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Because the field of Business Law is so great, this paper will examine a single aspect of Business Law, that of antitrust action. Specifically, as it is applied to Microsoft, antitrust litigation is raising eyebrows in both the legal and business worlds.
There is a hue and cry that antitrust laws as they exist today have outlived their usefulness when applied to cyber commodities and artificial intelligence. This paper will present those opposing viewpoints and attempt to answer the question: are laws wrought in the industrial age applicable to today’s technology? And if so, is the antitrust challenge to Microsoft the tip of the iceberg in Business Law reformation?
Antitrust Law
Antitrust law attempts to ensure that market competition is protected from an organization or cartel with a monopoly on a given product. Much of antitrust enforcement tries to create a balance between the benefits of coordination and consolidation, such as efficiencies that reduce price or improve quality, and the detriments of market power that can lead to higher prices or reduced innovation.
Corporate trusts grew rapidly in the US from 1880 to 1905, creating the atmosphere for President Theodore Roosevelt to launch his now famous trust busting campaigns. The era of antitrust legislation stems from the Sherman Act of 1890. The antitrust laws were based on the constitutional power of Congress to regulate interstate commerce. It declared illegal every contract, combination, or conspiracy in restraint of interstate and foreign trade. The Sherman Act makes monopolization illegal. The two elements of monopolization are: “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of the power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident.” 1 The Sherman Act was designed to eliminate restraints on trade and competition. It is the main source of antitrust law.
While the Sherman Act provided protection against monopolies, Congress determined that it wasn’t quite comprehensive in its’ self. It was supplemented in 1914 by the Clayton Antitrust Act, which prohibited exclusive sales contracts, inter-corporate stockholdings, and unfair price-cutting to freeze out competitors. The Clayton Act of
Seal Straugh 1914 makes price discrimination illegal, forbids tying arrangements involving only goods and makes anti-competitive mergers and acquisitions illegal. The Sherman and Clayton Antitrust Acts were made to promote competition between companies making similar products.2 To assure the effectiveness of these laws, the Federal Trade Commission Act of 1914 established the body of overseers that govern unfair and unlawful trade practices. The provision surrounding unfair price cutting was strengthened under the terms of the Robinson-Patman Act of 1936. 3
There have been many amendments to these laws over the years. An early federal success came with the Supreme Court decision of 1911 that forced the giant Standard Oil Company to split up into independent entities.4 Antitrust action declined in the 1920s, but was vigorously resumed in the 1930s under President Franklin D. Roosevelt. Antitrust legislation held firm for several decades. The Tunney Act of 1974 established public notice and judicial oversight procedures regarding consent decrees entered into by the government to settle antitrust cases. 5 antitrust enforcement was again de-emphasized in the 1980s under Presidents Reagan and Bush.
The growth of huge conglomerates that control multiple companies has hindered the enforcement of antitrust legislation. With growing unpopularity, antitrust laws have been criticized for hindering the ability of US corporations to compete internationally. There has also been extreme impact on US shores. The Microsoft Antitrust Suit has not only rocked the company, but the entire computer industry, the stock market, and the US justice system as well.
The United States VS Microsoft
Back in 1975, an intense, visionary man who co-owned a small firm in a budding industry imagined a future where people at every desk in all the offices would have a small computer on which they would use his software. That man was Bill Gates; the company was Microsoft. However even Mr. Gates did not foresee a future in which the chief antitrust prosecutor of the United States and his counterparts in the governments of 20 U.S. states would sue him for charging prices that are too low. In recent comments, Mr. Gates has revealed his naïveté about the antitrust laws. He seems to have assumed that they were pro-consumer, and he saw his company doing things that helped consumers, even the least technical of consumers, log on to the digital age. 6
The Justice Department charged Microsoft with engaging in anti-competitive and exclusionary practices designed to maintain its monopoly in personal computer
operating systems and to extend that monopoly to internet browsing software on May 18, 1998. Twenty state Attorneys General and the District of Columbia filed a similar action. They alleged Microsoft illegally abused its “Windows” monopoly power to curtail and eliminate competition, force computer manufacturers to take its separate Internet “browser” and other applications, and deny consumers who buy personal computers the benefits of a free, open and competitive market.
“This action will protect innovation by ensuring that anyone who develops a software program will have a fair opportunity to compete in the marketplace,” said Joel I. Klein, assistant attorney general of the Antitrust Division. “The lawsuit we filed today seeks to put an end to Microsoft’s unlawful campaign to eliminate competition, deter innovation, and restrict consumer choice. In essence, what Microsoft has been doing, through a wide variety of illegal business practices, is leveraging its Windows operating system monopoly to force its other software products on consumers. Inventors and investors cannot and will not develop and market innovative software programs if they know that Microsoft can use its Windows monopoly to block the distribution of their programs and to force consumers to buy Microsoft’s competing products.” 7
The reality, however, is that one of antitrust action’s major uses has been to penalize successful competitors. Sometimes the suits are brought by federal enforcers of antitrust laws. More often they are brought by bitter losers in the competitive process. According to Georgetown University’s Steven Salop, a top antitrust official in the Carter administration’s Federal Trade Commission, and New York University’s Lawrence J. White, chief economist in the Justice Department’s Antitrust Division under Ronald Reagan, the second most common kind of private antitrust suit is one brought by rivals.8 Competitors are unlikely to bother suing rivals that keep their output low and prices high. Microsoft is the ultimate competitor, setting the price of its browser, Internet Explorer, at zero. Microsoft’s main competitor in the browser market, Netscape, was upset at such low-price competition and applauded the Clinton administration’s lawsuit.
It appeared as though Microsoft was leveraging its Windows operating system monopoly to create a new browser monopoly. That may not be the case, as appearances deceive. Until about 40 years ago, the standard economic argument was that a monopoly could be extended from Product A to Product B by requiring purchasers of A to buy B. But as antitrust scholar and former federal judge Robert Bork showed in his 1978 book, The Antitrust Paradox, this seldom works, because charging a premium for B reduces the price that can be charged for A.
Mr. Bork explicitly rejected the government’s reasoning. He wrote: “This is not a case about ‘leveraging’ or ‘tie-ins,’ as it is frequently described, even by government lawyers who understand the case.” 9 So what is the lawsuit about? Mr. Bork says Microsoft is engaged in predatory pricing, giving its browser away to knock Netscape out of the market.
However, economists have shown that predatory pricing doesn’t typically make sense, because the losses are often larger to the predator than to the prey and because, once the predator raises prices, anyone who has bought the prey’s assets at fire-sale prices becomes a low-cost competitor. The most famous allegation of predatory pricing was made against John D. Rockefeller and Standard Oil of New Jersey.10 None the less, in a 1958 article in the Journal of Law and Economics, University of Washington economist John S. McGee concluded, after studying the transcript of Standard Oil’s 1911 trial, that there was no evidence that Standard was guilty of such tactics.
In any case, the standard economic argument about extending monopolies is inapplicable to Microsoft’s case. Microsoft doesn’t charge anything for Product B, Internet Explorer. Of course, the company benefits from giving it away. Microsoft wants to make it easy for computer manufacturers to install the browser so that PC buyers will use Windows applications instead of software written for Netscape Navigator and will use goods and services sold over the Internet by Microsoft and its partners. Is this monopolistic? No more so than a shopping mall owner’s providing free parking and then collecting higher rents from retailers that value the increased shopping.
In buying Netscape, was AOL gunning for Microsoft? For months, Microsoft Corp. thought it had a late-breaking piece of evidence that would save the software giant from the government’s antitrust noose: The three-way deal announced late last year among America Online, Netscape Communications, and Sun Microsystems. The alliance proved that Microsoft faced formidable competition, Microsoft lawyers contended. 11
There was great anticipation in the courtroom on June 14 when Microsoft recalled AOL Senior Vice-President David Colburn to the stand as a hostile rebuttal witness. For hours, Microsoft attorney John Warden pressed Colburn to concede that AOL had secret plans all along to take on Microsoft in the Internet browser business. But by the end of the day, the line of questioning didn’t seem to help Microsoft’s case appreciably. Even U.S. District Judge Thomas Penfield Jackson told Warden in a bench discussion that he didn’t quite see the value of the new testimony. Jackson suggested that, since Colburn hadn’t seen some of the key documents that Warden was putting before him, that Microsoft might want to call a witness who was familiar with them. That would be AOL chief executive Steve Case, a prospect that failed to enthrall Microsoft, since Case was already on record saying that he never intended to compete with Microsoft.
Colburn had testified earlier for the government that AOL chose Microsoft’s Internet Explorer browser for its online service because Microsoft offered something that Netscape couldn’t, promotional space on the dominant Windows operating system desktop. As part of the deal, AOL was allowed to provide only limited promotion of rival Netscape’s Internet browser. But all the while that Colburn was testifying last October, AOL was in hush-hush negotiations to buy Netscape and its browser business. The deal was announced last November. Warden tried to make the point that AOL intended to dump its near-exclusive promotion and distribution of Microsoft’s browser and substitute its own Netscape product once its contract with Microsoft expired in the year 2000.
On Sept. 20,1999, an E-mail from Case indicated that the company was seriously mulling the possibility of dumping Internet Explorer at some point. Case wondered if buying Netscape and committing to migrate to their browser instead would help Microsoft to pull AOL from Windows 98. “My main point is we shouldn’t assume we need to or want to maintain IE as primary browser,” Case wrote. “Maybe that’s the right answer, but maybe not — we should push down on all possibilities before deciding.” 12
However, government attorney David Boies stood up and cited rules that he said required Warden to read the E-mail’s response. Jackson then ordered Warden to read the response by AOL President Robert Pittman. Pittman’s response alluded to Microsoft’s power in the marketplace which made it infeasible for AOL to make a change any time soon: “I do think MSFT is too strong to throw them out of the tent — they can hurt us if they think they have no other option.” 13 Indeed, Colburn stuck to his story that the “consensus for a long time” within the company was to stay with Microsoft’s browser until the contract expired. And that’s what the company has done.
One internal AOL E-mail did bolster Warden’s argument that AOL intended to take on Microsoft. The Sept. 13 E-mail by AOL’s Scott Pearson laid out the “basic strategic rationale” for the deal: “Extend [AOL’s] control over the desktop…for the consumer, small business, and enterprise…. Ultimately make the [AOL] and [Netscape] clients, riding on the browser, the effective [operating system] used by most PCs.” But
Colburn insisted that Pearson wasn’t involved deeply in the details and that he was just “playing traffic cop” to make sure that all the pieces of the deal were analyzed. 14