issue.
   Given the risks to both sides from further litigation, the 
        November 6 Proposed Final Judgment is a reasonable settlement 
        of the remaining disputed issues in the case that insures that 
        Microsoft's anticompetitive conduct will not be repeated, and 
        insures that every market participant has a fair opportunity to 
        compete. The settlement also insures that the technology 
        industry will not be encumbered with excessive regulation that 
        would stifle innovation and growth.
   The additional remedies proposed by the non-settling States 
        on December 7 are not likely to enhance competition or promote 
        consumer welfare. The vast majority of the States' proposals go 
        far beyond the scope of the liability found by the Court of 
        Appeals and are thus legally unsupportable. Further, the 
        proposed remedies would likely interfere with natural market 
        forces, impose higher costs on consumers, impair innovation, 
        and benefit Microsoft's competitors at the expense of 
        consumers.
               i. summary of the court of appeals opinion
            A. Background
    On June 28, 2001 the United State Court of Appeals for the District 
of Columbia Circuit (``Court of Appeals'') issued its ruling in United 
States v. Microsoft. The Court of Appeals found that Microsoft had 
violated Section 2 of the Sherman Act by taking anticompetitive actions 
to protect its monopoly in the computer operating system market. The 
Court, however, reversed the District Court rulings entered adverse to 
Microsoft regarding tying, attempted monopolization, and imposition of 
a break-up remedy. The case has been remanded to the District Court for 
proceedings on the appropriate remedy to address the monopoly 
maintenance findings.
    While much of the Court of Appeal's opinion focuses on issues that 
are specific to Microsoft, the Court made two preliminary yet important 
observations with respect to antitrust enforcement activities in the 
high-tech sector. First, the Court noted that despite the relatively 
fast pace of the Microsoft proceedings, the speed at which 
technologically dynamic markets undergo change is even faster. The 
consequences of the speed at which the market changes has significant 
implications for the conduct of antitrust cases. This rapid change 
``threatens enormous practical difficulties for courts considering the 
appropriate measure of relief in equitable enforcement actions, both in 
crafting injunctive remedies in the first instance and reviewing those 
remedies in the second.'' Opinion at 10-11.
    Because technology moves so quickly there is little likelihood that 
a company with large market share at any given time can engage in 
anticompetitive exclusionary behavior that causes consumer injury. In 
many instances a more desirable successor technology may very rapidly 
displace a large market share company before that company is even able 
to attempt to exercise monopoly power.
    Second, the Court also noted that competition in the technology 
marketplace is frequently ``competition for the market'' rather than 
``competition in the market.'' This means that there is intense 
competition between firms when a new product is introduced, but once 
consumers choose the firm that makes the best product, that firm will 
likely garner the vast majority of market share. This ``network 
effect'' phenomenon means that as more users utilize a compatible and 
inter-operable system or service, the value to each user increases. 
Opinion at 11-12. Thus, the Court of Appeals made clear that lawful 
monopolies and companies with large market shares are frequently 
desirable and highly beneficial to consumers. Opinion at 11.
    The Court of Appeal's inclusion of this theoretical discussion is a 
broad response to the question that many have asked since the beginning 
of the Microsoft case--that is, do the antitrust laws, written and 
applied predominantly in a brick-and-mortar era, have the same level of 
relevance in the information technology era? The answer is mixed. The 
antitrust laws do apply to the new economy, but the application of the 
rules must take into account economic realities and to insure that the 
objectives of antitrust are achieved: the protection and enhancement of 
competition as measured by consumer welfare.
    The most dramatic illustration of the application of antitrust to 
the new economy was in the Court's rulings on the tying claim and in 
reversing the lower court's remedial order. The Court's application of 
a rule of reason analysis (rather than per se treatment) for tying 
claims while at the same time rejecting the ``separate products'' test 
marks a significant recognition that product integration in the 
technology sector is likely to have benefits to consumers that outweigh 
any harms to competition. Additionally, the Court's analysis in 
rejecting the lower court's break-up order suggests that absent a 
strong showing of a causal connection between anticompetitive acts and 
Microsoft's dominant position in the operating system market, radical 
structural relief or extensive conduct restrictions that go beyond the 
challenged conduct would be unsupportable.
            B. Monopoly Maintenance
    The Court of Appeals affirmed in large measure the District Court's 
ruling that Microsoft acted unlawfully to maintain its monopoly in the 
operating system market. The Court found that Microsoft viewed Netscape 
Navigator Internet browser as a potential threat to the Windows 
operating system because it could conceivably have become an 
intermediate platform (with exposed application programming interfaces 
or API's) for the development of software applications. In order to 
promote Internet Explorer and retard the distribution of Netscape 
Navigator, Microsoft placed restrictions on original equipment 
manufacturers (OEM's). OEM's were not permitted to remove the Internet 
Explorer icon or install a Navigator icon on the desktop.
    The Court also found that the way in which Internet Explorer was 
integrated into Windows was unlawful. Beginning with the release of 
Windows 98, Microsoft removed Internet Explorer from the list of 
programs that could be accessed using in the add/delete program 
feature. The Court found that this had the effect of impeding the 
inclusion of rival browsers on a computer because OEM's were reluctant 
to place two Internet browsers on the desktop. Because Microsoft did 
not offer any procompetitive justification for preventing the removal 
of Internet Explorer, the Court found this feature unlawful. The Court 
also found that Microsoft's dealings with some independent software 
vendors, Apple Computer Corp., Java, and Intel were designed solely to 
protect its operating system monopoly and therefore those dealings 
violated Section 2 of the Sherman Act.
    Shortly after the Court of Appeals decision was released, Microsoft 
announced that it would modify its release of Windows XP to respond to 
the Court of Appeals rulings in the monopoly maintenance section of the 
opinion. Thus, OEM's now are permitted to have more control over the 
appearance of the Windows desktop; they may add icons for competing 
software and on-line services and delete the Internet Explorer icon 
from the desktop. OEM's and consumers also have the ability to remove 
Internet Explorer icon from a computer using the add/delete 
function.\1\
---------------------------------------------------------------------------
    \1\ Shortly after the Court of Appeals issued its ruling, Microsoft 
asked the court to reconsider the finding that Microsoft had unlawfully 
``commingled'' code from Internet Explorer and Windows. Microsoft 
argued that as a factual matter the District Court was incorrect in 
finding that Microsoft actually had placed Windows code and Internet 
Explorer code in the same libraries in order to prevent IE from being 
removed. The Court of Appeals denied Microsoft's petition for rehearing 
on this issue but wrote that Microsoft could raise this issue on remand 
with respect to the appropriate remedy in the case. Microsoft's actions 
in allowing OEM's and/or consumers to remove the Internet Explorer icon 
and program link (and the inclusion of that concession in the 
settlement agreement) appears to address the Court's concerns regarding 
exclusion of rival browsers. Thus, any interpretation of the Court of 
Appeals decision to require that Microsoft re-engineer Windows to 
duplicate shared code functions and then remove the lE code (as the 
non-settling States interpretation does) would be inconsistent with the 
language and policy of the opinion as a whole. Further, the Court of 
Appeals found that shared library files that perform functions for both 
the operating system and the browser enhance efficiency. Opinion at 73.
---------------------------------------------------------------------------
            C. Attempted Monopolization
    The Court of Appeals reversed and dismissed the District Court's 
finding that Microsoft unlawfully attempted to monopolize the Internet 
browser market. Opinion at 62-68. The District Court had found that 
Microsoft's 1995 proposal to divide the browser market with Netscape 
created a dangerous probability of monopoly and that Microsoft's 
aggressive marketing of Internet Explorer after June 1995 also created 
a dangerous probability of monopoly. But the Court of Appeals found 
that the government had failed to properly identify the relevant market 
including reasonable substitutes for Internet browsers. Further, the 
Court also found that there was no showing of significant barriers to 
entry in any putative browser market.
    The Court's ruling on attempted monopolization has significant 
implications for future business activities in the technology sector. 
If the District Court rule had been upheld, the resulting rule would 
have made it virtually per se unlawful for successful firms to explore 
collaborative relationships with emerging competitors. Further, it 
would permit a ``dangerous probability of success'' to be proven simply 
by showing that a firm has secured a 50-60 percent market share without 
requiring any showing that the firm will ever be in a position to 
exercise market power--that is, the power to raise price and exclude 
competitors. Both propositions would have had serious adverse 
repercussions for the IT industry and would have likely blocked 
countless pro-competitive competitor collaborations that would benefit 
consumers.
            D. Tying
    The District Court found that Microsoft's inclusion of Internet 
Explorer with Windows was a per se unlawful tying arrangement. The 
Court of Appeals reversed this conclusion and ruled that per se 
analysis was inappropriate for arrangements involving platform software 
products. Because the inclusion of added functionality into software 
products has the potential to be pro-competitive and generate vast 
consumer benefits, integration in this area must be judged under the 
rule of reason. The Court of Appeals remanded the tying claim to the 
District Court for analysis under the rule of reason. Opinion at 68-90. 
Under the rule of reason, however, future antitrust plaintiffs must 
bear a heavy burden to prove that software integration unlawful.
    Historically tying arrangements have been deemed per se unlawful. 
But the Court properly recognized that software products are ``novel 
categories of dealings'' and that this case provided the ``first up-
close look at the technological integration of added functionality into 
software that serves as a platform for third-party applications. There 
being no close parallel in prior antitrust cases, simplistic 
application of per se tying rules carries a serious risk of harm.'' 
Opinion at 69. The Court also noted the benefits from software 
integration: ``Bundling obviously saves distribution and consumer 
transaction costs.'' Opinion at 73.
    In recognizing the potential benefits from integration, the Court 
then determined that the ``separate products'' test under Jefferson 
Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984)--that is, if the 
tying and tied products are ``separate products'' then the integration 
is unlawful--was not appropriate for platform software analysis.
    Finally, the Court of Appeals issued precise instructions to the 
District Court in considering the tying in the event the government 
were to pursue the claim on remand. Those instructions preclude the 
plaintiffs from arguing any theory of anti-competitive harm based on a 
precise definition of the browser market or barriers to entry in the 
putative browser market. Opinion at 87. Faced with this new legal 
standard, the United States, on September 6, 2001, announced that it 
would not pursue the tying claim on remand.
    In sum, adding new functions to existing software is a nearly 
universal form of innovation in the software industry and is essential 
in persuading customers to upgrade from their existing software to a 
new, improved version. For example, word processing programs have 
incorporated formerly separate spell-checkers and outliners, personal 
finance programs have incorporated tax functions, internet service 
providers have incorporated instant messaging features, database 
software companies are integrating their databases with their 
applications server, and e-mail programs have incorporated contact 
managers. If companies that gain a ``dominant'' position in a given 
field were barred from innovating in this manner, consumers would be 
denied new benefits that result from integration, and the software 
industry would stagnate. The Court of Appeals rejection of a per se 
rule for platform software integration, and the government's subsequent 
decision to drop that claim on remand, insures that technological 
innovation will be permitted to continue and provide consumers 
additional benefits.
            E. Remedy
    The Court of Appeals fundamentally altered the basis of liability 
found by the District Court and thus the structural and conduct 
remedies imposed by the lower court were reversed. Opinion at 106. The 
Court of Appeals correctly noted that an antitrust remedy must focus on 
restoring competition and the District Court must explain how its 
remedy will do so. Opinion at 99-100. Central to the inquiry of how to 
restore competition is the identification of specific injury to the 
competitive process by the defendant's behavior. Thus, the Court of 
Appeals directed the District Court on remand to make a finding of a 
``causal connection'' when assessing an appropriate remedy. Opinion at 
105.
    While the Court of Appeals left the District Court with a large 
measure of discretion in fashioning an appropriate remedy on remand, 
there are repeated and clear directions that the evidence necessary to 
sustain a structural remedy or extensive conduct remedy must be very 
strong. Opinion at 105-06. Faced with this language, the United States 
announced on September 6, 2001 that it would no longer seek break up of 
Microsoft. The individual States have also dropped their demand for a 
structural remedy.
    The remaining issue for the new District Court judge on remand, 
Colleen Kollar-Kotelly, is to fashion an appropriate remedy for the 
monopoly maintenance findings that were affirmed by the Court of 
Appeals. Here too the Court of Appeals has provided some general 
guidance. The appropriate remedy for Microsoft's antitrust violations 
may be ``an injunction against continuation of that conduct.'' Opinion 
at 105. The language cited by the non-settling States that the unlawful 
monopoly ``must be terminated'' would only apply in the context of a 
demand for structural relief. The non-settling States have not made a 
demand for structural relief, nor have they made a showing of a causal 
connection between Microsoft's unlawful behavior and actual harm in the 
marketplace.
               ii. summary of the proposed final judgment
    After the November 6, 2001 Proposed Final Judgment was announced 
many of Microsoft's competitors complained that the settlement was too 
lenient. The settlement, however, should not be designed as a wish list 
for Microsoft's competitors. The settlement should fairly address the 
areas of liability found by the Court of Appeals. Anything less would 
encourage Microsoft and other companies to engage in anticompetitive 
conduct in the future; anything more would inappropriately imperil the 
technology marketplace, cause harm to consumers, and likely be struck 
down by the Court of Appeals. Additionally, the settlement necessarily 
takes into account the fact that the issue of causation has not yet 
been decided by the Court. In light of the scope of the Court of 
Appeals decision and the uncertainty facing both sides from further 
litigation, the November 6 Proposed Final Judgment is a reasonable 
compromise of the antitrust litigation.
    The November 6 Proposed Final Judgment addresses the liability 
issues in the monopoly maintenance section of the Court of Appeals 
decision, and correctly does not seek to impose a remedy related to 
other areas in which Microsoft prevailed on appeal--attempted 
monopolization and tying.
    First, the settlement prohibits Microsoft from retaliating against 
any OEM because of the OEM's participation in promoting or developing 
non-Microsoft middleware or a non-Microsoft operating system. This 
provision takes the ``club'' out of Microsoft's hand and prevents the 
company from using anticompetitive means to discourage OEM's from 
promoting or preventing rival software from being developed or 
installed on Windows desktop. This anti-retaliation provision deals 
head on with most of the conduct the Court of Appeals found to be 
illegal in the monopoly maintenance section of its June 28, 2001 
opinion.
    Second, Microsoft is obligated to adhere to one uniform license 
agreement for Windows with all OEM's and the royalty for the license 
shall be made publicly available on a web site accessible by all OEM's. 
The price schedule may vary for volume discounts and for those OEM's 
who are eligible for market development allowances in connection with 
Windows products. This allows Microsoft to continue to compete in the 
middleware market with other middleware manufacturers and this 
competition will continue to benefit consumers.
    Third, OEM's are permitted to alter the appearance of the Windows 
desktop to add icons, shortcuts and menu items for non-Microsoft 
middleware, and they may establish non-Microsoft programs as default 
programs in Windows. Consumers also have the option of removing the 
interface with any Microsoft middleware product.
    Fourth, Microsoft must reveal the API's used by Microsoft 
middleware to interoperate with the Windows operating system. Microsoft 
must also offer to license its intellectual property rights to any 
entity who has need for the intellectual property to insure that their 
products will interoperate with the Windows operating system.
    These central features of the settlement insure that other 
companies have the ability to challenge Microsoft products, both in the 
operating system and middleware / applications markets. Consumers and 
OEM's have far greater freedom to install and use non-Microsoft 
products, Microsoft is prohibited from retaliating against any entity 
who promotes non-Microsoft programs, and all companies have equal 
access to Microsoft API's and technical information so that non-
Microsoft middleware has the same opportunity to perform as well as 
Microsoft middleware.
    The enforcement mechanisms of the settlement will enable the 
plaintiffs to insure Microsoft's compliance with the agreement. 
Representatives of the United States and the States may inspect 
Microsoft's books, records, source code or any other item to insure 
compliance with the settlement terms. In addition, an independent three 
person technical Committee will be established to insure that Microsoft 
complies with all terms of the settlement agreement. The technical 
Committee will have full access to all Microsoft source code, books and 
records, and personnel and can report to the United States and/or the 
States any violation of the settlement by Microsoft.
      iii. summary of the non-settling states' december 7 proposal
    While the November 6 Proposed Final Judgment goes beyond the 
liability found by the Court of Appeals in some areas (i.e., by 
requiring Microsoft to disclose its confidential technical information 
to software developers), the non-settling States' proposal filed on 
December 7, 2001 goes so far beyond the judgment as to bear little 
relationship to the Court of Appeals decision.
    The centerpiece of the states' remedy demand is that Microsoft be 
compelled to create and market a stripped down version of its Windows 
operating system that would not include many of the features that 
current versions of Windows do include. Since consumers can now easily 
remove Microsoft features from their desktop and OEM's are free to 
place non-Microsoft programs on the desktop, it is difficult to see how 
this requirement would benefit consumers.
    Instead of giving consumers more choices of software products, this 
unwarranted intrusion into marketing and design decision by the non-
settling States would cause further delays in the development of 
software created to run on XP, with developers waiting to see which 
version would become the standard. Such delays would further postpone 
the salutary effects of XP on the computer market. It would also hamper 
programmers' ability to take full advantage of technological 
improvements in Windows, creating a marketplace in which the same 
software applications would not perform equally. This remedy would 
balkanize the computing industry and would undermine the benefits 
consumers obtain from a standardized operating platform.
    In addition to the stripped down version of Windows, the December 7 
proposal would also require Microsoft to continue licensing and 
supporting prior versions of Windows for five years after the 
introduction of a new version of Windows. The primary effect of this 
requirement is to impose unnecessary costs upon Microsoft (that would 
likely be passed on to consumers) and reduce the incentives for 
Microsoft to improve the operating system. This disincentive to 
Microsoft to make technological advances would ripple throughout the 
software industry as applications developers would not have an 
advancing platform to write software to.
    The non-settling States remedy proposal also includes a variety of 
restrictions that will have little if any quantifiable benefit to 
consumers but which will simply advance the interests of Microsoft 
competitors. Consumers and OEM's currently have full ability and 
freedom to include Java software on their computers; the States' 
requirement that Microsoft carry Java on all copies of Windows does not 
provide consumers or OEM's with any more choice than they already have. 
Similarly, the requirement that Microsoft continue to produce an Office 
Suite for Macintosh interferes with natural market forces that direct 
resources to the best use and may actually preclude the success of 
competing applications software. Directing Microsoft to produce and 
support any software without regard for market forces is likely to harm 
consumers, not help them. Moreover, the November 6 Proposed Judgment 
fully addresses and prevents Microsoft from retaliating or taking any 
anticompetitive actions against Apple.
    Advances in technology are frequently made as a result of joint 
ventures between competitors. The Department of Justice and the Federal 
Trade Commission have recently released guidelines for the formation of 
such joint ventures. Notwithstanding the recognition by these 
enforcement agencies that most joint ventures are pro-competitive, the 
non-settling States seek to restrict Microsoft from entering into joint 
ventures whereby the parties to the joint venture agree not to compete 
with the product that is the subject of the joint venture. This 
restriction will chill innovation and prohibit countless consumer 
welfare enhancing arrangements. Further, this proposal flatly ignores 
the fact that the Court of Appeals found in Microsoft's favor on the 
issue of the alleged illegality of its joint venture proposal to 
Netscape.
    The most harmful of the remaining remedy proposals include those 
that require the extensive and mandatory sharing of Microsoft's 
intellectual property. The non-settling States proposals in this regard 
go well beyond those in the November 6 Proposed Final Judgment and 
appear to be aimed at benefitting Microsoft's competitors rather than 
insuring a level playing field for all participants in the software 
industry. 1n the absence of compelling justification for wholesale and 
forced disclosure of a company's intellectual property, the harm caused 
by such disclosure is unwarranted and harmful to the entire technology 
marketplace. The vigorous protection of intellectual property has 
fueled the rapid and dynamic growth of the technology industry. Actions 
that erode protections for intellectual property should be viewed with 
great trepidation.
    The long term effects of the conduct restrictions proposed by the 
non-settling States encourage continued litigation, rather than 
competition in the marketplace.
                               conclusion
    The Microsoft settlement and any remedies imposed must be judged in 
the context of the Court of Appeals opinion. The non-settling States 
remedial proposals go well beyond the liability found by the Court of 
Appeals. The Microsoft case, and this Committee hearing, should not be 
a forum for any government actor, no matter how well-intentioned, to 
try to reconfigure the marketplace based on guesswork and supposition. 
History has told us time and time again that government's efforts to 
micro-manage markets are far more likely to fail than to succeed. 
Consumers stand to lose the most.
    The Plaintiffs have never challenged Microsoft's acquisition of its 
dominant position in the operating system market. Microsoft was 
propelled into this position as a result of consumer choice. Consumers 
derive great benefit from the adoption of a standardized operating 
system platform. State antitrust officials and the courts should be 
wary of imposing remedies that would interfere with the positive 
network effects resulting from the large number of consumers who choose 
Windows.
    Government intervention in the marketplace can only be justified if 
the intervention is a reasonably accurate proxy for the actions that 
would occur in a competitive market. Otherwise, the unintended 
consequences of well-meaning government intervention are very likely to 
do more harm than good. It is simply beyond the capability of the 
courts and regulators to predict the direction and development of 
almost any market, let alone the highly dynamic markets in the 
technology industry. This counsels against the extensive and rigid 
conduct restrictions proposed by the non-settling States.

                                

    Statement of Dr. Mark N. Cooper, Director of Research, Consumer 
                Federation of America, Washington, D.C.

    Mr. Chairman and Members of the Committee,
    My name is Dr. Mark Cooper. I am Director of Research of the 
Consumer Federation of America. The Consumer Federation of America is 
the nation's largest consumer advocacy group, composed of two hundred 
and seventy state and local affiliates representing consumer, senior 
citizen. low-income, labor, farm, public power, and cooperative 
organizations, with more than fifty million individual members.
    I greatly appreciate the opportunity to appear before you today. 
This hearing on ``The Microsoft Settlement: A Look To the Future'' 
focuses public policy attention on exactly the right questions. What 
should the software market look like? Does the Court of Appeals' ruling 
provide an adequate legal foundation for creating that market? Is it 
worth the effort? What specific remedies are necessary to get the job 
done?
    Our analysis of the Microsoft case over four years leads us to 
clear answers.\1\
---------------------------------------------------------------------------
    \1\ The Consumer Case Against Microsoft (October 1998); The 
Consumer Cost of the Microsoft Monopoly: $10 Billion and Counting 
(January 1999); Economic Evidence in the Antitrust Trial: The Microsoft 
Defense Stumbles Over the Facts (March 18, 1999); Facts Law and 
Antitrust Remedies: Time for Microsoft to be Held Accountable for its 
Monopoly Abuses (May 2000) (Attachment A); Mark Cooper, ``Antitrust as 
Consumer Protection in the New Economy: Lessons from the Microsoft 
Case,'' Hasting Law Journal, 52 (April 2001) (see Attachment B); 
Windows XP/.NET: Microsoft's Expanding Monopoly, How it Can Harm 
Consumers and What the Courts Must Do to Preserve Competition 
(September 26, 2001) (see Attachment C).
---------------------------------------------------------------------------
   We reject the claim that consumers must accept monopoly in 
        the software industry. Real competition can work in the 
        software market, but it will never get a chance if Microsoft is 
        not forced to abandon the pervasive pattern of anticompetitive 
        practices it has used to dominate product line after product 
        line.
   The antitrust case has revealed a massive violation of the 
        antitrust laws. A unanimous decision of the Appeals Court 
        points the way to restoring competition.
   The public interest demands that we try.
   The proposed Microsoft-Department of Justice settlement is 
        far too weak to accomplish that goal. The litigating states' 
        remedial proposals are now the only chance that consumers have 
        of enjoying the benefits of competition in the industry.
Real Competition In The Software Industry Is The Goal
    The defenders of the Microsoft monopoly say that consumers cannot 
hope for competition within software markets because this is a winner-
take-all, new economy industry. In this product space companies always 
win the whole market or most of it, so anything goes. In fact. 
Microsoft's expert witness has written in a scholarly journal that:
          With ``winner take most'' markets.  .  . [If] there can be 
        only one healthy survivor, the incumbent market leader must 
        exclude its competition or die.  .  . There is no useful 
        nonexclusion baseline, which the traditional test for predation 
        requires.  .  .
          As to intent, in a struggle for survival that will have only 
        one winner, any firm must exclude rivals to survive.  .  .  . 
        In a winner take most market, evidence that A intends to kill B 
        merely confirms A's desire to survive.\2\
---------------------------------------------------------------------------
    \2\ Richard Schmalensee, ``Antitrust Issues in Schumpeterian 
Industries,'' 90 American Economic Review 192-194 (2000).
---------------------------------------------------------------------------
    By that standard, if a monopolist burned down the facilities of a 
potential competitor, it might be guilty of arson and other civil 
crimes, but it would not be guilty of violating the antitrust laws. 
Consumers should be thankful that both the trial court and the Appeals 
Court flatly rejected this theory of the inevitability of monopoly and 
upheld the century old standard of competition.
    In fact, the products against which Microsoft has directed its most 
violent anticompetitive attacks represent the best form of traditional 
competition--compatible products that operate on top of existing 
platforms seeking to gain market share by enhancing functionality and 
expanding consumer choice.\3\ Microsoft fears these products and seeks 
to destroy them, not compete against them, precisely because they 
represent uncontrolled compatibility, rampant interoperability and, 
over the long-term, potential alternatives to the Windows operating 
system.
---------------------------------------------------------------------------
    \3\ Mark Cooper, Antitrust and Consumer Protection, pp. 863-880.
---------------------------------------------------------------------------
    That is why we concluded over three years ago that this case is not 
about new high tech industries in which you have to live with a 
monopoly, it is about old dirty business practices that drive up 
prices, deny consumers choice and slow innovation by allowing the 
monopolist to control the pace of product development.\4\ If a monopoly 
were really the natural state of affairs in this market, then Microsoft 
would not have had to engage in so many unnatural acts to preserve it.
---------------------------------------------------------------------------
    \4\ The Consumer Case Against Microsoft, pp. 53-59.
---------------------------------------------------------------------------
    More importantly. we concluded that consumers need not fear real 
competition in the software industry. We can expect a competitive 
market to be far more efficient and consumer friendly than the 
Microsoft monopoly. There are a variety of very real consumer costs 
associated with the Windows operating system monopoly--from product 
complexity and PC homogeneity to viruses, privacy threats and an 
endless cycle of costly upgrades--even apart from the substantial 
overcharges Microsoft has for years imposed on consumers. There is 
every reason to believe that consumers would receive better products at 
lower prices if the anticompetitive practices were eliminated. The 
ability of developers to create products that are compatible, but 
driven out of the market by Microsoft's anticompetitive tactics, 
undermines the claim and lays to rest any fears that competition will 
cause computing to become more difficult or confusing.
An Effective Remedy is Fully Supported and is Required by the Trial 
        Record
    The claim by Microsoft and others that the court record will not 
support a strong remedy is simply wrong. The Court of Appeals not only 
reaffirmed our belief in real competition, but it pointed the way to 
competition by using the strongest terms possible to describe what the 
remedy must do.
          The Supreme Court has explained that a remedies decree in an 
        antitrust case must seek to `unfetter a market from 
        anticompetitive conduct,' Ford Motor Co., 405 U.S. at 577, to 
        `terminate the illegal monopoly, deny to the defendant the 
        fruits of its statutory violation, and ensure that there remain 
        no practices likely to result in monopolization in the future,' 
        United States v. United Shoe Mach. Corp., 391 U.S. 244, 250 
        (1968): see also United States v. Grinnell Corp., 384 U.S. 563, 
        577 (1966).\5\
---------------------------------------------------------------------------
    \5\ U.S. v. Microsoft, 253 F.3d 34, 103 (D.C. Cir. 2001) (en banc).
---------------------------------------------------------------------------
    A unanimous en banc Court of Appeals upheld the charge of 
monopolization. It explicitly affirmed Microsoft's liability under 
Section 2 of the Sherman Act, the vast bulk of the specific conduct 
challenged by the Department of Justice, and nearly every one of the 
trial court's hundreds of factual findings. As a result, it held a 
broad array of anticompetitive Microsoft practices to be illegal, 
constituting a massive violation of the antitrust law. Table 1 
identifies those anticompetitive practices that were directly linked to 
the violations of law.
    Soon after the district court's Conclusions of Law were released, 
we considered possible remedies.\6\ While we preferred a break up, we 
also identified a series of conduct remedies that would address the 
anticompetitive problems. The litigating states have risen to the task 
admirably. As described in Table 2, the litigating states' remedial 
proposals link each relief measure directly to a finding of fact and a 
conclusion of law. They included virtually every measure we deemed 
necessary.
---------------------------------------------------------------------------
    \6\ Facts, Law and Remedies
---------------------------------------------------------------------------
An Effective Remedy is Well Worth Fighting For
    Based on the record of the lower court and the ruling of the D.C. 
Circuit, this case demands a strong remedy. Claims that a weak remedy 
sooner is better than a strong remedy later, or that the cost of 
pursuing a strong remedy are too great, are absurd.
    Our analysis leads us to conclude that an unfettered software 
market will produce a flowering of innovations and consumer-friendly 
products that are well worth waiting for. More importantly, we have 
estimated that monopoly pricing by Microsoft has cost consumers between 
$10 and $20 billion.\7\ An amicus brief filed with the court put the 
figure at $25 to $30 billion.
---------------------------------------------------------------------------
    \7\ Cooper, Antitrust as Consumer Protection, pp. 840-862.
---------------------------------------------------------------------------
    Of equal importance are the non-economic and indirect ways in which 
Microsoft's anticompetitive practices become burdens on the consumer. 
The trial record demonstrates. with extensive evidence. repeated 
instances in which Microsoft's anticompetitive practices have the 
effect of denying consumers choice, impairing quality, and slowing 
innovation.
    Microsoft forces computer manufacturers to buy one bundle with all 
of its programs preloaded. It biases the screen location. start 
sequences and default options making it difficult if not impossible to 
choose non-Microsoft products. Products tailored to meet individual 
consumer needs (consumer friendly configurations and small bundles) are 
unavailable. Because of Microsoft's leveraging of the operating system, 
superior products are delayed or driven from the marketplace. Existing 
libraries of content (documents, movies, audio files) are rendered 
obsolete. Resources are denied, investment in competing products is 
chilled, and technology is slowed. Valuable products never get to 
market because of the barriers erected by Microsoft and eventually 
competing products disappear from the market.
    Past overcharges cannot be recovered in the Federal case nor can 
innovations that were slowed or stopped, but future abuse must be 
prevented. We are convinced that an effective remedy will trigger an 
explosion of innovation and economic activity from thousands of 
companies that have been shackled by the fear of retribution or 
expropriation by Microsoft. Unleashing these companies to innovate in a 
vigorously competitive market is the best way to stimulate economic 
activity and to put this industry on a solid long-term growth path. 
Settling for a short term fix, in the name of economic stimulus, that 
fails to address the underlying problem will create a chronic condition 
of underperformance, leaving the industry far short of achieving it 
true potential.
    We are also certain that the Microsoft-DOJ settlement will not do 
the job but make matters worse. Our review of Windows XP, from a 
competitive point of view, confirms our conclusion from four years ago 
that ``the threat to the public has grown with each subsequent conquest 
of a market.''\8\
---------------------------------------------------------------------------
    \8\ The Consumer Case Against Microsoft, p. 54, see also pp. 34-39 
for a discussion of Microsoft's attack on the Internet, a theme that is 
picked up in Windows XP/.NET.
---------------------------------------------------------------------------
    There is no doubt that effective law enforcement is definitely in 
the consumer's best interest and that the Microsoft-Department of 
Justice settlement is not. Based on the legal record, the weakness of 
the remedy, and the stakes for consumers, the court must find that the 
proposed Microsoft-Department of Justice settlement is not in the 
public interest. The court should certainly not reach any conclusion 
about the remedy that would best serve the public before the litigating 
states' remedial proposal has been fully vetted through the trial 
process.
Anticompetitive Practices Must Be Rooted Out At All Stages Of the 
        Software Value Chain--Creation, Distribution And Use
    To describe what must be done in practical terms, I like to use the 
business school concept of the value chain. To unfetter the market from 
anticompetitive conduct, terminate the illegal monopoly and ensure that 
there remain no practices likely to result in monopolization in the 
future, the remedy must address the creation, distribution and use of 
software. In order for new software to have a fair chance to compete 
the remedy must
   create an environment in which independent software vendors 
        and alternative platform developers are free to develop 
        products that compete with Windows and with other Microsoft 
        products,
   free computer manufacturers to install these products 
        without fear of retaliation, and
   enable consumers to choose among them with equal ease as 
        with Microsoft products.
    The Microsoft-Department of Justice settlement is an abysmal 
failure at all three levels. Under the proposed Microsoft-Department of 
Justice settlement, Microsoft will be undeterred from continuing its 
anticompetitive business practices.
    Independent software vendors and competing platform developers will 
get little relief from Microsoft's continual practice of hiding and 
manipulating interfaces. Microsoft has the unreviewable ability under 
the proposed settlement to define Windows itself, and. therefore to 
control whether and how independent software developers will be able to 
write programs that run on top of the operating system. The definitions 
of software products and functionalities and the decisions about how to 
configure applications programming interfaces are left in the hands of 
Microsoft to such an extent that it will be encouraged to embed the 
critical technical specifications deeply into the operating system and 
thereby prevent independent software developers from seeing them. To 
the extent that Microsoft would actually be required to reveal 
anything, it would be so late in the product development cycle that 
independent software developers would never be able to catch up to 
Microsoft's favored developers. Furthermore, the Court of Appeals 
recognized that the Microsoft monopoly is protected by a large barrier 
to entry, because many crucial applications are available only for 
Windows. The proposed settlement does nothing to undermine this 
``applications barrier to entry,'' for instance by requiring the 
porting of Microsoft Office to other PC platforms. Thus, the DOJ 
proposal won't restore competition; it all but legalizes Microsoft's 
previous anticompetitive strategy and, in reality, institutionalizes 
the Windows monopoly
    Computer manufacturers will not be shielded from retaliation by 
Microsoft. The restriction on retaliation against computer 
manufacturers leaves so many loopholes that any OEM who actually went 
against Microsoft's wishes would be committing commercial suicide. 
Microsoft is given free reign to favor some, at the expense of others 
through incentives and joint ventures. It is free to withhold access to 
its other two monopolies (the browser and Office) as an inducement to 
favor the applications that Microsoft is targeting at new markets, 
which invites a repeat of the fiasco in the browser wars. Retaliation 
in any way, shape, fit, form, or fashion should be illegal. The 
prohibition on retaliation must specifically identify price and non-
price discrimination and apply to all monopoly products.
    Consumer sovereignty is not restored by the settlement. Because the 
settlement does not require removal of applications, only the hiding of 
icons, Microsoft preserves the ability to neuter consumer choice. The 
boot screen and desktop remain entirely tilted against competition. 
Microsoft still is allowed to be the pervasive default option and 
allowed to harass consumers who switch to non-Microsoft applications 
and still gets to sweep those applications off the desktop, forcing 
consumers to choose them over and over.
Given Microsoft's Past Behavior, Enforcement Must Be Swift and 
        Punishment for non-Compliance Must be Substantial
    After the court identifies remedies that can address these 
problems, it must enforce them swiftly and aggressively. Microsoft has 
shown through a decade of investigations, consent decrees and 
litigation that it will not be easily deterred from defending and 
extending its monopoly. It behaves as though it believes its expert 
witness and has the right to do whatever it wants to kills off its 
competition. Every one of the illegal acts that led to the District 
Court findings and the unanimous appeals court ruling of liability took 
place after Microsoft signed the last consent decree.
    With three monopolies to use against its potential competitors (the 
Windows operating system, the Internet Explorer browser, and Office in 
desktop applications), enforcement must be swift and sure, or 
competition will never have a chance to take root. The proposed 
settlement offers virtually nothing in this regard. The technical 
Committee that is set up to (maybe) hear complaints can be easily tied 
up in knots by Microsoft because of the vague language of the 
settlement. If Microsoft violates the settlement nothing happens to the 
company, except that it must ``endure'' the annoyance of putting up 
with this weak settlement for a couple more years.
The Future of Effective Antitrust Demands A Strong Remedy
    I pointed out several months before the Court of Appeals ruled that 
we fully support a rule of reason for tying in the software industry. 
as long as the rules are reasonable.\9\ The Microsoft-Department of 
Justice settlement is not worthy of the thoughtful ruling of the Court 
of Appeals. Indeed, this Committee should be deeply troubled by the 
proposed settlement. By proposing such a weak remedy for such a strong 
case and well-articulated ruling, it could do permanent damage to the 
antitrust laws. `shy bother to bring a case if law enforcement is going 
to drop the ball at the last moment?
---------------------------------------------------------------------------
    \9\ Id., p. 1.
---------------------------------------------------------------------------
    The Consumer Federation of America is procompetitive when it comes 
to market structure and generally argues for a rule of reason based on 
fundamentals of economic cost-benefits analysis. However, good consumer 
economic analysis demands that the rule of reason be based on 
reasonable rules. The analytic framework must be able to comprehend 
basic empirical facts in a manner that coherently and realistically 
integrates economic structure, conduct and performance. There should be 
no presumptions in favor of, or against business. The discount rate 
should reflect the real rate of interest that consumers can earn. The 
value of a person's time and risk of harm should reflect the economic 
and intrinsic value of life. The Microsoft case rewards this pragmatic 
approach to policy analysis handsomely.
    I greatly appreciate the opportunity to appear before you today. I 
look forward to coming back after the trial court hands down a serious 
remedy based on the proposal laid before it by the litigating Attorneys 
General. I am confident that the court will reject the Microsoft-
Department of Justice settlement because it does not do justice to 
competition, consumers or the clear and insightful conclusions of the 
Court of Appeals Court--in short it is not in the public interest.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


 Statement of Mark Havlicek, Digital Data Resources, Inc., Des Moines, 
                                  Iowa

    Thank you, Chairman Leahy and distinguished Members of the 
Committee including my own Senator Grassley. I am pleased to contribute 
my comments to your hearing on ``The Microsoft Settlement: A Look to 
the Future.'' My name is Mark Havlicek and I am the President of 
Digital Data Resources, Inc. in Des Moines, Iowa. I have been actively 
involved in the technology industry for several years, and it is my 
hope that the Microsoft case will be settled.
    The economic outlook for 2002 is very concerning. From coast to 
coast, revenue growth has slowed, spending is exceeding budgeted 
levels, and many states are looking at large budget cuts. My own state 
of Iowa is in the middle of a terrible budget crisis.
    After the events of September 11, we saw a dramatic plunge in the 
technology sector. Instead of being tied up in court, technology 
entrepreneurs should at work developing products and charting new 
territory with never before imagined products and services. Given the 
opportunity and free of unnecessary hurdles to progress, technology 
companies can build our economy back up to record levels.
    Giants like Apple, IBM, and Microsoft provide a stable environment 
for the myriad small firms, like mine, to create, develop, and release 
new cutting-edge technologies and employ additional people in good 
paying careers. Small companies like my own, work in concert, and 
competition at times, with these giants. This mutually dependent 
relationship is the lifeblood of our industry and a driving force 
behind our growth.
    Over the past 20 years, we have seen computers go from the size of 
a refrigerator to the size of a deck of cards. And in tandem with those 
leaps forward, we have seen declining prices, better and faster 
technology, and increasingly more efficient methods of delivery to 
consumers.
    It takes a competitive, entrepreneurial spirit to survive in this 
exceptionally aggressive industry of ours, especially in the case of 
small or emerging businesses. We spend our days watching competitors, 
finding markets, and keeping a watchful eye on the economy. And it 
seemed the storm has passed, both figuratively and in the eyes of the 
stock market, when a settlement was announced last month.
    But the states, including my own state of Iowa, which remain 
involved have argued for tougher enforcement provisions, including a 
court-appointed ``special master'' to oversee Microsoft's compliance. 
And we have found through experience that there is no remedy discrete 
to Microsoft when it's the nucleus of a tech sector that operates as 
its own economy.
    These states are not right to push ahead for further prosecution of 
Microsoft. The proposed settlement is sufficient to address the 
concerns of business people like me who are in the technology industry 
and are most affected. Companies like mine strive to be similar to 
Microsoft and we are discouraged by the hold-out states position on 
further action. It seems to me to be a strong disincentive to progress 
and entrepreneurial achievement.
    The time to take a hard line on successful companies like Microsoft 
is over. The hold-out states are holding out to the detriment of their 
state economies and our national economy at a time when actions like 
this are not at all useful.
    It is a frightening prospect to see another dollar of precious 
development resources diverted to paying attorney's fees instead of 
rippling through our industry. Money that could have launched a new 
product or created new opportunities for a small business on the brink 
instead has disappeared into the abyss of this lawsuit. The settlement 
is a positive step in putting it all behind us and opening a new 
chapter in the life of the technology industry.
    I applaud Assistant Attorney General Charles James for his role in 
bringing the case this far. The settlement agreement is a strong one. 
It will have an enormous, positive impact on the future of my company 
and the entire software industry. My colleagues and I hope we can rely 
on your support. Thank you, Senators, for the opportunity to provide 
this statement at such a critical for our nation.
    Thank You.

                                

   Statement of Dave Baker, Vice President for Law and Public Policy 
                    EarthLink Inc., Atlanta, Georgia

    My name is Dave Baker and I am Vice President for Law and Public 
Policy with EarthLink. EarthLink is the nation's 3rd largest Internet 
Service Provider, bringing reliable high-speed internet connections to 
approximately 4.8 million subscribers every day. Headquartered in 
Atlanta, EarthLink provides a full range of innovative access, hosting 
and e-commerce solutions to thousands of communities over a nationwide 
network of dial-up points of presence, as well as high-speed access and 
wireless technologies.
    EarthLink is concerned with the potential for Microsoft to use its 
affirmed monopoly position in operating systems to leverage its 
position in innovative Internet services provided by Internet Service 
Providers (ISPs) including Internet access and associated services.
    The proposed Justice Department settlement with Microsoft allows 
them to continue to restrict competition and choice in ISP services by 
failing to classify e-mail client software and Internet access software 
as ``middleware''. By not including e-mail client and internet access 
software in the definition of middleware, this proposed settlement 
allows Microsoft to force OEMs to carry Microsoft's own ISP service, 
Microsoft Network (MSN), while restricting them from carrying competing 
e-mail client software or internet access software. The federal 
settlement also allows Microsoft to prohibit OEMs from removing the MSN 
from their products.
    The alternate settlement proposed by nine States and the District 
of Columbia would define middleware to include e-mail client software 
and Internet access software, thereby preserving competition in these 
markets. This distinction in the definition of middleware makes a huge 
difference given the diverse nature of the ISP marketplace. Many ISPs 
will never find a place on the Microsoft desktop if Microsoft can 
prohibit OEMs from including competing e-mail client software and 
Internet access software, or if Microsoft is able to make such software 
incompatible with the Windows operating system.
    ISPs provide distinct and valuable services beyond mere Internet 
connectivity. For example, ISPs provide specialized content, web 
hosting, e-commerce, content specialized for wireless access, and other 
innovative new products. ISPs provide free local computer and Internet 
classes for their customers, include local content on their home page, 
or provide free connections for community groups. EarthLink, while 
serving a broad range of users across the country, has made greater 
privacy protection a distinguishing feature of its ISP service. This 
diverse choice of service and source of future innovation is at risk if 
Microsoft is able to leverage its existing monopoly power in operating 
systems to all but force consumers to use its Internet access service, 
MSN, at the expense of other choices in internet service.
    Over the past few years, Microsoft has bundled its internet service 
more and more closely with succeeding versions of the Windows operating 
system. This has allowed Microsoft to constrict consumer choice in 
Internet access providers. In Windows 98, consumers had a choice of 
several ISPs from which to select for Internet access. Each ISP was 
listed in the same manner, with equal sized boxes on a referral server 
screen. In Windows Me, the MSN butterfly icon was the only ISP icon 
featured right on the desktop, giving it an advantage shared by no 
other ISP. Consumer had to click down through several screens to find 
other ISPs. Now, Windows XP has a dialogue boxes that pops up and 
several times to try to sway consumers to sign up for MSN internet 
service. While it is possible to select another ISP, this choice is 
buried and requires greater effort and diligence on the part of the 
consumer. This illustrates how Microsoft can use its control of the 
desktop to promote its own Internet access and related content, 
applications and services.
    Under the proposed federal settlement, even this limited choice can 
be eliminated by Microsoft, since they would be free to restrict OEMs 
from offering other ISPs on the desktop or from removing Microsoft's 
own icons from the desktop.
    On a related topic, Microsoft recently offered to settle numerous 
lawsuits by donating computer equipment to schools. Apple Computer has 
raised concerns that this donation would give Microsoft an 
inappropriate advantage in gaining greater market share for its 
operating system in the competitive school marketplace. EarthLink is 
also concerned that Microsoft would use the proposed computer donations 
(a good thing) to access with equipment and operating software. This 
would again unfairly steer consumers, including as here those least 
able to exercise choice in their internet applications, into using just 
associated Microsoft products.
    We note that the E-Rate, the federal grant program for school 
connectivity, requires that schools be allowed to purchase Internet 
access from a range of competitive providers. The government's clear 
intent is for schools to have a choice of competitive Internet access 
providers, in order to promote the broadest selection of services, 
diversity and choice of features, and lowest prices for Internet 
access. This intent would be undermined if Microsoft uses its proposed 
computer donations as a ``Trojan horse'' to install yet more of its own 
e-mail client and Internet access software. We encourage the 
preservation of choice for these schools and their students in their 
selection of Internet access and related services.
    EarthLink is concerned that just as Microsoft used its Windows 
operating system monopoly to force consumers to use the Microsoft 
browser, Internet Explorer, at the expense of competitors such as 
Netscape Navigator, Microsoft is now seeking to use the same leverage 
to force consumers to use their Internet service providers, MSN. 
EarthLink supports the alternate settlement proposed by the nine States 
to preserve competition in the market for email client software and 
Internet access software by including these services in the definition 
of middleware. As it considers the future of the Internet marketplace, 
we encourage the Committee not to allow Microsoft to leverage its 
existing monopoly into new and evolving Internet services. Thank you 
for giving us the opportunity to share our views with the Committee.

                                

   Statement of Jay L. Himes, Chief, Antitrust Bureau, Office of the 
          Attorney General, State of New York, New York, N.Y.

    Chairman Leahy and distinguished Members of this Committee, thank 
you for inviting me to testify before you today on the important issues 
relating to the settlement of the case against Microsoft, brought by 
the Antitrust Division of the United States Department of Justice, 18 
States and the District of Columbia. New York is one of the lead States 
in this lawsuit, and we have had a central role in the matter going 
back to the investigation that led to the filing of the case.
    As the members of the Committee know, on Friday, November 2, 2001, 
the DOJ and Microsoft reached a proposed settlement of the lawsuit, 
which was then publicly announced. After further negotiations between 
Microsoft and the States, a revised settlement was reached on Tuesday, 
November 6, 2001. New York--together with the States of Illinois, 
Kentucky, Louisiana, Maryland, Michigan, North Carolina, Ohio and 
Wisconsin--agreed to the revised settlement. The remaining State 
plaintiffs--California, Connecticut, Florida, Iowa, Kansas, 
Massachusetts, Minnesota, Utah, West Virginia and the District of 
Columbia--are seeking a judicially ordered remedy, as is their right.
    I, together with an Assistant Attorney General from the State of 
Ohio, were the principal representatives of the States in the lengthy 
negotiations that led to the proposed final judgment embodying the 
settlement. Therefore, I believe that we in New York see the Microsoft 
settlement from a vantage point that others who were notin the 
negotiating room may lack. I will do my best to try to share our 
observations with the Committee. I will begin by presenting an overview 
of the lawsuit and the settlement reached. After that, I will address 
in more detail several of the central features of the settlement. Then, 
I wish to turn to the settlement process itself, particularly insofar 
as it bears on criticism of the proposed final judgment.
1. Overview of the Case and the Settlement
    In May 1998, New York, 18 other States and the District of Columbia 
began a lawsuit against Microsoft, alleging violations of federal and 
state antitrust laws.\1\ The States' case was similar to an antitrust 
case commenced that same day by DOJ, and the two cases proceeded on a 
consolidated basis. In summary, the litigation against Microsoft 
charged that the company unlawfully restrained trade and denied 
consumers choice by: (1) monopolizing the market for personal computer 
(``PC'') operating systems; (2) bundling (or ``tying'') Internet 
Explorer--Microsoft's web browser--into the Windows operating system 
used on most PCs; (3) entering into arrangements with various industry 
members that excluded competitive software; and (4) attempting to 
monopolize the market for web browsers.
---------------------------------------------------------------------------
    \1\ Subsequently, one State (South Carolina) dropped out, and 
another (New Mexico) settled earlier this year.
---------------------------------------------------------------------------
    After a lengthy trial, the District Court upheld the governments' 
claims that Microsoft had unlawfully: (1) maintained a monopoly in the 
PC operating system market; (2) tied Internet Explorer to its Windows 
operating system monopoly; and (3 ) attempted to monopolize the browser 
market. The District Court issued a final judgment breaking up 
Microsoft into two separate businesses, and ordering certain conduct 
remedies intended to govern Microsoft's business activities pending 
completion of the break-up. These remedies were stayed while Microsoft 
appealed.
    In June of this year, the Court of Appeals for the District of 
Columbia Circuit issued its decision on appeal. United States v. 
Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001). The Court of Appeals 
broadly upheld the lower court's monopolization maintenance ruling, 
although it rejected a few of the acts of monopolization found by the 
District Court including the Court's determination that Microsoft's 
overall course of conduct itself amounted to monopoly maintenance. On 
the tying claim, the Court of Appeals reversed the lower court's 
holding of an antitrust violation, and ordered a new trial under the 
rule of reason--a standard more favorable to Microsoft than the 
standard previously used by the trial court. In view of these rulings, 
the Circuit Court vacated the final judgment, including the break-up 
provisions. Finally, the Court of Appeals disqualified the trial judge 
from hearing further proceedings. Thereafter, the Court of Appeals 
denied a rehearing petition by Microsoft, and the Supreme Court 
declined to hear an appeal by Microsoft concerning the Court of 
Appeals' disqualification ruling.
    The Court of Appeals returned the case to the District Court in 
late August of this year. At that point, a new judge--Hon. Colleen 
Kollar-Kotelly--was assigned. Shortly after that, DOJ and the States 
announced their intention, in the forthcoming proceedings before the 
District Court, to refrain from seeking another break up order--and to 
focus instead on conduct remedies modeled on those included in the 
earlier District Court judgment. DOJ and the States also announced that 
they would not retry the tying claim under the rule of reason test that 
the Court of Appeals had adopted. These decisions by the government 
enforcers were made in an effort to jump-start the process of promptly 
obtaining a strong and effective remedy for Microsoft's anticompetitive 
conduct, as upheld by the Court of Appeals' decision.
    The parties appeared before Judge Kollar-Kotelly for the first time 
at a conference held on September 28, 2001. The Court directed the 
parties to begin a settlement negotiation and mediation process, which 
would end on November 2. Specifically, the Court noted that `` I expect 
[the parties] to engage in settlement discussions seven days a week 
around the clock in order to see if they can resolve this case.'' 
(Transcript of September 28, 2001 proceedings, page 5) The Court also 
adopted a detailed schedule governing the proceedings leading to a 
hearing on remedies, which the Court tentatively set for March 2002, if 
no settlement could be reached.
    The settlement process that the District Court thus set in motion 
resulted in a proposed final judgment agreed to by Microsoft, DOJ and 
nine of the plaintiff States. The overarching objective of this 
settlement is to increase the choices available to consumers (including 
business users) who seek to buy PCs by promoting competition in the 
computer and computer software industries. More specifically (and as 1 
will explain further below), the proposed final judgment includes the 
following means to increase consumer choice and industry competition:
   Microsoft will be prohibited from using various forms of 
        conduct to punish or discourage industry participants from 
        developing and offering products that compete or could compete 
        with the Windows operating system, or with Microsoft software 
        running on Windows.
   Microsoft will be prohibited from restricting the ability of 
        computer manufacturers to make significant changes to Windows, 
        thereby encouraging manufacturers to offer consumers more 
        choice in the features included in PCs available for purchase.
   Microsoft will be required to disclose significant technical 
        information that will help industry participants to develop and 
        offer products that work well with Windows, and, in this way, 
        potentially aid in the development of products that will 
        compete with Windows itself.
   Microsoft will be subject to on-site scrutiny by a specially 
        selected three person Committee, charged with responsibility to 
        assist in enforcing Microsoft's obligations under the 
        settlement, and to help resolve complaints and inquiries that 
        arise by virtue of the settlement.
    New York decided to settle the Microsoft case because we believe 
that the deal hammered out over the many weeks of negotiations will 
generate a more competitive marketplace for consumers and businesses 
throughout the country, and, indeed, throughout the world. In summary, 
the settlement that the parties have submitted to the District Court 
for approval will accomplish the following:
2. Empowering Computer Manufacturers to Offer Choices to Consumers
    First, the proposed final judgment will empower computer 
manufacturers--the ``OEMs''--to offer products that give consumers 
choice. Under the settlement, OEMs have the opportunity to add 
competing middleware to the Windows operating system in place of 
middleware included by Microsoft. (Section III, paragraphs C and H)\2\ 
Middleware here refers not only to software like the Netscape browser, 
one of the subjects of the liability trial, but also to other important 
PC functions, such as email, instant messaging, or the media players 
that enable consumers to receive audio and visual content from the 
Internet. (Section VI, paragraphs K and M)\3\ Middleware is important, 
in the context of this case, because it may help break down barriers 
that protect Microsoft's Windows monopoly.
---------------------------------------------------------------------------
    \2\ Parenthetical references are to Revised Proposed Final Judgment 
attached to the Stipulation, dated November 6, 2001 (the ``November 6 
Stipulation''), in United States v. Microsoft Corp., Civil Action No. 
98-1232 (CKK)(D.D.C.), and State of New York v. Microsoft Corp., Civil 
Action No. 98-1233 (CKK)(D.D.C.) (together ``Microsoft'').
    \3\ For ease of exposition, I refer in this testimony to 
``middleware' as a generic term. In the proposed final judgment itself, 
there are four related middleware definitions, which are associated 
with various substantive provisions in the decree. (See Section VI, 
paragraphs J, K, M, N; Section IV(A) of the Competitive Impact 
Statement, dated November 15, 2001, filed in Microsoft.)
---------------------------------------------------------------------------
    The government negotiators insisted on, and eventually obtained, a 
broad definition of middleware so that the proposed decree covers both 
existing middleware and middleware not currently in existence, but 
which Microsoft and its competitors may develop during the term of the 
decree. The reason for our pressing a broad definition is plain enough: 
the broader the definition of middleware, the more software covered by 
the settlement, and the greater the opportunity for a software product 
to develop in a fashion that challenges the Windows monopoly.
    Under the proposed decree, OEMs will have the ability to customize 
the PC's that they offer. They may, for example, add icons launching 
both competing middleware--and products that use competing middleware--
to the Windows desktop or Start menu, and to other places in the 
Windows operating system. OEMs also will have the ability to suppress 
the existence of the competing middleware that Microsoft included in 
the Windows operating system licensed to the OEM. Microsoft itself will 
have to redesign Windows to the extent needed to permit this sort of 
substitution of middleware, and to ensure that the OEMs' customization 
of Windows is honored. (Section III, paragraphs C and H)\4\
---------------------------------------------------------------------------
    \4\ PC users themselves will have a similar ability to customize 
Windows.
---------------------------------------------------------------------------
    The options available to OEMs under the settlement mean that the 
Windows desktop is up for sale. Companies offering a package of 
features that includes middleware, and middleware developers 
themselves, who desire to put their product into the hands of consumers 
can go to OEMs and buy a part of the real estate that the Windows desk 
top represents. This opportunity for additional revenue should further 
empower OEMs to develop competing computer products that offer choice 
to consumers.
    The OEMs' ability to offer consumers competing middleware is backed 
up by a broad provision that prohibits Microsoft from ``retaliating'' 
against OEMs for any decision to install competing middleware (as well 
as any operating system that competes with Windows). (Section III, 
paragraph A) This provision forbids Microsoft from altering any of its 
commercial relations with an OEM, or from denying an OEM a wide array 
of product support or promotional benefits, based on the OEM's efforts 
to offer competitive alternatives. (Section VI, paragraph C)
    Then, to back up the non-retaliation provision, Microsoft also is 
required to license Windows to its 20 largest OEMs (who comprise 
roughly 70% of new PC sales) under uniform, non-discriminatory terms. 
(Section III, paragraph B) Microsoft also is prohibited from 
terminating any of its 20 largest OEMs for Windows licensing violations 
without first giving the OEM notice and an opportunity to cure the 
alleged violation. (Section III, paragraph A)
3. Empowering Software Developers and Others to Offer Competing 
        Middleware
    Second, the proposed final judgment seeks to encourage independent 
software developers--referred to as ``ISVs''--to write competing 
middleware. This is accomplished by forbidding Microsoft from 
retaliating against any IS V based on the ISV's efforts to introduce 
competing middleware or a competing operating system into the market. 
(Section III, paragraph F) The literally thousands of ISVs in the 
industry are protected by this additional non-retaliation provision, 
and they are protected whether or not they have an on-going business 
relationship with Microsoft.
    ISVs, and many other industry participants, are further protected 
by provisions that prohibit Microsoft from entering into exclusive 
dealing arrangements relating to middleware or operating systems. 
Exclusive dealing arrangements are a device that Microsoft used to deny 
competitors access to the distribution lines needed to enable their 
products to gain acceptance in the marketplace. (Section III, 
paragraphs F, G) We have effectively closed off that practice to 
Microsoft.
4. Requiring Microsoft to Disclose Information to Facilitate 
        Interoperation
    Third, the proposed final judgment requires Microsoft to provide 
the technical information--``interfaces'' and ``protocols''--that 
industry members need to enable competing middleware to work well with 
Windows. Middleware uses functions of the Windows operating system 
through connections or ``hooks'' called ``applications programming 
interfaces''--``APIs'' for short. Microsoft will now be required to 
disclose the APIs that its own middleware uses to interoperate with 
Windows, and to provide technical documents relating to those APIs, so 
that ISVs who wish to develop competing middleware will have the 
information needed to make their products work well with Windows. 
(Section III, paragraph D)
    This is, again, a place where the broad definition of middleware, 
covering both existing and yet to be developed products, matters. 
(Section VI, paragraph J) The broader the definition, the greater the 
number of APIs that Microsoft must disclose and document. The greater 
the technical information made available, the greater the likelihood 
that industry participants will be able to develop competing middleware 
that works well on Windows.\5\
---------------------------------------------------------------------------
    \5\ Strictly speaking, if Microsoft refrains from separately 
distributing a particular middleware product included in Windows, it 
need not disclose the APIs used by that middleware product. But 
powerful business considerations militate against Microsoft adopting a 
strategy in which only purchasers of new PCs, or of boxpackaged 
versions of Windows, receive a middleware product offered by Microsoft. 
Under such a strategy, Microsoft would be unable to supply the 
middleware product to any of the millions of Windows users worldwide 
who comprise its installed user base. Microsoft would thereby put 
itself at a competitive disadvantage as suppliers of competing 
middleware offered attractive product features to the installed base of 
Windows users.
---------------------------------------------------------------------------
    The proposed decree goes beyond requiring disclosure of APIs 
between Windows and Microsoft middleware. More and more, at-home 
consumers and computer users in the workplace can obtain functionality 
that they need from either the Internet or from network servers 
operating in a business setting. This trend means that computer 
applications running on servers may be an emerging location for 
developing middleware that could challenge the Windows monopoly at the 
PC level. Thus, the settlement is designed to prevent Microsoft from 
using Windows to gain competitive advantages in the way that PCs talk 
to servers. This is accomplished by requiring Microsoft to disclose, 
via a licensing mechanism, what are called ``protocols'' used to enable 
PCs and servers to communicate with each other. (Section III, paragraph 
E)
    This particular provision--sometimes referred to as the ``client/
server interoperability'' section--was especially important to the 
States. The provision included in the November 2 version of the final 
judgment between the DOJ and Microsoft did not seem to us in New York 
to go quite as far as we felt it needed to go. As a result, this was a 
place that we and other States focused on in the negotiations leading 
to the revised settlement signed on November 6. The changes that 
resulted did not involve many words, but we believe that they enhanced 
Microsoft's disclosure obligations in this critical area.
5. The Enforcement Mechanism
    The subject matter of the Microsoft lawsuit is complex, and so too 
are many parts of the remedy embodied in the final judgment. This 
complexity creates the potential for good faith disagreement, as well 
as for intentional evasion. For this reason, from the outset of the 
settlement negotiations, New York held to the view that enforcement 
provisions going beyond those typically found in antitrust decrees 
would be needed here. We worked closely with DOJ to achieve this 
objective. What you find in the proposed final judgment is an 
enforcement mechanism that we believe is unprecedented in any antitrust 
case.
    The proposed consent decree expressly recognizes the ``exclusive 
responsibility'' of the United States DOJ and the antitrust officials 
of the settling States to enforce the final judgment against Microsoft. 
(Section IV, paragraph A (1)) To assist this federal and state 
enforcement and compliance effort, the proposed decree will create a 
three person body, the ``Technical Committee'' or ``TC.'' (Section IV, 
paragraph B) The TC is empowered, among other things: (1) to interview 
any Microsoft personnel; (2) to obtain copies of any Microsoft 
documents--including Microsoft's source code--and access to any 
Microsoft systems, equipment and physical facilities; and (3) to 
require Microsoft to provide compilations of documents, data and other 
information, and to prepare reports for the TC. (Section IV, paragraph 
B(8)(b), (c)) The TC itself is authorized to hire staff and consultants 
to carry out its responsibilities. (Section IV, paragraph B(8)(h)) 
Microsoft also is required to provide permanent office space and office 
support facilities for the TC at its Redmond, Washington campus. 
(Section IV, paragraph B(7))
    In other words, for the five year term of the decree, the TC will 
be the on-site eyes and ears of the government enforcers. The TC and 
government enforcers may communicate with each other as often as they 
need to, and the TC may obtain advice or assistance from the enforcers 
on any matter within the TC's purview. In addition, the TC is subject 
to specific reporting requirements--every six months, or immediately if 
the TC finds any violation of the decree. (Section IV, paragraph 
B(8)(e), (f)) The TC further will be expected to field and promptly 
resolve complaints and inquiries from industry members, or from 
government enforcers themselves. (Section IV, paragraph B(8)(d), 
paragraph D)
    All of this will be paid for by Microsoft, subject to possible 
review by federal and state officials, or the Court. To discourage 
Microsoft from mounting dubious court challenges to the TC's costs and 
expenses, the proposed decree authorizes the TC to recover its 
litigation expenses, including attorneys' fees, unless the Court 
expressly finds that the TC's opposition was ``without substantial 
justification.'' (Section IV, paragraph B(8)(i))
    These enforcement provisions are probably the strongest ever 
crafted in an antitrust case. Federal and state enforcers will have at 
their disposal their regular enforcement powers, which may be invoked 
at any time independent of anything that the TC may do. (Section IV, 
paragraph A(2), (4)) Meanwhile, the TC will augment these traditional 
powers in significant respects. In addition, Microsoft itself is 
required to appoint an internal compliance officer to assist in 
assuring discharge of the company's obligations under the settlement. 
(Section IV, paragraph C)
    I am mindful that concern has been expressed regarding the 
enforcement provision that ``[n]o work product, findings or 
recommendations of the TC may be admitted in any enforcement proceeding 
before the Court .  .  .  .'' (Section IV, paragraph D(4)(d)) But the 
impact of this provision should not be great. As noted, the TC may 
report to the government enforcers, who may use the TC's work to seek 
from Microsoft a consensual resolution of, for example, any non-
compliant conduct, to initiate (and inevitably shortcut) enforcement-
looking activity, to pursue leads, and for other enforcement purposes. 
Moreover, the TC's work product, once known, should be readily 
susceptible of prompt replication by enforcement officials for use in 
judicial proceedings.
6. The Settlement Process
    As the very fact of these hearings attests, the proposed settlement 
of the Microsoft case is a subject of significant public interest and 
debate. For years, many have asserted that the case itself should never 
have been filed to begin with. For these individuals, the government 
should be satisfied to get any remedy at all. We in New York profoundly 
disagree with this view. As the liability trial and appeal confirmed, 
this case was properly brought to remedy serious anticompetitive 
activity by Microsoft. The trial and appellate proceedings further 
confirmed that the antitrust laws are alive and well in technological 
industries, just as they are in other parts of our nation's economy. 
Accordingly, the public is entitled to a strong, effective remedy.
    In this regard, however, some have criticized the settlement for 
not going far enough, or for having exceptions and limitations. We 
reject this view as well.
    In announcing the decision by New York and eight other States to 
settle the case, New York Attorney General Eliot Spitzer noted that ``a 
settlement is never perfect.'' A settlement is an agreed-upon 
resolution of competing positions and objectives. Do I wish that the 
DOJ and the States had gotten more? Of course I do. Do our counterparts 
on the Microsoft side wish that they had given up less? There is no 
doubt about the answer. So, asking these questions does not take us 
very far. Settlement necessarily means compromise. It is in the nature 
of the beast.
    This particular settlement is the product of roughly five weeks of 
consuming negotiations, much of which took place under the guidance of 
two experienced mediators. I am unaware of any calculation of the total 
person-hours consumed by this effort. Certainly it was in the 
thousands, if not tens of thousands, of hours. The process required the 
two sides to explore, both internally and in face-to-face negotiations, 
a host of factors that bear on terms of the settlement eventually 
reached, such as: (1) the competitive consequences of varying courses 
of action; (2) the design, engineering and practical implications and 
limitations of various remedy approaches, as well as their impact on 
innovation incentives; (3) the issues actually framed for trial in the 
liability phase of the case and their resolution by the Court of 
Appeals; (4) the law governing remedies for the monopoly maintenance 
violation that the Court of Appeals upheld, which the District Court 
would be called on to apply in the absence of a settlement; and (5) the 
resources, effort and time otherwise needed to resolve the sharp 
factual disputes that would be presented in a full-blown remedies 
hearing. New York and the other States, as well as the DOJ, were aided 
in this process by experienced staff and retained experts.
    In the final analysis, the DOJ, New York and the other settling 
States concluded that the benefits to consumers and to the competitive 
process that are likely to result from the negotiated settlement 
reached here outweigh the uncertain remedy that a contested remedies 
proceeding might bring. In assessing the soundness of that conclusion, 
the members of the Committee should recall that the settlement's 
critics have a luxury that those of us who settled did not have: they 
have the settlement floor created by the final judgment that we have 
offered. Absent this settlement, however, a judicial remedies hearing 
had not simply potential rewards, but significant risks as well.
    During the September 28 court conference, the District Court 
expressed its views regarding the appropriate scope of the conduct 
remedies that might emerge from a judicial hearing on relief. Among 
other things, the District Court stated the following:
          The Supreme Court long ago stated that it's entirely 
        appropriate for a district court to order a remedy which goes 
        beyond a simple prescription against the precise conduct 
        previously pursued .  .  .  . The Supreme Court has vested this 
        court with large discretion to fashion appropriate restraints 
        both to avoid a recurrence of the violation and to eliminate 
        its consequences. Now, case law in the antitrust field 
        establishes that the exercise of discretion necessitates 
        choosing from a range of alternatives.
                                *  *  *
          So the government's first and most obvious task is going to 
        be to determine which portions of the former judgment remain 
        appropriate in light of the appellate court's ruling and which 
        portions are unsupported following the appellate court's 
        narrowing of liability.
          Now, the scope of any proposed remedy must be carefully 
        crafted so as to ensure that the enjoining conduct falls within 
        the number [sic, penumbra] of behavior which was found to be 
        anticompetitive. The government will also have to be cautiously 
        attentive to the efficacy of every element of the proposed 
        relief.
    (Transcript of September 28, 2001 proceedings, pages 9, 8)
    These remarks highlight risks that both sides confronted if the 
decision were made to press for a court-ordered remedy. Several 
concrete examples, from the settlement actually reached, will further 
drive home this point.
   Microsoft's API disclosure obligations, and its obligations 
        to permit OEMs to customize the Windows desktop and operating 
        system more generally, revolve around a series of related 
        middleware definitions that the parties agreed to. Absent a 
        settlement, there could no assurance that the courts would 
        adopt middleware definitions as broad as those that DOJ and the 
        settling States negotiated.
   The liability trial in the case centered on Microsoft's 
        conduct directed to efforts by Netscape and Sun to get 
        Netscape's web browser and Sun's Java technologies installed on 
        individual PCs. Plaintiffs' theory of the case--which the trial 
        and appellate courts upheld--was that these forms of middleware 
        could, if sufficiently pervasive at the PC level, erode the 
        applications barrier to entry that protects Microsoft's Windows 
        monopoly. Microsoft therefore set out to exclude this 
        middleware from PCs. In the settlement negotiations leading to 
        the client/server interoperability provision, the government 
        negotiators argued that applications running at the server 
        level can be analogous to middleware running at the PC level. 
        On this approach, middleware developed at the server level 
        could also break down the applications barrier to entry into 
        the PC operating system market. Therefore, the remedy in this 
        case requires Microsoft to disclose ways that PCs running 
        Windows talk to servers running Microsoft software. Absent a 
        settlement, however, there could be no assurance that the 
        courts would order disclosure of this PC/server line of 
        communications. Microsoft resisted this provision during the 
        settlement negotiations, and would similarly have opposed it at 
        a remedies hearing.
   Finally, as I noted above, there does not seem to be any 
        antitrust precedent for an enforcement mechanism that puts a 
        monitor on site, with full access to the defendant's documents, 
        employees, systems and physical facilities--all at the 
        defendant's expense. Absent a settlement, Microsoft would have 
        vigorously opposed such a far-reaching enforcement regime, and 
        there plainly could be no assurance that the courts would have 
        ordered comparable relief.
    As these examples reflect, I believe that the proposed final 
judgment compares favorably to--and in some respects may well exceed--
the remedy that might have emerged from a judicial hearing.
    The existence of a settlement has also accelerated the point in 
time at which a remedy will begin to take effect. Microsoft has agreed 
to begin complying with the proposed final judgment starting on 
December 16, 2001. (November 6 Stipulation, paragraph 2) Assuming 
further that the District Court approves the proposed final judgment in 
Tunney Act proceedings in early 2002, there will be a remedy in place a 
year or more before the trial and appellate level proceedings, needed 
to resolve the appropriate remedy in the absence of a settlement, would 
be concluded. In this rapidly changing sector of the industry, the 
timeliness of a remedy is an important consideration.
7. Conclusion
    In sum, the settlement in the Microsoft case promotes competition 
and consumer choice. It is proportionate to the monopoly maintenance 
violations that the Court of Appeals for the District of Columbia 
Circuit sustained. The settlement represents a fair and reasonable 
vindication of the public interest in assuring the free and open 
competition that our nation's antitrust laws guarantee.
    Microsoft is reported recently to have issued a company-wide email 
stating its commitment to making the settlement ``a success'' and to 
``ensuring that everyone at Microsoft complies fully with the terms'' 
of the decree. D. ]an Hopper, Associated Press State & Local Wire (Nov. 
30, 2001). We expect nothing less, and we intend to see to it that 
Microsoft honors that commitment. New York is one of the members of the 
States' enforcement Committee, created under the proposed decree. Our 
State Antitrust Bureau will be vigilant in monitoring Microsoft's 
discharge of its obligations, and we look forward to working closely 
with the DOJ to make sure that the settlement is, indeed, a success. 
The American public is entitled to nothing less.

                                

  Statement of Hon. Jon Kyl, a U.S. Senator from the State of Arizona

    Mr. Chairman:
    The five-year judicial proceeding in the United States v. Microsoft 
litigation may be approaching a conclusion. Final briefs have been 
submitted and final arguments have been heard by Judge Colleen Kollar-
Kotelly of the U.S. District Court of the District of Columbia on the 
issue of whether to affirm, reject, or modify the settlement reached 
between Microsoft, the Department of Justice, and nine settling states.
    It is unclear when a decision will be handed down, or whether the 
decision, whatever it may be, will be appealed by any or all of the 
parties. However, it is important to note that Judge Kotelly, a Clinton 
appointee, has from the bench expressed strong support for a 
settlement.
    I offer my view as a U.S. Senator and as a member of the 
legislative branch of our government, a government in which the 
constitutional separation of legislative, judicial, and executive 
powers is scrupulously maintained. My purpose is not to influence the 
ongoing judicial process; rather, it is to offer my views to the 
Committee in a hearing which could be viewed as one-sided in opposition 
to the settlement.
    My view is that the parties have reached a balanced remedy for 
Microsoft's anti-competitive conduct. I believe this settlement is in 
the public interest because it will promote vigorous competition to the 
benefit of all consumers, and will advance the public policy codified 
in the Sherman Anti-Trust Act, which is to protect competition--not 
competitors.
    This settlement will, by its terms, effectively force Microsoft to 
reform how it conducts its business through comprehensive oversight and 
enforcement provisions. Those terms seem appropriate to the court's 
findings.
    Specifically, I am persuaded by the testimony of Assistant Attorney 
General for Antitrust, Charles James, that this is a timely settlement 
which remedies Microsoft's antitrust violations within the scope of the 
appellate court's ruling that Microsoft illegally maintained its 
Windows operating system monopoly. ``We wanted to stop the violations 
now, not after years of further proceedings and appeals,'' said Mr. 
James.
    The settlement forces several key concessions upon Microsoft for 
violating Section 2 of the Sherman Act. For instance, under its terms, 
the settlement affords makers of personal computers wide latitude to 
install non-Microsoft software on new computers, and to remove access 
to Microsoft icons and features, such as Internet browsers. It also 
forbids retaliation against companies that utilize this new latitude.
    The settlement also prohibits exclusive contracts, and requires 
that Microsoft disclose proprietary hardware and software design-code 
information so that competing products can be manufactured that are 
completely compatible with the Windows operating system. Significantly, 
the five-year settlement also establishes an independent technical 
compliance Committee that will assume permanent residency on the 
Microsoft campus to monitor compliance with the terms of this 
settlement.
    This compliance Committee will have full access to the facilities, 
personnel, records, and intellectual property of Microsoft. And, it is 
important to note that oversight of the independent compliance 
Committee is complementary to, not in place of, the ongoing oversight 
of the Department of Justice and the settling states.
    Mr. Chairman, in sum, I believe this settlement will protect and 
cultivate a vigorous and competitive computer soft and hardware 
industry. Such competition is integral to the health and vitality of 
the U.S. economy, and is in the clear interests of the American 
consumer.
    I will readily accept the final judicial resolution of this case, 
whatever it may be.
    Thank you, Mr. Chairman.

                                

  Statement of Professor Lawrence Lessig, Esq., Stanford Law School, 
                          Stanford, California

    Four years after the United States government initiated legal 
action against the Microsoft Corporation, Microsoft, the federal 
government, and nine states have agreed upon a consent decree (``the 
proposed decree'') to settle the finding of antitrust liability that 
the Court of Appeals for the D.C. Circuit has unanimously affirmed. In 
my view, that consent decree suffers from a significant, if narrow, 
flaw. While it properly enlists the market as the ultimate check on 
Microsoft's wrongful behavior, it fails to provide an adequate 
mechanism of enforcement to implement its requirements. If it is 
adopted without modification, it will fail to achieve the objectives 
that the government had when it brought this case.
    Yet while it is important that an adequate and effective remedy be 
imposed against Microsoft, in my view it equally important that any 
remedy not be extreme. Microsoft is no longer the most significant 
threat to innovation on the Internet. Indeed, as I explain more fully 
below, under at least one understanding of its current Internet 
strategy, Microsoft could well play a crucial role in assuring a strong 
and neutral platform for innovation in the future. Thus, rather than 
retribution, a remedy should aim to steer the company toward this 
benign and beneficial strategy. Obviously, this benign understanding of 
Microsoft's current strategy is not the only understanding. Nor do I 
believe that anyone should simply trust Microsoft to adopt it. But its 
possibility does suggest the importance of balance in any remedy. The 
proposed decree does not achieve that balance, but neither, in my view, 
does the alternative.
    I am a law professor at Stanford Law School and have written 
extensively about the interaction between law and technology. My most 
recent book addresses directly the effect of law and technology on 
innovation. I have also been involved in the proceedings of this case. 
In 1997, I was appointed special master in the action to enforce the 
1995 consent decree. That appointment was vacated by the Court of 
Appeals when it concluded that the powers granted me exceeded the scope 
of the special master statute. United States v. Microsoft Corporation, 
147 F.3d 935, 953-56 (D.C. Cir 1998) (``Microsoft II''). I was then 
invited by the District Court to submit a brief on the question of 
using software code to ``tie'' two products together.\1\ I have 
subsequently spent a great deal of time studying the case and its 
resolution.
---------------------------------------------------------------------------
    \1\ See .
---------------------------------------------------------------------------
    In this testimony, I outline the background against which I draw my 
conclusions. I then consider the proposed decree, and some of the 
strengths and weaknesses of the alternative proposed to the District 
Court by the nine remaining states (the ``alternative''). Finally, I 
consider two particular areas in which this Committee may usefully 
consider action in light of the experience in this case.
                               background
    In June, 2001, the Court of Appeals for the D.C. Circuit 
unanimously affirmed Judge Jackson's conclusion that Microsoft used its 
power over Windows to protect itself against innovation that threatened 
its monopoly power. United States v. Microsoft Corporation, 253 F.3d 54 
(D.C. Cir 2001) (Microsoft III). That behavior, the Court concluded, 
violated the nation's antitrust laws. The Court therefore ordered the 
District Court to craft a remedy that would `` `unfetter [the] market 
from anticompetitive conduct,' to `terminate the illegal monopoly, deny 
to the defendant the fruits of its statutory violation, and ensure that 
there remain no practices likely to result in monopolization in the 
future.' '' Microsoft III, 253 F.2d at 103 (citations omitted).
    Integral to the Court's conclusion was its finding that Microsoft 
had ``commingled code'' in such a way as to interfere with the ability 
of competitors to offer equivalent products on an even playing field. 
As the District Court found, and the Court of Appeals affirmed, 
Microsoft had designed its products in such a way as to inhibit the 
substitution of certain product functionality. This design, the 
district court concluded, served no legitimate business interest. The 
Court's conclusion was therefore that Microsoft had acted strategically 
to protect its market power against certain forms of competition.
    In my view, this holding by the Court of Appeals is both correct 
and important. It vindicates a crucial principle for the future of 
innovation generally, and in particular, on the Internet. By affirming 
the principle that no company with market power may use its power over 
a platform to protect itself against competition, the Court has assured 
competitors in this and other fields that the ultimate test of success 
for their products is not the decision by a platform owner, but the 
choice of consumers using the product. To the extent that Microsoft's 
behavior violated this principle, and continues to violate this 
principle, it is appropriate for the District Court to craft a remedy 
that will stop that violation.
    An appropriate remedy, however, must take into account the 
competitive context at the time the remedy is imposed. And in my view, 
it is crucially important to see that Microsoft does not represent the 
only, or even the most significant, threat to innovation on the 
Internet. If the exercise of power over a platform to protect that 
platform owner from competition is a threat to innovation (as I believe 
the Court of Appeals has found), then there are other actors who also 
have significant power over aspects of the Internet platform who could 
also pose a similarly dangerous threat to the neutral platform for 
innovation that the Internet as has been. For example, broadband cable 
could become a similar threat to innovation, if access to the Internet 
through cable is architected so as to give cable the power to 
discriminate among applications and content. Similarly, as Chairman 
Michael Powell suggested in a recent speech about broadband technology, 
overly protective intellectual property laws could well present a 
threat to broadband deployment.\2\
---------------------------------------------------------------------------
    \2\ See  
(suggesting ``re-examining the copyright laws'' and comparing freedom 
assured by decision permitting VCRs).
---------------------------------------------------------------------------
    Microsoft could play a significant role in resisting this kind of 
corruption of the Internet's basic values, and could therefore play an 
important role in preserving the environment for innovation on the net. 
In particular, under one understanding of Microsoft's current Internet 
strategy (which I will refer to generally as the ``.NET strategy''), 
Microsoft's architecture would push computing power and network control 
to the ``edge'' or ``ends'' of the network, and away from the network's 
core. This is consistent with a founding design principle of the early 
network--what network architects Jerome Saltzer, David Clark, and David 
Reed call ``the end-to-end argument.''\3\ .NET'S possible support of 
this principle would compete with pressures that now encourage a 
compromise of the end-to-end design. To the extent Microsoft's strategy 
resists that compromise, it could become a crucial force in preserving 
the innovation of the early network.
---------------------------------------------------------------------------
    \3\ See End to End Arguments in System Design, .
---------------------------------------------------------------------------
    This is not to say that this benign, pro-competitive design is the 
only way that Microsoft could implement its .NET strategy. There are 
other implementations that could certainly continue Microsoft's present 
threat to competition. And obviously, I am not arguing that anyone 
should trust Microsoft's representation that it intends one kind of 
implementation over another. Trust alone is not an adequate remedy to 
the current antitrust trial.
    My point instead is that there is little reason to vilify a company 
with a strong and powerful interest in a strategy that might well 
reinforce competition on the Internet--especially when, excepting the 
open source and free software companies presently competing with 
Microsoft, few of the other major actors have revealed a similarly 
proInternet strategy. Thus, rather than adopting a remedy that is 
focused exclusively on the ``last war,'' a proper remedy to the current 
antitrust case should be sufficient to steer Microsoft towards its 
benign strategy, while assuring an adequate response if it fails to 
follow this procompetitive lead.
    Such a remedy must be strong but also effectively and efficiently 
enforceable. The fatal weakness in the proposed decree is not so much 
the extent of the restrictions on Microsoft's behavior, as it is the 
weaknesses in the proposed mechanisms for enforcement. Fixing that flaw 
is no doubt necessary to assure an adequate decree. In my view, it may 
also be sufficient.
                          the proposed decree
    While the proposed decree is not a model of clarity, the essence of 
its strategy is simply stated: To use the market to police Microsoft's 
monopoly. The decree does this by assuring that computer manufacturers 
and software vendors remain free to bundle and support non-Microsoft 
software without fear of punishment by Microsoft. Dell or Compaq are 
thus guaranteed the right to bundle browsers from Netscape or media 
players from Apple regardless of the mix that Microsoft has built into 
Windows. Autonomy from Microsoft is thus the essence of the plan--the 
freedom to include any ``middleware'' software with an operating system 
regardless of whether or not it benefits Microsoft.
    If this plan could be made to work, it would be the ideal remedy to 
this four year struggle. Government regulators can't know what should 
or should not be in an operating system. The market should make that 
choice. And if competitors and computer manufacturers could be assured 
that they can respond to the demands of the market without fear of 
retaliation by Microsoft, then in my view they would play a sufficient 
role in checking any misbehavior by Microsoft.
    The weakness in the proposed decree, however, is its failure to 
specify any effective mechanism for assuring that Microsoft complies. 
The central lesson that regulators should have learned from this case 
is the inability of the judicial system to respond quickly enough to 
violations of the law.
    Thus the first problem that any proposed decree should have 
resolved is a more efficient way to assure that Microsoft complies with 
the decree's requirements. Under the existing system for enforcement, 
by the time a wrong is adjudicated, the harm of the wrong is complete.
    Yet the proposed decree does nothing to address this central 
problem. The decree does not include provision for a special master, or 
panel of masters, to assure that disagreements about application could 
be quickly resolved. Nor does it provide an alternative fast-track 
enforcement mechanism to guarantee compliance.
    Instead the decree envisions the creation of a Committee of 
technical experts, trained in computer programming, who will oversee 
Microsoft's compliance. But while such expertise is necessary in the 
ongoing enforcement of the decree, equally important will be the 
interpretation and application of the decree to facts as they arise. 
This role cannot be played by technical experts, and yet in my 
view,this is the most important role in the ongoing enforcement of the 
decree.
    For example, the decree requires that Microsoft not retaliate 
against an independent software vendor because that vendor develops or 
supports products that compete with Microsoft's. Proposed Decree, 
Sec. III.B. By implication, this means Microsoft would be free to 
retaliate for other reasons unrelated to the vendor's competing 
software. Whether a particular act was ``retaliation'' for an improper 
purpose is not a technical question. It is an interpretive question 
calling upon the skills of a lawyer. To resolve that question would 
therefore require a different set of skills from those held by members 
of the technical Committee.
    The remedy for this weakness is a better enforcement mechanism. As 
the nine remaining states have suggested, a special master with the 
authority to interpret and apply the decree would assure a rapid and 
effective check on Microsoft's improper behavior. While I suggest some 
potential problems with the appointment of a special master in the 
final section of this testimony, this arrangement would assure 
effective monitoring of Microsoft, subject to appeal to the District 
Court.
    The failure to include an effective enforcement mechanism is, in my 
view, the fatal weakness in the proposed decree. And while I agree with 
the nine remaining states that there are other weaknesses as well, in 
my view these other weaknesses are less important than this single 
flaw. More specifically, in my view, were the decree modified to assure 
an effective enforcement mechanism, then it may well suffice to assure 
the decree's success. Without this modification, there is little more 
than faith to assure that this decree will work. With this 
modification, even an incompletely specified decree may suffice.
    The reason, in my view, is that even a partial, yet effectively 
enforced decree, could be sufficient to steer Microsoft away from 
strategic behavior harmful to competition. Even if every loophole is 
not closed, if the decree can be effectively enforced, then it could 
suffice to push Microsoft towards a benign, pro-competitive strategy. 
The proposed decree has certainly targeted the most important 
opportunity for strategic, or anti-competitive, behavior. If the chance 
to act on these without consequence is removed, then in my view, 
Microsoft has a strong incentive to focus its future behavior towards 
an implementation of its .NET strategy that would reinforce rather than 
weaken the competitive field. An effective, if incomplete, decree 
could, in other words, suffice to drive Microsoft away from the pattern 
of strategic behavior that has been proven against it in the Court of 
Appeals.
    There are those who believe Microsoft will adopt this benign 
strategy whether or not there is a remedy imposed against them. Indeed, 
some within Microsoft apparently believe that supporting a neutral open 
platform is in the best interests of the company.\4\ Given the 
significant findings of liability affirmed by the Court of Appeals, I 
do not believe it is appropriate to leave these matters to faith. But I 
do believe that a remedy can tilt Microsoft towards this better 
strategy, at least if the remedy can be efficiently enforced.
---------------------------------------------------------------------------
    \4\ This is the argument of David Bank's Breaking Windows: How Bill 
Gates Fumbled the Future of Microsoft (New York: Free Press, 2001).
---------------------------------------------------------------------------
                      the nine states' alternative
    On Friday, December 7, 2001, the nine states that have not agreed 
to the proposed consent decree outlined an alternative remedy to the 
one proposed by the Justice Department. In many ways, I believe this 
alternative is superior to the Justice Department's proposed decree. 
This alternative more effectively protects against a core strategy 
attacked in the District Court--the commingling of code designed to 
protect Microsoft's monopoly power. It has an effective enforcement 
provision, envisioning the appointment of a special master. The 
alternative has a much stronger mechanism for adding competition to the 
market--by requiring that Microsoft continue to market older versions 
of its operating system in competition with new versions. And finally, 
the alternative requires that Microsoft continue to distribute Java 
technologies as its has in prior Windows versions.
    The alternative, however, goes beyond what in my view is necessary. 
And while in light of the past, erring on the side of overly protective 
remedies might make sense, I will describe a few areas where the 
alternative may have gone too far, after a brief description of a few 
of the differences that I believe are genuine improvements.
            Areas of Common Strategy
    Both the proposed decree and the alternative agree on a common set 
of strategies for restoring competition in the market place. Both seek 
to assure autonomy for computer manufacturers and software vendors to 
bundle products on the Microsoft platform differently according to 
consumer demand. Both decrees aim at that end by guaranteeing 
nondiscriminatory licensing practices, and restrictions on retaliation 
against providers who bundle or support non-Microsoft products. The 
alternative specifies this strategy more cleanly than the proposed 
decree. It is also more comprehensive. But both are aiming rightly at 
the same common end: to empower competitors to check Microsoft's power.
            Improvements of the Alternative
    The alternative remedy adds features to the proposed decree that 
are in my view beneficial. Central among these is the more effective 
enforcement mechanism. The alternative proposes the establishment of a 
special master, with sufficient authority to oversee compliance. This, 
as I've indicated, is a necessary condition of any successful decree, 
and may also be sufficient.
    Beyond this significant change, however, there are a number of 
valuable additions in the states' alternative. By targeting the 
``binding'' of middleware to the operating system, the alternative more 
effectively addresses a primary concern of the Court of Appeals. This 
restriction assures that Microsoft does not architect its software in a 
way that enables it strategically to protect itself against 
competition. Such binding was found by the courts to make it costly for 
users to select competing functionality, without any compensating pro-
competitive benefit.
    The alternative also assures much greater competition with new 
versions of the Windows operating system by requiring that prior 
versions continue to be licensed by Microsoft. This competition would 
make it harder for Microsoft to use its monopoly power to push users to 
adopt new versions of the operating system that advance Microsoft's 
strategic objectives, but not consumer preferences.
    Finally, the alternative addresses a troubling decision by 
Microsoft to refuse to distribute Java technologies with Windows XP. 
This decision by Microsoft raises a significant concern that Microsoft 
is determined to continue to play strategically to strengthen the 
applications barrier to entry.
            Concerns about the proposed alternative
    While I believe the alternative represents a significant 
improvement over the proposed consent decree, I am concerned that the 
alternative may go beyond the proper scope of the remedy.
    Open Sourcing Internet Explorer: While I am a strong supporter of 
the free and open source software movements, and believe software of 
both varieties is unlikely ever to pose any of the same strategic 
threats that closed source software does, I am not convinced the 
requirement of open sourcing Internet Explorer is yet required, or even 
effective. Both proposed remedies have a strong requirement that 
application interfaces be disclosed, and until that remedy proves 
incomplete, I don't believe the much more extreme requirement of full 
disclosure of source code is merited.
    The definition of Middleware Products: The central target of the 
litigation was Microsoft's behavior with respect to middleware 
software. Understood in terms relevant to this case, middleware 
software is software that lowers the applications barrier to entry by 
reducing the cost of cross-compatibility. Java tied to the Netscape 
browser is an example of middleware so understood; had it been 
successfully and adequately deployed, it would have made it easier for 
application program developers to develop applications that were 
operating system agnostic, and therefore would have increased the 
demand for other competing operating systems.
    This definition is consistent with the alternative definition of 
``middleware.'' But the specification of ``middleware products'' 
reaches, in my view, beyond the target of ``middleware.'' Middleware is 
not properly understood as software that increases the number of cross-
platform applications; middleware is software that increases the ease 
with which cross-platform programs can be written. Thus, for example, 
Office is not middleware simply because it is a cross-platform program. 
It would only qualify as middleware if it made it easier for 
programmers to write platform-agnostic code.
    The requirement that Office be ported: For a similar reason, I am 
not convinced of the propriety of requiring that Office be ported. 
While Office for the Macintosh is certainly a crucial application for 
the continued viability of the Macintosh OS, having Office on many 
platforms does not significantly affect the applications barrier to 
entry. No doubt if Microsoft strategically pulled the development of 
Office in order to defeat another operating system, or if it 
aggressively resisted applications that were designed to be compatible 
with Office (such as Sun's Star Office), that could raise antitrust 
concerns. But the failure simply to develop office for another platform 
would not itself respond to the concerns of the Court of Appeals.
    No doubt, each of these additional remedies might be conceived of 
as necessary prophylactics given a judgment that Microsoft is resolved 
to continue its strategic anticompetitive behavior. And after a fair 
and adequate hearing in the District Court, such a prophylactic may 
well prove justified. At this stage, however, I am not convinced these 
have been proven necessary.
                    appropriate congressional action
    It is obviously inappropriate for Congress to intervene in an 
ongoing legal dispute with the intent to alter the ultimate judgment of 
the judicial process. Thus while I believe it is extremely helpful and 
important that this Committee review the matters at stake at this time, 
there is a limit to what this Committee can properly do. In a system of 
separated powers, Congress does not sit in judgment over decisions by 
Courts.
    Yet there are two aspects to this case that do justify a greater 
concern by Congress. Both aspects are intimately tied to earlier 
decisions by the Court of Appeals. First, in light of the Court of 
Appeals' judgment in the 1995 Microsoft litigation, United States v. 
Microsoft Corporation, 56 F.3d 1448 (D.C. Cir. 1995) (Microsoft I), it 
is clear that the Tunney Act proceedings before the District Court are 
extraordinarily narrow. Second, in light of the Court of Appeals' 
judgment in 1998 Microsoft litigation, Microsoft II, it is not clear 
that, absent consent of the parties, the District Court has the power 
to appoint a special master with the necessary authority to assure 
enforcement of any proposed remedy. Both concerns may justify this 
Committee taking an especially active role to assure a proper judgment 
can be reached--in the first case through its consultation with the 
executive, and the second, possibly with clearer legislative authority.
            The Tunney Act Proceedings
    In Microsoft I, the Court of Appeals for the D. C. Circuit held 
that the District Court's authority under the Tunney Act to question a 
consent decree proposed by the government was exceptionally narrow. 
Though that statute requires that the District Court assure that any 
consent decree is ``within the public interest,'' the Court read that 
standard to be extremely narrow. If the decree can be said to be within 
``the reaches of the public interest,'' Microsoft I, 56 F.3d at 1461, 
then it is to be upheld.
    The consequence of this holding is that it will be especially hard 
for the District Court to question the government's proposed decree. 
Absent a showing of corruption, the decree must be affirmed. It is hard 
for me to imagine that the proposed decree would fail this extremely 
deferential standard. Thus any weaknesses in the proposed decree would 
have to be resolved in the parallel proceedings being pursued by the 
nine states.
    This deference may be a reason for Congress in the future to 
revisit the standard under the Tunney Act. Such a review could not 
properly affect this case, but concerns about this case may well 
suggest the value in future contexts.
    But the concern about this decree may well be relevant to this 
Committee's view about the appropriateness of the government's 
cooperation with any ongoing prosecution by the nine states. The 
federal government may well have decided its remedy is enough; it 
wouldn't follow from that determination that the federal government has 
a reason to oppose the stronger remedies sought by the states. At a 
minimum, the government should free advisors or consultants it has 
worked with to aid the continuing states as they may desire.
            The power to appoint a ``special master''
    In Microsoft II, the Court of Appeals interpreted a District 
Court's power to appoint a special master quite narrowly. While the 
Court acknowledged the strong tradition of using special masters to 
enforce judgments, it raised doubt about the power of the special 
master to act beyond essentially ministerial tasks. In particular, the 
task of interpreting and applying a consent decree to contested facts 
was held by the Court of Appeals to be beyond the statute's power--at 
least where the District Court did not reserve to itself de novo review 
of the special master's determination. Microsoft II, 147 F.3d at 953-
56.
    This narrow view of a special master's power was a surprise to 
many. It may well interfere with the ability of District Courts to 
utilize masters in highly technical or complex cases. This Committee 
may well need to consider whether more expansive authority should be 
granted the District Courts. Especially in the context of highly 
technical cases, a properly appointed master can provide invaluable 
assistance to the District Court judge.
    These limitations would not, of course, restrict the appointment of 
a master in any case to which the parties agreed. And it may well be 
that the simplest way for Microsoft to achieve credibility in the 
context of this case would be for it to agree to the appointment of a 
master with substantial authority to interpret and apply the decree, 
subject to de novo review by the District Court. Such a master should 
be well trained in the law, but also possess a significant degree of 
technical knowledge. But beyond the particulars of this case, it may 
well be better if the District Court had greater power to call upon 
such assistance if such the Court deemed such assistance necessary.

                                

 Statement of Mitchell E. Kertzman, Chief Executive Officer, Liberate 
                  Technologies, San Carlos, California

Introduction
    Mr. Chairman, Senator Hatch, and other members of the Committee, 
thank you for the chance to speak on this critical topic. The Proposed 
Final Judgment is woefully inadequate. It is a backward-looking 
document that fails to prevent Microsoft from abusing its monopoly 
position to increase costs and stifle new technologies--not just for 
personal computers, but also for new technologies like digital 
televisions, cellular phones, game consoles, and personal digital 
assistants.
    Microsoft has already announced its intent to expand its dominance 
beyond PC operating systems, servers, and applications to new devices 
and even personal information via its ``eHome'' and ``Passport'' 
initiatives. According to comments made by Microsoft President Steve 
Ballmer just last week, Microsoft is pursuing a `broader concept'' for 
its client devices like the xBox and set-top box software. In his 
words, ``[T]here's a bigger play we hope to get over time'' by annexing 
all of these devices into the Microsoft empire. Microsoft's own demos 
and white papers show that it plans to establish its operating system 
as the software that would collect information streaming into the home 
and distribute it to each new device.
    Microsoft has used and will continue to use its monopoly over 
desktop operating systems to deny competition in each new computing 
market as it evolves: first desktop applications, then internet 
browsers and servers, and now alternative devices ranging from smart 
phones to television set-top boxes.
    By dealing only with a narrow category of Windows products, and 
failing even there to impose any significant restrictions, the Proposed 
Final Judgment fails to check Microsoft's demonstrated willingness to 
exploit its power over the operating system in order to dominate other 
market segments.
Background
    By way of personal background, I am the CEO of Liberate 
Technologies, a company making middleware software that enables 
interactive and enhanced television. Before joining Liberate, I was 
Chairman and CEO of Sybase, then one of the world's ten largest 
independent software companies, founder and CEO of Powersoft, an 
enterprise software company, and Chairman of both the American 
Electronics Association and the Massachusetts Software Council. I am 
also currently a director of CNET, Handspring, and TechNet.
    Throughout my career, I have both partnered with and competed 
against Microsoft. I have been impressed by the power of its dominant 
platforms, but also concerned about the abuses that resulted from that 
dominance. I have seen Microsoft consistently use its power to block 
competition in new markets through at least three types of misconduct 
that the PFJ does nothing to deter: (1) Preventing original equipment 
manufacturers from supporting new technologies; (2) Tying commercial 
restrictions to investments; and (3) Blocking non-Windows-based 
industry standards.
            (1) Preventing Original Equipment Manufacturers from 
                    Supporting New Technologies
    My current company, Liberate, was originally Network Computer 
Incorporated, promoting computers and software that would operate via a 
network to significantly reduce the cost of computing. This model, like 
the Netscape browser, threatened the dominance of the Windows platform. 
But because the manufacturers of many new devices also manufacture 
desktop PCs, Microsoft was able to exploit its desktop OEM 
relationships to discourage competition. For example, Network Computer 
had an active relationship with Digital Equipment Corporation to 
develop a device running our software. Microsoft and Mr. Gates simply 
threatened the CEO of DEC that they would port Microsoft's NT operating 
system to DEC hardware only if DEC stopped development of a network 
computer, an offer DEC couldn't refuse. It's clear, and the courts have 
reaffirmed, that a monopoly simply cannot engage in this kind of 
conduct.
    Such tactics forced us to exit this business, and the price of PC 
operating systems and applications remains as high as ever when all 
other computing costs have plummeted.
    The Proposed Final Judgment focuses only on Windows products for 
desktop PCs and includes broad and ambiguous exceptions to its limits 
on retaliation. These loopholes would apparently let Microsoft get away 
with the kind of misconduct it perpetrated against Network Computer. 
The result would be to block or delay the development of new 
competitive devices and technologies. The remedy proposed by the non-
settling states would, on the other hand, prevent Microsoft from 
engaging in this type of retaliation and unfairly extending its desktop 
monopoly to a wider array of software and devices.
            Tying Commercial Restrictions to Investments
    Second, in investing the considerable proceeds of its desktop 
monopoly in new markets, Microsoft has extracted, or attempted to 
extract, exclusive or near-exclusive commercial distribution 
arrangements to block out competitors. In the interactive television 
industry alone, Microsoft has invested billions of dollars with leading 
cable and satellite networks. As recently as this week, Microsoft has 
again aggressively pursued this strategy with leading operators both 
here and in Europe. The strings attached to these investments often 
require networks to buy Microsoft's middleware, making it difficult or 
impossible for them to buy competitive products.
    Microsoft's money is a heavy thumb on the scale, biasing choices of 
future technologies in its favor. As new-generation computers and small 
consumer devices often rely on networks for their interconnections, 
these investments in network companies set the stage for continued 
dominance of these new platforms as they evolve.
    Again, the PFJ fails to even address the issue of such restrictive 
dealings outside the scope of desktop products. In contrast, the 
remedies filed last week by the non-settling states, while not barring 
new investments, would at least require that Microsoft give 60 days 
notice to permit a review of anti-competitive effects.
            (3) Refusing to Support Non-Windows-Based Industry 
                    Standards
    Microsoft has also abused its monopoly position by blocking 
industry-wide standards essential to the evolution of a new generation 
of network-based devices. In our industry, Microsoft has undermined 
Java as a standard for digital television, lobbying heavily to prevent 
U.S. and European standards bodies from standardizing on Java. As you 
know, Java lets developers ``write once, run anywhere'', permitting 
content to run across a wide variety of platforms rather than just on 
Microsoft's proprietary code.
    As a second prong of this strategy to block, co-opt, or ``embrace 
and extend'' standards, Microsoft has refused to join with other 
technology companies in pooling its intellectual property, instead 
indicating that it will sue to block the implementation of standards 
wherever it can find a violation of one of its patents. Microsoft 
certainly has the right not to support a standard. However, they are 
exploiting their dominance in the PC market to distort standards 
elsewhere.
    Third, by removing the Java Virtual machine from its PC operating 
systems while the JVM is common elsewhere, Microsoft discourages 
developers from creating new ``write-once, run-anywhere'' content, 
undermines support for uniform standards, and drives developers to 
write to proprietary Microsoft platforms.
    It is clear that Microsoft's foot-dragging and affirmative 
interference has slowed the deployment of digital television in the 
United States. Cable companies and television manufacturers both say 
that a gating issue has been the lack of a definitive standard for 
digital television, a standard that Microsoft's tactics have delayed 
and undermined. Microsoft's approach stands in direct opposition to the 
clearly expressed will of Congress and the interests of all Americans 
interested in richer and more varied television programming.
    Yet again, the PFJ would do nothing to prevent these abuses. The 
remedies recently filed by the non-settling states--by making available 
Microsoft APIs and certain types of code, opening access to the 
personal identification data captured by Microsoft Passport, and 
requiring the distribution of the Java Virtual Machine--would promote 
technology interoperability and the development of universally 
beneficial standards while maintaining relatively open alternatives to 
Microsoft software and services.
Conclusion
    The PFJ is a disappointment. Disappointing because it is weaker 
than the facts and the law of the case support, and disappointing 
because it will not limit Microsoft's plans to dominate new markets in 
the same way it has dominated operating systems, applications, and 
servers in the past.
    I welcome this hearing, and hope that this Committee will continue 
to exercise vigorous oversight of this case to assure that the final 
outcome is in the best interests of American consumers.

                                

  Statement of Charles F. (Rick) Rule, Counsel, Fried, Frank, Harris, 
Shriver & Jacobson, Counsel for Microsoft Corporation, Washington, D.C.

    Mr. Chairman and members of the Committee, good morning. It is a 
pleasure to appear before you today on behalf of Microsoft Corporation 
to discuss the proposed consent decree or Revised Proposed Final 
Judgment (the ``PFJ'') to which the U.S. Department of Justice and nine 
of the plaintiff states have agreed. As this Committee is aware, I am 
counsel to Microsoft in the case and was one of the principal 
representatives for the company in the negotiations that led to the 
proposed consent decree.
    The PFJ was signed on November 6th after more than a month of 
intense, around the clock negotiations with the Department and 
representatives of all the plaintiff states. The decree is currently 
subject to a public interest review by Judge Kollar-Kotelly under the 
Tunney Act \1\. Because we are currently in the midst of that review 
and because nine states and the District of Columbia have chosen to 
continue the litigation, I must be somewhat circumspect in my remarks. 
However, what I can--indeed, must--stress is that, in light of the 
Court of Appeals' decision last summer to ``drastically'' reduce the 
scope of Microsoft's liability and in light of the legal standards for 
imposing injunctive relief, the Department and the settling states were 
very effective in negotiating for broad, strong relief. As the chart in 
the appendix depicts, ever since the Department and the plaintiff 
states first filed their complaints in May 1998, the case has been 
shrinking. What began with five claims, was whittled down to a single 
monopoly maintenance claim by a unanimous Court of Appeals. Even with 
respect to that surviving claim, the appellate court affirmed Judge 
Jackson's findings on only about a third (12 of 35) of the specific 
acts which the district court had found support that claim.
---------------------------------------------------------------------------
    \1\ 15 U.S.C. Sec. 16(b)-(h).
---------------------------------------------------------------------------
    Given that history and the law, there is no reasonable argument 
that the PFJ is too narrow or that it fails to achieve all the relief 
to which the Department was entitled. In fact, as these remarks 
explain, the opposite is true--faced with tough, determined negotiators 
on the other side of the table, Microsoft agreed to a decree that goes 
substantially beyond what the plaintiffs were likely to achieve through 
litigation. Quite frankly, the PFJ is the strongest, most regulatory 
conduct decree ever obtained (through litigation or settlement) by the 
Department.
    Why then, one might ask, would Microsoft consent to such a decree? 
There are two reasons. First, the company felt strongly that it was 
important to put this matter behind it and to move forward 
constructively with its customers, its business partners, and the 
government. For four years, the litigation has consumed enormous 
resources and been a serious distraction. The constant media drumbeat 
has obscured the fact that the company puts a premium on adhering to 
its legal obligations and on developing and maintaining excellent 
relationships with its partners and customers. Litigation is never a 
pleasant experience, and given the magnitude of this case and the media 
attention it attracted, it is hard to imagine any more costly, 
unpleasant civil litigation.
    Second, while the Department pushed Microsoft to make substantial, 
even excessive concessions to get a settlement, there were limits to 
how far the company was willing or able to go (limits, by the way, 
which the Department and the settling states managed to reach). 
Microsoft was fighting for an important principle--the ability to 
innovate and improve its products and services for the benefit of 
consumers. To that end, Microsoft insisted that the decree be written 
in a way to allow the company to engage in legitimate competition on 
the merits. Despite the substantial burdens the decree will impose on 
Microsoft and the numerous ways in which Microsoft will be forced to 
alter its conduct, the decree does preserve Microsoft's ability to 
innovate, to improve its products, and to engage in procompetitive 
business conduct that is necessary for the company to survive.
    In short, at the end of the negotiations, Microsoft concluded that 
the very real costs that the decree imposes on the company are 
outweighed by the benefits, not just to Microsoft but to the PC 
industry and consumers generally.
            The Court of Appeals' ``Road Map''for Relief
    In order to evaluate the decree, one must first appreciate the 
history of this case and how drastically the scope of Microsoft's 
liability was narrowed at the appellate level. When this case began 
with the filing of separate complaints by the Department and the 
plaintiff states in May of 1998, it was focused on Microsoft's 
integration of browsing functionality called Internet Explorer or IE 
into Windows 98, which the plaintiffs alleged to be an illegal tying 
arrangement.
    The complaints of the Department and the states included five 
separate claims: (1) a claim under section 1 of the Sherman Act that 
the tie-in was per se illegal; (2) another claim under section I that 
certain promotion and distribution agreements with Internet service 
providers (ISPs), Internet content providers (ICPs), and on-line 
service providers (OSPs) constituted illegal exclusive dealing; (3) a 
claim under section 2 of the Sherman Act that Microsoft had attempted 
to monopolize Web browsing software; (4) a catch-all claim under 
section 2 that the alleged conduct that underlay the first three claims 
amounted to illegal maintenance of Microsoft's monopoly in PC operating 
systems; and (5) a claim by the plaintiff states (but not part of the 
Department's complaint) under section 2 that Microsoft illegally 
``leveraged'' its monopoly in PC operating systems.\2\ As discovery got 
underway, the case dramatically expanded as the plaintiffs 
indiscriminately began identifying all manner of Microsoft conduct as 
examples of the company's illegal efforts to maintain its monopoly. But 
then, the case began to shrink.
---------------------------------------------------------------------------
    \2\ Initially the plaintiff states included an additional section 2 
claim based on Microsoft Office; however, they voluntarily dropped that 
claim in their amended complaint.
---------------------------------------------------------------------------
   In response to Microsoft's motion for summary judgment, the 
        district court dismissed the states' Monopoly leveraging claim 
        (claim 5).
   After trial, Judge Jackson held that the plaintiffs failed 
        to prove that Microsoft's arrangements with ISPs, ICPs, and 
        OSPs violated section 1 (claim 2).
   Judge Jackson did, however, conclude that the plaintiffs had 
        sustained their claims that Microsoft illegally tied IE to 
        Windows (claim 1), illegally attempted to monopolize the 
        browser market (claim 3), and illegally maintained its monopoly 
        (claim 4), basing his decision on 35 different actions engaged 
        in by Microsoft.
   In a unanimous decision of the Court of Appeals sitting en 
        banc, the court reversed the trial court on the attempted 
        monopolization claim (claim 3) and remanded with instructions 
        that judgment be entered on that claim in favor of Microsoft.
   The unanimous court also reversed Judge Jackson's decision 
        with respect to the tie-in claim (claim 1). The appellate court 
        held that, in light of the prospect of consumer benefit from 
        integrating new functionality into platform software such as 
        Windows, Microsoft's integration of IE into Windows had to be 
        judged under the rule of reason rather than the per se approach 
        taken by Judge Jackson. The Court of Appeals refused to apply 
        the per se approach because of ``our qualms about redefining 
        the boundaries of a defendant's product and the possibility of 
        consumer gains from simplifying the work of applications 
        developers [by ensuring the ubiquitous dissemination of 
        compatible APIs].'' The court's decision did allow the 
        plaintiffs on remand to pursue the tie-in claim on a rule of 
        reason theory; however, shortly after the remand, the 
        plaintiffs announced they were dropping the tie-in claim.
   With respect to the only remaining claim (monopoly 
        maintenance--claim 4), the Court of Appeals affirmed in part 
        and reversed in part the lower court and substantially shrank 
        Microsoft's liability. After articulating a four-step burden-
        shifting test that is highly fact intensive, the appellate 
        court reviewed the 35 different factual bases for liability and 
        rejected nearly two-thirds of them.
           In the case of seven of those 35 findings 
        (concerning such conduct as Microsoft's refusal to allow OEMs 
        to replace the Windows desktop, Microsoft's design of Windows 
        to ``override the user's choice of a default browser,'' and 
        Microsoft's development of a Java virtual machine (JVM) that 
        was incompatible with Sun's JVM), the appellate court 
        specifically reversed Judge Jackson's decision.
           The Court of Appeals dismissed sixteen of the 
        remaining findings by reversing Judge Jackson's holding that 
        Microsoft had engaged in a general ``course of conduct'' that 
        amounted to illegal monopoly maintenance--the so-called 
        ``monopoly broth'' theory.
           With respect to the remaining twelve findings 
        (concerning such things as Microsoft's refusal to allow PC 
        manufacturers (OEMs) to remove end-user access to IE, 
        Microsoft's exclusive arrangements with ISPs, and its 
        ``commingling'' of software code to frustrate OEMs ability to 
        hide access to IE), the court did affirm Judge Jackson's 
        findings as not being ``clearly erroneous.'' And even as to 
        those twelve, a number were practices--for example, the 
        arrangements with ISPs--that Microsoft had already ceased.
    As a result, when the case was remanded to the district court and 
reassigned to Judge Kollar-Kotelly, four-fifths of the original claims 
were all but gone.\3\ With respect to the sole surviving claim, nearly 
two-thirds of the supporting findings had been rejected by the Court of 
Appeals. In the words of the Court of Appeals, its decision 
``drastically altered the scope of Microsoft's liability.''\4\
---------------------------------------------------------------------------
    \3\ As indicated above, all that remained for the tie-in claim was 
the recognition by the plaintiffs that they could not establish the 
unreasonableness of Microsoft's integration of IE into Windows under 
the appellate court's rule of reason test. That recognition came when 
the Department informed Microsoft on September 6, that the plaintiffs 
would not be pursuing the tie-in claim on remand. At the same time, the 
plaintiffs informed the court that, in light of the Court of Appeals' 
decision, they would not be seeking divestiture.
    \4\ United States v. Microsoft, 253 F.3d 34, 105 (D.C.Cir. 2001).
---------------------------------------------------------------------------
            The Relevance of the Drastic Narrowing of Liability
    The Court of Appeals' decision makes clear the critical 
significance of the drastic reduction in the scope of Microsoft's 
liability in terms of the relief to which the plaintiffs are entitled. 
As the court noted in instructing the lower court on how the remand for 
remedy should be handled,
          ``A court .  .  . must base its relief on some clear 
        `indication of a significant causal connection between the 
        conduct enjoined or mandated and the violation found directed 
        toward the remedial goal intended.' 3 PHILLIP E. AREEDA & 
        HERBERT HOVENKAMP, ANTITRUST LAW para. 653(b), at 91-92 (1996). 
        In a case such as the one before us where sweeping equitable 
        relief is employed to remedy multiple violations, and some--
        indeed most--of the findings of remedial violations do not 
        withstand appellate scrutiny, it is necessary to vacate the 
        remedy decree since the implicit findings of causal connection 
        no longer exist to warrant our deferential affirmance.  .  .  . 
        In particular, the [district] court should consider which of 
        the decree's conduct restrictions remain viable in light of our 
        modification of the original liability decision.''\5\
---------------------------------------------------------------------------
    \5\ Id. (emphasis added).
---------------------------------------------------------------------------
    At the time Judge Kollar-Kotelly ordered the parties into intensive 
negotiations, she clearly recognized the importance of the drastic 
alteration to the scope of Microsoft's liability.\6\ The judge informed 
the government that its ``first and most obvious task is going to be to 
determine which portions of the former judgment remain appropriate in 
light of the appellate court's ruling and which portions are 
unsupported following the appellate court's narrowing of 
liability.''\7\ The judge went on to note that ``the scope of any 
proposed remedy must be carefully crafted so as to ensure that the 
enjoining conduct falls within the [penumbra] of behavior which was 
found to be anticompetitive.''\8\ The judge also stated that 
``Microsoft argues that some of the terms of the former judgment are no 
longer appropriate, and that is correct. I think there are certain 
portions where the liability has been narrowed.''\9\
---------------------------------------------------------------------------
    \6\ This hearing, it should be noted, occurred after the plaintiffs 
had dropped their request for divestiture relief.
    \7\ Transcript of Scheduling Conference before the Honorable 
Colleen Kollar-Kotelly, September 28, 2001, at 8.
    \8\ Id.
    \9\ Id.
---------------------------------------------------------------------------
    Before discussing the negotiations and the decree itself, I would 
like to make three other points about the crafting of antitrust 
remedies that also are relevant to considering the relief to which the 
plaintiffs were entitled. First, the critics of the PFJ routinely 
ignore the fact that the Department has long acknowledged that 
Microsoft lawfully acquired its monopoly position in PC operating 
systems. Indeed, the Department retained a Nobel laureate in the first 
Microsoft case in 1994 to submit an affidavit to the district court 
opining that Microsoft had reached its position in PC operating systems 
through luck, skill, and foresight.\10\ It is true of course that 
Microsoft has now been found liable for engaging in conduct that 
amounted to illegal efforts to maintain that position; however, there 
is precious little in the record establishing any causal link between 
the twelve illegal acts of ``monopoly maintenance'' and Microsoft's 
current position in the market for PC operating systems. Thus, contrary 
to the critics' overheated rhetoric, there is no basis for relief 
designed to terminate an ``illegal monopoly.''
---------------------------------------------------------------------------
    \10\ The Declaration of Kenneth J. Arrow was attached as an exhibit 
to the Memorandum of the United States in Support of Motion to Enter 
Final Judgment, filed on January 18, 1995, with the District Court in 
support of the Department's 1994 consent decree with Microsoft.
---------------------------------------------------------------------------
    Second, decrees in civil antitrust cases are designed to remedy, 
not to punish. All too often, the critics of this decree speak as 
though Microsoft was convicted of a crime. It was not. This is a civil 
case, subject to the rules of civil rather than criminal procedure. To 
the extent the plaintiffs tried to get relief that could be deemed 
punitive, that relief would have been rejected.
    Third, a decree must serve the purposes of the antitrust laws, 
which is a ``consumer welfare prescription.'' I realize we are in the 
``season of giving,'' but an antitrust decree is not a Christmas tree 
to fulfill the wishes of competitors, particularly where that 
fulfillment comes at the expense of consumer welfare. Calls for 
royalty-free licensing of Microsoft's intellectual property, or for 
imposing obligations on Microsoft to distribute third party software at 
no charge, or for Microsoft to facilitate the distribution of an 
infinite variety of bastardized versions of Windows (and make sure they 
all run perfectly) are great for a small group of competitors who know 
that such provisions will quickly destroy Microsoft's incentives and 
ability to compete (not to mention violate the Constitution's 
proscription against ``takings''). Such calls, however, are anathema to 
consumers' interests in a dynamic, innovative computer industry. Twenty 
years ago, my old boss and antitrust icon, Bill Baxter, warned about 
the anticompetitive consequences of antitrust decrees designed simply 
to ``add sand to the saddlebags'' of a particularly fleet competitor 
like Microsoft. It's a warning the courts would certainly heed today.
    To their credit, the negotiators for the Department and the 
settling states understood these three fundamental antitrust 
principles. While we may have had to remind the other side of these 
principles from time to time, we did not have to negotiate for their 
adherence to them. Taxpayers and consumers can be proud that their 
interests were represented by honorable men and women with the utmost 
respect for the rule of law. For others to insinuate that, by agreeing 
to a decree that honors these three fundamental principles, the 
Department and the settling states ``caved'' or settled for inadequate 
relief is as offensive as it is laughable.
            The Negotiations
    It is against the background I have sketched that, on September 
27th, Judge KollarKotelly ordered the parties into intensive, ``around 
the clock'' negotiations. Microsoft had already indicated publicly its 
strong desire to try to settle the case, and so it welcomed the judge's 
order. As has been widely reported, all the parties in the case took 
the court's order very seriously. Microsoft assembled in Washington, 
D.C., a core team of in-house and outside lawyers who have been living 
with this case for years, and who spent virtually all of the next five 
weeks camped out in my offices down the street. Microsoft's top legal 
officer was in town during much of the period directing the 
negotiations. Back in Redmond, the company's most senior executives 
devoted a great deal of time and energy to the process, and we were all 
supported by a large group of dedicated lawyers, businesspeople, and 
staff.
    From my vantage point, the Department and the states (at least 
those that settled) made an equivalent effort. As the mediator wrote 
after the process ended, ``No party was left out of the negotiations. .  
.  . Throughout most of the mediation the 19 states (through their 
executive Committee representatives) and the federal government 
(through the staff of the antitrust division) worked as a combined 
`plaintiffs' team.''\11\ Jay Himes from the office of the New York 
Attorney General Eliot Spitzer and Beth Finnerty from the office of the 
Ohio Attorney General Betty Montgomery represented the states 
throughout the negotiations, putting in the same long hours as the rest 
of us. At various points Mr. Himes and Ms. Finnerty were joined by 
representatives from other states, including Kevin O'Connor from the 
office of Wisconsin Attorney General James Doyle.\12\
---------------------------------------------------------------------------
    \11\ Eric D. Green and Jonathan B. Marks, How We Mediated the 
Microsoft Case, Boston Globe, at A23 (November 15, 2001).
    \12\ Mr. O'Connor, as well as attorneys in the office of the New 
York Attorney General, had served as counsel of record for the states 
in the litigation.
---------------------------------------------------------------------------
    The negotiations began on September 28th and continued virtually 
non-stop until November 6th. During the first two weeks, we negotiated 
without the benefit of a mediator. As they say in diplomatic circles, 
the discussions were ``full and frank.'' The Department lawyers and the 
state representatives in the negotiation were extremely knowledgeable, 
diligent, and formidable.
    Microsoft certainly hoped to be able to reach a settlement quickly 
and before a mediator was designated. However, the views on all sides 
were sufficiently strong and the need to pay attention to every 
sentence, phrase, and punctuation mark so overwhelming that reaching 
agreement proved impossible in those first two weeks. Eric Green, a 
prominent mediation specialist, was appointed by the court and with the 
help of Jonathan Marks spent the next three weeks helping the parties 
find common ground. As Professor Green and Mr. Marks wrote after the 
mediation ended,   ``Successful mediations are ones in which mediators 
and parties work to identify and overcome barriers to reaching 
agreement. Successful mediations are ones in which all the parties 
engage in reasoned discussions of issues that divide them, of options 
for settlement, and of the risks, opportunities, and costs that each 
party faces if a settlement isn't reached. Successful mediations are 
ones in which, settle or not, senior representatives of each party have 
made informed and intelligent decisions. The Microsoft mediation was 
successful.'' \13\
---------------------------------------------------------------------------
    \13\ Green and Marks, supra fn. 11.
---------------------------------------------------------------------------
    Working day and night virtually until the original November 2 
deadline set by the judge, Microsoft and the Department agreed to and 
signed a decree early on November 2. The representatives of the states 
also tentatively agreed, subject to an opportunity from November 2 
until November 6 to confer with the other states that were more removed 
from the case and negotiations. During that period, the states 
requested several clarifying modifications to which Microsoft (and the 
Department) agreed. From press reports, it appears that during this 
period the plaintiff states also were being subjected to intense 
lobbying by a few of Microsoft's competitors who were desperate either 
to get a decree that would severely cripple if not eventually destroy 
Microsoft or at least to keep the litigation (and the attendant costs 
imposed on Microsoft) going. Notwithstanding that pressure, New York, 
Wisconsin, and Ohio--the states that had made the largest investment in 
litigating against Microsoft and in negotiating a settlement--along 
with six other plaintiff states represented by a bipartisan group of 
state attorneys general signed onto the Revised PFJ on November 6.
            The Proposed Final Judgment
    Throughout the negotiations, Microsoft was confronted by a 
determined and tough group of negotiators for the Department and the 
states. They made clear that there would be no settlement unless 
Microsoft went well beyond the relief to which, Microsoft believes, the 
Court of Appeals opinion and the law entitles the plaintiffs. Once that 
became clear, Microsoft relented in significant ways, subject only to 
narrow language that preserved Microsoft's ability to innovate and 
engage in normal, clearly procompetitive activities. Professor Green, 
the one neutral observer of this drama, has noted the broad scope of 
the prohibitions and obligations imposed on Microsoft by the PFJ, 
stating during the status conference with Judge Kollar-Kotelly that 
``the parties have not stopped at the outer limits of the Court of 
Appeals' decision, but in some important respects the proposed final 
judgment goes beyond the issues affirmed by the Court of Appeals to 
deal with issues important to the parties in this rapidly-changing 
technology.''\14\
---------------------------------------------------------------------------
    \14\ Transcript of Status Conference before the Honorable Colleen 
Kollar-Kotelly, November 2, 2001, at 5.
---------------------------------------------------------------------------
    I do not intend today to provide a detailed description of each 
provision of the PFJ; the provisions speak for themselves. It may come 
as something of a surprise in light of some of the uninformed criticism 
hurled at the decree, but one of Microsoft's principal objectives 
during the negotiations was to develop proscriptions and obligations 
that were sufficiently clear, precise and certain to ensure that the 
company and its employees would be able to understand and comply with 
the decree without constantly engendering disputes with the Department. 
This is an area of complex technology and the decree terms on which the 
Department insisted entailed a degree of technical sophistication that 
is unprecedented in an antitrust decree. Drafting to these 
specifications was not easy, but the resulting PFJ is infinitely 
clearer and easier to administer than the conduct provisions of the 
decree that Judge Jackson imposed in June 2000.
    If, as one might suspect would be the outcome in a case such as 
this, the PFJ were written to proscribe only the twelve practices 
affirmed by the Court of Appeals, the decree would be much shorter and 
simpler. The Department and settling states, however, insisted that the 
decree go beyond just focused prohibitions to create much more general 
protections for a potentially large category of software, which the PFJ 
calls ``middleware.'' But even these expansive provisions to foster 
middleware competition were not sufficient to induce the Department and 
the states to settle; rather, they insisted that Microsoft also agree 
to additional obligations that bear virtually no relationship to any of 
the issues addressed by the district court and the Court of Appeals. 
And lastly they insisted on unprecedented enforcement provisions. I 
will briefly describe each of these three sets of provisions.
1. Protections for ``Middleware''
    The case that the plaintiffs tried and the narrowed liability that 
survived appellate review all hinged on claims that Microsoft took 
certain actions to exclude Netscape's Navigator browser and Sun's Java 
technology from the market in order to protect the Windows operating 
system monopoly. The plaintiffs successfully argued that Microsoft 
feared that Navigator and Java, either alone or together, might 
eventually include and expose a broad set of general purpose APIs to 
which software developers could write as an alternative to the Windows 
APIs. Since Navigator and Java can run on multiple operating systems, 
if they developed into general purpose platforms, Navigator and Java 
would provide a means of overcoming the ``applications barrier'' to 
entry and threaten the position of the Windows operating system as 
platform software.
    A person might expect that a decree designed to address such a 
monopoly maintenance claim would provide relief with respect to Web-
browsing software and Java or, at most, to other general purpose 
platform software that exposes a broad set of APIs and is ported to run 
on multiple operating systems. The PFJ goes much further. The 
Department insisted that obligations imposed on Microsoft by the decree 
extend to a range of software that has little in common with Navigator 
and Java. The decree applies to ``middleware'' broadly defined to 
include, in addition to Web-browsing software and Java, instant 
messaging software, media players, and even email clients--software 
that, Microsoft believes, has virtually no chance of developing into 
broad, general purpose platforms that might threaten to displace the 
Windows platform. In addition, there is a broad catch-all definition of 
middleware that in the future is likely to sweep other similar software 
into the decree.
    This sweeping definition of middleware is significant because of 
the substantial obligations it imposes on Microsoft. Those 
obligations--a number of which lack any correspondence to the monopoly 
maintenance findings that survived appellate review--are intended to 
create protections for all the vendors of software that fits within the 
middleware definition. Taken together, the decree provisions provide 
the following protections and opportunities:
   Relations with Computer Makers. Microsoft has agreed not to 
        retaliate against computer makers who ship software that 
        competes with anything in its Windows operating system.
   Computer Maker Flexibility. Microsoft has agreed to grant 
        computer makers broad new rights to configure Windows so as to 
        promote non-Microsoft software programs that compete with 
        features of Windows. Computer makers will now be free to remove 
        the means by which consumers access important features of 
        Windows, such as Internet Explorer, Windows Media Player, and 
        Windows Messenger. Notwithstanding the billions of dollars 
        Microsoft invests developing such cool new features, computer 
        makers will now be able to replace access to them in order to 
        give prominence to non-Microsoft software such as programs from 
        AOL Time Warner or RealNetworks. (Additionally, as is the case 
        today, computer makers can provide consumers with a choice--
        that is to say access to Windows features as well as to non-
        Microsoft software programs.)
   Windows Design Obligations. Microsoft has agreed to design 
        future versions of Windows, beginning with an interim release 
        of Windows XP, to provide a mechanism to make it easy for 
        computer makers, consumers and software developers to promote 
        nonMicrosoft software within Windows. The mechanism will make 
        it easy to add or remove access to features built in to Windows 
        or to non-Microsoft software. Consumers will have the freedom 
        to choose to change their configuration at any time.
   Internal Interface Disclosure. Even though there is no 
        suggestion in the Court of Appeals' decision that Microsoft 
        fails to disclose APIs today and even though the Court of 
        Appeals' holding on monopoly power is predicated on the idea 
        that there are tens of thousands of applications written to 
        call upon those APIs, Microsoft has agreed to document and 
        disclose for use by its competitors various interfaces that are 
        internal to Windows operating system products.
   Relations with Software Developers. Microsoft has agreed not 
        to retaliate against software or hardware developers who 
        develop or promote software that competes with Windows or that 
        runs on software that competes with Windows.
   Contractual Restrictions. Microsoft has agreed not to enter 
        into any agreements obligating any third party to distribute or 
        promote any Windows technology exclusively or in a fixed 
        percentage, subject to certain narrow exceptions that apply to 
        agreements raising no competitive concern. Microsoft has also 
        agreed not to enter into agreements relating to Windows that 
        obligate any software developer to refrain from developing or 
        promoting software that competes with Windows.
    These obligations go far beyond the twelve practices that the Court 
of Appeals found to constitute monopoly maintenance. One of the 
starkest examples of the extent to which these provisions go beyond the 
Court of Appeals decision relates to Microsoft's obligations to design 
Windows in such a way as to give third parties the ability to designate 
non-Microsoft middleware as the ``default'' choice in certain 
circumstances in which Windows might otherwise be designed to utilize 
functionality integrated into Windows. As support for his monopoly 
maintenance conclusion, Judge Jackson had relied on several 
circumstances in which Windows was designed to override the end users' 
choice of Navigator as their default browser and instead to invoke IE. 
The Court of Appeals, however, reviewed those circumstances and 
reversed Judge Jackson's conclusion on the ground that Microsoft had 
``valid technical reasons'' for designing Windows as it did. 
Notwithstanding this clear victory, Microsoft acceded to the 
Department's demands that it design future versions of Windows to 
ensure certain default opportunities for non-Microsoft middleware.
2. Uniform Prices and Server Interoperability
    Nevertheless, agreeing to this wide range of prohibitions and 
obligations designed to encourage the development of middleware broadly 
defined was not enough to get the plaintiffs to settle. Instead, they 
insisted on two additional substantive provisions that have absolutely 
no correspondence to the findings of monopoly maintenance liability 
that survived appeal.
   Uniform Price List. Microsoft has agreed to license its 
        Windows operating system products to the 20 largest computer 
        makers (who collectively account for the great majority of PC 
        sales) on identical terms and conditions, including price 
        (subject to reasonable volume discounts for computer makers who 
        ship large volumes of Windows).
   Client/Server Interoperability. Microsoft has agreed to make 
        available to its competitors, on reasonable and non-
        discriminatory terms, any protocols implemented in Windows 
        desktop operating systems that are used to interoperate 
        natively with any Microsoft server operating system.
    In the case of the sweeping definition of middleware and the range 
of prohibitions and obligations imposed on Microsoft, there is at least 
a patina of credibility to the argument that the penumbra of the twelve 
monopoly maintenance practices affirmed by the Court of Appeals can be 
stretched to justify those provisions, at least as ``fencing in'' 
provisions. There is no sensible reading of the Court of Appeals 
decision that would provide any basis for requiring Microsoft to charge 
PC manufacturers uniform prices or to make available the proprietary 
protocols used by Windows desktop operating systems and Windows server 
operating systems to communicate with each other. Nevertheless, because 
the plaintiffs insisted that they would not settle without those two 
provisions, Microsoft also agreed to them.
    Before turning to the enforcement provisions of the PFJ, I want to 
say a word about the few provisos included in the decree that provide 
narrow exceptions to the various prohibitions and obligations imposed 
on Microsoft. Those exceptions were critical to Microsoft's willingness 
to agree to the sweeping provisions on which the plaintiffs insisted. 
Without these narrowly tailored exceptions, Microsoft could not 
innovate or engage in normal procompetitive commercial activities. The 
public can rest assured that the settling plaintiffs insisted on 
language to ensure that the exceptions only apply when they promote 
consumer welfare. For example, some companies that compete with 
Microsoft for the sale of server operating systems apparently have 
complained about the so-called ``security carve-out'' to Microsoft's 
obligation to disclose internal interfaces and protocols. That 
exception is very narrow and only allows Microsoft to withhold 
encryption ``keys'' and the similar mechanisms that must be kept secret 
if the security of computer networks and the privacy of user 
information is to be ensured. In light of all the concern over computer 
privacy and security these days, it is surprising that there is any 
controversy over such a narrow exception.
3. Compliance and Enforcement
    The broad substantive provisions of the PFJ are complemented by an 
unusually strong set of compliance and enforcement provisions. Those 
provisions are unprecedented in a civil antitrust decree. The PFJ 
creates an independent three-person technical Committee, resident on 
the Microsoft campus, with extraordinary powers and full access to 
Microsoft facilities, records, employees and proprietary technical 
data, including Windows source code, which is the equivalent of the 
``secret formula'' for Coke. The technical Committee provides a level 
of technical oversight that is far more substantial than any provision 
of any other antitrust decree of which I am aware. At the insistence of 
the plaintiffs, the technical Committee does not have independent 
enforcement authority; rather, reports to the plaintiffs and, through 
them, to the court. The investigative and oversight authority of the 
technical Committee in no way limits or reduces the enforcement powers 
of the DOJ and states; rather, the technical Committee supplements and 
enhances those powers. Each of the settling states and DOJ have the 
power to enforce the decree and have the ability to monitor compliance 
and seek a broad range of remedies in the event of a violation.
    Microsoft also agreed to develop and implement an internal 
antitrust compliance program, to distribute the decree and educate its 
management and employees as to the various restrictions and 
obligations. In recent years, Microsoft has assembled in-house one of 
the largest, most talented groups of antitrust lawyers in corporate 
America. They are already engaged in substantial antitrust compliance 
counseling and monitoring. The decree formalizes those efforts, and 
quite frankly adds very substantially to the in-house lawyers' work. As 
we speak, that group, together with key officials from throughout the 
Microsoft organization, are working to implement the decree and to 
ensure the company's compliance with it.
    As with the substantive provisions, Microsoft agreed to these 
unprecedented compliance and enforcement provisions because of the 
adamance of the plaintiffs and because of the highly technical nature 
of the decree. Microsoft, the Department, and the settling states 
recognized that it was appropriate to include mechanisms--principally, 
the technical Committee--that will facilitate the prompt and expert 
resolution of any technical disputes that might be raised by third 
parties, without in any way derogating from the government's full 
enforcement powers under the decree. Although the enforcement 
provisions are unprecedented in their stringency and scope, they are 
not necessitated or justified by any valid claim that Microsoft has 
failed to comply with its decree obligations in the past. In fact, 
Microsoft has an exemplary record of complying with the consent decree 
to which the company and the Department agreed in 1994. In 1997, the 
Department did question whether Microsoft's integration of IE into 
Windows 95 violated a ``fencing in'' provision that prohibited 
contractual tie-ins, but Microsoft was ultimately vindicated by the 
Court of Appeals.\15\ Microsoft has committed itself to that same level 
of dedication in ensuring the company's compliance with the PFJ.
---------------------------------------------------------------------------
    \15\ United States v. Microsoft, 147 F.3d 935 (D.C.Cir. 1998).
---------------------------------------------------------------------------
            Conclusion
    The PFJ strikes an appropriate balance in this complicated case, 
providing opportunities and protections for firms seeking to compete 
while allowing Microsoft to continue to innovate and bring new 
technologies to market. The decree is faithful to the fact that the 
antitrust laws are a ``consumer protection prescription,'' and it 
ensures an economic environment in which all parts of the PC-ecosystem 
can thrive.
    Make no mistake, however, the PFJ is tough. It will impose 
substantial new obligations on the company, and it will require 
significant changes in the way Microsoft does business. It imposes 
heavy costs on the company and entails a degree of oversight that is 
unprecedented in a civil antitrust case. For some competitors of 
Microsoft, however, apparently nothing short of the destruction of 
Microsoft--or at least the ongoing distraction of litigation--will be 
sufficient. But if the objective is to protect the interests of 
consumers and the competitiveness process, then this decree more than 
achieves that goal.
    Finally, for all those who are worried about the future and what 
unforeseen developments may not be covered by this case and the decree, 
remember that the Court of Appeals decision now provides guideposts, 
which previously did not exist, for judging Microsoft's behavior, and 
that of other high technology companies, going forward. Those 
guidelines, it is true, are not always easy to apply ex ante to 
conduct; however, now that the Court of Appeals has spoken, we all have 
a much better idea of the way in which section 2 of the Sherman Act 
applies to the software industry. In short, what antitrust law requires 
of Microsoft is today much clearer than it was when this case began. We 
have all learned a lot over the last four years, and Microsoft has 
every incentive to ensure that history does not repeat itself.



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



                                

   Statement of Matthew J. Szulik, President and CEO, Red Hat, Inc., 
                         Durham, North Carolina

    Good morning.
    I would like to thank the members of the Committee for allowing me 
to contribute my views on a topic that I feel is of vital importance to 
the future of our nation. I stand before you today as Winston Churchill 
said, ``only to fight while there is a chance, so we don't have to 
fight when there is non.'' Through your actions, members of the 
Committee can affect a remedy that many members of the growing, global 
technical community hope will restore balance and inspire 
competitiveness in a networked society free of monopolistic practices.
    I stand before you today as a representative of the open source 
community. And as the CEO of Red Hat, Inc., generally regarded as the 
most successful company that sells and supports open source software. 
The Red Hat Linux operating system software we sell is created by a 
global community of volunteers. Volunteers who share their creation of 
intellectual property. The basis for their work is an open license that 
requires improvements to the technology be shared with others. 
Programmers submit their software code, their creations to the scrutiny 
of a very critical community of peers. The best code wins and is 
included in the next version of the software. This open communication 
strikes me as so perfectly American. I envision the early leaders of 
this country drawing up the tenets of our constitution in much the same 
way--in the open, in pursuit of a solution that is fair and of benefit 
to all.
    Some have called this the technology equivalent of a barn-raising. 
Through this approach Linux software has grown, improved and become one 
of the most stable, cost-effective operating systems in the world. It 
continues to improve every day.
    The values and practices of Red Hat are in most ways antithetical 
to those of the monopolist I am here to reference.
    Much testimony has been provided on the practices by the 
monopolist, which in my view have placed a technical and financial 
stranglehold on the technology industry. Mr. McNealy and Mr. Barksdale 
and others that have come before me have done a good job of presenting 
the issues to the Committee. I support their conclusions that the 
software industry needs government intervention. I support their 
requests for strong enforcement of antitrust laws.
    I would like to reaffirm their case, that innovation will occur 
when there is a competitive environment free of monopolistic practices.
    Open source software arose because of a lack of alternatives that 
allowed the individual to choose the best tool for the job. Over the 
past 5 years, projects created by Red Hat and the open source community 
have become solutions of choice in areas of standards-based Internet 
software development, areas that the monopolist does not yet control.
    The growth of the Linux operating system is an example of this 
acceptance. The Apache web server is another, it now holds a market-
leading position.
    However, the Internet browser, desktop operating system and office 
productivity software are areas that have continued to be influenced by 
one vendor alone.
    One of the reasons I am. so deeply troubled by the consent decree 
in this case is that it seems to run counter to things that are 
fundamental to our identity as Americans. We value fair play, ethical 
competition, abiding by the rules and fostering innovation. The consent 
decree throws all of this away. It acknowledges that my competitor has 
broken the law; that through these violations it has built one of the 
most formidable businesses in the world. Yet the consent decree does 
little to prevent future misconduct. I feel if the antitrust laws are 
not enforced, the will and spirit of the true innovators will suffer.
    Lengthy legal critiques of the consent decree are already on 
record. In the interest of time I will not subject you to more this 
morning. I am sure you've heard enough legal arguments in considering 
this topic. Rather, I want to make a few key points:
    First, their growing monopoly power has seriously warped the 
technology market. Now that my competitor is a convicted monopolist, 
the world can see in the public record what those in technology 
companies have known for years: they don't compete fairly, they use 
their dominance in one market to dominate others, and they stifle 
innovation in the name of competition. The only way to stop this--to 
restore fairness to the market--is a settlement of this case that 
denies the monopolist the fruits of its past actions and provides 
remedial measures on the monopolist for its violations of the law.
    Second, the consent decree as it stands today, falls far short of 
this requirement. Given the monopolist's history of skating up to the 
edge, or over the edge, in not fully complying with prior settlements, 
it will take very strong measures to change their behavior. In the 
words of Massachusetts Attorney General Thomas F. Reilly, commenting on 
the consent decree: ``Five minutes after any agreement is signed with 
Microsoft, they'll be thinking of how to violate the agreement. They're 
predators. They crush their competition. They crush new ideas. They 
stifle innovation. That's what they do.''
    Microsoft is deeply concerned about open source software and has 
already making overtures on how it will use dominance rather than 
technical expertise to crush it.
    The CEO of the monopolist said, quote, ``Linux is a cancer that 
attaches itself in an intellectual property sense to everything it 
touches.''
    The head of the monopolist's Windows Platform Group has similar 
beliefs: He said publicly, quote, ``Open source is an intellectual 
property destroyer. I can't imagine something that could be worse than 
this for the software business.'' He goes on further to say, ``I'm an 
American, I believe in the American way. I worry if the government 
encourages open source, and I don't think we've done enough education 
of policymakers to understand the threat.''
    In my view, the consent decree should create a level playing field 
between Windows and Linux. Because of their comments, and their past 
actions, I believe the current consent decree is not strong enough. 
They will circumvent it.
    Third, we have all heard of the Digital Divide. It's the gap in 
information and computing access between the haves and have nots in our 
society. As many states struggle with declining revenues, I believe 
these shortfalls will have a material impact on the public funding of 
K-12 and higher education. The path to the development of an 
information economy can not be limited to a sole supplier, who in my 
view has seen education up to this point, relative to its financial 
position as a market--not as a responsibility. I believe the lack of 
choices and high recurring costs is in part responsible for this 
growing chasm between the two Americas.
    I'm involved with North Carolina Central University--an 
historically black university that cannot afford the monopolist's 
restrictive licenses and forced upgrades. I see this sad experience in 
schools throughout our country. Walk the halls of schools in East 
Roxbury, MA or Snow Hill, NC and question how we can expect, as a 
nation, to improve the future for our youth when schools must allocate 
30-40% of their IT budget for software and hardware upgrades. Provided 
choice, these same dollars could be put into teacher training and 
acquiring more technology.
    The Chinese government understands this. The French and German 
governments as well. They have stated that proprietary software will 
not be used to develop government and educational infrastructure.
    But the monopolist has more than 90% of the desktop operating 
system market and more than 70% of the Internet browser market. What 
choices do our schools have? What choices do our citizens have? As the 
monopolist extends its monopoly into additional markets, largely 
unfettered by the legal system and apparently immune to the 
consequences of their actions--the Digital Divide widens.
    Biologists know that an unbalanced ecosystem, one dominated by a 
single species, is more vulnerable to collapse. I think we're seeing 
this today. Under the consent decree, it will continue and probably get 
worse.
    In America, history has taught us that there is no mechanism more 
logical and efficient and than a free and open market. Our competitor's 
illegal monopolistic actions have significantly reduced the open market 
in information technology. I believe that in extreme cases like this, 
it is the role of the government to step in and restore balance.
    Thank you.

                                

   Statement of Hon. Jeff Sessions, a U.S. Senator from the State of 
                                Alabama

    I am troubled by the decision of Committee, acting in its official 
capacity, to send a transcript of this hearing to the federal district 
court that will determine the outcome of this pending litigation. By 
taking the apparently unprecedented step of sending a transcript of a 
hearing on pending litigation to the judge that is deciding the case, 
this Committee may have unintentionally traversed the critical boundary 
between attempting to inform the court and attempting to influence it.
    The Constitution vests the legislative power in the Congress, 
Article I, Sec. 1, the executive power in the President, Article II, 
Sec. 1, and the judicial power in the Supreme Court and lower federal 
courts, Article III, Sec. 1. Thus, Congress has the power to make law 
pursuant to its enumerated powers, the President has the power to 
enforce these laws, and the courts have the separate power to ``say 
what the law is''--``to rule on cases .  .  . to decide them,'' Marbury 
v. Madison, 5 U.S. (1 Cranch) 137, 177 (1803); Plaut v. Spendthrift 
Farm, Inc., 514 U.S. 211, 218 (1995).
    The separation of powers principle not only outlines the distinct 
spheres of operation of the three branches of government but also 
guides the branches in their dealings with each other. It is crystal 
clear that the Framers of our Constitution intended to have a judiciary 
that is independent of Congress. The provision for judges to hold 
office during good behavior in Article III, Sec. 1, for example, was 
said by Alexander Hamilton to constitute an ``excellent barrier to the 
encroachments and oppressions of the representative body.'' THE 
FEDERALIST NO. 78, at 465 (Hamilton) (Clinton Rossiter ed;, 1961). 
Thus, with respect to this case, Congress, the Senate, and this 
Committee, should defer to the court to decide the case by exercising 
its independent judgement. A publicized congressional hearing and a 
transcript submission to the court can only be perceived as an attempt 
to create for senators a status at a Tunney hearing that neither the 
court nor the Tunney Act permits.
    While the Tunney Act provides that a district court should accept 
comments from the public on a proposed antitrust settlement agreement, 
it does not provide for any role by the legislative branch in such a 
hearing. See Pub. L. No. 93-528 (1974). Indeed, the Congressional 
Research Service has informed me that it has found ``no instances in 
which any comments--whether Hearing transcripts, summaries of Hearing 
transcripts, or other written communications--were sent to'' the 
district court in a Tunney Act hearing. Congressional Research Service, 
Memorandum 2 (Dec. 18, 2001).
    While any senator may file comments on a proposed settlement 
agreement as a private citizen, it infringes upon the separation of 
powers principle for the Senate or this Committee officially to do so. 
It is the litigants and the public that inform the court in a Tunney 
Act hearing, not the Congress. See Pub. L. No. 93-528. For this 
Committee to submit its views on the merits of pending litigation 
creates the appearance of an attempt to influence the Article III 
federal court in the exercise of its independent judicial power.
    In addition to my constitutional concern, I have an underlying 
prudential concern. This transcript will include several statements 
from Senators opining on the merits of the Microsoft settlement 
agreement. A case such as this one involves a complex body of law and a 
extraordinary amount of evidence. Neither I nor, to the best of my 
knowledge, any other member of this Committee or of the Senate has had 
an opportunity to thoroughly review the law and the facts of this case. 
Consequently, our opinion with respect to this non-legislative matter 
is worth no more than that of any other reasonably informed citizen who 
may submit information to the court. There is no legitimate rationale 
for any court to give more weight to our opinions, whether stamped with 
the imprimatur of this Committee or not, than to the opinions of 
others. Accordingly, I respectfully object to the Chairman and Ranking 
Member's decision, without a vote of the Committee, to submit on behalf 
of the Committee, a copy of the transcript of this hearing to the 
district court.




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