Disclaimer: This may not be the most updated and final copy of our site, but it's close enough and contains approximately the same information.

Note to Users
When we began researching and planning the content for this site, we planned to create a comprehensive guide to the history of antitrust cases and a source for information and discussion relating to current and future cases. Along the way, we made a discovery that we think adds enough to make the site a springboard into something more-a new way of looking at the study of the antitrust movement.
During our intensive research, we realized a trend was developing. This trend runs throughout the history of antitrust, and seems to make the antitrust issue a good microcosm with which to teach students about the proceedings of the US government, from the legislative to the judicial.

The history of antitrust action is a shaky one, with periods of both lethargy and energy, the only constant being ambiguity. The policy makers of this country learned long ago that clear, unambiguous language can be a dangerous tool in the wrong hands. Bills that contain this sort of language inevitably contain loopholes, which were impossible to foresee when the bill was made. Eventually, potential violators will find and exploit these loopholes.
As a result, legislation often takes an all-encompassing, albeit vague approach in defining violations, ultimately leaving room for broad interpretation. This is one reason the judicial branch was founded. Many court cases are not clear-cut, guilty or not guilty decisions. Often, the court is called upon to articulate exactly what was intended by the law as enacted by the legislators before judging whether or not the defendant violated that law. Thus this approach to legislating leads to an endless, though absolutely necessary, string of engaging debates on the subject. This debate often results in changes in the very intended meaning of the original legislation, sometimes at the hand of changing social climates.

For instance, think of the way the potential interpretation of the right to bear arms has changed after the emergence of an ever increasingly violent society armed with ever increasingly accurate killing machines. No matter your stance on the issue, scarce few would have suggested removing or censoring this constitutional right 200 years ago when America was a more untamed place. The ability to change our interpretation of legislation is one of the properties that makes our system so strong; the system is open to change, and able to adapt and evolve to better fit society's needs, should those needs change, without overhauling the entire system and rewriting the constitution.

Antitrust is another good example of this trend of ambiguity and debate in US politics. The Trust Issue is a thorny one, with opponents touting the American ideal of the free market and trustbusters citing the economic benefits of competition and claiming the right to intervention on behalf of the consumer.
Besides the essential debate over the entire concept of antitrust law, there is also the debate over the validity of leveraging as a violation of antitrust laws. More debate is centered on whether prevailing economic conditions, such as global competition and the faster pace of the business world, make the old systems of antitrust analysis obsolete. Antitrust, now a hundred years old, still confuses and confounds the judiciary and sparks electric debate among political and economic analysts.

Hopefully, by reading about the history of antitrust action, including the conditions that prompted debate on the subject and the initial actions in response to The Trust Issue, and by reading the case study of the antitrust actions taken against Microsoft, students of antitrust will become students of US politics and earn a deeper understanding of the nature of the debate, and the action, which drives our political system.



Antitrust History/Background

Post Civil War Industrial Growth
The years before the American Civil War were the golden age of small industry, with most businesses owned by a single entrepreneur, family, or small group of stockholders.
The Civil War accelerated the effects of the industrial revolution in America. Wartime economic booms provided the needed capital, the pressing necessities of battle gave birth to rapid advances in manufacturing and machinery, and policies of reconstruction brought more industry into the south after the war.
In consequence, the war left America a much more industrialized nation. The industrial revolution in turn made larger industrial concerns possible and profitable.

Big Business
Before the industrial revolution, most manufacturing was done in small scale by small groups without much aid from machinery. After the industrial revolution, most production took place in large factories that employed many people and used machines to produce a large volume of goods. Several factors made this change possible, particularly changes in the social and economic order during this time.
The biggest change was in the availability of new, advanced machinery. The amount of profits a company makes on its product depends on how much of the product is made. Making more will mean more is sold, but the market will also flood, causing the price for each individual unit sold to drop.
The introduction of labor saving machines made manufacturing cheaper, but startup costs higher. This meant that to overcome the startup cost, you had to sell more product, which was made possible by the cheaper production costs. Thus, the invention of machinery made some increase in the scale of production not only possible, but necessary to turn a profit.
A system of high protective tariffs, in which the government charges high taxes on imported goods to make buying domestically produced goods a more viable alternative to foreign ones, began in 1861. This, coupled with higher volume of production made possible by labor saving devices, meant a lot of prosperity for American businesses, which led to natural growth and expansion in domestic businesses.
An accelerated growth in the size of the nation was also taking place. An increase in the birthrate came from post war economic and social prosperity; recent cessions of territory increased our land area and led to new settlements in the frontiers. All of this growth led to an increased demand for products, and industries had to grow to accommodate that demand.

Consolidation Trends
The newly industrialized economy gave rise to such intense competition that businesses were driven to combination and pooling resources to survive; many didn't and were driven to bankruptcy. Uniting, gave them a better chance of surviving this competition and limited the pool of competitors, further increasing their chance of survival.
The consolidation trend was followed in two stages in the years after the Civil War. The first stage lasted from 1879 to 1893 and was marked by horizontal combinations, in which companies making similar products in the same stage of production combine. For example, a steel factory would combine with other steel factories, but not with iron ore mines, which supply the necessary raw materials for steel production. The second stage lasted until 1904, and was marked by vertical combinations. In a vertical combination, companies in various stages of production combine, such as steel factories with mines.

Advantages of Combination
Large companies found it easier to secure good management, and had a larger pool of workers to pick from for promotions. Bargaining with labor and bankers was also easier for large corporations, because they had a solid reputation and were backed by many stockholders.
Transportation of product was a huge factor in consolidation, as railroad companies and other support industries often offered considerable volume discounts and other incentives to companies with high output.
The industrial revolution made operating a business riskier than ever. Increased volume of production saturated the markets and created ferocious competition for customers. Constant advances in technology made it hard for some firms to keep pace. The high investment involved in acquiring a factory and machinery discouraged many new entrepreneurs from entering competitive fields.
These factors all contributed to the rising trend of consolidation. Businesses all over America combined into trusts and corporations, and pooled resources to limit, and in many cases eliminate competition, creating industry-wide monopolies.

Rise of Corporations
As industrialization spread, investments became riskier due to intense competition, and more expensive due to higher starting costs of machinery and factories. Business ventures became too much for a single entrepreneur to handle, and the new corporate form of business was established after the Civil War. The corporate form had been used in the past, mostly in the formation of banks and the building of turnpikes and railroads, but now extended to all business fields.
Many operations were established solely for the purpose of eliminating competition in business. This has been popularly deemed detrimental to industrial development and the public interest. In response much legislation has been passed to make illegal those corporate forms that were commonly abused in this manner. The business community was then forced to invent new corporate forms to pursue this end, such as pools, trusts, holding corporations, and mergers.

The Corporate Form
In the Dartmouth College case of 1819, Chief Justice John Marshall defined a corporation as "an artificial being, invisible, intangible, and existing only in contemplation of law." A more specific definition of corporation is an association chartered by the government to do business and uphold the public interest
Corporations are often made up of a large pool of investors and a small group of directors who orchestrate the actual legal and business dealings for the corporation.
A corporation can issue stocks and bonds and buy and sell properties. It is not disrupted by the death or retirement of its members like other business forms. Another advantage is that the stockholders have liability that is limited by law, and aren't fully responsible for the corporation's actions.
In the ideal situation, the corporation is a business form in which many people can take a small part in the industrial development of the country by contributing only money, while the management chosen to handle the actual business is made up of men of great ability that can properly guide the corporation to achieve success and uphold the public interest.
Unfortunately, in a corporation the number of stockholders is so large that they have very little power over the corporation. Because they have little power, the stockholders often have little interest in the actions of the corporation, so long as their investment is returning dividends. Furthermore, the directors are seen as agents of the corporation itself, which is a separate legal entity, and aren't responsible to the stockholders directly.
This position of irresponsibility on the part of the members and unchecked power in the hands of the directors often leads to abuses, such as using the corporation to accomplish personal agendas, rather than the public good, which they are chartered to uphold.

Types of Corporations
A trust is a corporation organized for the purpose of eliminating competition in an area of business, usually for the purpose of controlling prices and output levels. In some cases, trusts are merely distinct companies that band together in agreements to cooperate rather than compete; others are separate companies that actually join to become a single corporate entity. Trusts have existed in five general forms in this nation's past.

One of the earliest methods of combining and consolidating businesses was pooling. Pools were a temporary and voluntary organization of separate entities. Each corporation would enter into a mutual agreement that would often fix production rates and prices and set aside exclusive markets in which each participant could operate unhindered by competition.
Pools were not only temporary, but were monopolistic in nature and thus illegal. Because of this fact, violations of a pool agreement could not be tried in court, and the contract was not legally binding. Pools were declared illegal in 1887 by the Interstate Commerce Act and in 1897 by the Supreme Court in the case against Trans-Missouri Frieght Association.

Business's next step in combination was the trust. Its main advantages were that it was legally binding and more permanent than pooling.
Trusts were formed when stockholders in several corporations exchanged their stock certificates with a group of trustees for trust certificates. The trustees then had influence over the separate corporations for which they consequently held stock and could orchestrate their cooperation with one another. Abuses in this system led to the breakup of many trusts, which led to a search for another method of combination.

Business next turned to holding companies, which are corporations set up to hold dominant amounts of stock in other corporations. In the case against the Northern Securities Company in 1904, it was decided that the concept of a holding company was not illegal, but an individual holding company could be if its obvious intent was to create a monopoly.

Another method of combination involves the absorption of one company into another, the merger. This often occurs when one company buys a dominant amount of stock in another, as in a hostile takeover.
An amalgamation is similar to a merger, but in this case both companies involved are merged into a third corporation, and the individual parts give up their original charters.
Mergers and amalgamations are still legal and quite common, but the Celler-Kefauver Antimerger Act now permits the government to intervene in any merger that would have the effect of lessening competition in a field of business, preventing monopolies of this type.

Communities of interest occur when a small group of business leaders hold large amounts of stock in several companies in related industries, and can coerce cooperation between them.
A similar method of combination is the interlocking directorate, in which people sit on the board of directors for several competing firms.
Both of these methods of combination were made illegal under the Clayton Antitrust Act, but they can still exist if the business leaders hire puppet directors to sit on the other boards and carry out their will indirectly.

Era of the Muckrakers
The Civil War, Reconstruction, and race relations led to a great deal of social unrest in the 19th century, and much of the negative aspects of society were overlooked. Also, a slow, unstable economy left Americans unwilling to experiment with new ideas. So when writers such as Henry George, Edward Bellamy, and Henry Demarest Lloyd spoke of the ills of modern society in the late 1800's, it is no surprise they were ignored. The fact that they were all associated with unorthodox political movements led most Americans to write them off as socialists, further limiting their appeal.

By the 20th century, the economy had gotten a good deal stronger and social issues of the past decades had cooled a bit, so Americans had time to reflect on society's ills and the Era of the Muckrakers began. Publications everywhere were flooded with social commentaries, which stirred the public to call for changes. The demand for change led to the birth of the Progressive Movement in American politics.
Muckrakers saw corruption everywhere, from industry to politics to society, but their investigations always seemed to lead to the same conclusion-that economic power was concentrated into the hands of too few, that this power had corrupted, and that corruption had spread.

TR & the Early Antitrust Movement
Theodore Roosevelt was one of the first and greatest presidents of the Progressive Movement. He was president during the era of the muckrakers when social critics were very successful in swaying public opinion toward change and turning attention toward society's ills. His domestic plan, called the Square Deal, advocated a moral approach to solving society's problems and an equal chance in life for all people and businesses.
In his fight against trusts and monopolies, he passed the Hepburn act, which strengthened the Interstate Commerce Commission and ended the unfair business practices of the railroads, such as dropping fares to drive competitors out of business. He also vigorously enforced the Sherman Antitrust Act, raising lawsuits against many trusts. These suits were largely unsuccessful, but brought attention to the need for legal action against trusts.

Election of 1912
The presidential election of 1912 was a particularly dramatic one. The organization of a Progressive party under the beloved Theodore Roosevelt made it a three way race. The Republicans chose the incumbent William Taft, who took a conservative non-progressive platform. The choice of Woodrow Wilson to run on the Democratic ticket assured a vitally important race for students of antitrust, showcasing the two opposing schools of thought emerging on the trust issue.
Roosevelt believed that prosecution under the Sherman Law should end. He said trusts and even monopolies were a natural state of business brought on naturally by competition, and a return to a competitive state would be simply futile.
He said trusts should be kept in tact and regulated by a government commission, which would see to it that they were well behaved and acted only in the public interest. If this method were carried out, he said there would be no need to prosecute or break up the trusts; their dangerous monopoly power would be kept from abuse.

Wilson believed that prosecution should continue under the Sherman law and the law should be strengthened by supplemental legislation. He said that trusts, by their very size, are less than optimally efficient, and only seem to prosper due to lack of competition.
He said competition should be restored, and then regulated to see that it is fair. Then breakup of well-behaved trusts would be unnecessary, as small new businesses with better facilities and management would gradually overcome them, given a fair chance.

Without Roosevelt's influences, Taft abandoned the progressive platform that got him elected to his first term in office, and reverted to his true conservative self.
Taft got little support from the Republican party, still reeling from the exodus of its progressives, and his stand on trusts and tariffs alienated progressives of all persuasions. He even went so far as to renounce the "sensationalism" of the media during the era of the muckrakers.
With progressivism in full swing, Taft stood no chance of reelection, and was abandoned by most supporters, financial and otherwise, midway through the campaign

Roosevelt was an energetic candidate with a flair for the dramatic, and he took the nation by storm. His campaign trips were immensely successful, and he quickly attracted a fanatic following.

Fearing the election of such a powerful leader with such radical ideas on government intervention, his opposition turned to ferocious, often unreasonable attacks. His platform was portrayed as a call to revolution; his ideas likened to socialism. He himself was called a "political antichrist" that would eventually rise to despot power if elected.
Despite the bold opposition, Roosevelt's chances of winning the campaign were slim to begin with, and his power largely illusory.
Wilson's nomination gave progressive Democrats a candidate they could stand behind, and few migrated to the new progressive party. This left Roosevelt to rely largely on Republican progressives for support.
Progressives were few in the republican ranks, and their largest concentration was in the agrarian west. Roosevelt's platform was contrary to the western progressives' call for lower tariffs and the breakup of trusts, so most western progressives were opposed to Roosevelt.
In the end, Wilson won the election, and it is, in fact, his policies we still practice-with varying results-in relation to the trust issue.
This may be contrary to common sense, when one thinks of all the huge corporations that dominate our industry today. One might think that we have been following Roosevelt's plan of keeping monopolies intact. The fact of the matter is that the existence of competition and the existence of large corporations are not mutually exclusive. Combination in restraint of competition isn't the only recognized economic trend that would have the net result of creating large corporations that rise to dominate their markets.
Adam Smith took a Darwinistic approach to competition, saying that fair competition promoted efficient industrial concerns and destroyed weaker ones. The end result is that the firms that are fit to survive fair competition are operating at optimal efficiency, and thus control large portions of the market. Thus competition and large corporations are not mutually exclusive.

Roosevelt's Proposal
Everyone seemed to be in agreement on one thing in the election of 1912-the Sherman Act had to go. The Sherman act was weak or flawed in some way that made it entirely ineffective.
The proposals parted ways on what to replace it with. According to Roosevelt and his supporters, the entire law was flawed. It set up a system under which trusts accused of anticompetitive practices were to be prosecuted and, if found guilty, were to be fined or broken up.
The flaw as Roosevelt saw it was that this was destructive of industry and not conducive to economic development. He believed that there were benefits in having large corporations, and that competition among many small firms would create so much waste as to render the industries inefficient.
His supporters also believed that competition was detrimental to the public interest. People rejected the unpredictable and violent price fluctuations that were common in highly competitive markets. For instance, if a consumer buys steel for a building frame today at a certain price, and his neighbor buys it tomorrow at thirty percent less, he must compete with his neighbor to rent the space in his building even though his neighbor's building was thirty percent cheaper to make. Thus consumers were less likely to buy knowing that sharp price cuts could happen at any time.
Furthermore, Roosevelt had seen in several cases where companies broken up under the Sherman Act came back together under the same management that had steered them wrong in the first place. Worse yet, the new firms were sufficiently small independently that they could not easily be tried under antitrust legislation, creating a sort of immunity. He pointed out the Tobacco Trust, which still had nearly seamless cooperation between the resulting firms after the breakup in court.

Roosevelt's plan was to create a regulatory commission similar in scope to the ICC. This commission would block any anticompetitive actions by the trusts before they were perpetrated. In doing so, the government would effectively force all trusts to be benevolent and well behaved, and eliminate the need to sue under the antitrust laws.
Roosevelt also recognized the importance of taking the vagueness out of current antitrust legislation, so the new commission would have specific rules with which to judge violations. He said it was unfair to judge business people guilty of anticompetitive practices which they had no idea would be interpreted as such; likewise it was unfair to judge businessmen who stumble into violations equally harsh as those who openly defy known laws. It was essential that all businessmen know what they can and cannot legally do.
He also proposed stopping at nothing to achieve this end. It was vitally important that business be reigned in at all costs, even if it were deemed necessary to impose explicit price controls. Many feared this call for absolute governmental power and said what he was proposing was socialism.
Many also feared that condoning past violations of the Sherman act and allowing violations under the law to go without prosecution would lead to a widespread disrespect for the law in general.
Another criticism was aimed at the practicality of the planned commission. The planned commission was similar to the ICC in scope, but the ICC was an overworked and largely ineffective commission. In fact, the greatest successes of the ICC were in the regulation of competition, not of existing monopolies.
Today the FTC and the DOJ are the established commissions for regulating businesses. Even under today's plan of maintaining competition if possible, which results in much less work than direct regulation of industry, these commissions are reigned in by being unable to handle their caseloads. For example, in 1999 the FTC declined to challenge the merger of CompUSA & Computer City, two computer superstores, despite their recent success in the Staples/Office Depot merger. They won a preliminary injunction in the case, which dealt with the related market of office superstores. A former staffer cited the FTC workload as a possible reason.

Wilson's Proposal
Wilson agreed with most progressives that the Sherman Act was not sufficient to handle the problems created by trusts. Few doubted the law had some flaws or weaknesses that made it entirely ineffective, but there was disagreement emerging as to what should replace the law.
According to Wilson's camp, the law had a good foundation, but didn't go far enough. The law needed more powerful and specific legislation to supplement it in order to achieve results.
The Sherman Act set up a system where large corporations that had reached their position by unfair means of competition should be broken up. Wilson advocated this approach, saying large corporations were inefficient. According to Wilson, it was clear that trusts did not prosper in proportion to their size, and that they only gained power in market segments where competition ceased to exist, and were actually losing ground where competition still stood.
Wilson said large corporations were inefficient because they carried both efficient and inefficient plants, all bought at exorbitant prices from competitors. They could afford to make these purchases because of loans, and because the net result was the elimination of competition which was detrimental to their profits. With this competition out of the way, the prices they set were undisputed, and they could cover their losses by raising prices.
Advocates of Wilson's plan feared other plans for maintaining the existence of large corporations and trusts as dangerous to the public interests. There was an inherent danger in the concentration of power, political or economic. Wilson said the founding fathers knew this when forming our nation. If the government commission was all that stood between trusts and their plans, the trusts would no doubt become friendly with the commission and spread their influence throughout the government. After all, businesses had been corrupting government officials for decades.

Wilson called for the restoration of competition in all branches of industry. When it had been properly established, it was to be protected and regulated. Many denounced competition in industry as wasteful, but Wilson said it was illicit and unfair competition that was wasteful.
He planned to establish a commission to regulate not trusts, but competition, to see that it was fair. If the trusts were really efficient as his opponents said they were, they would prosper in fair competition. If not, new competitors could enter the field and overcome them. He predicted that it would not be necessary to break up all trusts, for once competition returned to the marketplace, the trusts would be defeated naturally by fair competition.

Antitrust Legislation

Sherman Antitrust Act (1890)
This is the first and most basic of our nation's antitrust acts, and was passed in large part because conservative Republican senators who opposed the bill passed it in exchange for the passage of the McKinley Tariff.
The act had two important provisions. The first made every contract or conspiracy to restrain trade in interstate and foreign commerce illegal. The second made it illegal for any person to monopolize, or attempt to, or conspire with others to, monopolize any part of interstate and foreign commerce or trade.
Originally, conviction under the Sherman Act was a misdemeanor, and violators were subject to a maximum $50,000 fine and up to a year in prison, plus the possible breakup of the offending trust. Over time, the penalty has been made a felony, punishable by up to a $1,000,000 fine and up to three years in prison.

Unfavorable judicial interpretations weakened the law. In fact, in an ironic twist, the act was so misinterpreted at one point that business actually used the act to break a union strike on the grounds that the union had conspired against interstate commerce in doing so. In the famous Danbury hatters' case, a labor union was held responsible for financial damages sustained during a union boycott. Some courts actually questioned the legality of trade unions on the grounds of the Sherman Act because of their restrictive rules and practices.
The decisions in the cases against the Standard Oil Company and the American Tobacco Company in 1911 introduced the "rule of reason" interpretation of the Sherman Act, which tried to differentiate between good trusts and bad trusts. Many believed this interpretation weakened the act. Later, supplemental legislation provided more detailed descriptions of the offenses, and helped tie up loopholes that were discovered in the act.

Clayton Antitrust Act (1914)
This is the first supplement to the Sherman Antitrust Act. It was meant to clarify and elaborate on the offenses that were deemed illegal in the Sherman Act.
Also, the Clayton Act cleared up the confusion about the Sherman Act's application to labor unions by explicitly excluding them from the provisions of the act and other antitrust legislation. It affirmed the right for unions to strike and limited the use of federal injunction in labor disputes.
The Clayton Act aimed at any practices that substantially lessened competition or tended to create a monopoly. Provisions were included for local price-cutting to freeze out competitors and price discrimination, in which businesses would offer different prices to different consumers and market segments. The Clayton Act also made illegal the use of tying contracts, contracts between industry and consumers or suppliers that guaranteed they would deal only with that business, not competitors, in exchange for various kickbacks.
Combinations in restraint of trade that involved the purchase of stocks in competing firms (such as communities of interest) and the occupation of directorial seats in multiple corporations (i.e. interlocking directorates) were also made illegal by this act.

Federal Trade Commission (1914)
The same year they passed the Clayton Act, congress created the Federal Trade Commission, a government committee to monitor business practices and keep monopolies under control.
The FTC had the power to issue "cease and desist" orders whenever it found unfair competitive practices among businesses. These were analogous to warnings, and could be followed by prosecution under the antitrust laws if left unheeded.
The FTC monitors businesses by investigating price-fixing and price discrimination, and by prohibiting mergers and amalgamations that may lessen competition or lead to monopoly. They also investigate false advertising and false labeling of products.
The FTC reports its findings to the government, and gathers data on economic and business conditions for the President, Congress, and the public.

Robinson-Patman Act (1936)
The Robinson-Patman Act was meant to elaborate the types of price-fixing that was declared illegal in the Clayton Act. It was aimed at protecting small producers from being frozen out of markets by larger corporations by local price-cutting, not at addressing the effects of price-fixing on consumers.

Celler-Kefauver Antimerger Act (1950)
The Celler-Kefauver Antimerger Act was passed to prevent firms from carrying out mergers and amalgamations with other firms if the effect would be a substantial decrease in the amount of competition in the effected industry, or if the merger would tend to create a monopoly.

Hart-Scott-Rodino Premerger Notification Act (1976)
The HSR act strengthened the existing Antimerger act. It's major provision is one requiring all firms to present relevant data and go before the FTC for approval before the acquisition of any company worth at least $15 million. To lessen caseloads, the FTC can create guidelines under which firms can claim exemption from this act.

Summary of Current Policies
Antitrust legislation is still in existence today. Its effectiveness is dependent upon the political climate of the times and thus varies accordingly.
Antitrust legislation is still on the books in America, but tends to be vague as to what constitutes abuses, allowing for a great deal of variation in interpretation by the courts.
For example, the United States Steel Corporation ruling by the Supreme Court in the early 1920's said that having monopoly power did not constitute an infraction of the Sherman Act, so long as that power was not abused. This decision was reversed in the later ruling of the 1945 Aluminum Company of America case.
The effectiveness of antitrust legislation also depends on its selective enforcement by the administration in power. It is the Department of Justice, headed by the Attorney General, who decides when to prosecute corporations for antitrust violations. The Attorney General being a member of the cabinet, it is ultimately the president who decides the level of vigor with which the laws are upheld.
The prosecutorial resources available to the DOJ and FTC also have a major effect on the enforcement of antitrust laws. For example, in 1999 the FTC declined to challenge the merger of CompUSA & Computer City, two computer superstores, despite their recent success in the Staples/Office Depot merger. They won a preliminary injunction in the case, which dealt with the related market of office superstores. A former staffer cited the FTC workload as a possible reason.

The Federal Trade Commission has been established to monitor Big Business and issue "cease and desist" orders, which are analogous to warnings. If warnings go unheeded, legal action may be taken on the grounds of the antitrust laws.
The courts have not been consistent in their interpretation of the antitrust laws and the meaning of monopoly power. Several antitrust lawsuits have been filed in past years, such as those against International Business Machines, General Mills, General Foods, and now Microsoft, but no new principals of antitrust law or clear pattern of thinking seems to have emerged through the rulings or the choices to prosecute.
All in all, US efforts have been more effective at preventing complete monopolies than at maintaining highly competitive markets, so we are following more closely in effect to Roosevelt's plan than to Wilson.

Lately, economists have been paying less attention to the antitrust movement, as the emergence of a global economy and worldwide competition makes domestic monopoly seem less pressing of a concern.
For example, the FCC responded to the acquisitions of Columbia Pictures and MCA by Japanese media companies Sony and Matsushita respectively by deregulating the major communication networks. They hoped that American studio alliances could resist buyout by foreign firms. As a result, mergers in this industry have been rather common since 1993, often in defiance of antitrust legislation.
The fact is, despite various approaches, no modern, non-communist industrial society in the world has effectively solved the problem of maintaining competitive markets and keeping monopolies in check.

Europe has had a very different approach to the trust issue than America. They have had a tendency to nationalize most key industries, creating public monopolies, when competition proved more harmful than helpful. Other businesses have been allowed to form cartels, in which the major firms get together in voluntary agreements to set pricing and production agreements, which are carefully monitored by the state. Such agreements are illegal in the American system.
Another major difference in the European system is that more concern is placed on unfair competitive advantages than the American system, which often calls for proof that the exploitation of these advantages cause harm to consumers in some way.

In fact, the opposition to antitrust legislation has been mounting, especially in recent years. In 1994 the Libertarian party even added a plank to their platform that called for the complete abolition of antitrust laws.
Many sites have been organized in opposition of antitrust legislation (see our links page). Among these are the Center for the Moral Defense of Capitalism and the Freedom to Innovate Network.
There is even evidence put forth that says changes in antitrust policy has resulted in booms and depressions in the economy. Times of diligence in trust busting seem to destabilize the economy, cutting production and profits. Times of dormancy in antitrust policy tend to result in prosperity and economic growth. More on this is available at www.antitrust.org/economics/vertical/macro.html.



The Microsoft Monopoly: A Case Study

Microsoft & the FTC
In 1990, the FTC began an investigation into the possibility that Microsoft and IBM were conspiring together to monopolize the operating systems market. In an interview with Fortune magazine, Gates claimed that in actuality, Microsoft and IBM were in stiff competition with one another at the time.
As part of the investigation, the FTC began soliciting documents from opponents of Microsoft, and Gates says his company paid little attention to the investigation. Therefore, the testimony of Microsoft's direct competition was the only one the FTC heard, so the government began forming a one sided opinion of the issues from the beginning.

Microsoft, the DOJ, & the Consent Decree
Next the Department of Justice took up the investigation against Microsoft. In July 1994, Microsoft signed a consent decree saying they would not require computer manufacturers to license any other product when they sign a license for Windows. Microsoft is quick to point out that the decree also explicitly protects Microsoft's right to develop integrated software products.
Microsoft was at the time developing a new version of Windows that closely integrated Internet Explorer features, and bundled a working version of the web browser with the operating system. The DOJ began investigating Microsoft's licensing practices 14 months after the release of the first version of this operating system, and the allegations uncovered didn't go to trial until more than 2 years later, much too late for Microsoft to remedy its design so that Internet Explorer would not be so closely tied to the operating system.

In October 1997, the DOJ filed a petition with the US District Court saying Microsoft was in contempt of the consent decree because it offered the license for Windows only if computer manufacturers also agreed to license Internet Explorer as well, and offered no version of Windows without the browser included.
The DOJ asked the court to issue an order that would prohibit Microsoft from forcing computer manufacturers to accept and install the code that Microsoft distributed at retail as Internet Explorer 3.0.
Microsoft claimed that without the files that constituted Internet Explorer, Windows would not boot or function properly. Essentially the DOJ was ordering that Microsoft produce and market a non-functioning, and therefore commercially worthless operating system. Also, it said that the fact that Windows needed the code to function properly proved that Internet Explorer was integrated with Windows and thus protected by the consent decree.

Microsoft & the Preliminary Injunction
Judge Jackson denied the request for a contempt finding, which would mean Microsoft was guilty of a crime, but issued a preliminary injunction which adopted precisely the language that the DOJ had requested in a ruling. This basically meant Microsoft was guilty of no crime, but was issued a court order that forced them to begin distributing Microsoft Windows without Internet Explorer included.
In an attempt to comply with the preliminary injunction, Microsoft sent a letter to computer manufacturers informing them that they need not license and install Internet Explorer with Windows. They offered them two new licensing options, in which they could either install the most recent version of Windows, then delete all the files that constituted Internet Explorer (creating an operating system that was at best buggy, and perhaps inoperable), or install an earlier release of Windows without the Internet Explorer 1.0 which was shipped with it (creating an obsolete version of Windows roughly equivalent to the original August 95 release of Windows 95).
At the same time Microsoft filed an appeal of the preliminary injunction, which was heard by the Washington D.C. court of appeals.

The Preliminary Injunction Case
In December 1997, the DOJ asked the District Court to find Microsoft in contempt of the preliminary injunction, saying that MS had not complied with the ruling, because it offered only obsolete and unreliable alternatives to the Windows/Internet Explorer bundle, which were commercially worthless.
Microsoft said the suit was a complete about face of the DOJ's stance during the previous trial. The government asked the Judge to order Microsoft to release a version of Windows with most of the Internet Explorer code included so that the features that had suffered in Microsoft's new licensing options would be returned to functionality, but with the visible means of accessing it (such as the Internet Explorer icon on your desktop) hidden from view so the end user does not have access to it directly. Microsoft said this marked an admission by the government that Internet Explorer had been closely integrated with Windows 95.
Microsoft is quick to point out that when the government was trying to prove that Internet Explorer was a completely separate product from Windows, they repeatedly pointed to the early releases of Windows 95, before the integration of Internet Explorer, when Internet Explorer was kept on a separate disk from Windows. This was essentially what Microsoft's answer to the court order was-releasing this original version minus the Internet Explorer disk. Now the government said that this was not good enough.
Microsoft also points out that the DOJ expressly stated in court during the first contempt hearing relating to the consent decree that simply removing the visible means of accessing Internet Explorer (such as the desktop icon) would effectively achieve much of the government's objectives in the case, but they told the court that this was not the remedy they sought. They explicitly stated that they wanted the entirety of the Internet Explorer code removed. Thus, had Microsoft done as the government was now suggesting in the first place, they would not have been in compliance with the court order.
The government said that Microsoft was trying to rewrite the preliminary injunction, but Microsoft alleged the same thing of the government. When the DOJ was arguing for the injunction, they said it was a blatant violation of the consent decree to force any manufacturer to install any portion of the Internet Explorer software on their new PCs. Now they were saying that compliance with the order demanded that Microsoft distribute Windows with most of the code left in.
The court's order also said nothing about hiding or restricting access to the browsing software. According to Microsoft, the DOJ was asking the court to alter the preliminary injunction while the appeal process was still incomplete. In the 1978 Deering Milliken, Inc. v. FTC case, the court ruled that it was outside the jurisdiction of the district court to alter its own ruling while that ruling was still under appeal. Microsoft said that the case therefore had no merit.
The DOJ also suggested that while Microsoft had arguably complied with the letter of the injunction, they had ignored the spirit of it. The DOJ said that the ruling was meant to force Microsoft to offer the most current version of the Windows operating system without the inclusion of Internet Explorer, and with no other functions of the operating system affected.
Microsoft says that the DOJ's new interpretation speaks in terms of product development, whereas the injunction spoke in terms of licensing practices, as did the consent decree it was meant to uphold. Furthermore, Microsoft cited legal precedents that say civil contempt can only be found if the prosecution can find absolute proof that the offender violated a "clear and unambiguous" prohibition or restriction placed on it by the court. This does not describe the "spirit" of the ruling, so the government's case again had no merit.

The case was never resolved in a courtroom, however. In January 1998 Microsoft reached an agreement with the DOJ that effectively put Microsoft in compliance with the injunction and ending the contempt case, meanwhile leaving the injunction open to appeal and letting the case before the appeals court continue.
The agreement forced MS to offer two new licensing options, both of which left most of the Internet Explorer functionality in the operating system while removing some portion of the web browsing software or the visible means of accessing it, just as the DOJ had been asking the court to order.

Microsoft's Appeal of the Preliminary Injunction
On May 5, 1998, Microsoft motioned that the appeals court stay Judge Jackson's ruling as it applied to the upcoming Windows 98 operating system, on the grounds that the court had not heard any evidence relating to Windows 98, only to Windows 95. The Appeals Court granted this stay on May 12, ensuring that the release of Windows 98 on June 25 would not be affected by the court proceedings.
In reaction, federal and state officials filed several parallel suits in an attempt to block the release of Windows 98. In the first court appearance on May 22 the judge ruled that there was no need to seek the injunction against Windows 98 that was suggested by the DOJ. The judge also ruled that the suits filed by the states' attorneys general would be merged with the DOJ case.
On June 23, 1998, a three-judge panel for the US Court of Appeals ruled unanimously to overturn Jackson's injunction, saying Microsoft had demonstrated sufficiently that Internet Explorer was integrated with the Windows operating system and thus protected under the consent decree, and that that integration had benefited consumers.
This ruling could have been the end of the case against Microsoft, but the ongoing investigation by the government had uncovered the grounds for another antitrust lawsuit, based on claims of a monopoly in the PC operating system market and leveraging of that monopoly.

Misconduct Issues in US v. Microsoft Antitrust Trial
The most recent antitrust action taken against Microsoft is the trial taking place in Washington State. This trial is based on evidence of antitrust violations uncovered by the DOJ and FTC investigations that have been taking place since 1990.
One of the issues in this trial is so-called "Vaporware." It is alleged that Microsoft releases information on upcoming products early in an unfair attempt to convince users to wait for their product release, rather than purchasing a competitor's product.

A much thornier issue is that of bundling applications with Microsoft's Windows operating system without increasing the price. This issue has been the source of contention and litigation since the mid 1990's investigation by the DOJ.
The prosecutors say that by bundling applications for which their is a separate commercial market, such as web browsers, Microsoft gains an unfair competitive advantage in these commercial markets, and drives other producers out of business. This is evidenced by the fact that before the bundling of Internet Explorer with Windows, Netscape's browser had 80% of the market for web browsers, but after years of Microsoft employing this aggressive marketing tactic, their share had dropped to as low as about 30%.
Microsoft advocates prefer to think of these applications as "features," and defend the action of bundling them with the OS as mere product improvement.

Another issue is the aggressive tactics Microsoft employed in threatening to remove support for competitor's products from their Windows operating system, and withholding technical information about Windows from competing developers.
In 1995, Intel developed a technology called Native Signal Processing that could have completely changed the software industry. Microsoft responded by warning then CEO Andy Grove that it would cut support for Intel chips from Windows. Intel promptly stopped development on NSP. At one point, Microsoft threatened to cancel development of its Office line of products for use on the Macintosh operating system because Macintosh had made Netscape its default browser.
Microsoft also withheld vital technical details that delayed Netscape's release of a new browser.

Another major issue in the case is Microsoft's price policies for distributing windows to computer manufacturers. Compaq once signed an agreement with AOL to replace the MSN icon (Microsoft's internet provider) with an AOL one on all its desktops. Microsoft threatened to withdraw Compaq's Windows license, claiming this as an infringement of their Windows copyright, and Compaq reversed its decision. In return for its loyalty, Compaq now pays less than other computer manufacturers for Windows.

Several other allegations have been raised of Microsoft's anticompetitive practices. Among them, they may have offered Intuit, another ISP, a bribe to coerce them to switch browsers from Netscape to Internet Explorer. They also made an agreement to place an AOL icon on the desktop of all Windows computers in exchange for AOL switching to the Internet Explorer browser, and began scrutinizing AOL's dealings to make sure they were remaining loyal and not promoting competitor's products (especially Netscape) in any way.
Finally, it is alleged that Microsoft licensed the Java language, designed to run on any computer platform, and produced its own "polluted" version of Java that would only run on the Windows platform in an attempt to undermine the multiplatform nature of the language, which was perceived as a threat to Microsoft's domination of the OS market.


Legal Issues in US v. Microsoft

Market Power
The first issue that must be decided in the case is that of market power, and monopoly. Microsoft's Windows operating system controls 80% of the market for desktop computer operating systems, and 90% of the market for PCs (IBM-compatible desktops). That is, essentially, a monopoly.
Also, it is relatively undisputed that Microsoft holds a tremendous deal of market power. There are two markets in question here. There is the physical product market of computer operating systems and the innovation market. Basically the concept is that firms are considered to produce innovation, or technological development, along with their actual tangible products. If market power is achieved in either market, and this market power is exercised, the result is thought harmful for consumers.
If market power is exercised in a market, the result is increased prices and decreased output, because without competition the firms seek to gain the most profit. The way to do this is to produce less and sell it at a higher price. In an innovation market the result is less innovation, which is harmful to the consumer.

Entry
Market power is considered harmless so long as it is kept in check by the concept of entry. Theoretically, even an absolute monopoly must remain competitive as long as the possibility exists that a new firm might enter the market to offer new competition. If the possibility does not exist, possibly as a result of the anticompetitive practices a monopolist employs to maintain his monopoly, the monopolist is free to do as he pleases in terms of output and prices.
The possibility of entry is assessed by examining "barriers to entry," conditions which exist that would tend to discourage entrepreneurs that would otherwise enter a market and offer the monopolist competition.
The government says that barriers to entry are rampant in the current software industry, and cites Microsoft's misconduct as the source of many of them. According to the DOJ, everyone who becomes a significant competitor to Microsoft is in effect defeated by Microsoft's unfair business practices. This is alleged to have harmed the consumers, who suffer substandard innovation and higher prices for software.
Microsoft says that entry is always possible in a free capital market, one in which mergers are not impeded. A joint venture by several weak firms can easily erode the market share of an abusive monopolist. This fact makes entry a necessity, market power a moot point, and any monopoly inherently short lived. Opponents of antitrust legislation cite the same argument when claiming that the only permanent monopoly is one endorsed and defended by the government, such as a public utility.

Leveraging
The government is also trying the case on the grounds of leveraging, a rather disputed legal issue. Leveraging is the use of monopoly power in one market to gain advantage in another market. The government claims that Microsoft has repeatedly used its monopoly of the operating system market to gain unfair advantage in the software market.
It is worth noting that this definition does not explicitly state that the offending firm's intention be to create a monopoly in this second market. Simply gaining an unfair advantage is sufficient to make this claim.
Leveraging has been considered a violation of section 2 of the Sherman Act since US v. Griffith in 1984. Section 2 makes any person who monopolizes or attempts or conspires with others to attempt to monopolize guilty of a misdemeanor (this was later changed to a felony). In Berkey Photo, Inc. v. Eastman Kodak Co., the courts ruled that leveraging was also in violation of section 1 of the Sherman Act, which makes illegal any contract, conspiracy, or combination in restraint of trade, when the case involved bundling the product that has achieved monopoly concentration with the one that has not.
The circuit courts are deeply divided over the issue of leveraging, however. Some have found that an attempt at monopolization of the second market is requisite in accusing a firm of a violation of this nature. Other decisions denied that this is even a self-sufficient antitrust violation, and that it can be used only to supplement some other offense.

The AOL - Time Warner Merger: Microsoft's Ray of Hope
Things were looking bleak for Microsoft until AOL merged with Time Warner. This addition to the AOL-Netscape-Sun alliance created a $350 million competitor to Microsoft. Microsoft cited this as proof that they did have competition and the unavoidable possibilities of entry and swift creation of meaningful competition. The existence of these things made the case a moot point. It also served as evidence of Microsoft's earlier assertion, that the software market is so dynamic that any monopoly is inherently short lived.
One area of competition the two will most certainly be engaging in is the broadband market. This is the emerging market for high-speed internet access via cable and satellite. After AT&T merged with the cable company MediaOne, Microsoft invested $5 billion in AT&T stock, and set up a deal to provide them with 10 million set top internet boxes preloaded with a stripped down version of Windows. In response, AOL made a deal with Direct TV to offer satellite dish based internet access to 7 million customers.

Findings of Fact
Judge Jackson said that Microsoft failed to identify a common market in which AOL was a significant competitor on equal footing. As a result, he continued as planned with his Findings of Fact, which was completed around November 1999.
The findings say that Microsoft has monopoly power over the operating system market for PCs and desktop computers, which is not in itself illegal. They also say that Microsoft has used that monopoly to engage in anticompetitive practices, which is illegal, and that these anticompetitive practices harmed consumers by stifling innovation and raising prices, further incriminating Microsoft.
The findings go into detail as to the violations and anticompetitive practices that Microsoft was found to be engaged in. This provides the factual basis for further individual lawsuits by competitors and for the major antitrust judgment to come. They did not, however, provide a remedy plan, which is analogous to a sentence in a criminal trial, or even declare Microsoft guilty of any violations of law.

Microsoft admits the Findings of Fact do paint an unflattering picture of the company. Their response is that, even if the Findings are assumed to be flawless (which Microsoft contends they are not) they do not describe an abusive monopolist. They describe a fiercely competitive company, which has driven innovation, if by no other means then by being completely unbeatable in the market, so that the only means of effectively competing with them was by outdoing them with superior, innovative new technologies. They say their actions may seem unfair, but were completely lawful and did result in innovation and, ironically, increased competition.


Conclusions of Law
After Judge Jackson issued the Findings of Fact, the next step in the legal proceedings was the Conclusions of Law. The Conclusions of Law are based on the information contained in the Findings and what was brought out during the case, and they describe how the actions of the defendant are interpreted by the court-whether they are legal or not, and why.

Just as with the Findings of Fact, Microsoft got to propose their own conclusions of law, as did the government, to aid the judge in drawing up his own. Microsoft filed their proposed Conclusions of Law on January 18, 2000. In the document, Microsoft assumes that the Findings of Fact aren't flawed and present a reasonable picture of Microsoft's actions and how they affected the consumers. Microsoft does not believe the Findings do this, but their Conclusions show that even if they do present a reasonable picture, Microsoft believes the Findings do not constitute an antitrust violation.
One allegation Microsoft addresses in their Proposed Conclusions is that Microsoft foreclosed Netscape from distribution in several channels, including that of distribution on new computers and distribution bundled with internet service provider software. Microsoft said that while they may have made it difficult for Navigator to be distributed in these ways, it was still distributed on 22% of all new PCs and its usage actually increased significantly during the period Microsoft had allegedly foreclosed its distribution. Furthermore, Microsoft cites the 1998 Omega Environmental case that defended competitors' rights to sell directly to consumers, develop alternative distributors, and compete for existing distribution channels.
Also, Microsoft defends the restrictions it places on computer manufacturers' ability to modify windows. Microsoft says that when it comes down to it, Windows is copyrighted. Unauthorized changes in the content of a copyrighted work constitute infringement of that copyright. Microsoft asserts that they have every right to place conditions on the licensing of their products. Also, they cite the 1976 Gilliam v. ABC case, which ruled that it is illegal to distribute only parts of a copyrighted work without permission.
Microsoft also addressed the allegations that Microsoft holds a monopoly over PC operating systems and has turned to unfair means to maintain that monopoly. The market, as defined by the DOJ, that Microsoft is alleged to hold a monopoly over is too small, says Microsoft. By defining the relevant market to include only PC operating systems, you eliminate many of the major competitors to the Windows platform, including all of the competitors that the DOJ alleges Microsoft harmed in order to maintain its monopoly-Sun's Java and Netscape's Navigator are not operating systems, they are a programming language and a web browser, respectively, and Intel's Native Signal Processing isn't even software at all, but a processor technology.
Furthermore, Microsoft points out that the existence of a monopoly also requires that the monopolist hold the power to restrict output and control prices, neither of which they claim to have. And, even if a monopoly does exist, Microsoft says they have no incentive to misbehave in the traditional way. An operating system is only as good as the programs developed to run on it, and the only way to attract developers to a platform is by creating a common, open environment. The best way to do that is to produce abundant amounts of a cheap platform and distribute technical information freely to developers.
The Proposed Conclusions of Law also deals with the allegations that Microsoft illegally tied their Internet Explorer web browser to several internet providers' software and to the Windows operating system. Microsoft is quick to point out that their agreements with competitors do allow them to distribute some Netscape software, and were of relatively short duration, allowing their partners to change allegiances after the agreements ran out.
Microsoft also points to a legal precedent, the 1973 Telex Corp. v. IBM case, in which the court ruled that when one product is in question, the court's business is not to dissect that product and bind it back together under an imagined tying agreement. Microsoft asserts that their Windows / Internet Explorer amalgam is a single product and that the two are entirely integrated.

Despite Microsoft's defense, Judge Jackson sided again with the DOJ and the Conclusions of Law rendered by Jackson are similar in spirit and in form to the government's Proposed Conclusions.


Proposed Remedies
The Findings of Fact and Conclusions of Law left open the necessity to seek a remedy for the situation. There are two types of remedies in antitrust cases-structural and behavioral.
Structural remedies involve restructuring the offending firm in a way that destroys its monopolistic advantages and restores fair competition to the relevant market. Structural remedies often take the form of breakups, in which the firm is separated into several competing firms. The remedies can also take the form of what is called a firewall, in which the individual divisions of the company are barred from cooperating or sharing information with one another. This doesn't necessarily mean breakup must take place, but often firewalls are put in place between the firms resulting from a breakup.
Behavioral remedies involve government regulation of the offending firm for a period of time. Often the firm is forced to sign an agreement saying they will not engage in the anticompetitive practices that got them in trouble the first time, and the government watches them carefully to make sure the agreement is upheld in practice.

The first proposed remedy is behavioral. The government could force Microsoft into a consent decree saying they would never again engage in the anticompetitive practices they have been accused of, then spend years regulating them, at great expense to the government and intrusion to Microsoft. Besides the hassles of government regulation, the biggest argument against this solution is that it has failed before. Microsoft signed a consent decree in 1994, and the government claims they have failed to uphold this agreement since.
Another proposed remedy is structural. Microsoft could be cut vertically, creating several companies that develop and produce their own versions of the entire Microsoft product line, including both Windows and applications. A firewall would be placed between the companies, barring them from cooperation for a number of years, enforced by government monitoring. The problem here is that the end result is likely to involve recombination of the companies under the most competitive one (most likely the one that Gates is in charge of), which ends us back where we started.

With a 90% market share in the PC operating system market, Windows has arguably become the standard platform for development of software for home users. Most of Windows' competitors in this market are for special applications such as engineering or computerized graphics, with Windows in near absolute dominance of the home market. This might justify the type of regulation currently reserved for public utilities. In effect, you keep Microsoft's monopoly, but make it a public one rather than a private one.
Perhaps better still is a plan that would create a standards board of industry representatives. All the current internet standards-html, css, xml, ftp, tcp/ip, etc.-are maintained in this fashion by the W3C. The W3C debates changes to these standards and publishes specifications that describe the features supported under the most current standards and the ways in which applications that claim compliance with these standards must behave. For example, a web browser that claims compliance with HTML 4.0 must support all the features described in the specification for that standard. Writing standards specifications for Windows would be quite a task, but describing all the API functions that must be supported would allow other competitors to enter the market with their own operating systems without risking incompatibility with existing applications or forcing Microsoft to release their actual source code. Furthermore, it would allow representatives from the entire industry to take part in defining the specification, rather than just one company.

Recent developments in the nature of software development seem to make Microsoft's domination in the industry unsure (more on this later in Too Little Too Late?). Some would say this makes the case a moot point. Still others say that the very idea of antitrust law is flawed to begin with. The end result of these assumptions is that we should simply ignore the violations and let Microsoft go unpunished.
We cannot simply ignore violations of the law. It is contrary to common sense and the constitution to selectively uphold legislation and punish violations. History has shown that when violations of the law go unpunished, especially in high profile cases, the result is a loss of public respect for the law and the legal system. Besides, there are alleged victims to be considered here.
Antitrust legislation is set up such that private suits can be filed by the firms who are hurt by the anticompetitive actions of monopolists. At the very least, punishment should include this sort of action, so that the alleged victims of Microsoft's actions can have their fair chance at justice in a court of law. The downside is that those claiming to be injured by Microsoft are many, and indeed many of the private lawsuits filed against Microsoft are being dismissed as frivolous. The combination of so many hurting businesses and a scapegoat with deep pockets and a bad reputation preceding him (a.k.a. Microsoft) would result in a flood of time and money consuming lawsuits, with the legitimate barely distinguishable from the frivolous.

Among the behavioral remedies under particular consideration by the government is the release of the Windows source code, or at the very least the release of the secret API functions Microsoft has written into the operating system. The government alleges that Microsoft uses these functions in their own applications, but does not make them available to competing developers, giving Microsoft applications a clear advantage. Furthermore, this would take away one of Microsoft's weapons, withholding Windows' technical details from competitors, as it is alleged to have done to Netscape.
Another behavioral remedy under serious consideration would curb Microsoft's alleged unfair pricing practices for Windows. Microsoft would have to publish a price list that would apply to all computer manufacturers, regardless of their relationship with Microsoft.
Microsoft would also be barred from bundling applications, such as Internet Explorer, for which there is a separate commercial market, without an accompanying "commercially reasonable" price increase. To ensure this, they would go before the DOJ when they plan to add features to Windows, and the price increase would be decided by a pricing formula.
The major structural remedy under consideration would be a horizontal cut of the company into several smaller companies. Each would take a small portion of the product line of the current Microsoft, continue its development, and be its sole producer. The resulting firms would be barred from cooperation and communication, as ensured by government monitoring, i.e. a firewall would be placed between the resulting firms.
This would seem to do nothing, as Windows would still hold a monopoly of the PC operating system market. It would, however, maintain the simplicity in that market of having 90% of all PCs being compatible. Furthermore, as the company that got Windows would most likely produce nothing else, they would have no other market in which to leverage their monopoly, preventing many of the alleged anticompetitive practices from being repeated.
Many of the remedies, especially the structural ones, would be put on hold until the appeals process is complete. For example, if Microsoft is restructured before the appeals are exhausted, and then the appeal is successful, it would mean two disturbances due to restructuring-one to tear Microsoft apart, and another to sew it back together. Also, once the Windows source code is released, it cannot exactly be taken back; the damage will already be done.
For this reason, and believing the appeals process to be dangerously slow, the DOJ is proposing some weaker yet immediate restrictions on Microsoft's behavior. Among them, Microsoft would publish a price list that would apply to all computer manufacturers, effective immediately. As such, Microsoft would be unable to penalize computer manufacturers for actions that would harm Microsoft's market share, such as loading rival's software on their computers. 


The Final Judgment
Though Judge Jackson rejected Microsoft's proposals for both the Findings of Fact and the Conclusions of Law, they were still asked to put together a proposed final judgment, which Jackson would use with the DOJ's proposal to aid in rendering his own final judgment. For the proposed judgment, Microsoft was forced to assume that everything in the Findings and Conclusions was accepted as truth, and come up with remedies for the court to impose.

Microsoft filed their proposal on May 10, 2000, along with their objections to the government's plan, which included not only breakup, but also the release of the source codes for Windows. Microsoft's plan paid more attention to their intellectual property rights, protected their copyrights, and shied from structural remedies, in favor of behavioral ones. Among them were restrictions to Microsoft's ability to cancel the licenses of computer manufacturers and place conditions on the release of Microsoft software for other platforms. It also protected computer manufacturer's access to the Windows desktop (assuming they do not interfere with the portion of it the Microsoft has reserved for their content) and forced Microsoft to release technical details in the form of API functions, not source code, indiscriminately to all developers, be they direct Microsoft competitors or not. Microsoft would also agree to continue producing precedent versions of Windows for two years after the release of a new version, and would agree to allow government monitoring to ensure compliance with the court order and pay all the attorney fees of the states that were involved in the suit. The agreement would only last four years.

Jackson ruled against Microsoft's request for further deliberation and testimony relating to the possible consequences of the government's proposed plan, and on June 7, 2000 entered the government's plan without any significant changes. The structural remedy in the ruling would split Microsoft horizontally into two competing firms. One would produce Windows, while the other produces Microsoft's entire product line, save Windows, including computer accessories and applications.
A firewall would be placed between the two firms for a length of 10 years, enforced by government monitoring. The two would not be able to cooperate or share developments in any way during this time. This would effectively remove Microsoft's ability to leverage its Windows monopoly in other markets.
Also, as clearly stated in American antitrust law, Bill Gates would have to choose only one of the two companies to hold stock in and manage. American law prohibits people from holding a controlling interest in competing firms, especially those created through antitrust action.
The behavioral remedies endorsed by Judge Jackson's ruling would be effective as of September 5, 2000. Jackson would force Microsoft to publish the technical details about Windows by releasing the secret API functions so other developers could take advantage of them.
Also, Microsoft's pricing practices would be kept fair with a published price list. Further actions would guarantee the right of computer manufacturers to modify Windows in any way they see fit without retaliation by Microsoft, and to load any software they wish on the computers they sell.


Reactions to Judge Jackson's Ruling
Microsoft advocates say Judge Jackson failed to appreciate the dynamic and super-competitive nature of the software industry. This nature makes any dominant position inherently short lived. They say any firm that takes advantage of its position to harm consumers will surely see its market power eroded by new entrants. Entry is not only possible, but also likely, as entrepreneurs are encouraged by an industry where little or no startup costs are incurred, for no infrastructure is required.
Furthermore, Microsoft advocates cite the AOL-Time Warner merger as proof that any monopoly is under constant threat. In a free capital market (one in which mergers are not impeded by government regulation), combination of several firms with little capital can result in overnight competition. The AOL juggernaut now has $350 billion in assets, to match Microsoft's $400 billion, creating more competition than was previously imagined possible.

Antitrust advocates say that monopolists threaten the growth, stability, and prosperity our economy has enjoyed in recent decades.
They attribute most of this prosperity to small startup firms headed by ambitious entrepreneurs that become runaway successes (ironically not unlike Microsoft itself). It is just this sort of firm which would be most threatened by a monopoly, as they represent a possible future threat with little present power.
Therefore, prosecutors come to the surprising solution that breakup, usually thought to result in instability in the market, might actually accelerate growth, strengthen the economy, and protect the free market.

Political Ramifications
In a two-hour interview with Fortune magazine, Bill Gates said one reason the actions against his company got as far as they did was that he was not very concerned with politics or damage control in the past. He said business as usual and innovative product development were always his number one concern, so the only voices the DOJ got to hear were those of Microsoft's opponents.

If this is the case, the situation is certainly changing. Gates showed the DOJ he was ready to play hardball when he approached the Clinton administration and asked them to cut $9 million in funding to the DOJ from the proposed federal budget. Microsoft's new lobbying staff now includes four former members of congress. Also, Microsoft is following its competitors' example, contributing $1.7 million to the campaigns in the upcoming election cycle.
Microsoft has found allies in both the Senate and House Majority Leaders (Trent Lott and Dick Armey respectively), and even Democratic New Jersey Senator Robert Toracelli. The Republicans have recently told Al Gore they wish to make the case an issue in the upcoming presidential election. Microsoft has plenty of reason to look forward to the upcoming elections and buy time with appeals until then. If the pro-business Republicans take the Whitehouse, the DOJ will be at their command and more likely to settle on friendlier terms.

At the same time, trust busting itself may get a great boost from Jackson's ruling. Such a high profile case draws a lot of attention to antitrust law, especially when the DOJ wins. It is likely that a string of antitrust action will come from the momentum of this case. Also, the DOJ will probably be on the prowl for more high profile technology targets for future trials.


A Little Too Late?
Gates once expressed fears that antitrust actions would block the release of Windows 98, with great detriment to consumers, but now it is more likely to affect the release of Windows 2000. The investigations that led up to this case began in 1990, and most of the allegations are centered on Microsoft's actions in the mid 90's, around 1995. In high tech terms, ten years is several generations gone by, meanwhile antitrust actions were slowed to government pace. And we haven't even begun the appeals process.
Many say the damage is done. Others say the very direction the computing industry has taken in recent years makes the entire case a moot point. Many people do agree, though, the ruling was too late to do much good, and a few say that antitrust actions in the high tech industries requires a new approach, perhaps a new regulatory committee that has the power to keep up with the pace of the industry.

Ironically, the case against the Windows monopoly comes at a time when a mass migration in the industry is eroding the power that lies in that monopoly.
PC's are being replaced by the more mobile computing capabilities of digital assistants. That market is cornered by Palm, who holds 79% of the market, eclipsing Microsoft's WindowsCE.
It is not news that the computing industry is also moving online, where operating systems are irrelevant. There, Microsoft's MSN internet provider has only 3 million subscribers to match AOL's 22 million.
Even Microsoft itself has moved on to greener pastures. Their newest concern, according to Gates, is not Windows, but Next Generation Windows Programming. Microsoft's first step is to design a secure, pervasive network architecture that will allow applications to safely run on servers in cooperation with devices on a network. This will allow users to set up their own personal home networks, linking everything from computers and digital assistants to set top internet boxes, wireless devices, and appliances.


Appeals Process
On June 13, 2000, Microsoft filed their notice of appeal of Jackson's ruling in the antitrust case. They also filed a motion to stay the ruling, pending the resolution of the appeals process. Had the stay not been granted, the controls and prohibitions set forth in the ruling would have begun on September 5, 2000. The restrictions that would have begun on this date would have forced Microsoft to release their source code and trade secrets to competitors, interfered with current product development and releases, forced Microsoft to redesign their entire line of operating systems within six months, and put price controls on Microsoft products.
On June 19 the appeals court rejected a government argument that they had no jurisdiction in the case, and the case should be fast tracked to the Supreme Court. They also set a fast paced schedule for hearings on Microsoft's motion for a stay. The next day, Judge Jackson granted Microsoft a stay of his ruling pending the resolution of the appeals process, meaning the restrictions would not begin in September unless the appeals were exhausted by then. This made the Appeals Court's schedule moot. Jackson also certified the case for expedition to the Supreme Court, which now has the power to accept the case, or reject it and send it back to the Appeals court to hear it first. 

The next step in the appeal process could be the Washington DC Circuit court. This is the same one that overturned Jackson's ruling in the suit over Microsoft's bundling of Internet Explorer with Windows 95. The Expediting Act offers the chance to fast track the case directly to the Supreme Court, with unpredictable consequences for the ruling.
The DOJ supports the use of the Expediting Act to fast track the case. Publicly they say the high profile nature of the case and its importance to the economy and citizens of the country demand it, but they may have other private reasons. The Supreme Court is less predictable than the DC Circuit Court and may offer a more supportive ruling. However, there is no precedent case for which they gave a ruling. They currently seem to have a pro-business leaning, so the DOJ has every right to be nervous about the appeal no matter which court it goes to.

Microsoft says that because of the broad subject matter involved in this case, it would benefit from being first heard by the Court of Appeals, who could sort out the issues and simplify them for speedy review by the Supreme Court, if such a trial is necessary. They also point out that in the last 26 years only two cases have been sent to the Supreme Court by way of the Expediting act, and in both cases the subject matter involved was limited and both parties consented to the action.
However, their stance is most likely affected, at least in part, by the upcoming elections and the possibility of a friendlier Republican DOJ, not to mention the friendly precedent ruling by the Appeals Court in Microsoft's appeal of Jackson's preliminary injunction.