[Federal Register Volume 59, Number 160 (Friday, August 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20216]


[[Page Unknown]]

[Federal Register: August 19, 1994]


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DEPARTMENT OF JUSTICE

 

Proposed Final Judgment and Competitive Impact Statement; United 
States of America vs. Microsoft Corporation

    Notice is hereby given pursuant to the Antitrust Procedures and 
Penalties Act, 15 U.S.C. Sec. 16(b)-(h), that a proposed Final 
Judgment, Stipulation, and Competitive Impact Statement have been filed 
with the United States District Court for the District of Columbia in 
United States vs. Microsoft Corporation, Civ. No. 94-1564 (SS). The 
proposed Final Judgment is subject to approval by the Court after the 
expiration of the statutory 60-day public comment period and compliance 
with the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b)-
(h).
    The Complaint alleges that Microsoft uses exclusionary and 
anticompetitive contracts to market certain of its personal computer 
operating system software products. By these contracts Microsoft has 
unlawfully maintained its monopoly of personal computer operating 
systems and has unreasonably restrained trade thereby violating 
Sections 1 and 2 of the Sherman Act, as amended, 15 U.S.C. Secs. 1, 2.
    The proposed Final Judgment not only bans Microsoft's unlawful 
practices, but also contains additional provisions which are 
prophylactic in nature, and are intended to ensure that the 
anticompetitive effects of those practices are not replicated through 
use by Microsoft of other exclusionary practices.
    The proposed Final Judgment includes four categories of limitations 
on Microsoft's contracting practices. First, it limits the duration of 
license agreements for operating system software between Microsoft and 
personal computer manufacturers. Microsoft is prohibited from entering 
into any such license with a term exceeding one year, except that a 
license may include a term permitting the computer manufacturer to 
renew the agreement for up to one additional year on the same terms and 
conditions as those applicable in the original license period.
    Second, the proposed Final Judgment restricts the manner in which 
Microsoft may charge royalties for the distribution of its operating 
system software with personal computers. Microsoft may not enter into 
any ``per processor'' license (i.e., license requiring the computer 
manufacturer to pay a royalty for each computer shipped with a 
specified microprocessor). Microsoft's revenue from a license may not 
be calculated on anything other than a per copy basis (i.e., royalty 
for each unit of Microsoft operating system software licensed, sold or 
distributed) or a per system basis (i.e., a royalty for each computer 
system bearing a particular model name or number). Should Microsoft 
enter into a per system agreement with a licensee it must provide a 
statement, the text of which is set forth in the Final Judgment, 
advising the licensee of its rights under the license.
    Third, the proposed Final Judgment bans Microsoft from entering 
into license agreements that prohibit or restrict a personal computer 
manufacturer from licensing, selling, or distributing competing 
operating system products. Microsoft may neither condition the 
licensing of its operating systems on the licensing or use of other 
products, nor may it enter into any license containing a minimum 
commitment, nor may it use lump sum pricing.
    Fourth, the proposed Final Judgment places limits on Microsoft's 
use of non-disclosure agreements for its operating system products. 
Microsoft is prohibited from entering into any non-disclosure agreement 
whose duration extends beyond (a) the commercial release of the covered 
product, (b) any prior public disclosure of information covered by the 
agreement authorized by Microsoft, or (c) one year from the date of 
disclosure of information covered by the agreement to a person subject 
to the non-disclosure agreement, whichever comes first. Also, non-
disclosure agreements may not restrict persons subject to the agreement 
from developing software products that will run on competing operating 
systems, provided that such development does not entail the disclosure 
or use of Microsoft proprietary information during the term of the 
agreement. Nor may any non-disclosure agreement restrict the activities 
of persons subject to the agreement to whom no information covered by 
the agreement has been disclosed.
    Computer manufacturers that currently have licenses that are 
inconsistent with any provision of the Final Judgment may, without 
penalty, terminate the license or negotiate with Microsoft to amend the 
inconsistent provisions. Otherwise, Microsoft may enforce the license, 
subject to the following restrictions: (a) if the license is a per 
processor license, it must be treated as a per system license; and (b) 
Microsoft may not enforce prospectively any minimum commitment.
    Public comment is invited within the statutory 60-day comment 
period. Such comments, and the responses thereto, will be published in 
the Federal Register and filed with the Court. Written comments should 
be directed to Richard L. Rosen, Chief, Communications & Finance 
Section, Antitrust Division, Room 8104, 555 Forth Street NW., 
Washington, D.C. 20001 (202-514-5621). Copies of the Complaint, 
proposed Final Judgment and Competitive Impact Statement are available 
for inspection in Room 3233 of the Antitrust Division, Department of 
Justice, Tenth Street and Pennsylvania Avenue NW., Washington. D.C. 
20530 (202-633-2481) and at the office of the Clerk of the United 
States District Court for the District of Columbia, Third Street and 
Constitution Avenue NW., Washington, D.C. 20001.
    Copies of any of these materials may be obtained upon request and 
payment of a copying fee.
Mark C. Schechter,
Deputy Director of Operations, Antitrust Division.

    In The United States District Court For The District of 
Columbia, United States of America, Plaintiff, v. Microsoft 
Corporation, Defendant. Civil Action No. 94-1564, Judge Charles R. 
Richey
July 15, 1994.

Complaint

(For Violations of Sections 1 & 2 of the Sherman Act)
    The United States of America, acting under the direction of the 
Attorney General of the United States, brings this civil action to 
prevent and restrain the defendant Microsoft Corporation 
(``Microsoft'') from using exclusionary and anticompetitive contracts 
to market its personal computer operating system software. By these 
contracts, Microsoft has unlawfully maintained its monopoly of personal 
computer (``PC'') operating systems and has unreasonably restrained 
trade.
    Virtually all major PC manufacturers find it necessary to offer 
Microsoft operating systems on most of their PCs. Microsoft's monopoly 
power allows it to induce these manufacturers to enter into 
anticompetitive, long-term licenses under which they must pay royalties 
to Microsoft not only when they sell PCs containing Microsoft's 
operating systems, but also when they sell PCs containing non-Microsoft 
operating systems.
    These anticompetitive contracts help Microsoft maintain its 
dominance in the PC operating system market. By inhibiting competing 
operating systems' access to PC manufacturers, Microsoft's exclusionary 
contracts slow innovation and deprive consumers of an effective choice 
among competing PC operating systems.
    These contracts outlined below constitute illegal monopolization 
and unlawful restraints of trade, and the United States seeks this 
Court's order declaring Microsoft's anticompetitive contracts illegal 
and otherwise remedying the unlawful effects of Microsoft's 
anticompetitive conduct.

Jurisdiction, Venue and Commerce

    1. This Court has jurisdiction over this matter pursuant to Section 
4 of the Sherman Act, 15 U.S.C. Sec. 4, and 28 U.S.C. Secs. 1331, 1337.
    2. Venue is proper in this district under Section 12 of the Clayton 
Act, 15 U.S.C. Sec. 22, and under 28 U.S.C. Sec. 1391 because defendant 
Microsoft transacts business and is found within this district.
    3. Microsoft sells and licenses operating systems for PCs 
throughout the United States and the world. Microsoft delivers copies 
of its operating systems to PC manufacturers and retail customers 
across state lines and international borders. Thus, Microsoft is 
engaged in, and its activities substantially affect, interstate and 
foreign commerce. The major developers of other PC operating systems 
are exclusively U.S. companies.

The Defendant Microsoft and Its Products

    4. Microsoft is a corporation organized and existing under the laws 
of the State of Washington, with its principal place of business 
located at One Microsoft Way, Redmond, Washington.
    5. Microsoft develops, licenses, sells and supports several types 
of software products for PCs, including ``operating systems'' and 
``applications.''
    6. PC operating systems control the operation of a computer by 
managing the interaction between the computer's microprocessor, memory 
and attached devices such as keyboards, display screens, disk drives, 
and printers. A PC operating system functions as the ``central nervous 
system'' of the PC. PC operating system software is designed to work 
with specific microprocessors, the integrated circuits that function as 
the ``brain'' of the computer.
    7. Most of the personal computers in the world today use the x86 
class of microprocessors, originally designed by Intel Corporation. The 
x86 class includes Intel 286, 386, 486, and Pentium microprocessors, as 
well as microprocessors manufactured by other companies that use a 
substantially similar architecture and instruction set. Unless 
otherwise specified, the term ``PC'' refers to personal computers that 
use the x86 class of microprocessors.
    8. In 1980, Microsoft licensed from another company a PC operating 
system which it modified and introduced in 1981 as the Microsoft Disk 
Operating System (``MS-DOS''). According to Microsoft's 1993 Annual 
Report, as of June 30, 1993, approximately 120 million PCs in the world 
utilized MS-DOS.
    9. In 1985, Microsoft introduced a more sophisticated PC operating 
system product it calls ``Windows.'' Windows has a ``graphical user 
interface'' which allows users to give instructions by pointing and 
clicking on their computer screen with a ``mouse'' or other similar 
device. Windows also allows users to run more than one application at a 
time. All versions of Windows released to date require the presence of 
an underlying operating system, either MS-DOS or a close substitute. 
Microsoft estimates that over 50 million PCs now use Windows.
    10. Applications are software programs that work ``on top of'' PC 
operating systems to enable users to perform a broad range of 
functions. Applications communicate through the PC operating system 
with the computer's hardware. Commonly used applications include word 
processors and spreadsheets, such as WordPerfect, Lotus 1-2-3, and 
Quattro Pro among others. At least 50,000 applications now run on MS-
DOS and over 5,000 have been written to run on Windows. Microsoft sells 
a variety of its own very successful and profitable applications.
    11. Microsoft markets its PC operating system primarily through 
original equipment manufacturers (``OEMs''), which manufacture PCs. It 
also markets through independent, non-exclusive distributors. Microsoft 
has agreements with virtually all of the major microcomputer OEMs.
    12. Microsoft generally distributes MS-DOS only to OEMs. To retail 
customers, Microsoft generally offers only upgrades for MS-DOS. In the 
first half of 1994, the share of Windows units sold by Microsoft 
through the OEM channel was approximately 80%.

The Relevant Market and Microsoft's Monopoly Power

    13. The relevant product market is personal computer operating 
systems for the x86 class of microprocessors (hereinafter the ``PC 
operating system market''). Because operating systems written for other 
microprocessors will not work on machines with an x86 class 
microprocessor, OEMs who sell x86 machines and customers who buy such 
machines cannot use other operating systems.
    14. The relevant geographic market is the world.
    15. Microsoft has monopoly power in the relevant market and has had 
monopoly power since at least the mid-1980s. For almost a decade 
Microsoft has retained an extremely high market share--consistently in 
excess of 70%.
    16. Substantial barriers to entry and expansion exist in the 
relevant market. One barrier to entry and expansion is the considerable 
time and expense required to develop, test, and market a new PC 
operating system. Other interrelated barriers to entry and expansion 
include:
    a. the absence of a variety of high quality applications that run 
on a new operating system, and the difficulty of convincing independent 
software vendors (``ISVs'') to develop such applications;
    b. the lack of a sizable installed base of users; and
    c. the difficulty in convincing OEMs to offer and promote a non-
Microsoft PC operating system, particularly one with a small installed 
base and relatively few applications designed to run on it.
    17. These barriers magnify and reinforce each other because the 
value of an operating system to a consumer is directly related to two 
factors: the availability of a variety of high quality applications 
that run on that system, and the number of users who use that operating 
system and thus are able to share information and work with the system 
without additional training. ISVs, in turn, tend to develop 
applications for operating systems with a large installed base of 
users, and consumers gravitate towards operating systems with a large 
base of applications.
    18. Microsoft's anticompetitive contracting practices described 
below significantly increase the already high barriers to entry and 
expansion facing competitors in the PC operating system market. These 
practices reduce the likelihood that OEMs will license and promote non-
Microsoft PC operating systems, make it more difficult for Microsoft's 
competitors to persuade ISVs to develop applications for their 
operating systems, and impede the ability of a non-Microsoft PC 
operating system to expand its installed base of users.

Microsoft's Exclusionary and Anticompetitive OEM Licenses Foreclose 
Access to the OEM Channel by Microsoft's PC Operating System 
Competitors

    19. In 1980, IBM agreed to license the original version of MS-DOS 
from Microsoft for IBM's PC, which experienced considerable success. 
Other OEMs also used MS-DOS in order better to emulate the IBM PC. 
Microsoft quickly dominated and gained a monopoly in the market for PC 
operating systems. It then entered into a series of exclusionary and 
anticompetitive contract terms to maintain its monopoly.
    20. Because of Microsoft's monopoly position in the marketplace, 
OEMs believe that they must offer MS-DOS and Windows to their 
customers. Profit margins in the computer hardware industry are very 
thin and OEMs want to obtain MS-DOS and Windows at the lowest possible 
cost. Microsoft has induced many OEMs to execute anticompetitive ``per 
processor'' contracts for MS-DOS and Windows, even though many would 
prefer to preserve their freedom to offer PCs with non-Microsoft 
operating systems.

Microsoft's Licenses Impose a Penalty or Tax Paid to Microsoft on OEMs' 
Use of Non-Microsoft PC Operating Systems

    21. Microsoft's licenses impose a penalty or ``tax'' paid to 
Microsoft upon OEMs' use of competing PC operating systems. ``Per 
processor'' licenses require OEMs to pay a royalty for each computer 
the OEM sells containing a particular processor (e.g., an Intel 386 
microprocessor) whether or not the OEM has included a Microsoft 
operating system with that computer.
    22. Microsoft's per processor contracts penalize OEMs, during the 
life of the contract, for installing a non-Microsoft operating system. 
OEMs that have signed per processor contracts with Microsoft are 
deterred from using competitive alternatives to Microsoft operating 
systems.

The Contract Length of Microsoft's Anticompetitive Per Processor 
Contracts Magnifies Its Exclusionary Effects

    23. Microsoft further impedes PC operating system competitors by 
executing long-term contracts with major OEMs, and by requiring minimum 
commitments and crediting unused balances to future contracts, which 
effectively extends the contract term and makes it economically 
unattractive for an OEM to install a non-Microsoft operating system.
    24. Microsoft's exclusionary licenses are often for a duration of 
three years or more--a period of time equal to, or exceeding, the 
product life cycle of most PC operating system products. Microsoft 
often extends the term of its OEM licenses through amendment. Thus, 
Microsoft's anticompetitive per processor contracts can extend to 
beyond five years.

Microsoft's Exclusionary Contracts Foreclose Other PC Operating System 
Vendors From a Substantial and Critically Important Segment of the 
Market

    25. Access to the OEM channel is critical to the success of a 
competing operating system. The overwhelming majority of PCs are sold 
with a pre-installed operating system. Thus, to reach the ultimate 
consumer of an operating system, it is important that competitors have 
access to OEMs. Operating system vendors, as well as OEMs, confirm that 
successful entry is extremely difficult in the absence of ``proper 
support'' in the OEM channel in the form of public commitments to sell 
a new operating system.
    26. Since 1988, Microsoft has induced major OEMs to execute per 
processor contracts, many of which extend for several years. These OEMs 
are critical to the success of a new operating system entrant; it would 
be virtually impossible for a new entrant to achieve commercial success 
solely through license agreements with small OEMs that are not covered 
by Microsoft's per processor agreements. According to Microsoft, in 
fiscal year 1993, per processor agreements accounted for an estimated 
60% of Microsoft's MS-DOS sales to OEMs and 43% of Window sales to 
OEMs.
    27. Competing operating system developers, finding the largest OEMs 
contractually bound by Microsoft's exclusionary licenses, are 
disadvantaged in their efforts to bring to the consumer less expensive 
and/or better quality operating system products.
    28. The effect of Microsoft's licensing practices has been to 
exclude competitors by unreasonable and anticompetitive means and to 
lessen competition in the relevant market. Microsoft's practices deter 
OEMs from entering into licensing agreements with competing operating 
system providers, discourage OEMs who agree to sell non-Microsoft 
operating systems from promoting those products, and raise the price of 
computers sold with competing operating systems, thereby depressing the 
demand and restricting the output of these products. Microsoft's 
licensing practices have effectively foreclosed a substantial share of 
the relevant market; they are exclusionary, anticompetitive, and not 
justified by legitimate business considerations.

Microsoft's Anticompetitive Non-Disclosure Agreements

    29. ISVs develop applications, which motivate consumers to purchase 
PCs. Microsoft has sought to have several commercially important ISVs 
and their employees agree to non-disclosure agreements that would 
restrict their ability to work with competing PC operating systems as 
well as restrict their ability to develop competitive products.
    30. Microsoft moved to impose these restrictions in connection with 
its ``beta tests'' of its new operating system, the next version of 
Windows, code-named Chicago. Microsoft anticipates commercially 
releasing Chicago in late 1994 or early 1995. Beta tests of new 
versions of an operating system, which are conducted prior to the 
commercial release of that new version, help both Microsoft and the 
ISVs.
    31. For the ISVs, the beta tests provide, among other things, 
critical information about the interfaces in the operating system that 
connect with applications--information which the ISVs need to write 
applications that run on the operating system. Early access to the beta 
tests is especially valuable to the ISVs if they are to be able to 
release their applications within a short time after the commercial 
release of a new Microsoft operating system, such as Chicago.
    32. For Microsoft, the beta tests enable ISVs, informed experts, 
and selected members of the media to provide important feedback about 
the advantages ad drawbacks of the operating system. In addition, the 
demand for Microsoft's operating systems depends to a significant 
extent on the availability of applications designed to work with it. 
Accordingly, it is in Microsoft's interest to provide ISVs early access 
to beta tests.
    33. At the same time, because Microsoft necessarily must disclose 
certain confidential information during the course of the beta tests, 
it has legitimate interests in maintaining that confidentiality. In the 
past, Microsoft has protected its interests through non-disclosure 
agreements that prohibit those participating in the beta tests from 
disclosing such confidential information.
    34. In connection with its beta tests of Chicago, however, 
Microsoft sought to impose on certain leading software companies far 
more restrictive non-disclosure agreements than it had previously used. 
The terms of these non-disclosure agreements would preclude developers 
at these companies from working with operating system companies, other 
competitors of Microsoft, and competing technologies for an 
unreasonably long period of time.

The Anticompetitive Effects of Microsoft's Conduct

    35. Microsoft's exclusionary contracting practices have had the 
effect of excluding competitors on a basis other than competition on 
the merits and have thereby allowed Microsoft illegally to perpetuate 
its monopoly in the PC operating system market.
    36. Through the unlawful acts and practices described above 
Microsoft has harmed competition, consumers and innovation:
    a. Microsoft has unlawfully maintained a monopoly in the PC 
operating system market.
    b. Microsoft's exclusionary conduct has significantly impeded the 
ability of rival operating systems to compete in the PC operating 
system market. Competitors find it more difficult to convince OEMs to 
offer and/or promote their product and must incur greater marketing 
expenses to penetrate the market. Microsoft raised hurdles to fair 
competition even higher through unreasonably restrictive non-disclosure 
agreements.
    c. Microsoft's exclusionary licenses deprive rival PC operating 
systems of a significant number of sales that they might otherwise 
secure. These lost sales impede the ability of PC operating systems to 
develop an installed base sufficient to convince OEMs to bundle the new 
system with their hardware, to convince ISVs to write applications that 
run on the new system, and to convince users that the system is, and 
will remain, a viable alternative to the existing MS-DOS and Windows 
standard.
    d. Microsoft's conduct also substantially lengthens the period of 
time required for competitors to recover their development costs and 
earn a profit, and increases the risk that an entry attempt will fail. 
In combination, all of these factors deter entry by competitors and 
thus harm competition.
    37. The harm to competition caused by Microsoft's unlawful conduct 
harms consumers. OEMs that do offer customers a choice of operating 
systems may charge customers a higher price for PCs with non-Microsoft 
operating systems in order to be able to pay the double royalty 
necessitated by the Microsoft per processor agreements. Thus, users who 
do not receive a Microsoft operating system are still, indirectly, 
paying Microsoft.
    38. In addition, Microsoft's unlawful conduct has deterred the 
development of competing operating systems, depriving consumers of a 
choice of systems with possibly superior features. Similarly, the 
slower growth of competing operating systems has slowed the development 
and diffusion of applications designed to work on non-Microsoft 
operating systems and has limited choices of consumers and users of 
PCs.
    39. Those injured by Microsoft's conduct will continue to suffer 
such injury unless the relief prayed for herein is granted.

First Claim for Relief--Sherman Act Sec. 2

    40. Plaintiff realleges and incorporates herein by reference the 
allegations set forth in paragraphs 1 through 39 above.
    41. By engaging in the acts and practices described above, 
Microsoft has monopolized the market for PC operating systems in the 
United States.
    42. Such conduct constitutes monopolization in violation of Section 
2 of the Sherman Act, 15 U.S.C. Sec. 2.

Second Claim for Relief--Sherman Act Sec. 1

    43. Plaintiff realleges and incorporates by reference the 
allegations set forth in paragraphs 1 through 39 above.
    44. The licensing agreements and unnecessarily restrictive non-
disclosure agreements described above constitute contracts and 
combinations which unreasonably restrain trade in the market for PC 
operating systems, which affect interstate trade and commerce, in 
violation of Section 1 of the Sherman Act, 15 U.S.C. Sec. 1.

Prayer for Relief

    Wherefore, Plaintiff Prays For Relief As Follows:
    1. That the Court adjudge and decree that Microsoft has monopolized 
the interstate trade and commerce in the market for PC operating 
systems in violation of Section 2 of the Sherman Act.
    2. That the Court adjudge and decree that Microsoft has entered 
into unlawful contracts and combinations which unreasonably restrain 
the trade in interstate commerce in PC operating systems, in violation 
of Section 1 of the Sherman Act.
    3. That Microsoft and all persons, firms and corporations acting on 
its behalf and under its direction or control be permanently enjoined 
from engaging in, carrying out, renewing or attempting to engage, carry 
out or renew, any contracts, agreements, practices, or understandings 
in violation of the Sherman Act.
    4. That plaintiff have such other relief that the Court may 
consider necessary or appropriate to restore competitive conditions in 
the markets affected by Microsoft's unlawful conduct.
    5. That the plaintiff recover the cost of this action.

    Dated: July 15, 1994.
Anne K. Bingaman,
Assistant Attorney General.
Robert E. Litan,
Mark C. Schechter,
Richard L. Rosen,
James D. Bates,
Assistant U.S. Attorney, Chief, Civil Division, District of Columbia, 
Washington, DC 20001.
Samuel R. Miller,
Donald J. Russell,
Joyce Bartoo,
Robert J. Zastrow,
Richard L. Irvine,
Peter A. Gray,
Justin M. Dempsey,
Gilad Y. Ohana,
Lawrence M. Frankel,
Attorneys, Antitrust Division, U.S. Department of Justice, 555 4th 
Street NW., (202) 514-2401.

    United States District Court for the District of Columbia, 
United States of America, Plaintiff vs. Microsoft Corporation, 
Defendant. Civil Action No. 94-1564, July 15, 1994.

Stipulation

    It is stipulated by and between the undersigned parties, by their 
respective attorneys, that:
    1. The Court has jurisdiction over the subject matter of this 
action and over each of the parties hereto, and venue of this action is 
proper in the District of Columbia.
    2. The parties consent that a Final Judgment in the form hereto 
attached may be filed and entered by the Court, upon the motion of any 
party or upon the Court's own motion, at any time after compliance with 
the requirements of the Antitrust Procedures and Penalties Act (15 
U.S.C. 16), and without further notice to any party or other 
proceedings, provided that Plaintiff has not withdrawn its consent, 
which it may do at any time before the entry of the proposed Final 
Judgment by serving notice thereof on the Defendant and by filing that 
notice with the Court; and
    3. Defendant agrees to be bound by the provisions of the proposed 
Final Judgment pending its approval by the Court. If the Plaintiff 
withdraws its consent or if the proposed Final Judgment is not entered 
pursuant to this Stipulation, this Stipulation shall be of no effect 
whatsoever, and the making of this Stipulation shall be without 
prejudice to any party in this or in any other proceeding.

    Dated This 15th day of July 1994.

    For The Plaintiff The United States Of America.
Anne K. Bingaman,
Assistant Attorney General, Antitrust Division, U.S. Department of 
Justice.

    For The Defendant Microsoft Corporation.
William H. Neukom,
Senior Vice President, Law and Corporate Affairs, Microsoft 
Corporation.

    In the United States District Court for the District of the 
District of Columbia. United States of America, Plaintiff, v. 
Microsoft Corporation, Defendant. Civil Action No. 94-1564 (SS). 
Competitive Impact Statement.
    Received: July 27, 1994, Clerk, U.S. District Court, District of 
Columbia.

Competitive Impact Statement

    Pursuant to Section 2(b) of the Antitrust Procedures and Penalties 
Act, 15 U.S.C. Sec. 16(b)-(h), the United States submits this 
Competitive Impact Statement relating to the proposed Final Judgment 
submitted for entry with the consent of defendant Microsoft Corporation 
in this civil antitrust proceeding.

Nature and Purpose of the Proceeding

    On July 15, 1994, the United States filed a civil antitrust 
Complaint to prevent and restrain Microsoft Corporation (``Microsoft'') 
from using exclusionary and anticompetitive contracts to market its 
personal computer operating system software, in violation of Sections 1 
and 2 of the Sherman Act, 15 U.S.C. 1, 2. As alleged in the Complaint, 
Microsoft has used these contracts to restrain trade and to monopolize 
the market for operating systems for personal computers using the x86 
class of microprocessors, which comprise most of the world's personal 
computers. As used herein, ``PC'' refers to personal computers that use 
this class of microprocessor.
    The Complaint alleges that Microsoft has used its monopoly power to 
induce PC manufacturers to enter into anticompetitive, long-term 
licenses under which they must pay Microsoft not only when they sell 
PCs containing Microsoft's operating systems, but also when they sell 
PCs containing non-Microsoft operating systems. These anticompetitive, 
long-term licenses have helped Microsoft to maintain its monopoly. By 
inhibiting competing operating systems' access to PC manufacturers, 
Microsoft's exclusionary licenses slow innovation, raise prices, and 
deprive consumers of an effective choice among competing PC operating 
systems.
    The Complaint also alleges that in connection with pre-release 
testing of a new Microsoft operating system code-named ``Chicago,'' 
Microsoft sought to impose unreasonably restrictive and anticompetitive 
non-disclosure agreements on a number of leading developers of 
applications software products. These non-disclosure agreements would 
have unreasonably restricted the ability of software developers to work 
with competing operating systems or to develop competitive products or 
technologies.
    The Complaint seeks to prevent Microsoft from continuing or 
renewing any of the anticompetitive practices alleged to violate the 
Sherman Act, and thus to provide fair opportunities for other firms to 
compete in the market for PC operating systems.
    The United States and Microsoft have agreed that the proposed Final 
Judgment may be entered after compliance with the Antitrust Procedures 
and Penalties Act.\1\ Entry of the Final Judgment will terminate this 
civil action, except that the Court will retain jurisdiction for 
further proceedings that may be required to interpret, enforce, or 
modify the Judgment, or to punish violations of any of its provisions.
---------------------------------------------------------------------------

    \1\The proposed Final Judgment that was filed with the Complaint 
on July 15, 1994 contained several omissions and inconsistencies in 
the numbering of paragraphs and subparagraphs. With the Defendant's 
consent, a corrected version of the Final Judgment is being filed 
with this Competitive Impact Statement. See Attachment. Paragraph 
and sub-paragraph numbers in this Competitive Impact Statement refer 
to the numbers used in the corrected version of the Final Judgment.
---------------------------------------------------------------------------

Description of the Practices Involved in the Alleged Violations

    If this case were to proceed to trial, the United State would prove 
the following:
    Microsoft develops, licenses, sells, and supports several types of 
software products for personal computers, including operating systems 
and applications. An operating system is software that controls the 
basic operations of the personal computer. Applications software, such 
as word processing programs and spread sheets, runs ``on top of'' an 
operating system to enable the computer to perform a broad range of 
useful functions. Operating systems are designed to work with specific 
microprocessors, the integrated circuits that function as the ``brain'' 
of the computer. Most of the personal computers in the world today use 
the x86 class of microprocessors, originally designed by Intel, and now 
including microprocessors manufactured by other companies that use a 
substantially similar architecture and instruction set. Original 
equipment manufacturers (``OEMs'') that sell PCs and customers who buy 
such machines cannot use operating systems written for other 
microprocessors.
    In 1981, Microsoft introduced a PC operating system called the 
Microsoft Disk Operating System (``MS-DOS''), the original version of 
which Microsoft licensed to IBM for use in IBM's PC. As IBM's PC 
experienced considerable commercial success, other OEMs also used MS-
DOS in order better to emulate the IBM PC. In 1985, Microsoft 
introduced ``Windows,'' a more sophisticated PC operating system 
product designed for use in conjunction with MS-DOS. Windows allowed 
users to give instructions with a ``mouse'' or similar device and also 
to run more than one application at a time. Microsoft quickly gained a 
monopoly in the market for PC operating systems worldwide. For almost a 
decade, Microsoft's market share has consistently exceeded 70%.\2\
---------------------------------------------------------------------------

    \2\In 1993, Microsoft's MS-DOS operating system constituted 
approximately 79% of the operating systems sold to PC manufacturers. 
PC-DOS accounted for approximately 13% of such sales, OS/2 
constituted approximately 4%, DR-DOS constituted approximately 3%, 
and Unix operating systems constituted approximately 1%. A chart 
showing these market shares is attached as Exh. 1.
---------------------------------------------------------------------------

    Development, testing, and marketing of a new PC operating system 
involves considerable time and expense. A new operating system faces 
additional barriers to entry, including the absence of a variety of 
high quality applications to run on the system; the small number of 
people trained on and using the system, which discourages customers 
from buying it and software companies from writing applications to run 
on it; and, since the overwhelming majority of PCs are sold with a pre-
installed operating system, the difficulty of convincing OEMs to offer 
and promote the system.
    Microsoft has used exclusionary and anticompetitive contract terms 
to maintain its monopoly. OEMs believe that a substantial portion of 
their customers will want a PC with MS-DOS and Windows, and therefore 
feel that they must be able to offer their customers MS-DOS and 
Windows. With thin profit margins, OEMs want to obtain these products 
at the lowest possible cost.
    Beginning in 1988, and continuing until July 15, 1994, Microsoft 
induced many OEMs to execute anticompetitive ``per processor'' 
licenses. Under a per processor license, an OEM pays Microsoft a 
royalty for each computer it sells containing a particular 
microprocessor, whether the OEM sells the computer with a Microsoft 
operating system or a non-Microsoft operating system. In effect, the 
royalty payment to Microsoft when no Microsoft product is being used 
acts as a penalty, or tax, on the OEM's use of a competing PC operating 
system. Since 1988, Microsoft's use of per processor licenses has 
increased. In fiscal year 1993, per processor licenses accounted for an 
estimated 60% of MS-DOS sales to OEMs and 43% of Window sales to 
OEMs.\3\ Collectively, the OEMs who have such per processor contracts 
are critical to the success of competing operating system vendors, but 
those OEMs effectively are foreclosed to Microsoft's competitors.
---------------------------------------------------------------------------

    \3\Per processor licenses accounted for an increasing proportion 
of Microsoft's operating system sales in the 1988-1993 period. 
Twenty per cent of all units of MS-DOS that were sold to OEMs in FY 
1989 were sold pursuant to per processor licenses. That percentage 
increased to 22% in FY 1990; 27% in FY 1991; 50% in FY 1992; and to 
60% in FY 1993. A chart showing this increasing use of per-processor 
licenses is attached as Exh. 2.
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    Microsoft has further foreclosed the OEM channel through the use of 
long-term contracts with major OEMs, some expiring as long as five 
years from their original negotiation date. In some cases, these 
contracts have left OEMs with unused balances on their minimum 
commitments, which Microsoft can allow to be used if the contract is 
extended, but which would be forfeited if the OEM does not extend the 
contract. These practices have allowed Microsoft to extend the 
effective duration of its OEM contracts, further impeding the access of 
PC operating system competitors to the OEM channel.
    In addition to using anticompetitive OEM licenses, Microsoft has 
also employed anticompetitive restrictions in certain of its non-
disclosure agreements (``NDAs''). Microsoft anticipates commercially 
releasing Chicago, the next version of Windows, in late 1994 or early 
1995. In preparation for its release, Microsoft has allowed certain 
third parties, including independent software vendors (``ISVs'') who 
write applications, to have access to pre-release versions of Chicago, 
a process known in the software industry as ``beta testing.'' This 
permits Microsoft to receive feedback from the beta testers, and the 
ISVs to begin writing applications for Chicago prior to its release.
    In connection with beta testing Chicago, Microsoft employed, as it 
has in prior beta tests, NDAs prohibiting disclosure of confidential 
information. In this instance, however, Microsoft sought to impose on 
certain leading software companies far more restrictive NDAs than it 
had previously used. These NDAs would have precluded developers from 
working on competitive products and technologies for an unreasonably 
long period of time.
    Through these practices, Microsoft has excluded competitors by 
unreasonable and anticompetitive means, thereby lessening competition 
and maintaining a monopoly in the PC operating system market. 
Microsoft's licensing practices deter OEMs from entering into licensing 
agreements with operating system rivals and discourage OEMs who agree 
to sell non-Microsoft operating systems from promoting those systems. 
By depriving rivals of a significant number of sales that they might 
otherwise secure, Microsoft makes it more difficult for its rivals to 
convince ISVs to write applications for their systems, for OEMs to 
offer and promote their systems, and for users to believe that their 
systems will remain viable alternatives to MS-DOS and Windows.
    Microsoft's exclusionary contracts harm consumers. OEMs that sign 
Microsoft's exclusionary licenses but offer consumers a choice of 
operating systems may charge a higher price, in order to cover the 
double royalty, for PCs using a non-Microsoft operating system. Even 
consumers who do not receive a Microsoft operating system still pay 
Microsoft indirectly. Thus, Microsoft's licensing practices have raised 
the cost of personal computers to consumers.
    Microsoft's conduct also substantially lengthens the period of time 
required for competitors to recover their development costs and earn a 
profit, and thereby increases the risk that an entry attempt will fail. 
In combination, all these factors deter entry by competitors and thus 
harm competition. By deterring the development of competitive operating 
systems, Microsoft has deprived consumers of a choice of potentially 
superior products. Similarly, the slower growth of competing operating 
systems has retarded the development of applications for such systems.

Explanation of the Proposed Final Judgment

    The proposed Final Judgment will end Microsoft's unlawful practices 
that restrain trade and perpetuate its monopoly power in the market for 
PC operating systems. In addition, the proposed Final Judgment contains 
provisions that are remedial in nature and designed to assure that 
Microsoft will not engage in the future in exclusionary practices 
designed to produce the same or similar effects as those set forth in 
the Complaint.
    In particular, Sections IV (A), (C), and (F) prohibit Mirosoft's 
use of the specific exclusionary practices alleged in the complaint--
``per processor'' contracts, lengthy terms, and minimum commitments--
that foreclose competing PC operating system vendors from much of the 
OEM channel. Sections IV (K)-(L) prohibit the use of anticompetitive 
non-disclosure agreements in conjunction with Mirosoft's distribution 
of pre-commercial releases of operating system software products. 
Sections IV (B), (E), (G), and (H) impose prohibitions that go beyond 
the alleged exclusionary practices in order to ensure that Microsoft's 
future contracting practices--not challenged here because not yet 
used--do not unreasonably impede competition. Sections IV (J) and (M) 
are designed to bring existing contracts into immediate compliance with 
the proposed Final Judgment.

Scope of the Final Judgment

    The injunctions in Section IV generally apply to ``covered 
products'' which are defined, in Section II(A), as the binary code of 
MS-DOS 6.22; Microsoft Windows 3.11; Windows for Workgroups 3.11; 
predecessor versions of those products; the product currently code-
named ``Chicago'' (the planned successor to Microsoft Windows 3.11); 
and other successor versions of or products marketed as replacements 
for the aforementioned products. This definition includes all 
Microsoft's PC operating system products in which the defendant 
currently possesses a substantial degree of market power. The 
definition does not encompass and specifically excludes, Windows NT 
Workstation and Windows NT Advanced Server, neither of which has a 
significant share of a relevant market at this time.
    The definition of ``covered product'' was drafted with the 
recognition that Microsoft will continue to modify its operating system 
products throughout the duration of the Final Judgment. The 
prohibitions in the decree will apply to the successor and replacement 
products of those existing operating system products that have 
substantial market power. The decree will govern the licensing of such 
products if they are made available as stand-alone products to OEMs 
pursuant to license agreements, or as unbundled products that perform 
operating system software functions now embodied in the specifically 
listed existing products. Moreover, the decree will govern the 
licensing of successor versions of or products marketed as replacements 
for MS-DOS 6.22, Microsoft Windows 3.11, Windows for Workgroups 3.11, 
and ``Chicago,'' even if such successor or replacement products could 
also be characterized as successors or replacements of operating system 
software products that are not covered, such as windows NT Workstation 
or Windows NT Advanced Server.

Prohibition of the Licensing Violations

    The three anticompetitive factors of Microsoft's license agreements 
that are challenged in the complaint--the excessive duration of those 
agreements, the requirement of royalty payments on a ``per processor'' 
basis, and large minimum commitments--are addressed principally in 
Sections IV(A), IV(C) and (IV)(F) of the Final Judgment.
    Duration: Section IV(A) limits the duration of Microsoft's license 
agreements with OEMs to one year, with OEMs having the option to renew 
a license for one additional one year term on the same terms and 
conditions as in the first year. This limitation on the duration of 
license agreements, along with the safeguards provided in Section 
IV(G), will ensure that vendors of competing operating systems will 
have regular and frequent opportunities to attempt to market their 
products to OEMs. Absent such opportunities, Microsoft's competitors 
might be unable to reach the level of market penetration needed for 
profitable operation in a reasonable period of time, even if they are 
offering products that are deemed superior by those customers who have 
an opportunity to buy them.
    Per Processor Licenses: Section IV(C) prohibits the use of per 
processor licenses.\4\ Section II(K) defines per processor licenses as 
licenses that require the OEM to pay a royalty for all personal 
computer systems that contain specified microprocessors. As noted 
above, the requirement to pay a royalty to Microsoft on the sale of a 
PC that has a non-Microsoft operating system is comparable, in its 
economic effect, to the imposition of a ``tax'' on the competing 
operating system. Per processor licenses are also very similar to 
exclusive dealing or requirements contracts; the OEM in effect is 
obtaining the right to use Microsoft's operating system, and is paying 
an operating system royalty, for all of its operating system 
``requirements'' for use on PCs using the designated microprocessors.
---------------------------------------------------------------------------

    \4\Section IV(J)(1) converts all per processor licenses to per 
system licenses, except those models which an OEM excludes, which 
will thereafter be subject to the limitations imposed on Microsoft 
by Section IV(G).
---------------------------------------------------------------------------

    Minimum Commitments: Section IV(F) will bar Microsoft from entering 
into any license agreement containing a minimum commitment.\5\ While 
minimum commitments are not in and of themselves illegal, they can be 
used to achieve a similar effect as that accomplished through per 
processor licenses or exclusive dealing contracts. If the minimum 
commitment is greater than the number of units of Microsoft software 
that the OEM expects or would otherwise desire to use at any time 
during the term of the contract, the minimum commitment creates a 
disincentive for an OEM to make incremental purchases of non-Microsoft 
operating systems. In that context, the minimum commitment also 
operates in effect to require a royalty payment to Microsoft, even for 
PCs that use a non-Microsoft operating system. This effect will be 
ended by Section (IV)(F).
---------------------------------------------------------------------------

    \5\Section IV(J)(2) prohibits Microsoft from prospectively 
enforcing minimum commitments in existing license agreements.
---------------------------------------------------------------------------

Restoring Competition to the Market Through Prophylactic Additional 
Relief

    The proposed Final Judgment not only bans Microsoft's unlawful 
practices, but also contains additional provisions which are 
prophylactic in nature, and are intended to ensure that the 
anticompetitive effects of those practices are not replicated through 
use by Microsoft of other exclusionary practices.
    Microsoft Prohibited From Limiting OEM Sales of Competing Operating 
System Products: Section IV (B) bars Microsoft from entering into 
license agreements that prohibit or restrict an OEM from licensing, 
selling, or distributing competing operating system products. In 
addition, Section IV (E) prohibits Microsoft from expressly or 
impliedly conditioning its licenses of operating systems on the 
licensing, purchase, use or distribution not only of other covered 
products, but also any other Microsoft product, or non-Microsoft 
product. Without these provisions Microsoft could force OEMs to 
purchase covered products and thus accomplish anticompetitive effects 
similar to those achieved through its unlawful licensing practices, or 
attempt to extend or protect its monopoly in any covered product by 
conditioning its licensing, purchase or use of other products.
    Microsoft Limited to Per Copy and Per System Licenses: Sections IV 
(D) and IV (G) require Microsoft to use either ``per copy'' or ``per 
system'' licenses. Per copy licenses, if used in conjunction with pro-
competitive volume discounts, pose few competitive concerns. Per system 
licenses, if not carefully fenced in, could be used by Microsoft to 
accomplish anticompetitive ends similar to ``per processor'' licenses. 
However, if an OEM easily can designate models not subject to a per 
system license, it can use non-Microsoft operating systems on those 
models without incurring a royalty obligation to Microsoft. If an OEM 
need not pay a royalty to Microsoft for anything but the number of 
copies of the Microsoft operating system that it actually uses, that 
OEM will not be deterred from licensing, purchasing or using competing 
operating system products.
    Restriction on Per System Licenses: The Final Judgment also places 
restrictions on the use of per system licenses to ensure that they are 
not used in an exclusionary manner. In particular, Section IV (G) 
specifies that per system licenses must allow the licensee to create 
``new systems'' that can be sold without incurring a royalty obligation 
to Microsoft if they do not utilize a Microsoft product. Under Section 
IV (G), an OEM need only designate a new model name or number to create 
a ``new system.'' Microsoft may not require the OEM even to notify 
Microsoft of the creation of a new system; nor may Microsoft impose 
requirements relating to the marketing or advertising of a new system, 
or penalize an OEM for creating a new system. Section IV (G)(4) 
requires Microsoft to notify within 30 days following entry of this 
Final Judgment all existing OEM licensees under per system licenses and 
all OEM licensees with per processor licenses who choose to let them to 
be converted to per system licenses (a provision discussed below) of 
their rights to create new systems that will not be subject to any 
existing per system license. This notice provision ensures that 
existing licensees promptly know of their rights to avoid royalty 
payments under per system contracts if they choose to create new 
systems.
    Microsoft Prohibited From Using Lump Sum Pricing: Section IV (H) 
also serves a prophylactic function, prohibiting the use of lump sum 
pricing in license agreements for covered products. As defined in 
Section II (F), lump sum pricing is any royalty payment that does not 
vary with the number of copies of the covered product (under per copy 
licenses) or the number of personal computer systems (under per system 
licenses) that are licensed, sold, or distributed by the OEM. This 
restriction, like the prohibitions on minimum commitments and 
requirements contracts, restricts conduct that could be used by 
Microsoft to achieve effects comparable to the effects of the conduct 
challenged by the government, and for that reason is enjoined.\6\
---------------------------------------------------------------------------

    \6\If a license agreement established a minimum commitment 
greater than the OEM's requirements for operating systems (an 
agreement that would be prohibited under this decree), the minimum 
commitment would constitute, in effect, a lump sum payment. 
Regardless of the number of copies distributed by the OEM, its 
royalty payment to Microsoft would not vary. A lump sum pricing 
arrangement imposed by a monopolist that allowed unlimited use of 
the licensed product for a single fee calibrated to the anticipated 
total operating system needs of a particular OEM would also produce 
a similar economic effect as a requirements contract or a per 
processor license: the OEM would owe the same royalty to Microsoft 
whether it chose to use a Microsoft operating system on all of the 
PCs it sold, or only on some of the PCs it sold, and would, in 
effect, ``pay twice'' if it chose to purchase a non-Microsoft 
operating system for some of its PCs.
---------------------------------------------------------------------------

    Neither Section IV (H) nor any other provision of the proposed 
Final Judgment prohibits the use of royalty rates, including rates 
embodying volume discounts, agreed upon in advance with respect to each 
individual OEM, each specific version or language of a covered 
products, and each designated personal computer system model. Nothing 
in the Final Judgment, however, in any way sanctions Microsoft 
structuring any volume discount whose purpose or effect is to impose de 
facto requirements contracts or exclusive arrangements on the OEM. As 
discussed below in connection with alternatives to the proposed Final 
Judgment, given Microsoft's monopoly power in operating systems, such 
practices can violate the antitrust laws.

Transition Rules

    In the Stipulation consenting to the entry of the proposed Final 
Judgment, Microsoft agreed to abide by the provisions of the proposed 
Final Judgment immediately upon the filing of the Complaint, i.e., as 
of July 15, 1994. Among other things, the transition provisions 
described herein will require Microsoft to abide by the foregoing 
limitations and prohibitions when entering into any license agreements 
with OEMs after July 15, 1994. Certain additional provisions of the 
proposed Final Judgment also apply to existing license agreements that 
are inconsistent with the proposed Final Judgment's requirements for 
new license agreements.
    Under Section IV (I), existing OEM licensees may terminate or 
negotiate with Microsoft to amend their agreements to make them 
consistent with the requirements of the Final Judgment.
    Section IV (J) provides that if an OEM chooses not to exercise 
either of these options, Microsoft must abide by the following rules. 
First, under Section IV (J)(1), a per processor license must be treated 
as a ``per system'' license' OEM models that contain the 
microprocessor(s) specified in such a per processor license will be 
considered to be covered by the ``per system'' license unless the OEM 
opts in writing to exclude such model from coverage. As already noted, 
OEMs may freely sell PCs with non-Microsoft operating systems, and 
avoid any obligation to pay royalties to Microsoft under a per system 
license, simply by designating such PCs as a new system with a separate 
model number or name. Second, under Section IV (J)(2), Microsoft may 
not enforce any minimum commitment in an existing license agreement.
    These provisions further two consistent goals. Opportunities for 
competition in the PC operating system market are fostered by a rapid 
end to the unlawful practices embodied in existing licenses. At the 
same time, the transition rules avoid creating hardships for OEMs by 
not unnecessarily disrupting established commercial relationships with 
Microsoft. Indeed, OEMs are not required to terminate or amend their 
existing contracts with Microsoft; the choice to do so is theirs alone. 
Microsoft, however, may not enforce the per processor or minimum 
commitment features of any existing contract. Providing OEMs with this 
choice minimizes the costs of the transition from existing license 
agreements that are inconsistent with the decree to new license 
agreements, while ensuring that any unavoidable transition costs be 
borne largely by Microsoft.
    To ensure that existing licensees learn of their rights under the 
proposed Final Judgment, Section IV (M) requires Microsoft to provide a 
copy of the Final Judgment to all OEMs with which it has license 
agreements, except for those who have licenses only under Microsoft's 
Small Volume Easy Distribution program or the Delivery Service Partner 
program.

Non-Disclosure Agreements

    Finally, the proposed Final Judgment contains provisions that 
prevent Microsoft from imposing unlawfully restrictive NDAs on 
developers of applications software.
    Sections IV(K)(l) limits the duration of any NDA to the earliest of 
(a) the commercial release of the product covered by the NDA, (b) an 
earlier public disclosure of the information covered by the NDA, or (c) 
one year after the information is disclosed to the person subject to 
the NDA. Section IV(K)(2) provides that NDAs may not restrict subject 
parties from developing software products that will run on competing 
operating systems, if such development does not entail the use or 
disclosure of Microsoft proprietary information during the term of the 
NDA.
    In combination, these provisions recognize that whatever 
Microsoft's legitimate interest in protecting the confidentiality of 
proprietary information covered by the NDAs, the need for any such 
protection must be balanced against the competitive consequences of any 
restriction imposed on others concerning disclosure and use of the 
information. The proposed Final Judgment ensures that any NDA imposed 
by Microsoft will not extend beyond the point that the information has 
been released to the public or has otherwise been in the hands of 
parties for more than one year.
    Section IV(L) requires that the form of all standard NDAs must be 
approved by a Microsoft corporate officer, and that non-standard 
language in an NDA relating to matters covered in Section (K) must be 
approved by a Microsoft senior attorney. These provisions are designed 
to ensure that NDAs will be reviewed by company officials mindful of 
the requirements of the Final Judgment.

Enforcement

    Section V of the proposed Final Judgment establishes standards and 
procedures by which the Department of Justice may obtain access to 
documents and information from Microsoft related to its compliance with 
the Final Judgment.
    In particular, Section V(D) contains provisions under which the 
Department can obtain information and documents relating to any 
Undertaking by or Decision against Microsoft arising from parallel 
antitrust proceedings of the Directorate-General for Competition of the 
European Commission (``DG-IV''). This provision will allow the 
Department to coordinate its monitoring and enforcement of compliance 
of the Final Judgment with DG-IV's monitoring and enforcement of 
parallel provisions contained in an Undertaking with DG-IV signed by 
Microsoft on July 15, 1994.

Duration

    Section VI of the proposed Final Judgment provides that the Final 
Judgment will expire on the seventy-eighth month after its entry. 
Jurisdiction will be retained by the Court to conduct further 
proceedings relating to the Final Judgment, as specified in Section VI.

Remedies Available to Potential Private Litigants

    Section 4 of the Clayton Act, 15 U.S.C. Sec. 15, provides that any 
person who has been injured as a result of conduct prohibited by the 
antitrust laws may bring suit in federal court to recover three times 
the damages suffered, as well as costs and reasonable attorney's fees. 
Entry of the proposed Final Judgment will neither impair nor assist the 
bringing of such actions. Under the provisions of Section 5(a) of the 
Clayton Act, 15 U.S.C. Sec. 16(a), the Judgment has no prima facie 
effect in any subsequent lawsuit that may be brought against the 
defendant in this matter.

Procedures Available for Modification of the Proposed Judgment

    As provided by the Antitrust Procedures and Penalties Act, any 
person believing that the proposed Final Judgment should be modified 
may submit written comments to Richard L. Rosen, Chief, Communications 
and Finance Section, United States Department of Justice, Antitrust 
Division, 555 4th Street N.W., Room 8104, Washington, D.C. 20001, 
within the 60-day period provided by the Act. These comments, and the 
Department's responses, will be filed with the Court and published in 
the Federal Register. All comments will be given due consideration by 
the Department of Justice, which remains free to withdraw its consent 
to the proposed Final Judgment at any time prior to entry. If the 
Department does not withdraw its consent to the proposed Final 
Judgment, it will file with the Court a Certificate of Compliance after 
the requirements of the Antitrust Procedures and Penalties Act have 
been satisfied. The Court then must determine whether the proposed 
decree is in the public interest, pursuant to Section 5(e) of the 
Clayton Act, 15 U.S.C. Sec. 16(e).\7\
---------------------------------------------------------------------------

    \7\In making this public interest determination, ``[t]he 
balancing of competing social and political interests affected by a 
proposed antitrust consent decree must be left, in the first 
instance, to the discretion of the Attorney General. The court's 
role in protecting the public interest is one of insuring that the 
government has not breached its duty to the public in consenting to 
the decree. The court is required to determine not whether a 
particular decree is the one that will best serve society, but 
whether the settlement is `within the reaches of the public 
interest.''' United States v. Bechtel Corp., 648 F.2d 660, 666 (9th 
Cir.), cert. denied, 454 U.S. 1083 (1981) (citations and internal 
quotations omitted). Accord United States v. Western Electric Co., 
993 F.2d 1572, 1576 (D.C. Cir. 1993); United States v. American Tel. 
and Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982), aff'd sub nom. 
Maryland v. United States, 460 U.S. 1001 (1983).
---------------------------------------------------------------------------

Alternatives to the Proposed Final Judgment

    In addition to the remedies provided in the proposed Final 
Judgment, the Department also considered whether to require limitations 
on the manner in which Microsoft could structure volume discount 
pricing arrangements for covered products. While the Department 
recognizes that volume discount pricing can be and normally is pro-
competitive, volume discounts also can be structured by a seller with 
monopoly power (such as Microsoft) in such a way that buyers, who must 
purchase some substantial quantity from the monopolist, effectively are 
coerced by the structure of the discount schedule (as opposed to the 
level of the price) to buy all or substantially all of the supplies 
they need from the monopolist. Where such a result occurs, the 
Department believes that the volume discount structure would unlawfully 
foreclose competing suppliers from the marketplace--in this case, 
competing operating systems--and thus may be challenged.
    The Department ultimately concluded that it would not require 
provisions in the Final Judgment to attempt to proscribe in advance the 
various means by which Microsoft could attempt to structure volume 
discounts as a means to thwart competition rather than as a means of 
promoting competition. The Department reached this conclusion because 
it does not have evidence that Microsoft has, to date, in fact 
structured its volume discounts to achieve anticompetitive ends. The 
Department did, however, communicate to Microsoft its concern and 
stated its intent to initiate an investigation and antitrust 
enforcement proceeding, if warranted, should Microsoft adopt 
anticompetitive volume discount structures in its future license 
agreements. Given the procompetitive impact of the provisions of the 
proposed Final Judgment, the normally procompetitive nature of volume 
discount pricing, and the absence of any evidence that Microsoft has 
used volume discounting in an anticompetitive manner to date, the 
Department believes that this resolution is appropriate on the record 
at this time.
    Another alternative to the proposed Final Judgment would be a full 
trial of this case. The Department of Justice believes that such a 
trial would involve substantial cost to the United States and is not 
warranted since the proposed Final Judgment provides all of the relief 
that the United States seeks in its Complaint and includes substantial 
additional prophylactic measures as well.

Determinative Materials and Documents

    No materials or documents of the type described in Section 2(b) of 
the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b), were 
considered in formulating the proposed Final Judgment.

    Dated: July 27, 1994.

    Respectfully submitted,
Anne K. Bingaman,
Assistant Attorney General, Antitrust Division.
Donald J. Russell,
U.S. Department of Justice, Antitrust Division, Communications & 
Finance Section, Judiciary Center Building, 555 Fourth Street, N.W., 
Washington, DC 20001, (202) 514-5814.

    United States District Court for the District of Columbia, 
United States of America, Plaintiff, v. Microsoft Corporation, 
Defendant. Civil Action No. 94-1564 (SS)

Final Judgment

    Whereas Plaintiff, United States of America, having filed its 
Complaint in this action on July 15, 1994, and Plaintiff and Defendant, 
by their respective attorneys, having consented to the entry of this 
Final Judgment without trial or adjudication of any issue of fact or 
law; and without this Final Judgment constituting any evidence or 
admission by any party with respect to any issue of fact or law;
    Now, Therefore, before any testimony is taken, and without trial or 
adjudication of any issue of fact or law, and upon consent of the 
parties, it is hereby
    Ordered, Adjudged and Decreed as follows:

I. Jurisdiction

    This Court has jurisdiction of the subject matter of this action 
and of the person of the Defendant, Microsoft Corporation 
(``Microsoft''). The Complaint states a claim upon which relief may be 
granted against the Defendant under Sections 1 and 2 of the Sherman 
Act, 15 U.S.C. Secs. 1, 2.

II. Definitions

    (A) Covered Product(s) means the binary code of (1) MS-DOS 6.22, 
(2) Microsoft Windows 3.11, (3) Windows for Workgroups 3.11, (4) 
predecessor versions of the aforementioned products, (5) the product 
currently code-named ``Chicago,'' and (6) successor versions of or 
replacement products marketed as replacements for the aforementioned 
products, whether or not such successor versions or replacement 
products could also be characterized as successor versions or 
replacement products of other Microsoft Operating System Software 
products that are made available (a) as stand-alone products to OEMs 
pursuant to License Agreements, or (b) as unbundled products that 
perform Operating System Software functions now embodied in the 
products listed in subsections (1) through (5). The term ``Covered 
Products'' shall not include ``Customized'' versions of the 
aforementioned products developed by Microsoft; nor shall it apply to 
Windows NT Workstation and its successor versions, or Windows NT 
Advanced Server.
    (B) Customized means the substantial modification of a product by 
Microsoft to meet the particular and specialized requirements of a 
final customer of a computer system. It does not include the adaptation 
of such a product in order to optimize its performance in connection 
with a Personal Computer System manufactured by an OEM.
    (C) Duration means, with respect to a License Agreement, the period 
of time during which an OEM is authorized to license, sell or 
distribute any of the Covered Products.
    (D) A License Agreement means any license, contract, agreement or 
understanding, or any amendment thereto, written or oral, express or 
implied, pursuant to which Microsoft authorizes an OEM to license, sell 
or distribute any Covered Product with its Personal Computer System(s).
    (E) A Minimum Commitment means an obligation of an OEM to pay 
Microsoft a minimum amount under a License Agreement, regardless of 
actual sales.
    (F) Lump Sum Pricing means any royalty payment for a Covered 
Product that does not vary with the number of copies of the Covered 
Product that are licensed, sold or distributed by the OEM or of 
Personal Computer Systems distributed by the OEM.
    (G) New System means a system not included or designated in a Per 
System License.
    (H) NDA means any non-disclosure agreement for any pre-commercial 
release of a Covered Product that imposes any restriction on the 
disclosure or use of any such pre-commercial release of any Covered 
Product or any information relating thereto.
    (I) OEM means an original equipment manufacturer or assembler of 
Personal Computer Systems or Personal Computer System components (such 
as motherboards or sound cards) or peripherals (e.g., printers or mice) 
that is a party to a License Agreement.
    (J) Per Copy License means any License Agreement pursuant to which 
the OEM's royalty payments are calculated by multiplying (1) the number 
of copies of each Covered Product licensed, sold or distributed during 
the term of the License Agreement, by (2) a per copy royalty rate 
agreed upon by the OEM and Microsoft, which rate may be determined as 
provided in Section IV (H).
    (K) Per Processor License means a License Agreement under which 
Microsoft requires the OEM to pay Microsoft a royalty for all Personal 
Computer Systems that contain the particular microprocessor type(s) 
specified in the License Agreement.
    (L) Per System License means a License Agreement under which 
Microsoft requires the OEM to pay Microsoft a royalty for all Personal 
Computer Systems which bear the particular model name(s) or number(s) 
which are included or designated in the License Agreement by the OEM to 
Microsoft, at the OEM's sole option and under the terms and conditions 
as set forth herein.
    (M) Personal Computer System means a computer designed to use a 
video display and keyboard (whether or not the video display and 
keyboard are actually included) which contains an Intel x86, or Intel 
x86-compatible microprocessor.
    (N) Operating System Software means any set of instructions, codes, 
and ancillary information that controls the operation of a Personal 
Computer System and manages the interaction between the computer's 
memory and attached devices such as keyboards, display screens, disk 
drives, and printers.

III. Applicability

    This Final Judgment applies to Microsoft and to each of its 
officers, directors, agents, employees, subsidiaries, successors and 
assigns; and to all other persons in active concert or participation 
with any of them who shall have received actual notice of this Final 
Judgment by personal service or otherwise.

IV. Prohibited Conduct

    Microsoft is enjoined and restrained as follows:
    (A) Microsoft shall not enter into any License Agreement for any 
Covered Product that has a total Duration that exceeds one year 
(measured from the end of the calendar quarter in which the agreement 
is executed).
    Microsoft may include as a term in any such License Agreement that 
the OEM may, at its sole discretion, at any time between 90 and 120 
days prior to the expiration of the original License Agreement, renew 
such License Agreement for up to one additional year on the same terms 
and conditions as those applicable in the original license period.
    The License Agreement shall not impose a penalty or charge of any 
kind on an OEM for its election not to renew all or any portion of a 
License Agreement. In the event that an OEM does not exercise the 
option to renew a License Agreement as provided above, and a new 
License Agreement is entered between Microsoft and the OEM, the arm's 
length negotiation of different terms and conditions, specifically 
including a higher royalty rate(s), will not by itself constitute a 
penalty or other charge within the meaning of the foregoing sentence.
    The Duration of any License Agreement with an OEM not domiciled in 
the United States or the European Economic Area that will not be 
effective prior to regulatory approval in the country of its domicile 
may be extended at the option of Microsoft or the OEM during the time 
required for any such regulatory approval.
    License Agreement provisions that do not bear on the licensing or 
distribution of the Covered Products may survive expiration or 
termination of the License Agreement.
    (B) Microsoft shall not enter into any License Agreement that by 
its terms prohibits or restricts the OEM's licensing, sale or 
distribution of any non-Microsoft Operating System Software product.
    (C) Microsoft shall not enter into any Per Processor License.
    (D) Except to the extent permitted by Section IV (G) below, 
Microsoft shall not enter into any License Agreement other than a Per 
Copy License.
    (E) Microsoft shall not enter into any License Agreement in which 
the terms of that agreement are expressly or impliedly conditioned 
upon:
    (1) the licensing of any other Covered Product, Operating System 
Software product or other product (provided, however, that this 
provision in and of itself shall not be construed to prohibit Microsoft 
from developing integrated products); or
    (2) the OEM not licensing, purchasing, using or distributing any 
non-Microsoft product.
    (F) Microsoft shall not enter into any License Agreement containing 
a Minimum Commitment. However, nothing contained herein shall prohibit 
Microsoft and any OEM from developing non-binding estimates of 
projected sales of Microsoft's Covered Products for use in calculating 
royalty payments.
    (G) Microsoft's revenue from a License Agreement for any Covered 
Product shall not be derived from other than Per Copy or Per System 
Licenses, as defined herein. In any Per System License:
    (1) Microsoft shall not explicitly or implicitly require as a 
condition of entering into any License Agreement, or for purposes of 
applying any volume discount, or otherwise, that any OEM include under 
its Per System License more than one of its Personal Computer Systems;
    (2) Microsoft shall not charge or collect royalties for any Covered 
Product on any Personal Computer System unless the Personal Computer 
System is designated by the OEM in the License Agreement or in a 
written amendment. Microsoft shall not require an OEM which creates a 
New System to notify Microsoft of the existence of such a New System, 
or to take any particular actions regarding marketing or advertising of 
that New System, other than creation of a unique model name or model 
number that the OEM shall use for internal and external identification 
purposes. The requirement of external identification may be satisfied 
by placement of the unique model name or model number on the machine 
and its container (if any), without more. The OEM and Microsoft may 
agree to amend the License Agreement to include any new model of 
Personal Computer System in a Per System License. Nothing in this 
clause shall be deemed to preclude Microsoft from seeking compensation 
from an OEM that makes or distributes copies of a Covered Product in 
breach of its License Agreement or in violation of copyright law;
    (3) The License Agreement shall not impose a penalty or charge on 
account of an OEM's choosing at any time to create a New System. 
Addition of a New System to the OEM's License Agreement so that Covered 
Products are licensed for distribution with such New System and 
royalties are payable with respect thereto shall not be deemed to 
constitute a penalty or other charge of any kind within the meaning of 
the foregoing sentence;
    (4) All OEMs with existing Per System Licenses, or Per Processor 
Licenses treated by Microsoft under Section IV (J) as Per System 
Licenses, will be sent within 30 days following entry of this Final 
Judgment in a separately mailed notice printed in bold, boxed type 
which shall begin with the sentence ``You are operating under a 
Microsoft Per System License,'' and shall continue with the language 
contained in the first four quoted paragraphs below. All new or amended 
Per System Licenses executed after September 1, 1994 shall contain a 
provision that appears on the top half of the signature page in bold, 
boxed type shall begin with the sentence ``This is a Microsoft Per 
System License,'' and which shall continue with the language contained 
in the first four quoted paragraphs below.

    ``As a Customer, you may create a `New System' at any time that 
does not require the payment of a royalty to Microsoft unless the 
Customer and Microsoft agree to add it to the Licensing Agreement.''
    ``Any New System created may be identical in every respect to a 
system as to which the Customer pays a Per System royalty to 
Microsoft provided that the New System has a unique model number or 
model name for internal and external identification purposes which 
distinguishes it from any system the Customer sells that is included 
in a Per System License. The requirement of external identification 
may be satisfied by placement of the unique model name or model 
number on the machine and its container (if any), without more.''
    ``If the customer does not intend to include a Microsoft 
operating system product with a New System, the Customer does not 
need to notify Microsoft at any time of the creation, use or sale of 
any such New System, nor does it need to take any particular steps 
to market or advertise the New System.''
    ``Under Microsoft's License Agreement, there is no charge or 
penalty if a Customer chooses at any time to create a New System 
incorporating a non-Microsoft operating system. If the Customer 
intends to include a Microsoft operating system product with the New 
System, the Customer must so notify Microsoft, after which the 
parties may enter into arm's length negotiation with respect to a 
license to apply to the New System.''

    In the case of OEMs with Per Processor Licenses treated as Per 
System Licenses pursuant to Section IV (J), the notice shall include 
the following paragraph at the beginning of the notice:

    ``All models covered by your Per Processor License are now 
treated as subject to a Per System License. You may exclude any such 
model from being treated as subject to a Per System License by 
notifying Microsoft in writing. Such notice to Microsoft must 
include the model designation to be excluded from the Per System 
License. Such exclusion shall take effect on the first day of the 
calendar quarter next following Microsoft's receipt of such 
notice.''

    (H) Microsoft may not use any form of Lump Sum Pricing in any 
License Agreement of Covered Product(s) executed after the date of this 
Final Judgment. It is not a violation of this Final Judgment for 
Microsoft to use royalty rates, including rates embodying volume 
discounts, agreed upon in advance with respect to each individual OEM, 
each specific version or language of a Covered Product, and each 
designated Personal Computer System model subject to the License 
Agreement.
    (I) OEMs that currently have a License Agreement that is 
inconsistent with any provision of this Final Judgment may, without 
penalty, terminate the License Agreement or negotiate with Microsoft to 
amend the License Agreement to eliminate such inconsistent provisions. 
An OEM desiring to terminate or amend such a License Agreement shall 
give Microsoft ninety (90) days written notice at any time prior to 
January 1, 1995.
    (J) If an OEM has a License Agreement that is inconsistent with any 
provision of this Final Judgment, Microsoft may enforce that License 
Agreement subject to the following:
    (1) if the License Agreement is a Per Processor License, Microsoft 
shall treat it as a Per System License for all existing OEM models that 
contain the microprocessor type(s) specified in the License Agreement 
except those models that the OEM opts in writing to exclude and such 
exclusion shall take effect on the first day of the calendar quarter 
net following Microsoft's receipt of such notice, and
    (2) Microsoft may not enforce prospectively any Minimum Commitment.
    (K) Microsoft shall not enter into any NDA:
    (1) whose duration extends beyond (a) commercial release of the 
product covered by the NDA, (b) an earlier public disclosure authorized 
by Microsoft of information covered by the NDA, or (c) one year from 
the date of disclosure of information covered by the NDA to a person 
subject to the NDA, whichever comes first; or
    (2) that would restrict in any manner any person subject to the NDA 
from developing software products that will run on competing Operating 
System Software products, provided that such development efforts do not 
entail the disclosure or use of any Microsoft proprietary information 
during the term of the NDA; or
    (3) that would restrict any activities of any person subject to the 
NDA to whom no information covered by the NDA has been disclosed.
    (L) The form of standard NDAs will be approved by a Microsoft 
corporate officer and all non-standard language in NDAs that pertains 
to matters covered in Section (k) above will be approved by a Microsoft 
senior corporate attorney.
    (M) Within thirty (30) days of the entry of this Final Judgment, 
Microsoft will provide a copy of this Final Judgment to all OEMs with 
whom it has License Agreements at that time except for those with 
licenses solely under the Small Volume Easy Distribution (SVED) program 
or the Delivery Service Partner (DSP) program.

V. Reporting

    (A) To determine or secure compliance with this Final Judgment, 
duly authorized representatives of the Plaintiff shall, upon written 
request of the Assistant Attorney General in charge of the Antitrust 
Division, on reasonable notice given to Defendant at its principal 
office, subject to any lawful privilege, be permitted:
    (1) Access during normal office hours to inspect and copy all 
books, ledgers, accounts, correspondence, memoranda and other documents 
and records in the possession, custody, or control of Defendant, which 
may have counsel present, relating to any matters contained in this 
Final Judgment.
    (2) Subject to the reasonable convenience of Defendant and without 
restraint or interference from it, to interview officers, employees, or 
agents of Defendant, who may have counsel present, regarding any 
matters contained in this Final Judgment.
    (B) Upon written request of the Assistant Attorney General in 
charge of the Antitrust Division, on reasonable notice given to 
Defendant at its principal office, subject to any lawful privilege, 
Defendant shall submit such written reports, under oath if requested, 
with respect to any matters contained in this Final Judgment.
    (C) No information or documents obtained by the means provided by 
this Section shall be divulged by the Plaintiff to any person other 
than a duly authorized representative of the Executive Branch of the 
United States government, except in the course of legal proceedings to 
which the United States is a party, or for the purpose of securing 
compliance with the Final Judgment, or as otherwise required by law.
    (D) Defendant shall produce to plaintiff, within forty-five (45) 
days, any documents provided to the Directorate-General for Competition 
of the European Commission (``DG-IV'') in connection with its 
monitoring or securing of compliance with any Undertaking by or 
Decision against Microsoft that relates to Microsoft's licensing of any 
Covered Product. In addition, Defendant shall not object to disclosure 
to Plaintiff by DG-IV of any other information provided by defendant to 
DG-IV, or to cooperation between DG-IV and Plaintiff in the enforcement 
of this Judgment, provided that Microsoft shall receive in advance a 
detailed description of the information to be provided and the 
Plaintiff will accord any Microsoft information received from DG-IV the 
maximum confidentiality protection available under applicable law. 
Specifically, Plaintiff will treat Microsoft information that it 
receives from DG-IV as ``confidential business information'' within the 
meaning of the Freedom of Information Act, 5 U.S.C. Sec. 552, with 
Microsoft deemed a ``submitter'' of the information under the statute. 
Plaintiff shall take precautions to ensure the security and 
confidentiality of Microsoft information provided in electronic form.
    (E) If at the time information or documents are furnished by 
Defendant to Plaintiff, Defendant represents and identifies in writing 
the material in any such information or document to which a claim of 
protection may be asserted under Rule 26(c)(7) of the Federal Rules of 
Civil Procedure, and Defendant marks each pertinent page of such 
material ``Subject to claim of protection under Rule 26(c)(7) of the 
Federal Rules of Civil Procedure,'' then ten days notice shall be given 
by Plaintiff to Defendant prior to divulging such material in any legal 
proceeding (other than a grand jury proceeding) to which Defendant is 
not a party.

VI. Further Elements of Judgment

    (A) This Final Judgment shall expire on the seventy eighth month 
after its entry.
    (B) Jurisdiction is retained by this Court over this action and the 
parties thereto for the purpose of enabling any of the parties thereto 
to apply to this Court at any time for further orders and directions as 
may be necessary or appropriate to carry out or construe this Final 
Judgment, to modify or terminate any of its provisions, to enforce 
compliance, and to punish violations of its provisions.

VII. Public Interest

    Entry of this Final Judgment is in the public interest.

Entered:---------------------------------------------------------------

United States District Judge

----------------------------------------------------------------------
Page 15 of the Final Judgment
Section VII  Public Interest
    Entered and United States District Judge should be printed as is. 
This is not an omission.
Cynthia Preston,
Office of Operations.
[FR Doc. 94-20216 Filed 8-18-94; 8:45 am]
BILLING CODE 4410-01-M