Parts II. D., and III.
Microsoft begins its copyright argument by announcing that "Windows 95 and Windows 98 are both copyrighted works," MS Memo at 54, as though that talismanic invocation were enough to shield it from the antitrust laws. But possession of a copyright does not permit its owner to do whatever it likes with that copyright, in defiance not only of antitrust law but also of copyright policy. Microsofts conduct with respect to its copyrighted works violates both. [begin page 76] Moreover, the relevant facts regarding the restrictions in Microsofts licensing agreements are sharply contested, precluding summary judgment.
Much of Microsofts copyright argument relies on a limited and rather obscure set of cases suggesting that copyright owners are vested with a "moral right" of integrity in their works. This is a continental law concept largely foreign to American jurisprudence.
Microsoft relies most heavily on Gilliam v. ABC, 538 F.2d 14 (2d Cir. 1976), which does contain language suggesting that the court envisioned a new right of integrity where a work was significantly changed but still promoted under its original name; the decision spoke of the "mutilation" of a work by a licensee. But the Gilliam court itself acknowledged the lack of statutory or doctrinal support in copyright for its newly-created right.39 Indeed, the court ultimately grounded its new right in trademark instead.40 In any event, in the two decades since the decision Gilliam has not been read expansively by other courts. See, e.g., Halicki v. United Artists, 812 F.2d 1213 (9th Cir. 1987) (refusing to endorse the broad new moral right plaintiff read Gilliam to create); Weinstein v. University of Illinois, 811 F.2d 1091, 1095 n.3 (7th Cir. 1987) (same); Smith v. Montoro, 648 F.2d 602 (9th Cir. 1981) (same); Paramount v. Video Broadcasting, 724 F. Supp. 808, 820 (D. Kan. 1989) (juxtaposition of advertisements with [begin page 77] copyrighted movie on videotape was not copyright infringement, despite Gilliam); cf. Seshadri v. Kasraian, 130 F.3d 798, 803 (7th Cir. 1997) (rejecting a Gilliam-based integrity argument, noting that the plaintiffs "might conceivably have some remedy, but it wouldn't be under the Copyright Act.").41
Whatever policy justifications might exist for a moral right of integrity in works of art, the context in which the concept was developed, they are substantially weaker when the work at issue is a computer program.42 Computer programs -- and particularly operating systems -- are functional works. Their value resides not in their artistry, but in what they do. Cf. Apple Computer v. Microsoft Corp., 35 F.3d 1435 (9th Cir. 1994). Numerous software cases have allowed defendants to make alterations to a plaintiff's program in appropriate circumstances, and for a variety of reasons.43 Indeed, the Copyright Act itself expressly allows owners of a copy of a [begin page 78] computer program to "adapt" it in appropriate circumstances without the permission of the copyright owner, a power that is fundamentally at odds with Microsoft's asserted "right of integrity" for software. See 17 U.S.C. § 117; Aymes v. Bonelli, 47 F.3d 23 (2d Cir. 1995).
At a minimum, application of this novel concept to software raises a number of material factual issues, none of which Microsoft has addressed. These include the extent of copyright protection in the portions of the software being modified, the extent and type of the modification involved, the purpose of the modification, and the consequences of permitting or prohibiting it. All of these facts are sharply contested, and summary judgment on this issue would be particularly inappropriate.44
The thrust of Microsofts copyright argument is that it is free to do whatever it wishes in licensing its copyrighted works. But copyright law does not provide an unbounded property right. Rather, as the Supreme Court has repeatedly recognized, it is a limited power designed to encourage to a reasonable degree the creation of new works of authorship. See, e.g., Stewart v. Abend, 495 U.S. 207, 224-25 (1990) (noting the Copyright Act's "balance between the artist's [begin page 79] right to control the work . . . and the public's need for access"); Computer Assocs. Intl, Inc. v. Altai, Inc., 982 F.2d 693, 711 (2d Cir. 1992) ("interest of copyright law is not in simply conferring a monopoly on industrious persons, but in advancing the public welfare through rewarding artistic creativity, in a manner that permits the free use and development of non-protectable ideas and processes"); Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975) ("private motivation must ultimately serve the cause of promoting broad public availability of literature, music and other arts"). Limits on the scope of a copyright include the requirement that protection extend only to "original works of authorship," Feist, 499 U.S. at 346-47; the requirement that copyright protection extend only to the author's expression, and not to the underlying idea being expressed, 17 U.S.C. § 102(b); Baker v. Selden, 101 U.S. 99 (1879); and the absence of copy protection against certain "fair" uses, 17 U.S.C. § 107; Campbell v. Acuff-Rose Music Inc., 510 U.S. 569 (1994).
In the context of computer programs, these limitations impose significant restrictions on Microsoft's claimed "right to control the manner in which its copyrighted works are used." MS Memo at 54. First, it is by now well established that the copyright in a computer program cannot extend to the functional aspects of that computer program; to design choices dictated by necessity, cost, convenience or consumer demand; or to portions of the program that are not original to its creator. See, e.g., Mitel v. Iqtel, 124 F.3d 1366, 1374-76 (10th Cir. 1997) (interface specifications of a communications protocol are freely copiable because they are functional rather than expressive); Apple v. Microsoft Corp., 35 F.3d at 1441 (user interface of a computer program entitled to only limited protection against "virtually identical" copying, because of license and because of limited number of different ways the underlying idea can be expressed); [begin page 80] and Computer Associates, 982 F. 2d at 715 (significant portions of the structure, sequence, and organization of a program may be copied in order to write a similar program to run on a different platform).
Second, copyright law does not provide Microsoft with the unfettered right "to license their intellectual property as they see fit." MS Memo at 54. Rather, copyright's misuse doctrine imposes significant restrictions on the ability of a copyright owner to extend its control to adjacent markets, to prevent the development and use of interoperable programs by competitors, or to impose anticompetitive restrictions on licensees. Several cases are instructive. In DSC Communications v. DGI Technologies, the Fifth Circuit held that it was likely copyright misuse for DSC to use its copyright in the computer program operating a telephone switch to try to prevent a competitor from designing and testing a compatible switch that used DSC's protocols. 81 F.3d at 601. And in Lasercomb America v. Reynolds, 911 F.2d 970 (4th Cir. 1990) and Practice Management Info. Corp. v. American Med. Assn, 121 F.3d 516 (9th Cir. 1997), as amended Jan. 9, 1998, the Fourth and Ninth Circuits found copyright misuse where a copyright owner entered into license agreements that restricted its licensees from competing with it.45
These intellectual property principles establish that Microsoft's copyrights do not give it the right to impose whatever restrictions it wishes on its licensees. Instead, copyright law offers no protection for license restrictions, like those at issue here, that attempt to extend Microsoft's [begin page 81] rights beyond what the copyright laws protect or for those that attempt to impose anticompetitive conditions on the licensing of the copyright.
The underlying error in Microsoft's copyright argument is that it proceeds from an assumption that, if Microsofts restrictions are contained in a license to legitimately copyrighted material, the copyright automatically prevails and any restrictions it chooses to insert in its licensing agreements are permissible under the antitrust laws. This assumption is wrong.
A copyright does not give its owner immunity from the laws of general applicability. Examples are legion,46 and antitrust law is among them. See, e.g., Data General Corp. v. Grumman Sys. Support, 36 F.3d 1147, 1185 n.63 (1st Cir. 1994) ("[i]t is in any event well settled that concerted and contractual behavior that threatens competition is not immune from antitrust scrutiny simply because it involves the exercise of copyright privileges"; citing cases). Antitrust liability may attach to anticompetitive licensing restrictions. See United States v. Loew's, Inc., 371 U.S. 38 (1962); United States v. Paramount Pictures, 334 U.S. 131 (1948); Straus v. American Publishers Ass'n, 231 U.S. 222, 234 (1913); Digidyne, 734 F.2d 1336.
One of the principles adopted by the courts in reconciling antitrust and copyright law is that a copyright owner may not use licensing agreements to impose certain anticompetitive [begin page 82] restrictions on its licensees. Thus, efforts to use a copyright license to obtain control in an adjacent market or to tie copyrighted to uncopyrighted works have been held to violate the antitrust laws. Eastman Kodak, 504 U.S. at 479 n.29 ("The Court has held many times that power gained through some natural and legal advantage such as a patent, copyright, or business acumen can give rise to liability if a seller exploits his dominant position in one market to expand his empire into the next.");47 Eastman Kodak v. Image Technical Servs., 125 F.3d 1195 (9th Cir. 1997); Digidyne, 734 F.2d 1336.
Here, the United States complains about allegedly anticompetitive restrictions Microsoft has included in its licensing agreements: requiring the preinstallation and display of Internet Explorer and preventing OEMs from utilizing preferred means of developing and installing their own add-on programs or customizing the user interface. With regard to each restriction, the conduct at issue is not whether Microsoft has an intellectual property right not to license its copyrighted works, but whether Microsoft's insertion into its license agreements of restrictions that exclude competing browsers and maintain and extend Microsofts operating system monopoly violates the antitrust laws.
Finally, Microsoft suggests that the relief sought by the United States would infringe
its copyright interests. But Microsofts rights under the copyright laws are very
different at the remedy stage, after liability has been established. Courts have regularly
ordered compulsory [begin page 83] licensing of valid patents
and copyrights as a remedy for a proven antitrust violation. See, e.g., United
States v. Glaxo Group, 410 U.S. 52 (1973) (compulsory licensing of present and future
patents at a court-set rate was an appropriate remedy for past antitrust violations); United
States v. National Lead Co., 332 U.S. 319, 328-35 (1947); Hartford-Empire Co. v.
United States, 323 U.S. 386, 419 (1945); F.M. Scherer, Industrial Market Structure
and Economic Performance 456 (1980) ("compulsory licensing has been specified as
a remedy in more than 125 antitrust cases . . ."). If plaintiffs establish that
Microsoft's licensing restrictions violate the law, the copyright laws will pose no
obstacle to an appropriate remedy.
III. PLAINTIFFS ARE ENTITLED TO PRELIMINARY AND PERMANENT RELIEF
Contrary to the unsupported assertions in its Memorandum in Opposition to Plaintiffs Motions for Preliminary Injunction, Microsoft clearly possesses monopoly power; its conduct has excluded competition; and its conduct cannot be justified by self-serving pronouncements as to the benefits of "integration" and its asserted rights in the "integrity" of its intellectual property.
Microsoft claims that the relevant product market in this case is broader than that alleged by the plaintiffs, and that the appropriate market encompasses not only operating systems for Intel-based PCs, but also for minicomputers, workstations, non-Intel based PCs, network computers attached to mainframes, and handheld computers. See MS Memo. at 10-11.48 [begin page 84] Microsofts assertion that operating systems for other types of computers are substitutes for desktop PC operating systems is utterly unsupported by anything other than speculation and conjecture. There is no evidence that hardware such as workstations (adapted to run higher-powered applications than PCs) or handheld computers (adapted to run lower-powered applications than PCs) provide viable substitutes for Intel-based desktop PCs for any significant number of users. [redacted material] To the contrary, the evidence supports plaintiffs allegations that the relevant market in this case is no broader than (and perhaps narrower than) one for desktop operating systems for Intel-based PCs. [redacted material]
The Court of Appeals has twice considered actions against Microsoft and has commented on its apparent monopoly power and the characteristics of the operating system market that have contributed to this power. See United States v. Microsoft Corp., 56 F.3d 1448, 1451-53 (D.C. Cir, 1995); United States v. Microsoft Corp., 1998 WL 327855, *1 (D.C. Cir. 1998) ("Because IBM chose to install Microsofts operating system on its personal computers, Microsoft acquired an installed base on millions of IBM and IBM-compatible PCs. That base constituted an exceptional advantage, and has created exceptional risks of monopoly, because of two characteristics of the software industry -- increasing returns to scale and network externalities.").
Of course, some of the other companies in the operating system business are large and well-funded, and have numerous smart engineers at their disposal. But those assets do not enable firms to enter and compete meaningfully in the relevant market. The evidence plainly indicates that other would-be operating system competitors, including computer giant IBM, despite the [begin page 85] resources at their disposal, have been unable to penetrate the desktop operating system market. [redacted material] Measured against the historical record of such companies utter failure to gain a foothold in the competitive battle against Windows, their resources might as well be infinite. The barriers to entry -- exactly the barriers described by the plaintiffs in their opening briefs -- would be no less high. [redacted material]
Microsoft seeks to deal with these barriers (most notably, the strong network effects exhibited by the operating system market) by simply assuming them away. Microsoft offers no evidence at all to support its claim that the large installed base of Windows users serves as a "magnet" for entry, and certainly none that rebuts the substantial evidence that Microsofts dominance is reinforced by the positive feedback loop between Windows-specific applications and further growth in the Windows installed base. [redacted material] Not a single operating system vendor witness called to testify in these proceedings has even remotely suggested that he views selling to the Windows installed [begin page 86] base as an attractive business opportunity. To the contrary, such vendors repeatedly have testified that the desktop market is essentially foreclosed, forcing them to direct their efforts elsewhere. [redacted material]
Finally, Microsoft futilely seeks refuge in the assertion that operating system prices remain low and represent a small portion of the cost of a personal computer, and that the relevant market is characterized by rapid technological advances. Whether operating system technology has advanced in the past several years (itself a subjective judgment which Microsoft makes no effort to substantiate) is immaterial. The courts have consistently held that a firm may possess monopoly power in an industry notwithstanding the fact that innovation has continued to occur and prices have not increased. See, e.g., Allen-Myland, 33 F.3d at 210-11; Greyhound Computer Corp. v. IBM Corp., 559 F.2d 488, 497 (9th Cir. 1977). [redacted material] [begin page 87] [redacted material]
Moreover, Microsofts argument misstates the facts. The prices of nearly all other components of personal computers have decreased substantially, even while their technological capabilities have dramatically expanded. See, e.g., [redacted material] The price of Windows has not. Ibid. As a result, the percentage of the cost of a PC to a consumer represented by Windows has been steadily increasing. [redacted material] have declined to take any pricing action in response, choosing instead to maintain Windows royalties at least at prior levels. This is evidence of monopoly power, not the absence thereof. [redacted material]
As discussed in preceding sections of this Memorandum, Microsofts monopoly power is the lens through which its anticompetitive conduct must be viewed. [redacted material] OEMs repeatedly [begin page 88] express fear of disrupting their relationships with Microsoft. Both their absence of choice and their fear is consistent only with the fact that Microsoft possesses monopoly power. This power, in turn, is the fulcrum by which Microsofts coercive business practices have been implemented, distinguishing them in critical ways from the non-predatory practices of Microsofts operating system and browser competitors. Microsofts exclusionary conduct is not, as Microsoft characterizes it, merely "commonplace." It is extraordinary, and extraordinary for the very reason it offends the antitrust laws: it coerces consumer, OEM, ISP, and ISV purchasing and licensing decisions and forecloses competition through the exertion of monopoly power, not the ordinary power of persuasion based purely on the merits of Microsofts products.
* * * * * * * * *
For the reasons set forth in plaintiffs memoranda in support of preliminary injunction, and based on the evidence set forth previously and herein, plaintiffs meet each of the factors required for the entrance of preliminary and permanent injunctive relief.
DATED: August 31, 1998