Opposition to Motion for Summary Judgment.
DOJ v. Microsoft II, Case No. 98-CV-1232, 1233.
Date: August 31 or September 1, 1998.
Source: U.S. Department of Justice.

Part II. B.

B.  Microsoft's Exclusionalry Agreements With ISPs, ICPs and OEMs Are Unlawful

Microsoft’s agreements with ISPs,⁴ OEMs, and ICPs are exclusionary in that they make it more difficult and costly for Microsoft’s rivals to develop and distribute their Internet browsers and thus tend to exclude those rivals from the market. Exclusionary agreements of this nature are judged for antitrust purposes under the rule of reason, and they are unlawful if the exclusionary provisions are on balance anticompetitive -- if, in other words, they injure Microsoft’s rivals by restricting their output more than they further Microsoft’s legitimate objectives, National Society of Prof. Eng’rs v. United States, 435 U.S. 679, 691 (1978); American Ad Mgmt., Inc. v. GTE Corp., 92 F.3d 781, 791 (9th Cir. 1996), or if their harmful effects on Microsoft’s rivals are not necessary in order to achieve Microsoft’s legitimate objectives. Sullivan v. NFL, 34 F.3d 1091, 1103 (1st Cir. 1994), cert. denied, 513 U.S. 1190 (1995). There is substantial evidence that Microsoft’s ISP, ICP and OEM agreements are unlawful. See, e.g., Sibley Dec., ¶¶ 61-65; Fisher Dec., ¶ III.D.; Warren-Boulton Dec., ¶¶ 52-54.

Although Microsoft argues principally that its agreements do not materially harm its browser rivals, it also suggests that the agreements can be justified on the ground that they were entered into for "valid business reasons." MS Memo at 59, 61-62. But Microsoft cannot show [begin page 22] substantial, let alone undisputed, evidence, as to either the exclusionary effect of the agreements or their purported justifications. Microsoft is therefore not entitled to summary judgment on these issues.

1.  Microsoft's Agreements Have Substantially Excluded Its Browser Rivals From the Most Important Browser Distribution Channels

The law condemns the impairment of competition on the merits, even if that impairment does not constitute complete exclusion of a rival or foreclosure of its opportunities. Even under the most exacting legal standard, the United States need not prove that every possible avenue of distribution has been effectively foreclosed to a rival. See, e.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) (denial of a necessary input merely impeded competitor’s ability to market its product; competitor never contended that the joint marketing program at issue was essential to its survival). Rather, the exclusionary provisions in Microsoft’s agreements are unlawful under Section 1 of the Sherman Act (and therefore under Section 2 as well) if on balance they impair competition and thus unreasonably restrain trade. See, e.g., Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327-28 (1961).

The rule of reason inquiry under Section 1 is practical and fact-based and focuses "directly on the challenged restraint’s impact on competitive conditions." National Society of Prof. Eng’rs, 435 U.S. at 688. And, because Microsoft must, for purposes of its summary judgment motion, be deemed to be a monopolist, its agreements also should be condemned under Section 2 of the Sherman Act upon proof that they have had some exclusionary effect and were not reasonably necessary to achieving a legitimate business objective. Aspen Skiing Co., 472 U.S., at 605; see also 3 P.E. Areeda & H. Hovenkamp, Antitrust Law ¶ 651a, at 78 (conduct that [begin page 23] "reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power" violates Section 2 and raises a presumption of harm).

Perhaps even more important, the exclusionary effect of each of Microsoft’s restrictions must be determined in the context of all of Microsoft’s other restrictions and pertinent market factors. First, the cumulative effect of all of Microsoft’s restrictive agreements combined, rather than of any one individually, must be evaluated. Second, whatever the exclusionary impact on Microsoft’s browser rivals of any one of Microsoft’s agreements viewed in isolation, each such agreement is also plainly unlawful when, in light of all the other exclusionary factors and agreements affecting the market, its exclusionary impact is significant. See, e.g., Continental Ore. Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962). Thus, as the Supreme Court has made clear, instead of examining individual pieces of evidence in a vacuum as Microsoft would have this Court do, "plaintiffs should be given the full benefit of their proof, without tightly compartmentalizing the various factual components and wiping the slate clean after scrutiny of each." Id. at 699; see also City of Anaheim v. Southern California Co., 955 F.2d 1373, 1376 (9th Cir. 1992) (inquiring into the overall combined effect of specific individual acts); Litton Sys. Inc. v. American Tel. & Tel. Co., 700 F.2d 785, 816 (2d Cir. 1983); City of Mishawaka, Ind. v. American Elec. Power Co. Inc., 616 F.2d 976, 986 (7th Cir. 1980).

Microsoft’s motion fails to address either the substantial evidence of foreclosure in the context of the other restrictions or the cumulative foreclosure as a whole. Instead, Microsoft seeks to obscure the issue by "tightly compartmentalizing" its few facts in exactly the way rejected by the Supreme Court. Plaintiffs’ ample (often uncontroverted) evidence of substantial [begin page 24] anticompetitive effects both in each of the most important browser distribution channels and as a cumulative whole requires denial of Microsoft’s motion.

a.  Microsoft's Browser Rivals Have Been Substantially Foreclosed From The ISP and OEM Channels

Plaintiffs’ evidence, including unequivocal statements in Microsoft’s business documents, leave no doubt that the two leading ways in which PC users obtain their browsers are from the Internet Service Providers ("ISPs") that connect them to the Internet, and from OEMs, installed on new PCs. Microsoft’s restrictive agreements with ISPs and OEMs effectively foreclose Microsoft’s browser competitors from these most-important distribution channels.

(1) The ISP Agreements Foreclose Microsoft's Rivals

By their express terms, Microsoft’s agreements with ISPs and OLSs significantly restrict Netscape and other competitors from access to this critical channel. Among the restrictions (detailed at PI Brief at 30-36) are the following:

• ISPs must market, promote, and distribute Internet Explorer as the "exclusive" or "primary" browser, and cannot distribute a non-Microsoft browser unless it is specifically requested by the customer;
• ISPs may not "express or imply" to a customer that another browser is available;
• Even if a customer specifically requests a competing browser, Microsoft requires that ISPs ship Internet Explorer as the only browser a large majority of the time, usually for at least 75 to 85 percent of all browser shipments. The providers whose names appear in the Windows Online [begin  page 25] Services folder must ship Internet Explorer, and no other browser, at least 85% of the time; and
• ISPs, with minor exceptions, cannot advertise or promote any non-Microsoft browsers.

There is concrete evidence of the market effects of these agreements. Microsoft’s own documents track the degree of foreclosure they cause in the ISP channel. For example, in June 1996 [redacted material] Microsoft had entered into restrictive referral server agreements with all of the largest ISPs and OLSs.

Major ISPs and OLSs would have preferred to have maintained flexibility in the browsers they distribute and promote.  [redacted material]  Because of Microsoft’s agreements, however, many no longer distribute or promote Netscape Navigator at all.

Conspicuously omitting the huge OLSs, Microsoft argues that it has referral server agreements with only eleven out of thousands of U.S. ISPs. But, even putting OLSs aside, those eleven ISPs account for a substantial amount of the total U.S. Internet access provider subscriber base, see, e.g., SJ Ex. 26, [redacted material] [begin page 26] [redacted material] ⁵   Once the OLSs, including AOL, CompuServe, and Prodigy -- all of which had and continue to have restrictive agreements with Microsoft -- are added to the picture, the significance of Microsoft’s agreements becomes far more dramatic. In 1997, AOL alone accounted for [redacted material]  Plainly, the restrictive ISP agreements interfere with the distribution of non-Microsoft browsers.⁶

Microsoft (again neglecting the huge and therefore critical OLSs) cites statistics suggesting that usage of Internet Explorer by customers of the ISPs that had entered into its exclusionary agreements is roughly equal to usage of Internet Explorer by customers of other ISPs. MS Memo at 12. These statistics are misleading and immaterial because they do not say anything about the impact of the restrictive agreements on the rate of browser acquisition over time. Microsoft appears to have aggregated Internet Explorer usage across all ISPs currently in the Windows Internet referral server -- even those such as Sprint, Concentric, and GTE, that [redacted material] [begin page 27] entered into referral server agreements as late as September 1997 and were distributing large numbers of Navigator to their customers before that date -- without controlling for the date on which subscribers of these services acquired their browser. Indeed, Microsoft’s own documents show that Internet Explorer’s share of browser usage is [redacted material]  The available evidence establishes that Microsoft’s ISP restrictions have been quite effective at foreclosing competitors’ browser distribution.

(2)  The OEM Agreements Foreclose Microsoft's Rivals

Microsoft’s agreements with OEMs have the practical effect of significantly restricting Netscape and other competitors from access to, by Microsoft’s own admissions, one of the two most important channels of browser distribution. Microsoft’s Windows 95 and 98 license agreements with OEMs require that the OEMs license and install Internet Explorer in order to receive a license to Windows. PI Brief at 23-24. Microsoft’s OEM agreements also prohibit the OEMs from removing the Internet Explorer icon, other means of access, or any of its code from Windows. Id.

Microsoft does not even attempt to refute the evidence that major OEMs, contractually prohibited from removing Internet Explorer from, or otherwise modifying the initial bootup sequence or Windows desktop screen of, the PCs they sell, are less likely to preinstall another browser, see PI Brief at 24-25; [redacted material] or even to consider other browser [begin page 28] products on the merits. [redacted material] ⁷  This effect is explained by practical OEM concerns -- including the likelihood of customer confusion, costly product testing, and increased support costs -- about preinstalling multiple browsers. See PI Brief at 24-25. In fact, Microsoft’s own Senior Vice President of OEM Sales has testified that, [redacted material] ⁸  More recently, Netscape’s former Vice President of Sales and Marketing testified that [redacted material] ⁹

Microsoft’s only rejoinder to this evidence is that, under the letter of their Windows license agreements, OEMs are permitted to add icons and other browsers, MS Memo at 11-12.  [redacted material] [begin page 29]  The marketplace realities OEMs confront render such formalistic freedom meaningless because Microsoft’s bootup and desktop screen restrictions deprive them of the ability to take the steps -- even modest steps to minimize confusion, testing, and support costs -- necessary to make adding other browsers commercially palatable.

Microsoft seeks to belittle the evidence of foreclosure in the OEM channel by contradicting its own internal documents and arguing that the OEM channel is insignificant as a channel for consumer browser distribution. Microsoft’s only support for this assertion is [redacted material]  What Microsoft does not mention, however, is that it failed to [redacted material]  Given Microsoft’s conduct in the OEM channel, it is dramatic evidence of competitive harm that Netscape has determined that it receives only [redacted material]

* * * * *

In the aggregate, the restrictive terms of Microsoft’s agreements with ISPs and OEMs have left Microsoft’s browser rivals with significantly reduced access to distribution, and therefore [redacted material] [begin page 30] with a Hobson’s choice: suffer reductions in market share or increase reliance on far less efficient and more costly distribution channels.

In addition to the above points, Microsoft makes one other argument about both the ISP and OEM channels. As a general matter, Microsoft suggests there is no evidence of foreclosure because Netscape Navigator currently has an installed [redacted material] MS Memo at 9.¹⁰  To be sure, there is little doubt that Netscape was the first to recognize and respond to the tremendous commercial opportunity for Internet browsers and that it built up a large installed base in the mid-’90s. But the relevant question is not whether the user base includes many who got their browsers before Microsoft began its exclusionary practices, but whether Microsoft’s agreements have since impaired the ability of Netscape and other rivals to continue to distribute their browsers. [redacted material]   Thus, Microsoft fails to establish the absence of a genuine dispute that there has been a substantial foreclosure of browser competition in the ISP and OEM channels.

b.  Microsoft's ICP Agreements Materially Injure Its Browser Rivals

Microsoft argues that it has contracts with only 24 U.S. ICPs, and that the ICP channel is not a significant browser distribution channel. But the ICP agreements injure Microsoft’s browser [begin page 31] distribution. Foreclosure is not limited to browser distribution. An ICP’s endorsement of a particular browser and its accompanying standards has a real effect on browser adoption, especially in a market characterized by network effects and heavily influenced by industry perception.  [redacted material]  Indeed, Microsoft itself has recognized the importance of content providers, particularly in their standard-setting capacity, to its Internet mission.  [redacted material]

Microsoft’s ICP restrictions have, in addition, had significant impact on the browser usage and distribution practices of important ICPs. For instance, [redacted material] one of the largest [redacted material] Microsoft also prevented [redacted material]  Absent these prohibitions, Intuit would have continued the promotion and distribution of Navigator, not only from its websites, but also in its capacity as a leading ISV.

These exclusionary effects must of course be considered in the context of Microsoft’s other exclusionary practices. And they should be considered also in light of the importance and prominence of Microsoft’s ICP partners (including Disney, Time Warner, and Intuit), which are among the most popular and visible of all content providers. [redacted material] [begin page 32]

c.  Relegating Its Rivals To Reliance On Other, Less Efficient And More Costly Distribution Channels Cannot Compensate For The Foreclosure Microsoft Has Created In The ISP, ICP and OEM Channels

Microsoft’s summary judgment argument is largely premised on the fact that, putting the ISP, OEM, and ICP channels aside, other distribution channels remain available to Microsoft’s rivals. But the alternatives are decidedly and demonstrably inferior. Most significantly, Microsoft itself has repeatedly recognized that ISPs and OEMs are the most important browser distribution channels.   [redacted material]

Recent depositions of Netscape executives -- on which Microsoft misleadingly relies to support its assertions -- in fact unequivocably confirm the importance of the OEM and ISP channels to browser distribution.  [redacted material] [begin page 33] [redacted material]

The record further shows that other methods of distribution, such as mailing physical CDs or disks to individual homes, are more costly and much less effective than distribution through ISPs and OEMs. [redacted material]   In particular, as browsers have expanded in size the downloading of browsers has become more cumbersome, less effective, and a far less successful means of distributing browsers. [redacted material] clearly establish the serious limitations of downloading.  [redacted material] ¹¹

In light of this evidence, it is plain that numerous issues of fact remain disputed about the extent and significance of the exclusionary effects of Microsoft’s ISP, OEM and ICP restrictions. Summary judgment is therefore unwarranted.

2.  The Exclusionary Provisions In Microsoft's ISP, ICP And OEM Agreements Are Not Necessary To Further Legitimate Interests

Microsoft’s summary judgment motion should be denied because plaintiffs have adduced strong proof of the significant exclusionary effects of Microsoft’s practices. Microsoft’s motion also must fail because Microsoft cannot show that there are no disputed material facts concerning [redacted material] [begin page 34] the other half of the rule of reason analysis: Microsoft’s assertion that its contractual restrictions were implemented for "valid business reasons." MS Memo at 59, 61-62.¹²  On this point too the plaintiffs’ evidence overwhelms Microsoft’s unsubstantiated claims.

In addition to ignoring numerous disputed facts, Microsoft’s argument on this point misstates the applicable legal standard. As discussed above, see supra, Section II.B, it is well-settled that an anticompetitive contractual restriction may be justified only if the restraint’s anticompetitive effects are both outweighed by, and reasonably necessary to further, a legitimate business justification.¹³

Microsoft is thus simply wrong when it argues that the mere existence of "legitimate business reasons" is sufficient to justify its exclusionary contract provisions. To prevail, it must demonstrate more -- that the asserted business reason is truly valid, that it could not be achieved by [redacted material] [begin page 35] a means less restrictive of competition, and that its benefits outweigh the harm to competition resulting from the exclusionary provisions.

When measured against this standard, the evidence demonstrates not only that Microsoft’s motion must be denied, but also that Microsoft’s purported justifications for its exclusionary conduct are plainly insubstantial.

a.  Microsoft's Anticompetitive Restrictions On ISPs Are Not Justified

Microsoft seeks to justify the restrictive provisions in its ISP agreements by arguing that the contracts are "nothing more than commonplace cross-marketing arrangements." MS Memo at 63. This simply repeats Microsoft’s mantra that its conduct merely reflects "ordinary business practice[s] typical of those used in a competitive market" and therefore cannot "constitute anti-competitive conduct." MS Memo at 76 (internal quotations omitted). As noted above, that argument is incorrect as a matter of law in light of Microsoft’s monopoly power. It is also factually infirm.

For example, Microsoft cites provisions in Netscape’s browser distribution agreements [redacted material]  In addition, unlike the Microsoft agreements, Netscape’s licenses contain [redacted material] and (also unlike the Microsoft agreements) they do not [redacted material] [begin page 36]

Microsoft argues that "consumers benefitted" from its ISP agreements because "they were part of an overall effort to make it easier for Windows 95 users to gain access to the Internet." MS Memo at 63, 67. This argument is both misleading and disingenuous. On their face, the exclusionary provisions harm consumers by making it more difficult for them to obtain non-Microsoft browsers, and Microsoft has not explained how those exclusions might benefit consumers. Moreover, even were Microsoft to offer proof that some part of the agreements benefit consumers, the relevant question is not that, but instead whether the exclusionary provisions in the agreements are necessary to achieve those benefits. They are not, and Microsoft cannot show any connection between making Internet Explorer available to more PC users, and restricting ISPs ability to distribute and promote competing browsers.

Microsoft suggests that the restrictions compensated Microsoft both for maintaining the ISP referral server and for permitting ISPs in it to enjoy the ICW’s favorable desktop placement, MS Memo at 63, but there is no reason why Microsoft had to receive compensation in the form of exclusionary restrictions. To the contrary, [redacted material] demonstrates that Microsoft could be compensated in ways that do not exclude rivals.

The evidence shows that any interest Microsoft might assert in receiving compensation for "renting" its desktop real-estate is pretextual. See Eastman Kodak, 504 U.S. at 484. According to Microsoft executives, [redacted material] [begin page 37] [redacted material]  Indeed, Microsoft recently made the decision to permit major OEMs to place the ISPs of the OEM’s choice in the Internet Connection Wizard for Windows 98 and to [redacted material] thereby confirming that Microsoft has little interest in charging for its desktop real-estate.

Far from trying to benefit consumers, Microsoft imposed its ISP restrictions to choke off distributional avenues for competing browsers and thereby choke off consumer choice. See [redacted material]

b.  Microsoft's Anticompetitive Restrictions on OLSs Are Not Justified

Microsoft defends its contractual restrictions on the ability of OLSs to promote and distribute non-Microsoft browsers with the refrain that the restrictions are necessary to prevent "free riding." See generally Sylvania, 433 U.S. at 55 (explaining that preventing free riding may justify certain vertical restraints). As Microsoft explains, the OLSs are given preferred placement on the Windows desktop and assistance in developing a proprietary client (or browser "shell") [begin page 38] based on Internet Explorer in exchange for the OLSs’ agreement to curtail their distribution and promotion of non-Microsoft browsers. See MS Memo at 71. Having granted OLSs these benefits, the argument runs, Microsoft is entitled to "some assurance that the OLSs will not take advantage of that assistance and then turn around and adopt competing technologies." Id. at 72.

As Judge Easterbrook has explained, however, "[w]hen payment is possible, free-riding is not a problem because the ‘ride’ is not free." See Chicago Professional Sports Ltd. Partnership v. NBA, 961 F.2d 667, 675 (7th Cir. 1992) (Easterbrook, J.). If Microsoft wishes to be paid for benefits it confers on Online Service Providers, then -- as with its ISP agreements -- it can charge OLSs a fee rather than receive compensation in the form of exclusionary rights.¹⁴   Microsoft similarly cannot show that restricting OLSs’ distribution and promotion of competing browsers is reasonably necessary to ensure that competitors do not free ride on Microsoft’s technological assistance. Any such assistance Microsoft provides to an OLS would be useful only in developing a customized OLS browser based on Internet Explorer, and could not readily be used to assist the OLS in working with Netscape or another browser producer. Thus, there is negligible danger of free riding. Because Microsoft cites no evidence, let alone a lack of genuinely disputed evidence, to the contrary, its argument therefore cannot meet its summary judgment burden.

c.  Microsoft's Anticompetitive Restrictions On ICPs Are Not Justified

Microsoft offers the same justifications for the exclusionary provisions in its ICP agreements; and, for the same reasons, those asserted justifications are insufficient. Even if Microsoft’s creation of its "channel bar" might have "facilitated the use of innovative technologies [begin page 39] and provided consumers with easy access to high quality content on the Internet," see MS Memo at 69-70, Microsoft makes no attempt to explain why restricting ICPs’ relationships with competing web browsers and requiring ICPs to implement Internet Explorer-specific technologies is reasonably necessary to provide ICPs placement on the channel bar. Moreover, the restrictions apply only to ICPs' relationships with the top two "Other Browsers," [redacted material] a fact that supports the inference that Microsoft imposed the restriction not for any procompetitive purpose but rather to impede the commercial opportunities of its leading competitors.

In any event, there simply is no justification for Microsoft’s restrictions on ICP’s ability to compensate Netscape, and Microsoft asserts none. At a minimum, there certainly is no undisputed justification, and therefore no basis for summary judgment.

d.  Microsoft's Restictive OEM Licenses Are Not Justified

Microsoft’s principal defense of the exclusionary provisions in its OEM agreements is an argument of antitrust immunity based on the copyright laws. That argument is addressed separately in Section II.D, below. We address here Microsoft’s effort to defend the exclusionary OEM agreements on economic grounds.

Microsoft first asserts that its OEM restrictions "preserve[] the operating system as a stable and consistent platform that supports a broad range of compatible software applications software." MS Memo at 57. The platform issue, however, has to do with the APIs to which ISVs write. Those APIs are unaffected by alterations to the Windows boot-up sequence, modifications to the contents of desktop folders, or creation of icons of different shapes and sizes. To the contrary, Microsoft has promoted Internet Explorer to end-users on the basis that the icon [redacted material] [begin page 40] could be easily removed, see Gaspar Dec. ¶ 19 (Consent Decree Case); Sibley Dec. ¶ 43 n.48 (citing sources); Cole 50:2 - 51:24, while using its screen restrictions to prohibit the OEMs from removing the Internet Explorer icon themselves. Thus, lifting the prohibition on OEMs removing access to web browsing via Internet Explorer would not "undermine the consistency of the [Windows] platform in any meaningful way." Sibley Dec. ¶ 43.

Microsoft provides no evidentiary support for its platform argument. Even if it did, factual questions concerning the degree to which the restriction furthers the asserted justification, and whether the justification outweighs the anticompetitive effects it causes, plainly would preclude summary judgment. See, e.g., id. ¶ 43 & n.47 (questioning Microsoft’s argument because ISVs commonly distribute shared program libraries with applications to ensure that their software runs on the large installed base of machines that lack the latest version of Windows).

Microsoft also argues that its restrictions on altering the initial boot-up process "promote a consistent user experience," MS Memo at 47, but the record makes clear that there are disputed questions of material fact as to whether Microsoft’s restrictions are reasonably tailored to that end. As an initial matter, Microsoft’s contention that the challenged restrictions are justified in order to provide customers the benefit of "the same initial user experience" across brands, MS Memo at 58 (emphasis added), is belied by Microsoft’s own conduct. See Sibley Dec.¶ 47. Among other things, Microsoft permits (1) all OEMs to ship Windows 98 with the "active desktop" either on or off; (2) all OEMs to add items of varying sizes to the active desktop (but not to the traditional Windows desktop), [redacted material] [begin page 41] [redacted material] (4) some OEMs to replace the list of ISPs included in the Internet Referral Server with their own lists; and (5) all OEMs to preload the software of the OEM’s choice, subject to Microsoft’s license restrictions.

These exceptions create considerable variation in the initial experience a PC user will have depending on the OEM from which he or she buys their PC. This level of variation makes clear that, at most, Microsoft’s restrictions might help preserve some very general "look and feel" of the Windows operating system. The challenged restrictions, however, cannot be shown to be reasonably necessary to achieve that objective. Removal by OEMs of the Internet Explorer icon and other means of using Internet Explorer to browse the Web (which Microsoft prohibits) would not affect the overall "look and feel" of Windows any more than when OEMs add various software (which Microsoft readily permits). Nor is the "look and feel" of Windows impaired by permitting OEMs to install icons of different sizes; Microsoft permits precisely that in those instances when an OEM ships the active desktop enabled (which, because it provides additional ways of launching Internet Explorer, also increases the likelihood that the user will use Internet Explorer).

Even with respect to the Windows initial boot process, where Microsoft at least can plausibly argue some legitimate interest in ensuring that users supply and receive certain information, the exclusionary provisions in its OEM agreements are far broader than necessary.  As noted above, Microsoft prevents OEMs from [redacted material] [begin page 42] [redacted material] ¹⁵

Microsoft also argues that "substantial consumer confusion and disappointment would result if new personal computers arrived with various advertised features of Windows altered or deleted in various ways unintended by Microsoft." MS Memo at 58. For two reasons, this argument does not justify the exclusionary restrictions in the OEM agreements.

Significant factual issues exist as to whether the restrictions challenged by the plaintiffs were designed to advance Microsoft’s asserted interest. Internal Microsoft documents show that Microsoft began serious efforts to enforce and augment its exclusionary provisions only [redacted material] ¹⁶   [redacted material] [begin page 44]

Second, Microsoft could have achieved the objective of preventing consumer confusion through substantially less anticompetitive means. For instance, Microsoft has permitted certain OEMs to [redacted material] ¹⁷

There is no reason why Microsoft could not similarly permit OEMs to insert additional screens in the start-up sequence that permit end users to select the browser of their choice, pursuant to guidelines designed to ensure the process’ smooth operation and preserve the general "uniformity" of the first-boot process.

Moreover, that OEMs -- who have an unquestioned interest in meeting consumer demand -- have sought at various times to remove the Internet Explorer icon from the Windows 95 and Windows 98 desktops, [redacted material] or urged Microsoft to ship Windows 98 with Internet Explorer uninstalled, [redacted material] supports the conclusion that permitting OEMs to remove the Internet Explorer icon and associated means of browsing the web would meet, rather than disappoint, consumer expectations. Any legitimate interest in avoiding "consumer confusion and disappointment," see MS Memo at 58, could be met by requiring disclosure when OEMs remove the means of using Internet Explorer to browse the Web. OEMs vigorously compete against one another by advertising to end users the particular features of the machines they sell; many OEMs allow end- [begin page 44] users to choose the precise components of their PCs, including the preinstalled software;¹⁸ and because the OEM market is competitive, OEMs that cause user "confusion and disappointment" would be punished by fewer sales, [redacted material]  There is every reason, therefore, to believe that a labeling requirement can prevent customer disappointment without inflicting the competitive harm caused by Microsoft’s exclusionary license provisions.

For similar reasons, Microsoft’s restrictions cannot be sustained on the theory that they "preserve[] Microsoft’s reputation as a supplier of quality operating system software." MS Memo at 58-59. OEMs have no incentive to engage in conduct that will cause consumer confusion or otherwise impair Microsoft’s goodwill. OEMs not only bear their own support costs and face vigorous competition, but also bear the costs of customer support calls directed to Microsoft, as Microsoft refers customer calls to the pertinent OEM.

Thus, Microsoft’s contention, MS Memo at 58, that its reputation, not the OEMs’, would "suffer if Windows did not perform as represented" by Microsoft misses the point; the very structure Microsoft has created (quite aside from its contractual restrictions) is designed to ensure that OEMs take actions consistent with preserving Microsoft’s reputation.

Moreover, the facts simply do not support Microsoft’s contention that lifting the challenged restrictions threatens to tarnish the Windows brand. Permitting OEMs to promote browsers and to provide browser choice in the boot-up sequence no more threatens Microsoft’s [begin page 45] reputation than Microsoft’s decision to permit OEMs to provide in that sequence their own ISP sign-up software. Nor does permitting OEMs to vary the size of shapes and icons, which Microsoft permits when the OEM ships the "active desktop" enabled (but with respect to the "classic" desktop screen). Of course, even if Microsoft’s conduct were consistent with respect to the claimed justification, a labeling requirement, as discussed above, would (along with ordinary OEM incentives to minimize costs and seek to meet consumer demand) suffice to prevent any reputational injury to Microsoft from OEM removal of the means of using Internet Explorer to browse the web, removal of the On-Line Services Folder, or addition of a choice of user interface in the initial boot-up sequence.

Finally, Microsoft cannot argue that its screen restrictions are justified because they simply reflect ordinary business practice typical of those used in a competitive market. First, as already noted, this argument simply does not apply here because of Microsoft’s uncontested monopoly power. Second, the factual reality is that, far from using practices similar to Microsoft, other operating system vendors commonly allow significantly more customization than Microsoft. For instance, [redacted material] permits OEMs to choose among alternative interfaces and to decide whether or not to install the browser that ships with its operating system products; and does not believe that permitting OEMs these options will impair its goodwill, fragment its operating system as a platform, cause end-user confusion or disappointment. [redacted material] ¹⁹

3.  Microsoft's Sudden Revision Of Some Of Its Exlusionary Agrements On The Eve Of Litigation Provides No Basis For Summary Judgment

Microsoft argues that certain exclusionary provisions in its ISP and ICP agreements challenged by the plaintiffs are "effectively moot," MS Memo at 13, on the ground that Microsoft has "unilaterally waived" those provisions. See id. at 65, 68. (Microsoft makes no such argument about its OEM or OLS restrictions.)

Microsoft’s courthouse conversion suggests, at the very least, both that Microsoft has no legitimate need for those provisions and that it recognizes their doubtful legality.²⁰  But it does not provide a legal defense in these cases. To the contrary, "[i]t is the duty of the courts to beware of efforts to defeat injunctive relief by protestations of repentance and reform." United States v. Oregon State Med. Soc’y, 343 U.S. 326, 333 (1952).

There are several flaws in Microsoft’s mootness argument. In the first place, Microsoft has not waived all of its exclusionary agreements. While it announced last March -- the night before Mr. Gates testified before Congress about the agreements -- that it was waiving the restrictive provisions, it in fact waived some provisions, modified but did not entirely abandon others, and left some agreements -- including the exclusionary provisions in its agreement with AOL, which is by far the largest and most important ISP -- entirely unchanged.

In any event, it is plain that this Court retains jurisdiction to pass on the legality of even the "waived" practices because those practices caused anticompetitive effects that are within the [begin page 47] court’s power to remedy. See Northwestern Environmental Defense Center v. Gordon, 849 F.2d 1241, 1245 (9th Cir. 1988) ("The fact that the alleged violation has itself ceased is not sufficient to render a case moot. As long as effective relief may still be available to counteract the effects of the violation, the controversy remains live and present.").

Moreover, regardless of the effects of Microsoft’s abandoned or modified conduct, it is settled that "voluntary cessation of allegedly illegal conduct" does "not make the case moot." United States v. W.T. Grant Co., 345 U.S. 629, 632 (1953). In such circumstances -- when the "defendant is free to return to his old ways," id. -- the defendant must demonstrate that it is "‘absolutely clear’" that "‘the allegedly wrongful behavior could not reasonably be expected to recur.’" Vitek v. Jones, 445 U.S. 480, 487 (1980) (quoting United States v. Phosphate Export Ass’n, 393 U.S. 199, 203 (1968)). Microsoft has not met this "heavy" burden. County of Los Angeles v. Davis, 440 U.S. 625, 631 (1979). With respect to both its ISP and ICP restrictions, Microsoft merely abandoned some of the challenged practices when threatened with government enforcement action. It has not even "disclaimed any intention to revive them." W.T. Grant, 345 U.S. at 633. And, even if it had made such a disclaimer, "[s]uch a profession does not suffice to make a case moot." Id.²¹

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