The question of remedy in the Microsoft case:
a brief summary

William S. Comanor
(GLOCOM Fellow and Professor of Economics, University of California, Santa Barbara and Los Angeles)

(a larger paper on this topic was published in The Antitrust Bulletin for Spring 2001, Federal Legal Publications, 221 Judson Ave., Dobbs Ferry, N.Y. 10522, USA)

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Dominant firms in major industries create a dilemma for policy makers, as seen in the current litigation brought by the U.S. Department of Justice, and 19 state Attorney's General against the Microsoft Corporation. This article points out the importance of the "remedy" issue, which has attracted relatively little attention.

Evidence on structural reorganization

The author and a colleague earlier conducted a study of structural relief in antitrust cases and examined the contrasting fortunes in both the marketplace and antitrust courts of two dominant firms in the early years of the 20th century: the Standard Oil Company and the U.S. Steel Corporation (William S. Comanor & F. M. Scherer, "Rewriting History: The Early Sherman Act Monopolization Cases," 2 Int'l J. Econ. & Bus. 263; 1995). Both companies held commanding positions in their respective industries, and both faced antitrust challenges in the second decade of the century. However, they fared quite differently in the courthouse. Standard Oil was divided into 34 parts, largely on a geographic basis, while U.S. Steel withstood the legal challenge and emerged largely unscathed.

The market fortunes of these companies were equally disparate. The Standard Oil offspring remained leading participants in a more competitive world petroleum industry. In contrast, the U.S. Steel Corporation steadily lost market share throughout the rest of the century. The company, as a monopoly, was ill-prepared to meet the competitive challenges mounted by foreign steel producers.

The experience of these companies is not exceptional. In the face of antitrust challenges, some companies were divided and others remained undivided in various industries during the first three decades of the twentieth century. It is striking that the successor firms to the successful antitrust cases retained active market positions, while those that won in the courts invariably failed in the marketplace.

A similar pattern was repeated in the 1980s. In 1983, AT&T was ordered to be reorganized and the so-called Baby Bells were created. On the same date, the suit for monopolization against IBM was dismissed. In the decade between 1983 and 1993, AT&T and the successor Baby Bells substantially increased their valuation on the New York Stock Exchange, whereas IBM sharply declined in stockholder values. While one can never be certain about the prospective results that would flow from any particular divestiture or dissolution, the evidence surely indicates that prior instances of structural relief have been uniformly successful, if not immediately, at least in the long run.

Posture of the current litigation

The Department of Justice filed its complaint in the current litigation on May 18, 1998, although it followed form prior judicial proceedings. Indeed, nearly 4 years earlier, on July 15, 1994, the Department had filed an earlier complaint. In the original action, the government focused on Microsoft's use of exclusionary contracts that limited the ability of rivals to compete for the same products. A striking feature of that case is that it settled on the same date to remove the offending contractual provisions.

Following the agreed-upon settlement between Microsoft and the Department of Justice, a federal court rejected the settlement and ruled it would not lead to a more competitive market outcome. However, the court of appeals decided otherwise, and ruled that a judge's investigation into the public interest did not provide him with a license "to assume the role of attorney general." A final judgment was entered, which included a provision that prohibited "Microsoft from conditioning licenses to its operating system on an OEM's either licensing another Microsoft product or agreeing not to license or distribute a non-Microsoft product."

Two years passed, and Microsoft proceeded to introduce a new version of its operating system software that included Internet browser technology. The government cried "foul," and on October 20, 1997 returned to court asking that Microsoft be found in contempt for violating the earlier judgment. The district court agreed on December 11, 1997, but again the court of appeals found for Microsoft on grounds that "the United States presented no evidence suggesting that Windows 98 was not an ‘integrated product' and thus exempt from the prohibition" of the earlier judgment.

From this background, the Department of Justice filed its current complaint. Microsoft was now charged not only with the anticompetitive effects of a tying arrangement between Internet browsers and operating systems, but also with using various methods to buttress its monopoly position, which taken together violated the monopolization provisions of the Sherman Act.

This complaint triggered the recent trial as well as Judge Jackson's Findings of Fact and of Law. In those decisions, the judge found that Microsoft had exercised monopoly power in the market for operating systems software for use on personal computers, and that it had buttressed and defended its positions through exclusionary practices. The judge ruled that Microsoft had violated section 2 of the Sherman Act.

Importance of remedies

Whatever the difficulties associated with reaching this finding on liability, they pale when compared with the problem of constructing a suitable remedy. The reason is that punishment alone is not sufficient. What is also required is that remedial actions promote competitive markets and enhance consumer welfare. Merely punishing an errant firm is not sufficient.

Finding and imposing effective remedies is a critical part of an effective pro-competitive policy. The proposed dissolution of the Microsoft Corporation must be evaluated in this regard. The greatest danger of Judge Jackson's decree is that competitive conditions might not change very much at all. Merely imposing vertical divestiture from which two successor companies evolve: one associated with application software and the other with the Windows and related operating systems, will leave their current monopoly positions intact. The hope is that the successor companies would face quite different incentives and no longer protect and promote their formerly associated products.

What Judge Jackson's decree does not require is the formation of competitive structure at the operating system level, where Microsoft's monopoly position was grounded. That position has been left largely intact. While the proposed decree represents a partial step toward the creation of a more competitive structure in the supply of operating system software, whether that step would be sufficient to achieve more competitive results remains an open question.