U.S. V. MICROSOFT
Phew!
A blow for reason in the Court of Appeals.
In a unanimous decision Thursday, the U.S. Circuit Court of Appeals for the District of Columbia stuck a learned dagger into those who would disembowel Microsoft.
To be sure, the court's long and dispassionate opinion sustains the Justice Department's position on some important issues of antitrust liability, while roundly rebuffing the government on others. For short-term political impact, however, all the punch comes from its decisive rejection of Judge Thomas Penfield Jackson's hasty and ill-conceived order to break Microsoft into two corporations, backed up by a sternly worded command removing Judge Jackson from the case on remand.
The court should be applauded for an opinion that, happily, contained no surprises, as the stable market in Microsoft shares reveals. On the substantive side, it set the proper tone by making the initial presumption against government antitrust regulation, especially in technology markets characterized by feverish innovation. The sluggish pace of judicial proceedings stands in stark contrast to market forces that operate not over years but in months or weeks. A government suit that confuses monopoly with innovation only invokes an expensive legal process to protect weak firms at the expense of nimble competitors and demanding consumers. Accordingly, our antitrust doctors in the Justice Department and elsewhere are well advised to heed a legal version of the Hippocratic Oath--"First, do no harm."
More concretely, that maxim translates into a sensible operating principle--invoke the antitrust laws only when it is likely that the persistent practices of the firm will create or perpetuate monopoly power.
Consistent with this principle, the appeals court was willing to affirm Judge Jackson's finding of antitrust violations for various exclusionary practices. It thus sustained his finding of liability for Microsoft's decision to exclude Internet Explorer from the add/remove programs utility, and for commingling the code for its browser and operating systems. The court also took dead aim at Microsoft's exclusive marketing arrangements for original-equipment manufacturers, content providers, independent software vendor and, yes, Apple Computer.
These conclusions (while not beyond criticism) are without question securely grounded in traditional antitrust law. After all, if exclusive practices did not have any anticompetitive effects, then why do firms like Microsoft engage in them when they could simply raise the price? (It was instructive that Microsoft offered at best feeble pro-competitive justifications for these practices.)
These antitrust violations, it must be stressed, require relatively modest judicial intervention, namely undoing a few product-design decisions and contract provisions by narrow and focused remedies that fall far short of Judge Jackson's breakup of Microsoft.
At the opposite antitrust pole, the court correctly rejected Judge Jackson's holding that Microsoft's decision to offer its products and services at lower prices than its competition constituted an illegal form of predatory pricing. These predation claims depend on weird and exotic theories that a predator that loses gobs of money in the short run can somehow recoup those losses in the long term after its hapless competitors have been driven from the field. But that scenario is almost never observed. The unfortunate upshot of these predation suits is to protect weak companies against strong price competition from efficient rivals. Good riddance, I say, to this improbable antitrust violation, here and everywhere else.
The appeals court also refused to find that any tie-in arrangement, such as that between an operating system and a browser, constituted a violation per se of the antitrust laws. The antitrust laws face the unenviable task of deciding whether any ostensibly restrictive practices offer some real efficiency gains. As the court made clear, the integration of Microsoft's Internet Explorer browser into its basic operating system could not be dismissed as a simple exclusionary practice when that integrated design also enhances the usefulness and reduces the price of the entire package.
All sorts of firms in highly competitive markets bundle functionalities and technologies together to win over savvy consumers. Why deny Microsoft the same opportunity? The upshot is that the government can prevail on these tying claims only under a "rule of reason" whereby it explains how the restrictive impact of the tie dominates its efficiency features. Don't count on the government making that case very persuasively.
The appeals court's substantive analysis of the Microsoft violations followed traditional lines that were in place long before the high-tech boom became a high-tech bust. One useful long-term consequence of the decision is to reveal the folly of pompous claims that the antitrust law must remake itself in the shadow of the Web.
But the real punch of the court's opinion comes only in its last pages, wherein the appeals judges rake over the coals the district judge. Quite simply, how could Judge Jackson have behaved so foolishly?
Antitrust law has never been invoked to break up a firm that has grown by internal expansion. The few judicial divestitures have always followed merger and acquisition. Judge Jackson therefore engaged in public professional suicide in ordering the breakup of Microsoft at all, let alone without holding a hearing on whether his draconian remedy would do more harm than good.
Nor could anyone disagree with the appeals court's harsh condemnation of Judge Jackson's fatal lapse in judgment in sharing his negative views on Microsoft with any reporter who came knocking on the door. The only mild surprise here, perhaps, is that of the appeals court allowing his findings of fact to stand, even as it pointedly remanded the case to another trial judge.
In light of this opinion, it is easy to advise the Bush administration on how to salvage something from the Clinton administration's largest judicial initiative. Don't tempt fate a second time. Don't ask the Supreme Court to weigh in, now that matters have come to a sensible resting point. Accept the decision of the court of appeals and march obediently back to a new district judge. Forget about the breakup. Press to eliminate only those exclusive contracting practices or design features with clear monopoly overtones.
After his scare, Bill Gates should be eager to settle, and we can all get on with our lives secure in the knowledge that the high-tech industry will continue to churn out better products at lower prices.
Mr. Epstein is interim dean of the University of Chicago Law School.
