Memorandum and Order.
(Denying Microsoft's Motion for Summary Judgment).
(Part 4).

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VI.

Plaintiffs contend that Microsoft has monopoly power in Intel-compatible PC operating systems, the relevant product market in this case, and that its monopoly is reinforced by high barriers to entry and network effects. Plaintiffs also allege that Microsoft has "willfully" maintained that monopoly by engaging in anticompetitive conduct, including the tying²² and other alleged §1 violations discussed supra, aimed at eradicating competition in the browser market, which it perceives as a threat to its operating system monopoly. This conduct, plaintiffs contend, lacks any legitimate business justification.

In order to succeed on their claims of illegal monopolization, plaintiffs must prove: (1) Microsoft's possession of monopoly power in a relevant market; and (2) the "willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." See United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). For purposes of summary judgment, Microsoft concedes its possession of monopoly power in the market for Intel-compatible PC operating systems.  Accordingly, the Court must deny summary judgment on the monopolization claim if there are disputed facts regarding whether Microsoft has "willfully" maintained its alleged monopoly.

A monopolist's conduct that violates § 1 necessarily violates § 2. See United States v. Griffith, 334 U.S. 100, 106 (1948); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 239 (1st Cir. 1983). Since the Court found sufficient facts to be in dispute to preclude summary [begin page 43] judgment for defendant on plaintiffs' § 1 allegations, summary judgment is ipso facto precluded on the monopolization claims. Furthermore, a monopolist's conduct that does not rise to the level of a § 1 violation may nevertheless violate § 2 if it "impair[s] competition in an unnecessarily restrictive way." Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985); see also Lorain Journal Co. v. United States, 342 U.S. 143, 149 (1951). As Justice Scalia wrote in Eastman Kodak, "[w]here a defendant maintains substantial market power, his activities are examined through a special lens: Behavior that might otherwise not be of concern to the antitrust laws -- or that might even be viewed as procompetitive -- can take on exclusionary connotations when practiced by a monopolist." 504 U.S, at 488 (Scalia, J., dissenting), see also Berkey Photo v. Eastman Kodak Co., 603 F.2d 263, 274-75 (2d Cir. 1979). These are quintessential fact questions and are genuinely disputed.

Plaintiffs also contend that Microsoft is unlawfully attempting to monopolize the market for Internet browsers. In order to prevail on this claim, plaintiffs must prove that Microsoft.(1) engaged in predatory or anticompetitive behavior (2) with a specific intent to monopolize and, that (3) there is a "dangerous probability" of its achieving monopoly power. See Spectrum S orts, Inc. v. McQuillan, 506 U.S. 447, 456 (1993); see also International Distribution Ctrs. v. Walsh Trucking Co., 812 F.2d 786, 790 (2d Cir. 1987); William Inglis & Sons Baking Co. v. ITT Continental Baking Co., Inc., 668 F.2d 1014, 1027 (9th Cir. 1981).

The Supreme Court has held that intent to injure or destroy a rival and to expand one's own business are, standing alone, insufficient to produce an antitrust violation. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 225 (1993); see also Abcor Corp. v. AM Int'l, Inc., 916 F.2d 924, 927 (4th Cir. 1990); Morgan v. Ponder, 892 F.2d 1355, [begin page 44] 1359 (8th Cir. 1989) (statements such as "we'll do whatever it takes" are "often legitimately used by business people in the heat of competition"); Great Escape, Inc. v. Union City Body Co., 791 F.2d 532, 541 (7th Cir. 1986) (because "[a]ll lawful competition aims to defeat and drive out competitors," the "mere intention to exclude competition and to expand one's own business is not sufficient to show a specific intent to monopolize"), Richter Concrete Corp. v. Hilltop Concrete Corp., 691 F.2d 818, 826 (6th Cir. 1982). The intent must be "something more than an intent to compete vigorously." See Spectrum Sports, 506 U.S. at 459.

As Professor Hovenkamp points out, "[i]ntent to 'exclude' is consistent with both efficient practices (research and development) and inefficient ones (predatory pricing)." See Herbert Hovenkamp, Federal Antitrust Policy 252 (1994). Consequently, courts are hesitant to decide cases as a matter of law where the evidence of intent is ambiguous.  See, e.g., U.S. Phillips Corp. v. Windmere Corp., 861 F.2d 695, 698-703 (Fed. Cir. 1988) (letting jury decide whether internal memoranda containing statements such as "let's pound [our competitors] into the sand" were simply sales talk or sufficient evidence of anticompetitive intent).

In Spectrum Sports the Supreme Court held that improper intent may be inferred from objective evidence such as predatory conduct. See 506 U.S. at 459 ("Unfair or predatory conduct may be sufficient to prove the necessary intent to monopolize."); see also William Inglis & Sons, 668 F.2d at 1027; United States v. Empire Gas Corp., 537 F.2d 296 (8th Cir. 1976). The same facts that preclude summary judgment on plaintiffs' § 1 allegations, if proven, might be sufficient for the Court to infer an improper intent from that behavior.

Plaintiffs also contend that Microsoft's specific intent to monopolize the browser market can be inferred from its attempt to solicit its major competitor, Netscape, to participate in an [begin page 45] illegal market allocation scheme. Cf. United States v. American Airlines, Inc., 743 F. 2d 1114, 1121 (5th Cir. 1984) (a solicitation to form a cartel in a concentrated market, even if the solicitation is rejected, can in itself constitute an attempt to monopolize). While Microsoft vigorously disputes plaintiffs' account of the June 21, 1995 meeting with Netscape, plaintiffs' evidence is sufficient to create a genuine dispute. Chris Jones, Microsoft's then Group Manager for Internet Explorer, participated in that meeting. In deposition testimony, Mr. Jones indicated that Microsoft "absolutely" intended to persuade Netscape not to compete and offered as a quid pro quo the prospect of Microsoft's staying out of browser development for non-Windows platforms. See Jones Dep., 208:5 - 209:6; 211:22 - 212:6. Plaintiffs allege that Microsoft's offer was part of a larger pattern of conduct that included similar discussions with Intel, Apple, and Real Networks. See infra at 11.

The test of conduct necessary to prove an attempt claim is, of course, substantially more demanding than the requirements for illegal monopolization. See, e.g., Transamerica Computer Co., Inc. v. IBM, 698 F.2d 1377, 1382 (9th Cir. 1983) (if conduct is not monopolization, it is not attempt either). The conduct must be sufficiently hostile toward competition so as to be branded "predatory," meaning an attempt to drive rivals from the market or to deter their entry. See Neumann v. Reinforced Earth Co., 786 F.2d 424, 427 (D.C. Cir. 1986). In support of their "attempt" claims, plaintiffs cite, among other behavior, the same conduct that supports their claims of tying and other unlawful restraints of trade. While Microsoft repeats its claims that it did not engage in any predatory behavior, the relevant facts are, as previously discussed, genuinely in dispute.

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To sustain the attempted monopolization claim, plaintiffs must also prove a "dangerous probability" of Microsoft's succeeding in its effort to monopolize the market for Internet browsers. To prove a "dangerous probability," courts generally require plaintiffs to show that a defendant has a certain minimum market share. In Lorain Journal v. United States, 342 U.S. 143 (195 1), for example, the Supreme Court upheld a judgment that a newspaper had attempted to monopolize the sale of advertising by refusing to deal with advertisers who purchased advertising from a local radio station. The Supreme Court took particular note of the newspaper's market power and the likelihood that the boycott would eventually eliminate the broadcaster-competitor. See id. at 152-54.

The Fourth Circuit has articulated the market share requirement as follows: "(1) claims of less than 30% market shares should presumptively be rejected; (2) claims involving between 30% and 50% shares should usually be rejected, except when conduct is very likely to achieve monopoly or when conduct is invidious ... ; (3) claims involving greater than 50% share should be treated as attempts at monopolization when the other elements for attempted monopolization are also satisfied." See M&M Med. Supplies & Serv. v. Pleasant Valley Hosp., 981 F.2d 160, 168 (4th Cir. 1992) (en banc).

According to plaintiffs, the latest data from a commercial market research firm show that as of February 1999, Internet Explorer had a 58% share of the browser market, with Navigator at 40%. See Sibley Decl. ¶ 29 & Table 3. Courts have found a dangerous probability of success on a comparable share of the market. See, e.g., McGahee v. Northern Propane Gas Co., 858 F.2d 1487, 1506 (11' Cir. 1988) ("[A] sixty or sixty-five percent market share is a sufficiently large platform ... to create a genuine issue of material fact as to whether ... [the defendant] would [begin page 47] succeed in achieving a monopoly."), Kelco Disposal, Inc. v. Browning-Ferris Indus., 845 F.2d 404, 409 (2d Cir. 1989) (55% share sufficient), aff'd 492 U.S. 257 (1989).

Microsoft agrees that its browser "usage share" has increased in the last several years. It argues, however, that IE's success is due to the rapid addition of features and functionality, rather than any anticompetitive conduct. Moreover, Microsoft also contends that Netscape is still the market leader: Netscape's own June 1998 internal marketing studies show that the usage share for Navigator is 56.7% while IE's share is 37.2%. Microsoft correctly points out that courts rarely find a market share between 30% and 50% sufficient to establish a dangerous probability of monopolization. See, e.g., U.S. Anchor Mfg. v. Rule Indus., Inc., 7 F.3d 986, 1001 (11th Cir.1993) (less than 50% market share insufficient "as a matter of law"); Indiana Grocery, Inc. v. Super Valu Stores, Inc., 864 F.2d 1409, 1415 (7th Cir. 1989) (nearly 50% share insufficient), Broadway Delivery Corp. v. United Parcel Serv. of Am., 651 F.2d 122, 129 (2d Cir. 1981) (share below 50% precludes finding of dangerous probability absent "significant evidence concerning the market structure to show that the defendant's share gives it monopoly power").

Microsoft also argues that, regardless of market share, in order to prove attempted monopolization, plaintiffs must show that the structure of the browser market lends itself to monopolization. See, Colorado Interstate Gas Co. v. Natural Gas Pipeline Co. of Am., 885 F.2d 683, 694 (10th Cir. 1989) (defendant must have "the ability to propel itself to monopolistic control over the market"), Microsoft argues that the "fast-moving nature of the software business where no single firm can gain control over productive assets" - makes it highly unlikely that any firm could ever acquire the power to control prices or exclude competition, regardless- of its market share. See, Dial A Car, Inc. v. Transportation, Inc., 82 F.3d 484, 486-87 (D.C. Cir. [begin page 48] 1996) (no unlawful attempt absent indication that monopolization of corporate car service business in District of Columbia is even possible). Plaintiffs disagree, contending that the structure of the browser market -- like the operating system market -- lends itself to dominance by one firm.

The statements of Microsoft executives, when considered in conjunction with other evidence of anticompetitive behavior (including the evidence supporting the § 1 claims as well as evidence that Microsoft may have sought to induce Netscape to agree to an illegal market allocation), at least raises a question as to Microsoft's intent to monopolize the browser market. Plaintiffs, of course, must prove that Microsoft intended to do more than "compete vigorously." Similarly, whether or not Microsoft's conduct was "predatory" is not an issue that can be properly decided as a matter of law. And whether Microsoft may be deemed to have a "dangerous probability" of monopolizing the browser market depends primarily on Microsoft's and Netscape's relative shares of the browser market, a question that is sharply disputed. Consequently, the Court must deny Microsoft's motion for summary judgment on plaintiffs' attempted monopolization claims.

VII.

The States bring a separate claim of monopoly "leveraging" under § 2. Under this theory, first recognized by the Second Circuit in dictum²³ in Berkey Photo v. Eastman Kodak Co., 603 F.2d 263, 276 (2d Cir. 1979), a seller who has a monopoly in one product violates § 2 when it uses a tie-in to obtain a competitive advantage in a second market, "even if there has not been an [begin page 49] attempt to monopolize the second market. " See id. (ultimately not finding liability on this theory) (emphasis supplied).

The continuing viability of the monopoly leveraging theory is in serious doubt. The Supreme Court has offered conflicting views on the theory. In a footnote to Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451, 479 n.29 (1992), the Supreme Court observed that it had "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." Less than a year later, however, the Supreme Court noted that "§ 2 makes the conduct of a single firm unlawful only when it actually monopolizes or dangerously threatens to do so." See Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 459 (1993). And in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 775 (1984), the Supreme Court noted that "[b]ecause the Sherman Act does not prohibit unreasonable restraints of trade as such - but only restraints effected by a contract, combination, or conspiracy - it leaves untouched a single firm's anticompetitive conduct (short of threatened monopolization)." (emphasis supplied).

While those statements were dicta in cases not involving a "leveraging" claim as such, several courts have either rejected the theory outright or expressed extreme doubts about its viability. For example, in Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 548 (9th Cir. 1991), the Ninth Circuit flatly rejected Berkey Photo's theory, holding that, "[u]nless the monopolist uses its power in the first market to acquire and maintain a monopoly in the second market, or to attempt to do so, there is no Section 2 violation." Similarly, in Fineman v. Armstrong World Industries, Inc., 980 F.2d 171, 205 (3d Cir. 1992), the Third Circuit relied on [begin page 50] Copperweld in holding that "Berkey Photo's formulation of monopoly leveraging to proscribe unilateral restraints of trade does violence to the text of the Sherman Act." But see Kerasotes Mich. Theatres v. National Amusements. Inc., 854 F.2d 135, 138 (6th Cir. 1988) (reversing dismissal of leverage claim).

The D.C. Circuit has never spoken definitively on the leveraging theory, but has noted "substantial academic criticism cast upon the leveraging concept." See Association for Intercollegiate Athletics for Women v. NCAA, 73 5 F.2d 577, 586 & n. 14 (D.C. Cir. 1984). Professor Hovenkamp agrees that the idea that a seller can use a tie-in to enlarge monopoly profits has been "condemned repeatedly by commentators." See Herbert Hovenkamp, Federal Antitrust Policy 371 (1994). Assuming that Microsoft has an operating system monopoly and browsers are being sold competitively, Microsoft incentive is to extract all available monopoly profits from the OS/browser combination. Accordingly, it already prices its operating system at the monopoly profit-maximizing price, considering what consumers are willing to pay for the entire package. Even if Microsoft were to obtain a monopoly in the market for browsers, the profit-maximizing price for the combination wouldn't change; Microsoft could not make additional monopoly profits even by monopolizing the browser market as well. See Hirsh v. Martindale-Hubbell, Inc., 674 F.2d 1343, 1349 n. 19 (9th Cir. 1982).

In fact, the Ninth Circuit noted that "leveraging" may actually "tend to undermine monopoly power, "see Alaska Airlines, 948 F.2d at 549 (emphasis in original), since "[e]very time the monopolist asserts its market dominance on a firm in the leveraged market, the leveraged firm has more incentive to find an alternative supplier, which in turn gives alternate suppliers more reason to think they can compete with the monopolist," Id.

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The Court will grant Microsoft's motion for summary judgment on the States' leveraging claim. While the Supreme Court has not considered a leveraging claim per se, it has clearly stated that a firm violates § 2 only when it actually monopolizes or dangerously threatens to do so. The Third and Ninth Circuits and many commentators have rejected the theory outright, as contrary to both economic theory and the Sherman Act's plain language.

VIII.

Finally, Microsoft contends that the States' pendent state-law claims, seeking to force Microsoft to alter its copyrighted operating system software (and to allow OEMs to do so), directly conflict with the copyright laws' goal of promoting the distribution of copyrighted works to the general public. See Harper & Row Publishers, Inc. v. National Enters., 471 U.S. 539, 558 (1985) (federal copyright laws' "encouragement of individual effort by personal gain is the best way to advance public welfare through the talents of authors and inventors") (internal citation and quotation marks omitted). Microsoft repeats many of the same arguments it made in support of the boot and start-up screen restrictions, i.e., that it has an unfettered right to license (or not to license), and to prevent alterations to its copyrighted software. While courts have upheld the ability of states to regulate some )me aspects of copyrighted works, see, e.g., Fox Film Corp. v. Doyal, 286 U.S. 123, 131 (1932) (upholding ability of state to levy tax on copyright royalties); Associated Film Distribution Corp. v. Thornburgh, 683 F.2d 808, 814-17 (3d Cir. 1982) (upholding state regulation of certain procedures by which films were marketed and licensed to theaters), Microsoft argues, they have also recognized that a state law prohibiting the exercise of specific fights conveyed by the copyright laws would be invalid. See, e.g., Allied Artists Pictures Corp. v. Rhodes, 496 F. Supp. 408, 445 n. 19 (S.D. Ohio 1980); Remick Music Corp. v. Interstate [begin page 52] Hotel Co., 58 F. Supp. 523, 544-45 (D. Neb. 1944) (invalidating state statute that interfered with copyright holder's ability to license public performances of copyrighted music).

"[T]he Supremacy Clause, U.S. Const. Art. VI, cl. 2, invalidates state laws that 'interfere with, or are contrary to,' federal law." Hillsborough County, Florida v. Automated Med. Lab, Inc., 471 U.S. 707, 712 (1985) (quoting Gibbons v, Ogden, 22 U.S. (9 Wheat.) 1, 211 (1824)). State laws are "preempted" when they "stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hines v. Davidowitz, 312 U.S. 52, 67 (1941); accord Gade v. National Solid Wastes Management Ass'n, 505 U.S. 88, 98-99 (1992). But "[c]onsideration of issues arising under the Supremacy Clause starts with the assumption that the historic police powers of the States are not to be superseded by Federal Act unless that is the clear and manifest purpose of Congress." Cipollene v. Liggett Group, Inc., 505 U.S. 504, 516 1992) (internal citation and quotation marks omitted).

It is fairly clear that the copyright laws do not preempt state antitrust statutes. The Copyright Act's preemption clause provides that "[n]othing in this title annuls or limits any rights or remedies under the common law or statutes of any State with respect to activities violating legal or equitable rights that are not equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106." See 17 U.S.C. § 301(b)(3).

The Tenth Circuit recently addressed a similar preemption question. In Harolds Stores, Inc, v. Dillard Department Stores, Inc., 82 F.3d 1533 (10th Cir.), cert. denied, 117 S. Ct. 297 (1996), a retailer sued a competitor, alleging that the competitor's copying of fabric designs violated its copyrights and the state antitrust laws. The defendant argued that the antitrust law was preempted by the federal copyright scheme. Id. at 1543. The court rejected the defense, [begin page 53] holding that "the restraint of trade component of [the state antitrust act] claim requires a litigant claiming a violation of [that act] to establish proof beyond that required to demonstrate a violation of the exclusive rights protected by §106 of the Copyright Act, i.e., copying, preparation of derivative works, performance, distribution or display." Id.

As explained, supra, the Copyright Act does not give a copyright holder a license to engage in anticompetitive behavior that violates federal antitrust law. See, e.g., Data General Corp, v. Grumman Sys. Support Corp., 36 F.3d 1147, 1186-87 & n.63 (1st Cir. 1994) (it is "well settled that concerted and contractual behavior that threatens competition is not immune from antitrust inquiry simply because it involves the exercise of copyright privileges") (citations omitted); Allied Artists, 496 F. Supp. at 443-44 (holding that "ownership of a copyright does not entitle a company to abuse the market power it obtains thereby by engaging in a per se illegal tying arrangement"). Microsoft fails to articulate how state antitrust laws, which are based upon and largely emulate the federal scheme, see California v. ARC Am. Corp., 490 U.S. 93, 102 (1989) (state antitrust laws are consistent with broad purposes of federal antitrust laws), "conflict" with any right conferred by federal copyright law. The Supreme Court has recognized that there is "nothing either in the language of the copyright laws or in the history of their enactment to indicate any congressional purpose to deprive the states, either in whole or in part, of their long-recognized power to regulate combinations in restraint of trade." See Watson v. Buck, 313 U.S. 387, 404 (1941).

Furthermore, Microsoft has not established the extent of any copyright protection in the specific portions of software plaintiffs seek to modify, and the parties dispute whether Microsoft [begin page 54] abused its copyright for anticompetitive purposes.  Until those questions are resolved, Microsoft's copyright argument is premature at best.

For the forgoing reasons, it is, this 14th day of September, 1998,

ORDERED, that the motion of the defendant Microsoft Corporation for summary judgment on the plaintiff States' Third Claim for Relief is granted, and that claim is dismissed with prejudice; ant it is

FURTHER ORDERED, that the motion of Microsoft Corporation for summary judgment is otherwise denied.

______________________
Thomas Penfield Jackson
U.S. District Judge