Full Text of Orrin Hatch's Letter To Charles A. James Re: Microsoft Antitrust Settlement, Nov. 29, 2001

The Full Text You Can't Find Anywhere Else

After scouring the web, for reasons I can't understand, no one has posted the full text of Orrin Hatch's provocative, interesting, and, as yet unanswered letter to the head of the Bush Administration's antitrust efforts, Charles James. Hatch asks James to explain why the federal government roled over and played dead in the Micorosft settlement. James gave unresponsive congressional testimony posted at the DOJ site.

I had to scan this in; please report any typos.

On the stationery of the U.S. Senate Committee on the Judiciary

Addressed to Charles A. James, Assistant Attorney General, Antitrust Division

Dear Assistant Attorney General James:

As you know, the Senate Judiciary Committee has a long-standing interest in the policy implications of the government's antitrust case in United States v. Microsoft. During my tenure as chairman, the Committee held a series of investigative hearings examining allegations of antitrust violations by Microsoft and the ability of existing law to address anti-competitive commercial conduct effectively and in a. timely fashion. Many of the Committee's findings were later manifested in the decisions by the District Court and the Court of Appeals for the District of Columbia Circuit.

The resolution of this case has significance not only for the parties to the litigation, but also for the future application and enforcement of our nation's antitrust laws in the software industry. Given the Committee' s continued interest in these policy questions, it would be extremely helpful for me and other members of the Committee to have a better understanding of the various legal, regulatory and practical considerations relating to the proposed settlement.

I have reviewed the Proposed Final Judgment ("PFJ') submitted by the Department of Justice and several of the state plaintiffs, as wen as the Competitive Impact Statement ("CIS") filed by the Department on November 15, 2001. At the outset I should note that the CIS provides information that further explains the implications of the proposed settlement and appears to satisfy your statutory obligation. Even so, I have a number of specific questions that I believe are critical to analyzing and understanding the PFJ. These questions are not intended to suggest a predisposition either in support of or in opposition to the settlement, and any interpretation otherwise would. signal a misunderstanding of my interest in this matter. Rather. the questions are intended to elicit important information that I believe is necessary ,for forming an independent, objective, and informed analysis of the PFJ, Such objective analysis is essential in view of the importance of this case to Microsoft and its competitors, to innovation in the high-technology industry, to the economy. and to consumers.

1. An earlier decision by the Court of Appeals, United States v. Microsoft Corp., 147 F.3d 935 (D.C.Cir. 1998) ("Microsoft II"), relating to the interpretation of an earlier consent decree with Microsoft, has been interpreted by some as expressing the view that judges should not be involved in software design, and that the government simply has no business telling Microsoft or any other company what it can include in any of its products. In its most recent decision however, the Court of Appeals said that to the extent that the decision in Microsoft II completely disclaimed judicial capacity to evaluate high-tech product design; it cannot be said to conform to prevailing antitrust doctrine. See United States v. Microsoft Corp., 253 F.3d.34 (D.C. Cir. 2001} ("Microsoft III"). Is the law clear that the Department does have a responsibility to assess the competitive implications of software design in bringing antitrust enforcement actions? And, if so, does the Department have the necessary technical expertise and resources to perform such an evaluation?

2. To foster competition "middleware" the PFJ requires disclosure of APIs and similar information, but it then limits this provision only to those instances where disclosure would be for "the sole purpose of interoperating with a Windows Operating System Product." Except for the limitation, this provision is almost exactly like a comparable provision in Judge Jackson's interim consent decree. Why did the Department decide to add this limitation to the PFJ and what effect will the inclusion of the limitation have on restoring competition? Please explain .the competitive significance of web-based services, and whether the PFJ guarantees interoperability with the servers that operate those web-based services?

3. The Department has concluded that the PFJ is in the "public interest" as required by the Tunney Act. Are you aware of my other case where a Tunney Act "public interest" determination has occurred with respect to a. settlement where the underlying liability on the merits already has been affirmed by the Court of Appeals? To what extent should the scope of the District Court's deference to the Antitrust Division under the Tunney Act be affected by a Court of Appeals' prior affirmance of Sherman Act liabi1ity?

4. The Court of Appeals remanded the remedy issue because, among other reasons, the District Court failed to demonstrate how divestiture relief was "designed to unfetter [the] market from anticompetitive conduct,' ... to 'terminate the illegal monopoly, deny to the defendant the fruits of its statutory violation and ensure that there remain no practices likely to result in monopolization in the future.'" Microsoft III, 253 F .3d at 103 (quoting Ford Motor Co. v. United States, 405 U.S. 562, 577 (1972), United States v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968)). Please describe how the PFJ meets this standard dictated by the Appellate Court. (a) How docs the PF J "terminate the monopoly" Microsoft was found by the Appel1ate Court to have un1awfully maintained over PC operating system software? (b) How does the PFJ deny to Microsoft: the fruits of its Section 2 violation?" and (c) How does the PFJ "ensure that there remain no practices likely to result in monopolization in the future?"

5. Are there findings by the Appellate Court against Microsoft that are not addressed by the PFJ? If so, what were the reasons why the Department chose not to address these findings?

6. The Court of Appeals held than it was illegal for Microsoft to bind products together with Windows by "'commingling code" because this practice helped Microsoft unlawfully maintain its desktop operating system monopoly. The court concluded that code commingling has an "anticompetitive effect" by deterring OEMs from pre-installing rival software, "thereby reducing the rivals' usage share and, hence, developers' interest in; rivals' APIs as an alternative to the API set exposed by Microsoft's operating system." Microsoft III, 153 F.3d at 66. How does the PFJ prevent Microsoft from future unlawful commingling of non-Windows code with Windows?

7. You have said that Microsoft "won the right to sell integrated products" and that "the tying claim was eliminated by the appeals court." (Business Week, November 19,2001, p. 116). Other observers, however, argue that the Court of Appeals simply vacated the per se findings of a tying law violation and remanded that issue for consideration under a "rule of reason" standard. Why did the Department conclude that the tying claim was "eliminated" and not simply remanded to be retried under a different standard? What are the circumstances, if any, under which the court or the Department could find it impermissible for Microsoft to "integrate' a product with its Windows operating system?

8. The CIS acknowledges that the users rarely switched from whatever browsing software was placed most readily at their disposal." It bas been suggested that the most effective way to restore competition and to prevent future misconduct would be to require Microsoft to sell a product that is simply an operating system without all of the various applications that are now incorporated into Windows. Without such a requirement, the argument goes, consumers would be forced to procure two products if they choose to use a non-Microsoft version of a product that has been included in the operating system--Microsoft's version and the competitor's version. If Microsoft middleware is preinstalled with Windows, how do think the adoption rate by users of non-Microsoft midd1eware wi1l be affected? Did the Department consider including in the PFJ a requirement that Microsoft sell a version of Windows that is solely an operating system without other applications bundled with it?

9. Some observers claim the Court of Appeals found that Microsoft's technological tying, particularly its "commingling of code" was an illegal act of monopolization under Section 2 of the Sherman Act, but that there was insufficient evidence to determine that the same conduct violated Section 1. Do you agree with this? Does the PFJ provide a remedy for such misconduct? In your analysis, does the failure to find that the conduct violated Section I obviate the need to provide a remedy for the violation the court found under Section 2?

10. Some Wall Street analysts have opined that the PFJ imposes no obligation on Microsoft to change its business practices or redesign its products. Instead, these analysts have concluded, the PFJ seeks to restore competition by permitting OEMs to add products to Microsoft's desktop. Is this view of the PFJ accurate? Is it the Department's position that OEMs are in the best: economic position to restore competition in personal computing? If so, what is the basis for that position? Are there other entities that might be in a position to help restore competition?

11. A significant portion of the Microsoft III opinion was devoted to Microsoft's conduct vis-a-vis Java technology. The Court found Microsoft unlawfully used distribution agreements to forestall competition with middleware manufacturers. See e.g. Microsoft III, 253 F3d at 74.-78. The court found these agreements to be anticompetitive because they "foreclosed a substantial portion of the field for distribution and because, in so doing, they protected Microsoft's monopoly from a middleware threat," Id. at 76. Does the PFJ address such practices?

12. The Supreme Court has said that in an antitrust remedy, "it is not necessary that all of the untraveled roads to that [unlawful] end be left open and that only the worn one be closed." International Salt Co. v. United States, 332 U.S. 392,401 (1947). The Court also has made clear that injunctive relief which simply "forbid[s] a repetition of the illegal conduct" is not sufficient under Section 2, because defendants "could retain the full dividends of their monopolistic practices and profit frm the unlawful restraints of trade which they had inflicted on competitors." Schine Chain Theatres, Inc. v. United States, 334 U.S. 110,128 (1948). Are the standards enunciated by the Cour in International Salt and Schine Chain Theatres applicable in. the Microsoft case? If so, would you identify provisions in the PFJ that satisfy these standards?

13. The Supreme Court also has held that a Section 2 monopolization remedy "must break up or render impotent the monopoly power found to be in violation of the Act." United States v. Grinnell Corp., 384 U.S. 563, 577 (1966). Does the PFJ "render impotent" Microsoft's Windows monopoly and. if so how?

14. There has been considerable discussion about Microsoft's Windows XP product with some critics arguing that Microsoft is repeating the same technical binding, bundling and monopoly maintenance tactics found by the court to be unlawful when used in the past against Microsoft's competitors. If true, this allegation would be significant, given the appellate court's instruction "that there remain no practices likely to resu1t in monopolization in the future," Microsoft III, 253 F .3d at 103 {quoting United States v. United Shoe Mach. Corp., 391 U .S, 244, 250 (1968)). Some critics have also charged that Microsoft's broad .NET strategy is an effort to build upon the fruits of Microsoft' s past unlawful conduct and remake the Internet as a Microsoft proprietary Internet. Does the PFJ apply to Windows XP or to Microsoft's .NET strategy? If not, why has the Department decided not to apply the settlement to these products? Can competition in the operating system be restored without addressing these products?

15. Many of the provisions of the PFJ appear to assume that OEMs will act to aggregate operating system software and assume the role of desktop design and software packaging in the PC distribution chain. According to many observers, however, there simply is no financial incentive for OEMs to do anything but accept the full Microsoft software package. What is the Department's position on this issue? Was any consideration given to reports that OEMs did not take advantage of an offer by Microsoft this past summer to replace icons in the Windows XP desktop?

16. The Court of Appeals affirmed that Microsoft's conduct with respect to Java, in which the Court found it to engage in a "campaign to deceive [Java] developers" and "polluted" the Java Standard in. order to defeat competition to its operating system monopoly violated Section 2 of the Sherman Act. The Court held "Microsoft's conduct related to its Java developer tools served to protect its monopoly of the operating system a in a manner not attributable either to the superiority of the operating system or to the acumen of its makers, and therefore was anticompetitive. Unsurprisingly) Microsoft offers no procompetitive explanation for its campaign to deceive developers. Accordingly, we conclude this conduct is exclusionary, in violation of Section 2 of the Sherman Act." Microsoft III slip op. p. 101. As you know, the 1ower court decree included a provision designed to prevent deliberate sabotaging of competitive products by Microsoft. Does the PFJ restrict Microsoft's ability to modify, alter, or refuse to support computer industry standards, including Java, or to engage in campaigns to deceive developers of competitor platform, middleware or applications software?

17. The Court of Appeals found that Microsoft violated Section 2 of the Sherman Act by entering into an exclusive contract with Apple that required Apple to intsta11 Internet Explorer as the Macintosh browser. Microsoft III, 252 F3d at 72-74. Many observers accuse Microsoft of having forced Apple to enter into the contract by threatening to withhold the porting of Microsoft Office to the Macintosh operating system. Does the PFJ prohibit Microsoft from threatening to withhold development of Microsoft Office with resect to other platforms such as handheld devices, set-top boxes, and phones? If no, why did the Department choose not to address this concern in the PFJ?

18. You have been quoted as saying that various software and computer service companies are in the process of purchasing space on the desktop from Microsoft. (Business Week. November 19, 2001, p. 116). In the Department's view is the space on the desktop on computers manufactured by the OEMs owned by Microsoft or should that space be the property of the computer manufacturers?

19. The CIS suggests the Department has embraced the goal of encouraging competitive development of "middleware" in order that such middleware can become the type of platform software that could challenge the operating system monopoly. The settlement requires Microsoft to allow OEMs to remove consumer "access" to the company's "middleware." It has been observed, however, that since the code for Microsoft's middleware" is commingled with Windows, OEMs are only allowed to remove the icon for a middleware application. The CIS seems to acknowledge that Microsoft understood that software developers would only write to the APIs exposed by Navigator in numbers large enough to threaten the applications barrier to entry if they believe that Navigator would emerge as the standard software employed to browse the web. Can you explain why you believe third-party application developers would write applications to non-Microsoft APIs if the Microsoft middleware APIs as well as the Windows APIs will present on over 95% of the personal computers sold?

19. Concerns have been raised about the consequences of severa1"provisos" that have been included in the PFJ. For example, Sec. III.H.3 prohibits Microsoft from denying consumers the choice of using competing applications, but a proviso to this language states that Microsoft can challenge a consumer's decision to choose an application other than its own after 14 days and encourage the consumer to switch back to the Microsoft product. What does the Department believe will be the impact of the messages that Microsoft will be able to send to consumers on their own computers? Are other companies permitted to send comparable messages to consumers who choose to utilize Microsoft products? Finally, why did the Department choose a period of 14 days as opposed to some other period of time?

21. Under Sections III.H and VI.N a competing middleware application receives protection under the PFJ, but this protection applies only if the competitor ships at least one million units over the course of a year. Why did the Department choose that particular number? Did the Department give consideration to the argument that small innovators, who may be in the initial stages of product development and sales, might be in need of greater protection than a company capable of selling more than one million units?

[THERE IS NO 22 in the original letter]

23. Section III.B of the PFJ prohibits Microsoft from engaging in discriminatory pricing of its desktop operating system with OEMs. Does the PFJ also prohibit use of the same kind of discriminatory pricing against server operating systems and other non-Windows software?

24. The interim decree proposed by Judge Jackson included a provision precluding Microsoft from taking knowing action to disable or adversely affect the operation of competing middleware software. Does the PFJ contain a comparable provision? If not, what was the Department's rationale for not including this prohibition in the proposed settlement?

25. Why did the Department choose not to present evidence to the District Court on current PC operating system market developments, including changes in the Internet browser market share since the trial began? Did the Department undertake an investigation of current market developments to determine the impact of the PFJ on the existing market realities? For example, was there an analysis of the impact of the proposed settlement on Microsoft's proposed future products and services?

26. The CIS suggests that the District Court's role under the Antitrust Procedures and Pena1tiesAct is limited to reviewing the remedy in relationship to the violations that the United States has alleged in its complaint. See CIS at p. 61. Yet the authorities cited for that proposition appear to be cases that were settled before trial. Some observers argue that in this case the District Court should review the settlement in relationship to the Court of Appeals ruling rather than to the violations alleged in the original complaint. Does the Department agree with that assessment?

27. Has the Department undertaken any studies to determine the effectiveness of its prior consent decree with Microsoft in restoring competition? How do you believe prior obstacles to enforcement of consent decrees with Microsoft are addressed by the PFJ?

28. Do you believe that current antitrust law is sufficient to guarantee not onlu competition but timely enforcement in areas as the software industry?

29. What steps, if any, should be taken, legislatively or otherwise, to ensure that the Department has the proper economic and technological resources to enforce the law in the software industry?

I appreciate your cooperation with this request. As 1 hope you see, a better understanding of the Department's objectives and the scope of the remedy measures included in -as well as excluded from-the PFJ will serve the long~term interest we share in proper application of the anuitrust laws to the emerging information economy. I look forward to your response and to the opportunity to address these issues with you, Microsoft and other interested parties in the coming weeks.

Orrin G. Hatch Ranking Republican Member