IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Petitioner,

v.

MICROSOFT CORPORATION,

Respondent.

Supplemental to

Civil Action No. 94-1564

Hon. Thomas Penfield Jackson

MEMORANDUM OF THE UNITED STATES IN SUPPORT OF	PETITION

FOR AN ORDER	TO SHOW	CAUSE WHY RESPONDENT

MICROSOFT CORPORATION SHOULD NOT BE FOUND IN CIVIL CONTEMPT

Joel I. Klein

Assistant Attorney General

A. Douglas Melamed

Principal Deputy Assistant Attorney General

Rebecca P. Dick

Director of Civil Non-Merger Enforcement

Christopher S Crook

Chief

Phillip R. Malone

Steven C. Holtzman

Pauline T. Wan

Karma M. Giulianelli

Michael C. Wilson

Sandy L. Roth

Attorneys

U.S. Department of Justice

Antitrust Division

450 Golden Gate Ave., Room 10-0101

San Francisco, CA 94102

(415) 436-6660

TABLE OF CONTENTS

I.	INTRODUCTION	1

II.	JURISDICTION	4

III.	STATEMENT OF FACTS	4

A.	Microsoft's Operating System Monopoly	4

B.	The Prior Monopolization Case Against

Microsoft and the Resulting Final Judgment	6

C.	The Internet, the World Wide Web, and the Emergence of the Browser	7

D.	Microsoft's Response and the Outbreak of the "Browser Wars"	9

IV.	MICROSOFT IS IN CONTEMPT OF THIS COURT'S FINAL JUDGMENT	11

A.	Legal Standard	11

B.	The Plain Language of the Final Judgment Expressly Prohibits

Microsoft from Conditioning an OEM's Windows 95 License

On the OEM Also Licensing and Distributing Internet Explorer	12

C.	Microsoft Is Violating The Plain Language of the Final Judgment	13

1.	Microsoft Has Entered Into Windows 95

"License Agreements" with OEMs	13

2.	The Terms of Microsoft's Windows 95 OEM License

Agreements Are Conditioned Upon OEMs Licensing Internet

Explorer	14

a.	Microsoft Has Required, and Is

Continuing to Require, OEMs to License

and Preinstall Internet Explorer 3.0

As a Condition of Their Windows 95 License	14

b.	Microsoft Currently Intends to Require OEMs to

License and Preinstall Internet Explorer

4.0 As a Condition of Their Windows 95 License	18

3.	Internet Explorer Is an "Other Product" from Windows 95, and

Not an "Integrated Product," for Purposes of the Final Judgment	19

a.	Substantial OEM and End-User Demand Exists for

Internet Explorer and Other Browser Products Separate

From Demand for Windows 95 or Other Operating Systems	20

b.	Microsoft's Actions Demonstrate That

It Recognizes and Responds to the

Separate Demand for Its Internet Explorer Product	21

i.	Microsoft Markets and Distributes

Internet Explorer As a Stand-Alone

Product Through Numerous Means

Independent of Its Windows 95 Product	21

ii.	Microsoft Has Developed and Distributes

Versions of Internet Explorer for

Non-Windows 95, and Indeed

Non-Microsoft, Operating Systems	22

iii.	Microsoft Regularly Describes Its

Internet Browser as a Separate

Product From Windows 95, and

Aggressively Markets It Under Its Own Name	23

iv.	Microsoft Regularly Tracks the

Status of Internet Explorer as a

Separate Product Competing In

What Microsoft Identifies As a

Distinct Browser "Space" or "Market"	24

v.	Microsoft's Pattern of Conduct with

Respect to Internet Explorer Is Different

from Its Treatment of Any True Windows

Operating System "Feature" or "Update". . . . . . . . . . . . . 25

c.	Licensing and Distributing Internet

Browser Products Separately from

Operating Systems Is the Commercial Norm	26

d.	Licensing and Distributing Internet Explorer

Separately from Windows 95 Is Physically Possible	27

e.	Conditioning Windows 95 License Agreements

On OEMs Licensing And Distributing Internet

Explorer Is Not Necessary	To Enable Microsoft To

"Develop" Any "Integrated Product"	27

V.	MICROSOFT'S CONDITIONING OF WINDOWS 95 LICENSES

ON OEMS LICENSING INTERNET EXPLORER IS PRECISELY

THE KIND OF ANTICOMPETITIVE CONDUCT THE

FINAL JUDGMENT WAS INTENDED TO PREVENT	28

A.	The Express Purpose of Section IV (E) of the Final Judgment

Is to Prevent Microsoft from Trying to Protect or Extend Its

Windows Monopoly Through Requiring OEMs

to License or Distribute Other Products Such as Internet Explorer	28

B.	Browser Technology Is a Significant Threat

To Microsoft's Windows Operating System Monopoly	31

C.	Microsoft Perceives Competing Browsers as

Serious Threats To Its Operating System Monopoly	33

D.	The United States Seeks to Protect the Competitive

Process From Microsoft's Abuse of Its Monopoly Power	36

VI.	MICROSOFT'S NON-DISCLOSURE AGREEMENTS MAY

HAMPER THE ABILITY OF THE COURT TO ENFORCE

THE FINAL JUDGMENT AND OF THE UNITED STATES

TO INVESTIGATE POSSIBLE VIOLATIONS OF IT	36

VII.	RELIEF REQUESTED	39

TABLE OF AUTHORITIES

Cases

Leman v. Krentler-Arnold Hinge Last Co., 284 U.S. 448 (1932)	4

McComb v. Jacksonville Paper Co., 336 U.S. 187 (1949)	4,11

United States v. Armour & Co., 402 U.S. 673 (1971)	11,12

United States v. ITT Continental Baking Co., 420 U.S. 223 (1975)	11,12

United States v. Greyhound, 508 F.2d 529 (7th Cir. 1974)	11

United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995)	4

United States v. Western Electric Co., 12 F.3d 225 (D.C. Cir. 1993)	12

United States v. Western Electric Co., 894 F.2d 1387 (D.C. Cir. 1990)	11

United States v. Young, 107 F.3d 903 (D.C. Cir. 1997)	12

United States v. Greyhound Corp., 363 F. Supp. 525 (N.D. Ill.),

aff'd, 508 F.2d 529 (7th Cir. 1974)	11

Washington-Baltimore Newspaper Guild v. Washington Post,

626 F.2d 1029 (D.C. Cir. 1980)	11

Statute

18 U.S.C. § 401(3) (1988)	4

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Petitioner,

v.

MICROSOFT CORPORATION,

Respondent.

Supplemental to

Civil Action No. 94-1564

Hon. Thomas Penfield Jackson

MEMORANDUM OF THE UNITED STATES IN SUPPORT OF	PETITION

FOR AN	ORDER TO SHOW	CAUSE WHY RESPONDENT

MICROSOFT CORPORATION SHOULD NOT BE FOUND IN CIVIL CONTEMPT

I.	INTRODUCTION

The United States has petitioned this Court for an Order to Show Cause why Respondent Microsoft Corporation ("Microsoft") should not be found in civil contempt of Section IV(E)(i) of the Final Judgment entered by this Court on August 21, 1995, in United States v. Microsoft, 1995-2 Trade Cas. ¶ 71,096 (D.D.C. 1995) ("Final Judgment") (copy attached hereto in the Appendix to this Memorandum (hereinafter "App."), Exhibit 1). This action is necessary to stop Microsoft's ongoing violation and defiance of Section IV(E)(i) of the Final Judgment, which forbids Microsoft from requiring personal computer ("PC") original equipment manufacturers ("OEMs") to license other Microsoft products in order to obtain a license to Microsoft's monopoly PC operating system products. In violation of this provision, Microsoft has required OEMs to license and distribute another Microsoft software product -- its "Internet Explorer" browser software -- as a condition of licensing Microsoft's current monopoly PC operating system product known as "Windows 95."

The United States is particularly concerned about Microsoft's unlawful conduct because of the significance of Internet browsers. Internet browser technology, as developed by companies competing with Microsoft, may be an important element in the reintroduction of competition to the PC operating system market. This potential is a result of the fact that browsers and the technology they incorporate can serve as a platform to which applications can be written and accessed without regard to the identity of the underlying operating system. The development of application programs that are written to run on or through an Internet browser, which can itself run on any operating system, is a serious threat to Microsoft's monopoly, which stems from and is reinforced by the overwhelming base number of software application programs that have been written specifically to work with Windows 95. Microsoft recognizes this threat and is taking action to defeat it. Its efforts include using its PC operating system market power to coerce OEMs to license and distribute Microsoft's Internet Explorer product in violation of the Final Judgment. In filing the Petition, the United States seeks to ensure that Microsoft abides by the terms of the Final Judgment, and that it does not misuse its monopoly power in operating systems to gain an unlawful advantage that could protect or extend its monopoly and inhibit competition.

The United States files its Petition to bring about an immediate end to the specific Microsoft conduct described herein. At the same time, the United States is continuing to investigate a variety of other licensing and distribution practices used by Microsoft in connection with its Internet browser and other Internet software products to determine whether those practices violate the Final Judgment or the antitrust laws.

In both bringing this action and continuing to investigate, the United States is concerned that the Court's ability to enforce the Final Judgment, and the government's ability to investigate possible violations of it and the antitrust laws, may be hampered by restrictive non-disclosure agreements that Microsoft insists its licensees and business partners sign. Many of these agreements prohibit voluntary disclosure to anyone (by implication including the United States Department of Justice or this Court) of information broadly deemed "confidential" by Microsoft. In addition, in some cases these agreements actually require the parties to them to give notice in advance to Microsoft before they produce "confidential" information to a court or the Department of Justice, even if such production is in response to court order or compulsory process.

Microsoft has recently informed the Department of Justice that it does not interpret these agreements as requiring signatories to give Microsoft notice of their discussions or dealings with the Department. Nevertheless, the agreements continue to pose a particularly serious risk, intended or not, of chilling the disclosure of information about possible Microsoft misconduct by companies or individuals that are contemplating coming forward to volunteer information to the government but that have no way of knowing about Microsoft's new interpretation. Moreover, the risk remains that the agreements may inhibit the legitimate disclosure of information even when third parties are approached by the United States and may reduce those third parties' ability and willingness to provide the United States or the Court with full information relevant to whether Microsoft is violating the Final Judgment. In so doing, the agreements may materially interfere with the Court's ability to enforce the provisions of the Final Judgment. The Petition accordingly requests that the Court order Microsoft to delete the restrictive provisions of the non- disclosure agreements, to notify all parties to those agreements that those provisions may not be enforced with respect to communications with the Department of Justice, and to similarly modify all future agreements.

The United States submits this Memorandum in support of the Petition and respectfully requests that this Court order Microsoft to show cause why it should not be found in civil contempt of this Court and thereafter adjudge Microsoft in civil contempt and enforce compliance with the Final Judgment by ordering the relief requested in the Petition.

II.	JURISDICTION

This Court has inherent power to enforce compliance with its orders. McComb v. Jacksonville Paper Co., 336 U.S. 187, 193 (1949); see also 18 U.S.C. § 401(3) (1988). A court whose order has been disobeyed has jurisdiction and venue to hear the contempt proceeding. Leman v. Krentler-Arnold Hinge Last Co., 284 U.S. 448 (1932). Moreover, Section VII(B) of the Final Judgment provides:

Jurisdiction is retained by this Court over this action and the parties thereto for the purpose of enabling any of the parties thereto to apply to this Court at any time for further orders and directions as may be necessary or appropriate to carry out or construe this Final Judgment, to modify or terminate any of its provisions, to enforce compliance, and to punish violations of its provisions.

III.	STATEMENT OF FACTS

A.	Microsoft's Operating System Monopoly

Microsoft, the world's largest producer of software for personal computers, has monopoly power in the production, licensing, and sale of operating system software for Intel-compatible PCs. See United States v. Microsoft Corp., 56 F.3d 1448, 1450-51 (D.C. Cir. 1995). As defined in the Final Judgment, the operating system is the software that controls the operation of the PC and manages the interaction between the computer's memory and attached hardware devices such as the keyboard, display screen, disk drives, and printer. See App. Exhibit 1, Final Judgment, Section II(14). In addition to these functions, the operating system also enables application software ("programs" such as word processing, spreadsheet, or Internet browser products) to operate or "run" by serving as a "platform" to which they are written.

The source, significance, and durability of Microsoft's monopoly power in the licensing and distribution of PC operating system software was set forth in the United States' Complaint leading up to the Final Judgment. See App. Exhibit 2, Complaint, ¶¶ 9-20. Currently, Microsoft's monopoly power is embodied in its most recent PC operating system release, Windows 95. Windows 95 is the dominant PC operating system product at this time. In mid- 1996, for example, Microsoft estimated that 80 percent of the 23 million PCs projected to be sold in the United States in the time period from mid-1996 to mid-1997 would have Microsoft operating system products preinstalled on them by the OEMs, while only 6 percent would have competing operating system products preinstalled. Microsoft projected that its OEM-installed operating system market share would be almost 86 percent by the end of mid-1997, while its competitors' shares would be only 2 percent. See Confidential App. Exhibit 3 (at MS6 6001073- 82); Confidential App. Exhibit 4 (at MS6 6006370, 6006377).

Because most purchasers of PCs demand that an operating system be preinstalled on the PCs they buy, and because shipping PCs without operating systems is likely to cause customer confusion and increase product support costs, OEMs routinely preinstall operating system software on the hard disk drive memory of nearly all their PCs. As a result of Microsoft's monopoly power in the operating system market, it is a commercial necessity for OEMs to preinstall Windows 95 as the operating system product on the vast majority of the PCs they sell, and virtually all OEMs do so. See, e.g., App. Exhibit 5, Declaration of E. Browning (hereinafter "Browning Decl".), ¶ 4; App. Exhibit 6, J. Kozel deposition transcript excerpts (hereinafter "Kozel Dep."), p. 10, line 5 - p. 12, line 6; App. Exhibit 7, M. Ransom deposition transcript excerpts (hereinafter "Ransom Dep."), p. 10, line 5 - p. 11, line 14; App. Exhibit 8, J. Von Holle deposition transcript excerpts (hereinafter "Von Holle Dep."), p. 8, line 2 - p. 10, line 18, p. 12, line 22 - p. 14, line 2; App. Exhibit 9, S. Decker deposition transcript excerpts (hereinafter "Decker Dep."), p. 10, line 5 - p. 11, line 21.

B.	The Prior Monopolization Case Against

Microsoft and the Resulting Final Judgment

On July 15, 1994, the United States sued Microsoft for unlawfully maintaining its monopoly in the market for PC operating system software. The United States' complaint alleged, among other things, that Microsoft had engaged in anticompetitive marketing practices directed at PC manufacturers that distribute operating system software preinstalled on their PCs. Such practices included entering into license agreements that imposed financial penalties on OEMs that distributed or promoted any non-Microsoft operating system, covered excessively long terms, and required unreasonably large minimum commitments to the Microsoft product. The result of these exclusionary license agreements was to foreclose competitors from using OEMs to distribute competing operating system software.

Microsoft consented to the entry of judgment against it, and this Court entered the Final Judgment on August 21, 1995. The Final Judgment remedied Microsoft's illegal conduct by prohibiting Microsoft from entering into the above-described license agreement terms with OEMs. Of more significance for this contempt action, the Final Judgment also prohibited Microsoft from engaging in other conduct which could yield similar anticompetitive results. In particular, the Final Judgment enjoined Microsoft from misusing its monopoly power by conditioning licenses of its operating system software on OEMs either licensing any other Microsoft product or not licensing or distributing any non-Microsoft products. See App. Exhibit 1, Final Judgment, Section IV(E). The purpose of Section IV(E) was to prevent Microsoft's use of such conditioning to try to protect or extend its operating systems monopoly. See App. Exhibit 10, Competitive Impact Statement filed in connection with the Final Judgment (hereinafter "CIS"), pp.10-11, 59 Fed. Reg. 42845, 42852 (1994); Section V.1, infra.

C.	The Internet, the World Wide Web, and the Emergence of the Browser

The Internet is a huge global network which interconnects smaller networks of computers, permitting users on one network to communicate with and transfer information to users on many other separate networks. The computers connected to the Internet range from Intel-compatible PCs and Apple Computer Corporation's Macintosh PCs, to high-powered computer workstations and large mainframe computers. In order to transfer data across networks of different kinds of computers, individuals must use a single format for data files that is recognizable by all of the interconnected (and different kinds of) computers. The need for a common file format led to the development of a special language called hypertext markup language ("HTML") for writing and displaying documents to users on the Internet. Moreover, users needed a simple way to move from one HTML document to another, which led the developers of HTML to adopt the hypertext transport protocol ("HTTP"). HTTP allows users to click on highlighted parts of an HTML document in order to transfer to a related document. As HTML documents proliferated on the Internet, they became known collectively as the World Wide Web ("the Web"). Collections of HTML documents put out by a single source became known as websites.

As the Web grew in size, users needed a convenient method of searching for, retrieving, and viewing HTML documents on the Web. In response to this need, a group of software engineers at the National Center for Supercomputer Applications developed a software application that provided the interface for accessing and reviewing HTML documents. This application, which is stored on the user's computer, became known as an Internet browser. When a user wishes to view an HTML document, the browser transmits the request for the particular HTML document to another computer on the network called a Web server. When the browser receives the HTML document from the Web server, it processes the HTML codes in the document and displays the resulting text, graphic images, and other content on the user's computer screen.

A number of different browsers are now available to consumers for browsing the Web. Currently, the most widely used browser is the "Navigator," produced by Netscape Communications Corp. ("Netscape"). Netscape released its first version of Navigator in late 1994. It has since produced three more releases. The latest of these, Navigator 4.0, was released to consumers in final commercial form in June 1997, as part of a software suite called Netscape "Communicator." Other browsers include Mosaic and Sun Microsystems' ("Sun") "Hot Java" software.

D.	Microsoft's Response and the Outbreak of the "Browser Wars"

Microsoft responded by developing and launching its own competing browser product, which it called Internet Explorer (or, as it is often referred to in the industry, "IE"). The first release of Internet Explorer arrived in August 1995. During the following year, Microsoft quickly came out with two more releases -- Internet Explorer 2.0 and 3.0 -- and aggressively promoted each as a substantial improvement over both the prior version and competing browser products. Microsoft released its most recent browser product, Internet Explorer 4.0, on September 30, 1997. As Netscape has done with Navigator, Microsoft has created versions of its Internet Explorer product for use with operating systems other than Windows 95. In particular, Microsoft has released Internet Explorer 3.0 for use on the Apple Macintosh operating system and Windows 3.11. In addition, Microsoft has stated that it plans to release Internet Explorer 4.0 for Windows 3.11, the Macintosh operating system, and Sun's Solaris operating system.

Microsoft aggressively marketed each version of its Internet Explorer, licensing and distributing it free of charge to users as a stand-alone product through a wide variety of distribution paths. For OEMs that wish to license and preinstall Windows 95, however, Microsoft has gone beyond merely offering Internet Explorer and has instead forced them to license versions 1.0, 2.0, and 3.0 (and soon version 4.0) of Internet Explorer as a condition of licensing Windows 95. Microsoft has done so by requiring OEMs to license both Windows 95 and Internet Explorer under the same blanket license agreement. It is this forced licensing and distribution of Internet Explorer by OEMs that is the subject of the United States' Petition.

Microsoft's Internet Explorer has steadily and rapidly gained a substantial share of browser users. The resulting competition between the Microsoft and Netscape browser products has been fierce, so much so that it has frequently been characterized in the industry as the "browser wars." Each release of a new, improved version of one of the browser products has been followed by an improved version of the other, and in all cases the two products are marketed to and understood by the public to be browsers competing with each other.

To the extent that this competition brings substantial benefits to PC users, the United States welcomes it. To the extent that it has the potential to continue to spur rapid technological innovation and increase consumer choice of browsers and operating systems, the United States wishes to see it continue. Microsoft, however, has gone beyond legitimate competition and has sought to use, and is using, its Windows monopoly power to gain an advantage by coercing OEMs to license and distribute Internet Explorer.

IV.	MICROSOFT IS IN CONTEMPT OF THIS COURT'S FINAL JUDGMENT

A.	Legal Standard

Failure to comply with a court order or decree may be deemed contempt. In order for the respondent to be found in civil contempt, the petitioner must show by clear and convincing evidence that there was a lawful decree, that the respondent had knowledge of the decree, and that the decree was violated. Washington-Baltimore Newspaper Guild v. Washington Post, 626 F.2d 1029, 1031 (D.C. Cir. 1980); United States v. Greyhound Corp., 363 F. Supp. 525, 570 (N.D. Ill.), aff'd, 508 F.2d 529 (7th Cir. 1974). Evidence of intent or willfulness on the part of the defendant is not required for a finding of civil contempt. McComb v. Jacksonville Paper Co., 336 U.S. 187, 191 (1949). In this case, there should be no dispute that the Final Judgment was lawful and that Microsoft had knowledge of it. The only issue is whether Microsoft violated the Final Judgment.

To determine whether Microsoft violated the Final Judgment, this Court must look to the language of the Final Judgment. An antitrust consent decree is read as one would read a contract. United States v. ITT Continental Baking Co., 420 U.S. 223, 236-37 (1975); United States v. Western Electric Co., 894 F.2d 1387, 1390 (D.C. Cir. 1990). In reading the Final Judgment, the Court should look to its plain language, United States v. Armour & Co., 402 U.S. 673, 678 (1971), and may use certain aids to construction. ITT Continental, 420 U.S. at 239. These aids include looking to the general usage of certain terms; common terms that are not defined in the decree are to be construed in their "natural sense" and "normal meaning." ITT Continental, 420 U.S. at 235; Armour, 402 U.S. at 678; United States v. Greyhound, 508 F.2d 529, 532 (7th Cir. 1974). The Court may also read decree terms by reference to the circumstances and purpose surrounding the formation of the decree and by any technical meaning words used may have had to the parties. United States v. Western Electric Co., 12 F.3d 225, 230 (D.C. Cir. 1993); United States v. Young, 107 F.3d 903, 908 (D.C. Cir. 1997). The Court, however, should not look to the purposes of one of the parties at the time of the contempt action, Armour, 402 U.S. at 681-82, but rather should consider the contemporaneous expressions of the decree's purpose. ITT Continental, 420 U.S. at 235, 239.

B.	The Plain Language of the Final Judgment Expressly Prohibits

Microsoft from Conditioning an OEM's Windows 95 License

On the OEM Also Licensing and Distributing Internet Explorer

Section IV(E)(i) of the Final Judgment states:

(E) Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon:

(i) the licensing of any other Covered Product, Operating System Software product or other product (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products).

Consequently, demonstrating a violation of Section IV(E)(i) in this case requires proof of the following three elements:

(1)	Microsoft has entered into Windows 95 License Agreements with OEMs;

(2)	The terms of these License Agreements are expressly or impliedly conditioned upon OEMs licensing Internet Explorer; and

(3)	Internet Explorer is an "other product" from Windows 95, and not part of an "integrated product" within the meaning of the Final Judgment.

Each of these elements is satisfied in this case.

C.	Microsoft Is Violating The Plain Language of the Final Judgment

1.	Microsoft Has Entered Into Windows 95

"License Agreements" with OEMs

There should be no dispute in this case either that Microsoft has entered into license agreements with OEMs for Windows 95 or that those agreements are covered by Section IV(E)(i) of the Final Judgment. Section II(4) of the Final Judgment defines "License Agreement" to include "any license, contract, agreement or understanding, or any amendment thereto, written or oral, express or implied, pursuant to which Microsoft authorizes an OEM to license, sell or distribute any Covered Product with its Personal Computer System(s)." Windows 95 is a "Covered Product," as defined by the Final Judgment.

There is no question that Microsoft licenses Windows 95 to OEMs. In sworn Interrogatory responses submitted to the United States, Microsot describes its OEM licensing policy as follows:

Microsoft licenses its Windows operating system software products to OEMs pursuant to written agreements with which the [Antitrust] Division is familiar. These agreements typically bear a title such as "Microsoft OEM License Agreement for Desktop Operating Systems."

App. Exhibit 11, Microsoft Response to Interrogatory 3(a) of the Visitation Letter dated August 21, 1997. These licenses for Windows 95 are "License Agreements" within the meaning of Section IV(E)(i).

2.	The Terms of Microsoft's Windows 95 OEM License Agreements

Are Conditioned Upon OEMs Licensing Internet Explorer

There also should be no dispute in this case that Microsoft licenses its Internet Explorer product to OEMs under, and as a condition of receiving, their Windows 95 operating system license. Microsoft has acknowledged as much. In its Interrogatory responses, Microsoft states:

Each of the major English language versions of Internet Explorer has been licensed to OEMs as part of Windows operating system software products. . . . As described above, the [Windows license] agreements include provisions concerning the pre-installation and shipment of updates to Windows products, such as updated versions of Internet Explorer and other features of Windows.

App. Exhibit 11, Microsoft Response to Interrogatory 3(a), pp. 8-9.

a.	Microsoft Has Required, and Is Continuing to Require,

OEMs to License and Preinstall Internet Explorer 3.0

As a Condition of Their Windows 95 Licenses

Joachim Kempin, Vice-President of Microsoft's OEM Sales and Marketing Group and the executive who directly oversees all of Microsoft's OEM sales activities worldwide, confirmed in sworn deposition testimony that, when OEMs license Windows 95, they also must license Internet Explorer as part of the "package":

Q.	In your position with Microsoft, do you view or do you consider Internet Explorer versions 1, 2, and 3 to be licensed to the OEMs when they place it on the PCs and sell those PCs?

A.	When they license Windows, they get it with the package.

Q.	And so the Internet Explorer that's on that PC is covered by the Windows license?

A.	That's correct.

App. Exhibit 12, J. Kempin deposition transcript excerpts (hereinafter "Kempin Dep."), p. 27, line 22 - p. 28, line 5.

Microsoft not only licenses Internet Explorer to OEMs as part of and along with the Windows 95 licenses, but the Windows 95 license agreements in fact are conditioned on the OEMs licensing and distributing Internet Explorer in this way. OEMs have no choice but to license and preinstall Internet Explorer on PCs when they preinstall Windows 95. OEMs also have no choice but to leave Internet Explorer on their PCs when they ship them, even if they would prefer -- as some do -- to remove and not include the version of Internet Explorer that Microsoft packages with Windows 95. In short, Microsoft coerces OEMs to license and distribute its Internet Explorer browser product whether they want it or not, even though removing the browser, as is discussed below (see infra, Section IV.C.3.d), will have no effect on the functioning of the underlying Windows 95 operating system.

Microsoft's conditioning is demonstrated by the company's own admissions, the language of its Windows license agreements with OEMs, and its history of enforcing those agreements. Since the commercial release of Windows 95 in August 1995, Microsoft has inserted various provisions into its OEM Windows 95 license agreements that consistently prohibit OEMs from deleting any "features or functionality" -- as Microsoft defines them -- from the package of software that Microsoft chooses to include and ship together labelled as "Windows 95." For example, a provision in the OEM license agreement states: "[The OEM] shall not modify the Product software, nor delete or remove any features or functionality without the written approval of MS in each instance." See Confidential App. Exhibit 13, OEM Windows 95 License Agreement (at MSV 0000163).

These provisions are not merely boilerplate. This fact is evident from a Microsoft internal e-mail sent prior to the launch of Windows 95, "So far, no major objections to including Internet Explorer. Some want to remove the icon from the desktop -- our response should be that this is not allowed." App. Exhibit 15, E-mail from Chris Jones, Program Manager of Mail/News Design in Microsoft's Internet Platform and Tools Division, to Brad Silverberg and John Ludwig, dated July 21, 1995.

Moreover, when OEMs have in fact sought to delete Internet Explorer and/or its accompanying desktop icon, Microsoft has invoked the license agreement terms prohibiting such actions, in each case refusing the requests. See, e.g., App. Exhibit 5, Browning Decl., ¶ 8; App. Exhibit 16, Gateway 2000, Inc. 9/19/97 Answers to Interrogatories, p. 8. In the most extreme case, Microsoft issued a formal notice that it intended to terminate the Windows 95 license agreement of one of the nation's largest OEMs, unless that OEM restored and thereafter continued to preinstall the Internet Explorer (and the Microsoft Network) icons. See App. Exhibit 17, Microsoft Letter dated June 6, 1996; App. Exhibit 9, Decker Dep. at p. 18, line 21 - p. 21, line 6. The OEM capitulated and once again began distributing the Internet Explorer and MSN icons as required by Microsoft in order to maintain its Windows 95 license. See App. Exhibit 18, Microsoft Letter dated June 25, 1996; App. Exhibit 9, Decker Dep. p. 21, lines 7-14.

Recognizing Microsoft's operating system dominance, all OEMs have complied with Microsoft's license agreement restrictions and have licensed and preinstalled each of the first three versions of Internet Explorer on their PCs sold with Windows 95. See, e.g., App. Exhibit 5, Browning Decl. at ¶¶ 5, 8; App. Exhibit 16, Gateway 2000, Inc. 9/19/97 Answers to Interrogatories, p. 8; App. Exhibit 7, Ransom Dep., p. 13, lines 10-19.

Finally, the deposition testimony of Microsoft's Kempin leaves no doubt that the terms of Microsoft's Windows 95 license agreements are conditioned on OEMs licensing Internet Explorer:

Q.	Just so I'm clear, do OEMs with versions 1.0, 2.0, and 3.0, do OEMs have any choice or have they had any choice about whether or not they load Internet Explorer onto the machines that have Windows 95 on them?

A.	I mean the way we write the license for Windows 95 is that the OEM loads the total system so the answer is no.

Q.	And so I take it from that answer that if an OEM wanted to then delete the Internet Explorer code from machines on which they have loaded Windows 95, well, let me ask, would they be allowed to do that or not under their license agreements?

A.	Under their license agreement, they are not allowed to do so.

App. Exhibit 12, Kempin Dep., p. 16, lines 9-23.

b.	Microsoft Currently Intends to Require OEMs to

License and Preinstall Internet Explorer 4.0

As a Condition of Their Windows 95 License

Microsoft also licenses its latest Internet Explorer browser product, IE 4.0, to OEMs as part of its Windows 95 license package. In Internet Explorer 4.0 marketing agreements signed recently with a number of the largest PC OEMs, Microsoft has stated that Internet Explorer 4.0 "will be licensed to [the OEM] as a "Supplement" to Windows 95 pursuant to [the OEM's] existing license agreement for Windows 95." See, e.g., Confidential App. Exhibit 19, Memorandum of Understanding ("MOU") re: Internet Explorer 4.0 between Microsoft and an OEM (at MSV 10034). Although Microsoft believes that its Windows 95 license agreements currently give it the power to require OEMs to license and distribute in the box with their PCs a separate compact disk ("CD-ROM") containing Internet Explorer, it has informed the Antitrust Division that it is not requiring OEMs to do so at this time. See App. Exhibit 12, Kempin Dep., p. 79, line 15 - p. 80, line 21.

Beginning in February 1998, however, Microsoft intends to begin conditioning its Windows 95 license agreements on OEMs actually licensing and preinstalling IE 4.0. See App. Exhibit 12, Kempin Dep., p. 96, lines 1-5. Specifically, in licensing Internet Explorer 4.0 as a "Supplement" to Windows 95, Microsoft intends to invoke terms of the Windows 95 license agreement to require OEMs to license and include IE 4.0 with new PC models shipped after February 1, 1998. At that time, unless restrained by the Court, the terms of Microsoft's Windows 95 license agreement will be conditioned on OEM licensing and preinstallation of Internet Explorer 4.0 (in addition to Internet Explorer 3.0, which will be required continuously up to, and possibly beyond, that time).

3.	Internet Explorer Is an "Other Product" from Windows 95, and

Not an "Integrated Product," for Purposes of the Final Judgment

Internet Explorer possesses a distinct physical and commercial existence of its own, separate and apart from Windows 95 or any other Microsoft operating system. Microsoft's internal documents, public statements, and unambiguous actions in the marketplace demonstrate that Internet Explorer is a separate or "other" product from the Windows 95 operating system, and not "integrated" with it, for purposes of Section IV(E)(i) of the Final Judgment. As detailed below, there is substantial demand for Internet Explorer as a separate product; Microsoft recognizes and has responded directly and distinctively to that demand; Internet Explorer is and can be commercially distributed separately from Windows 95; and Internet Explorer can physically be removed from a PC on which it has been preinstalled along with Windows 95.

The United States anticipates that Microsoft may respond to this Petition by asserting that Internet Explorer is just a component or feature of Windows 95. Regardless of how Microsoft now attempts to label or package Internet Explorer for strategic or legal advantage, Microsoft's business conduct in licensing, distributing, and tracking Internet Explorer in the marketplace tells the true story. Internet Explorer is a separate product, and it does not become an "integrated product" simply because Microsoft chooses to force OEMs to accept it as part of a "package" of software including Windows 95, or chooses to call Internet Explorer a feature of Windows 95 for some purposes, or chooses to include certain software files or APIs in Internet Explorer.

a.	Substantial OEM and End-User Demand Exists for

Internet Explorer and Other Browser Products Separate

From Demand for Windows 95 or Other Operating Systems

There is separate demand for Internet browser products (including Internet Explorer), on the one hand, and Windows 95, on the other. As noted above, some OEMs have requested that Microsoft permit them to remove the version of (or icon for) Internet Explorer packaged with Windows 95. See supra, Section V.C.2.a. There are sound commercial reasons why an OEM might prefer to select Internet browser software and operating system software separately. For example, one OEM executive cites three benefits: first, the importance of avoiding customer confusion that he believes may result from Microsoft's requirement that the OEM license Internet Explorer as part of the Windows 95 package, second, the OEM's desire to choose among browser products independently of the operating system, and third, the benefit to consumers of being able to customize the browser selected to meet unique customer preferences and profiles. See App. Exhibit 5, Browning Decl., ¶¶ 7, 9. At least one OEM for a time deleted the Internet Explorer icon specifically in order to highlight -- over the Microsoft Internet Explorer -- a competing browser product. See, e.g., App. Exhibit 9, Decker Dep., p. 18, lines 5-20. These factors illustrate well the OEM demand for Internet browser products separate from Windows 95.

Moreover, as noted below, PC users commonly demand, and often in fact obtain, Internet browsers as stand-alone products, entirely apart from Windows 95. Whether produced by Microsoft or its competitors, Internet browser products are distributed in numerous ways independent of operating system products, further illustrating the separate demand for the two products.

b.	Microsoft's Actions Demonstrate That It

Recognizes and Responds to the Separate

Demand for Its Internet Explorer Product

i.	Microsoft Markets and Distributes Internet Explorer

As a Stand-Alone Product Through Numerous

Means Independent of Its Windows 95 Product

Microsoft distributes its Internet Explorer software to end users of PCs as a stand-alone product through various means and channels of distribution that are separate from and independent of Windows 95. Microsoft has made each version of Internet Explorer available for PC users to "download" directly onto their computers over the Internet. It has signed distribution agreements with major on-line service providers and numerous Internet Service Providers (firms to which PC users subscribe for the service of connecting their computers to the Internet), which distribute Internet Explorer to their subscribers as a browser product they can use for their Internet access, regardless of which operating system they use. In addition, Microsoft sells CD-ROMs and floppy disks containing Internet Explorer as stand-alone products, in thier own box and labeled as "Internet Explorer," not as a mere feature of or update to Windows 95, at retail software outlets. Microsoft also distributes Internet Explorer in connection with a variety of other non-operating system software application products. Finally, Microsoft even arranges with hardware manufacturers to distribute Internet Explorer along with PC-related hardware devices such as printers. See App. Exhibit 12, Kempin Dep., p. 25, line 13 - p. 26, line 21.

Microsoft's OEM distribution plans for Internet Explorer 4.0 further highlight how separate the Internet Explorer product is from Windows 95. Although Microsoft has strategically chosen to license IE 4.0 to OEMs in conjunction with (as what Microsoft calls a "Supplement" to) Windows 95, it is not part of or integrated with the Windows 95 product. Instead, it is currently distributed to OEMs on a separate CD-ROM -- a different CD-ROM than that containing Windows 95 and its various features and updates -- which OEMs may put in the box with their new PCs. See App. Exhibit 12, Kempin Dep., p. 80, lines 15-21.

When, in February 1998, OEMs lose the ability to choose whether or not to include the IE 4.0 CD-ROM in the box with their PCs, that loss of choice will be unaccompanied by any change in the nature of either Windows 95 or IE 4.0. IE 4.0 and Windows 95, which are plainly separate today, will not become any less separate or any more integrated in February 1998 just because of a Microsoft marketing strategy decision to require OEMs to ship an IE 4.0 CD-ROM in the box with their PCs, or later to preinstall IE 4.0. Microsoft's initial distribution of IE 4.0 and Windows 95 physically separate from each other, like its ongoing distribution of IE 3.0 separate from Windows 95, renders hollow any attempt to describe them as an "integrated product" for purposes of the Final Judgment.

ii.	Microsoft Has Developed and Distributes Versions

of Internet Explorer for Non-Windows 95,

and Indeed Non-Microsoft, Operating Systems

Microsoft has developed and distributed versions of its Internet Explorer 3.0 product for a non-Microsoft operating system, Apple Computer's Macintosh, and has stated its intention soon to offer versions of Internet Explorer 4.0 for Macintosh and Sun's Solaris operating system. The fact that PC users have demanded Internet Explorer for operating systems other than Windows 95, and that Microsoft's Internet browser offerings have responded to this demand, is further evidence that Internet Explorer is a stand-alone product, separate from and not integrated with Windows 95.

iii.	Microsoft Regularly Describes Its Internet Browser as A Separate Product from Windows 95, and Aggressively Markets It Under Its Own Name

Recognizing that there is substantial consumer demand for Internet Explorer separate from any operating system product, Microsoft has chosen to advertise, distribute, and license Internet Explorer as a separate product -- in many cases using the term "product" to describe it -- rather than as a feature of Windows 95. For example, the End User License Agreement for the retail version of Internet Explorer 3.0, which is sold in a box as a stand-alone product, defines the Internet Explorer as the software product. See App. Exhibit 20, Microsoft Internet Explorer Retail End User License Agreement. Additionally, Microsoft's co-marketing and logo program for the Internet Explorer does not mention Windows in its definition of "the product." Instead, "The product name for Microsoft Internet Explorer should appear as 'Microsoft (R) Internet Explorer' at the first and most prominent use in all materials . . . ." App. Exhibit 21, Microsoft Internet Explorer Standard Logo Usage Guidelines (at MSV 0005703).

With the release of Internet Explorer 4.0, Microsoft continues to define the browser as a "product." In its End User License Agreement for Internet Explorer 4.0, presented to PC users when they begin to download IE 4.0 from the Web, Microsoft defines the browser as a "software product," to be used "in conjunction with" Windows 95 -- not as an upgrade or integral part of Windows 95. App. Exhibit 22, Microsoft Internet Explorer Downloading End User License Agreement. Microsoft has also entered into a number of marketing relationships with OEMs specifically to promote Internet Explorer 4.0. The documents memorializing these relationships discuss the OEM promoting the browser as a distinct product, not as a feature of Windows 95. See, e.g., Confidential App. Exhibit 19, MOU between Microsoft and an OEM (at MSV 10034- 38).

iv.	Microsoft Regularly Tracks the Status of

Internet Explorer as a Separate Product

Competing In What Microsoft Identifies

As a Distinct Browser "Space" or "Market"

In addition to frequently describing Internet Explorer as a separate product, Microsoft also views the competition between Internet Explorer and competing browsers as occurring in a distinct, well-recognized browser "space" or, as Microsoft sometimes calls it, "market." Moreover, Microsoft closely tracks customer usage of both Internet Explorer and competing Internet browser products. Its internal documents and public statements make clear that obtaining a large number of Internet Explorer browser users is a critical goal for the company.

For example, as recently as three weeks ago in a speech heralding the rollout of Microsoft's new Internet Explorer 4.0 browser, Microsoft Chairman and CEO Bill Gates embraced the view both that Internet Explorer is a distinct product and that it is competing with other, similar products in a "browser space":

"Certainly, we believe we've made a lot of progress in the browser space. One thing we feel is that with this product, Internet Explorer 4.0, during its lifetime, we will go to over 50 percent market share of browser users. So IE 4 is a major event."

App. Exhibit 23, Bill Gates speech, September 30, 1997, downloaded from Microsoft Internet Website, www.microsoft.com/BillGates/billgates_1/speeches/ie4launch.htm, p. 3.

Similarly, in an Internet audio interview with an industry publication at the time of IE 4.0's release, Yusuf Mehdi, Microsoft's IE 4.0 Product Manager, acknowledged that "[w]e definitely believe that IE 4 is a significant enough product that we're going to do two things. We're going to bring millions of users to the Internet, and we're going to switch a lot of Netscape users over to IE, so that we think in the long run it's going to be [inaudible] that gets us to the leadership position in browser share." App. Exhibit 24, Excerpt of September 30, 1997 C/net audio interview of Yusuf Mehdi, available on the World Wide Web at www.news.com/Radio

/Rams/1997/09/30/ns.ram (3:14 to 3:29 of 28:06 total).

These references recognize and admit that there is demand for Internet browser products separate from demand for operating systems.

v.	Microsoft's Pattern of Conduct with Respect to

Internet Explorer Is Different from Its Treatment of Any Other Operating System "Feature" or "Update"

Microsoft's distribution and licensing strategy with respect to Internet Explorer contrasts starkly with its historical approach to introducing new features and functionality into its operating system products. In general, when Microsoft has offered new features and updates to users of its Windows operating systems, it has done so without significant advertising or marketing, without referring to them as a product separate from Windows, without tracking them in any separate "space" or "market," without making them separately available through a wide variety of distribution channels, and without making them available for non-Microsoft operating systems.

The fact that Microsoft has chosen not to follow the approach it has otherwise consistently followed in integrating other features into its operating system products demonstrates that Internet Explorer and Windows 95 are not an "integrated product." In nearly all other cases, Microsoft has highlighted its conclusion that new features and functionalities are integrated into the operating system by specifically not advertising, marketing, distributing, and tracking those features separately, but instead only doing so for the overall Windows operating system product. By not following that course here with Internet Explorer, Microsoft has demonstrated through its actions its belief to the contrary, has tacitly admitted that Internet Explorer is a separate product, and has undermined any claim it might otherwise have that Internet Explorer and Windows 95 can be considered an "integrated product."

c.	Licensing and Distributing Internet Browser Products Separately from Operating Systems Is the Commercial Norm

Not only does Microsoft itself market and distribute a browser product separately from Windows 95, but so does its closest competitor, in both cases for the very reason that separating the browser from any particular operating system is commercially feasible. Without attaching its browser product to any particular operating system, Netscape has progressively introduced new versions of Navigator that offer users many or all of the same features offered by Internet Explorer, including features providing an alternative user interface. Indeed, Netscape recently announced a new product (code named "Aurora") that would provide much the same features and functions to the PC user as are provided by IE 4.0, without necessarily being linked to any particular operating system. The development and marketing of such products shows, as does Microsoft's distribution of Internet Explorer separate from Windows 95, that it is commercially possible to offer Internet browsers and operating system products separately. It naturally follows that it is commercially feasible not to require OEMs or PC users to license any particular Internet browser as a condition of licensing any particular operating system product.

d.	Licensing and Distributing Internet Explorer

Separately from Windows 95 Is Physically Possible

As OEMs confirm, Internet Explorer 3.0 can be removed readily from PCs on which it has been preinstalled by an OEM without affecting the performance or functioning of the underlying Windows 95 operating system. See App. Exhibit 7, Ransom Dep., p. 13, line 20 - p. 14, line 8; App. Exhibit 5, Browning Decl., ¶ 7. Moreover, particularly given Microsoft's short- term plans for its newest Internet Explorer, IE 4.0 (see supra, Section IV.C.2.b), there is no question that the Internet Explorer product and the Windows 95 product can and do exist separately. PC users can currently choose whether or not to install IE 4.0 on a PC with Windows 95 and obtain the full function of it, just as they would if IE 4.0 were preinstalled by the OEM (as IE 3.0 now is). That Microsoft is offering OEMs and consumers a choice until February 1998 demonstrates that it expects some consumers to operate Windows 95 without IE 4.0. This fact, in turn, indicates both that it is physically possible to keep IE 4.0 and Windows 95 separate and that the two products cannot be considered "integrated."

e.	Conditioning Windows 95 License Agreements On OEMs Licensing And Distributing Internet Explorer Is Not Necessary To Enable Microsoft to "Develop" Any "Integrated Product"

Section IV(E)(i) of the Final Judgment states that nothing in the provision shall in and of itself be construed "to prohibit Microsoft from developing integrated products." (emphasis added). Holding Microsoft in contempt for conditioning the license to Windows 95 on OEMs' licensing Internet Explorer in no way prohibits Microsoft from developing integrated products. To the contrary, the Petition alleges that Microsoft has violated the Final Judgment by the way in which it has marketed and distributed Internet Explorer through OEMs, not by anything Microsoft has done to develop an "integrated product."

Indeed, the language of the proviso to Section IV(E)(i), which focuses on "developing integrated products," makes clear that the proviso was never intended to exclude from the prohibition of that Section forced, joint marketing of separate products, even complementary products like Windows 95 and Internet Explorer, but rather was intended to ensure that the Final Judgment does not prevent the legitimate development of new, single products into which new features or functionality have been truly integrated. In other words, Microsoft can develop whatever products it chooses, but it cannot leverage the monopoly power of Windows 95 to force OEMs to take a non-integrated Internet Explorer if they do not want it.

Providing OEMs with the option not to take Internet Explorer is consistent with the purpose of Section IV(E)(i) as expressed in the Competitive Impact Statement. As described in the CIS, Section IV(E)(i) was intended to prevent Microsoft from extending or protecting its monopoly in any Covered Product. See App. Exhibit 10, CIS, pp. 10-11, 59 Fed. Reg. at 42852. To permit Microsoft to continue to force OEMs to license Internet Explorer would allow it both to extend its Windows monopoly to Internet browsers and to protect that monopoly from the threat, described below (see infra, Sections V.B & V.C), posed by competing browser products.

V.	MICROSOFT'S CONDITIONING OF WINDOWS 95

LICENSES ON OEMS LICENSING INTERNET EXPLORER

IS PRECISELY THE KIND OF ANTICOMPETITIVE

CONDUCT THE FINAL JUDGMENT WAS INTENDED TO PREVENT

A.	The Express Purpose of Section IV(E) of the Final Judgment

Is to Prevent Microsoft from Trying to Protect or Extend Its

Windows Monopoly Through Requiring OEMs

to License or Distribute Other Products Such as Internet Explorer

The overall purpose of the complaint in the prior action, and of the consent decree that became the Final Judgment, was to prevent Microsoft from maintaining its monopoly in the PC operating system market by excluding competitors through unreasonable and anticompetitive licensing practices and thereby deterring the development of competing operating system software. See App. Exhibit 10, CIS at p. 1, 7-8 (59 Fed. Reg. at 42845, 42851). This was also the specific purpose of Section IV(E) of the Final Judgment:

Without these provisions Microsoft could . . . attempt to extend or protect its monopoly in [Windows] by conditioning its licenses on the licensing, purchase or use of other products. . . .

See App. Exhibit 10, CIS at 10, 59 Fed. Reg. at 42852.

The overall purpose of the Final Judgment was confirmed and amplified upon by the United States in its Memorandum of the United States In Support of Motion to Enter Final Judgment and In Opposition To the Positions of I.D.E. Corporation and Amici, filed January 18, 1995 prior to (and urging) entry of the Final Judgment. After describing Microsoft's operating system dominance, the brief continued:

It is important to note, however, that an alternative to Microsoft's operating system might arise at some point, an operating system that either displaces Microsoft's or attracts sufficient users to gain the benefits of increasing returns to the point where the market is divided between the world of Microsoft and the world of this new operating system. The proposed Consent Decree insures that this new operating system, when developed, will have access to the market.

* * * * *

We cannot say when, or indeed whether, such an operating system will succeed in displacing Microsoft, but the rewards for that success are so large that we expect to see continued attempts. We also can say that those who mount such attempts should not have to face the additional artificial barriers created by Microsoft's unlawful license provisions.

Memorandum of the United States In Support of Motion to Enter Final Judgment and In Opposition To the Positions of I.D.E. Corporation and Amici, January 18, 1995, at pp. 24, 26-27 (see also fn. 14 at p. 27, omitted from the quote).

Microsoft's current conduct -- forcing OEMs to license and distribute Internet Explorer as a condition of licensing Windows 95 -- is precisely the sort of anticompetitive behavior the Final Judgment sought to preclude. As described below, Microsoft itself views this conduct as a means of undermining the ability of other browsers to serve as platforms and thereby create effective competition for Windows. Microsoft's coercive conditioning of OEM licenses for Windows 95 on the licensing of Internet Explorer is unnecessary to bring the benefits of browser technology to Windows 95 purchasers, which it could readily do through the non- coercive means of offering OEMs and customers the option of licensing Internet Explorer. If permitted to continue, Microsoft will be able to undermine the very rationale for the Final Judgment, head off the competitive threat posed by competing browser products, and improperly protect its operating system monopoly.

Of course, the United States is not required in this proceeding to prove or even present evidence of Microsoft's intent or of the likelihood of any particular effect or impact from its prohibited activity. All that is required is a showing that Microsoft has knowingly violated the provisions of a lawful decree. See Section IV.A, supra. Nevertheless, the following discussion of the threat that is posed to Microsoft's monopoly by competing browser products, and Microsoft's clear recognition of that threat, should help to put the Petition in context and to demonstrate why Microsoft's conduct violates the purpose (as well as the letter) of the Final Judgment.

B.	Browser Technology Is a Significant Threat

To Microsoft's Windows Operating System Monopoly

Perhaps the greatest significance of Internet browser technology, as distinguished from the legions of other software application products currently available, is its role in a new competitive challenge to Microsoft's monopoly in the PC operating system software market. The distribution and acceptance of competing browser products could threaten Microsoft's Windows monopoly in a variety of ways, in each case by increasing the ability of users to substitute among different operating system products. The threat that competing browsers present to Microsoft's monopoly has two primary aspects: first, the degree to which browsers may become accepted as an interface; and second, the extent to which they can serve as a platform to which applications can be written that are independent of the underlying operating system.

Millions of computer users have embraced Internet browser technology as an intuitive, user-friendly interface to access applications and information from the Internet, any other computer network, or even the hard disk drives of their computers. They can accomplish all of this without interacting with the underlying operating system on the PC (other than to access and launch the browser), and in doing so they reduce their dependence on any particular operating system. Whether a user chooses an Apple Macintosh computer, a PC with Windows 95, a PC with IBM Corporation's OS/2 PC operating system, or some new operating system (which might be less expensive or require less PC memory) developed especially for this purpose, that user is able to activate a browser and, through it, access information and applications from the Internet or other network. The browser interface will be the key to this access, regardless of the underlying operating system.

Browser products also facilitate the use of competing operating system products because they incorporate technology that allows developers to write applications which do not depend on the underlying operating system -- that is, are "platform-independent." As described earlier, developers currently write applications to a specific operating system, such as Windows 95. In order for the application to run on a different operating system, the developer must spend valuable resources to rewrite or "port" the application to the other operating systems. Such resources may be so great that the developer will be unwilling to port the application to other operating systems, or will not do so quickly. Developers therefore end up developing applications primarily for the dominant operating system platform that reaches the most users -- Windows 95. In turn, the availability of a wide range of compatible applications further reinforces Windows 95's monopoly position. Adopting a platform-independent approach to application writing through browsers allows the developer to save such resources, to the potential benefit of operating systems that otherwise would not attract such applications.

In recent months, the computer industry has seen substantial steps toward the realization of platform independence. For example, Sun Microsystems has developed and licensed the "Java" programming language, designed to allow developers to write their applications to run on a computer regardless of what underlying operating system resides on the computer so long as a computer has certain Java-related software (a Java "virtual machine" and Java "class libraries"). IBM Corporation, among others, is currently developing a suite of Java applets that will deliver word processing, spreadsheet, and presentation and graphics functionality in an operating system- independent manner. See generally App. Exhibit 25, R. Smith deposition transcript excerpts, p. 19, lines 10-23. Because Internet browsers incorporate the necessary Java-related software, their success could contribute to the proliferation of platform-independent Java applications and as a result weaken Microsoft's dominance of the operating system market. See, e.g., App. Exhibit 8, Von Holle Dep., p. 31, line 22 - p. 35, line 13; App. Exhibit 12, Kempin Dep., p. 44, line 7 - p. 46, line 24.

C.	Microsoft Perceives Competing Browsers as

Serious Threats to Its Operating System Monopoly

It is clear that Microsoft is concerned about the threat that competing browsers pose to its operating system monopoly. Microsoft's own internal business documents demonstrate that Microsoft fears that the widespread distribution and use of competing browser products may encourage applications software developers to write applications delivered over the Internet or other networks and designed to run on a competing browser, utilizing either browser APIs or the browser's Java Virtual Machine.

In May 1995, Bill Gates, CEO and Chairman of Microsoft, in a memo to his Executive Staff entitled "The Internet Tidal Wave," described the Internet as "the most important single development to come along since the IBM PC was introduced in 1981. It is even more important than the arrival of graphical user interface (GUI)." App. Exhibit 26, Bill Gates, e-mail to the Microsoft Executive Committee, May 26, 1995, p. 1 (at MS6 5004550). In the same memo, Gates recognized the threat browser technology represents to Microsoft's dominance: "A new competitor 'born' on the Internet is Netscape. Their browser is dominant, with 70% usage share, allowing them to determine which network extensions will catch on. They are pursuing a multi- platform strategy where they move the key API into the client [browser] to commoditize the underlying operating system." Id. at p. 4 (at MS6 5004553).

Gates' fear of the threat posed by Netscape and Navigator to Microsoft's operating system monopoly has since been reflected in numerous other internal Microsoft documents. For example, Brad Silverberg, Microsoft's Senior Vice President for the Internet Platform and Tools Division ("IPTD"), characterized the competition between Netscape and Microsoft at an IPTD meeting as follows: "The Internet Battle: This is not about browsers. Our competitors are trying to create an alternative platform to Windows. . . ." App. Exhibit 27, IPTD Division Meeting Presentation, dated April 25, 1996 (at MS6 6005550).

In a separate marketing plan, another Microsoft executive explained in detail the nature of this "battle":

The rise of the Internet has been driven by the success of a series of "platforms" that utilize [Internet protocols such as HTTP] at their core and provide a set of APIs for ISVs [Independent Software Vendors] to develop on top of. By far the most successful platform to date has been Netscape's, with Netscape Navigator on the browser and Netscape Suite Spot on the server. The core threat for Microsoft is the potential for this platform to abstract the Win32 API. For example, if Netscape continues its success in getting ISVs [Independent Software Vendors] and ICVs [Independent Content Vendors] to develop applications for Netscape's client/server API's, these API's could be the most important API's in the future putting Win32 and Microsoft's platform position in jeopardy.

Confidential App. Exhibit 28, Andrew Wright, Manager of Advanced Authoring Tools, Winning @ Internet Content Marketing Plan, dated June 22, 1996 (at MS6 5005709).

Paul Maritz, Group Vice President of Microsoft's Platforms Group, described the issue more simply as "The Problem: Browser Market Share," and explained why "the problem" should matter to Microsoft:

[Web p]ages become applications; Netscape/Java is using the browser to create a "virtual operating system" [that is] no longer a browser, now an environment . . . Windows will become devalued, eventually replaceable?

App. Exhibit 29, P. Maritz, Internet Browsers Presentation, dated February 22, 1996 (at MS6 6006231-32).

Brad Chase, Vice President of Developer Relations & Marketing in the Platforms Group, in a memo exhorting Microsoft marketing managers to "Go for maximum browser share," noted that although the browser is a

no revenue product, . . . you should worry about your browser share, as much as BillG[ates] because: we will loose [sic] the Internet platform battle if we do not have a significant user installed base. The industry would simply ignore our standards. Few would write Windows apps without the Windows user base. [A]t your level, if you let your customers deploy Netscape Navigator, you loose [sic] the leadership on the desktop.

App. Exhibit 30, Memo from B. Chase to FY97 World Wide Marketing Managers Attendees, dated April 4, 1996, Re: FY97 Planning Memo "Winning the Internet Platform Battle," p. 2 (at MS6 5005719).

Finally, Microsoft's Joachim Kempin, in deposition testimony, left little doubt that Microsoft, on the eve of this action, continues to view the success of competing browsers as a threat to Microsoft's operating system. Kempin acknowledges that by adopting a non-Microsoft browser interface, users

might not know if they are on a Unix machine, or a Macintosh, or a Windows machine anymore. Because the next browser might have a totally different interface, and it just can't be in our interest to promote that other interface. . . . I mean if the user gets used to a totally different metaphor, he might not buy a Windows machine anymore. He might just say, oh, now I can buy a Mac, I can buy a Unix machine, I can buy a Nintendo machine.

App. Exhibit 12, Kempin Dep., p. 44, line 20 - p. 45, line 14.

D.	The United States Seeks to Protect the Competitive

Process From Microsoft's Abuse of its Monopoly Power

The United States cannot predict whether browsers will succeed in "commoditizing" operating systems and thereby diminishing Microsoft's market power. Moreover, the United States is not interested in taking sides in the various battles between Microsoft and its competitors. The market should make those decisions and determine those outcomes. This action is intended only to ensure that the market remains able to choose between the competing technologies on their merits and that Microsoft does not use the market power of Windows 95 to distort market choice in its favor, and thereby reinforce its dominance, by requiring OEMs to license its browser product as a condition of licensing Windows 95. What the United States said in January 1995, in urging entry of the Consent Decree that became this Final Judgment, remains true today:

What will happen in the market is anyone's guess: it is not our job to pick winners or losers. It is our job, however, to level the playing field so that Microsoft and its competitors can fight it out in the market, in the best American tradition, with no artificial restraints imposed by anyone. That is what the proposed Consent Decree does.

Memorandum of the United States In Support of Motion to Enter Final Judgment and In Opposition To the Positions of I.D.E. Corporation and Amici, filed on January 18, 1995, at 19- 20.

VI.	MICROSOFT'S NON-DISCLOSURE AGREEMENTS MAY

HAMPER THE ABILITY OF THE COURT TO ENFORCE

THE FINAL JUDGMENT AND OF THE UNITED STATES

TO INVESTIGATE POSSIBLE VIOLATIONS OF IT

Microsoft requires many of the companies and individuals with which it has business relationships, including OEMs, to sign various forms of non-disclosure agreements ("NDAs") or to include non-disclosure provisions in their contracts or other agreements with Microsoft. These NDAs restrict the companies' and individuals' abilities to disclose what Microsoft deems "Confidential Information." Although there are numerous forms of these agreements and their specific terms vary, some define "Confidential Information" quite broadly. In the most extreme cases, "Confidential Information" is defined to include any nonpublic information that Microsoft designates as confidential or that relates to the "marketing or promotion" of any Microsoft product or any Microsoft "business policies or practices." See, e.g., App. Exhibit 31, Microsoft Corporation Non-Disclosure Agreement (Reciprocal), dated March 27, 1997 (at MSV 0004339).

Many Microsoft NDAs include a blanket prohibition on any disclosure of confidential information by signatories to the NDAs to anyone, without exception, such as: "Receiving Party shall not disclose any Confidential Information or Confidential Materials to third parties for five (5) years . . . ." App. Exhibit 31 (at MSV 0004339). In addition, these NDAs at times contain additional language stating that signatories "may disclose Confidential Information or Confidential Materials in accordance with judicial or other governmental order, provided Receiving Party shall give Disclosing Party reasonable notice prior to such disclosure and an opportunity to contest such order, . . ." App. Exhibit 31 (at MSV 0004339).

Microsoft's broad non-disclosure provisions, particularly those as restrictive as the above examples, create the serious potential for hampering the ability of the Court adequately to enforce, and of the United States fully to investigate whether Microsoft is complying with, the Final Judgment. Companies and business-people with direct business dealings with Microsoft or knowledge of its marketing and business practices are precisely the sources most likely to have information about potential Microsoft violations and perhaps to have a business interest in bringing those potential violations to the attention of the authorities. At the same time, many if not most such companies and individuals are likely to be signatories to and therefore bound by Microsoft's restrictive NDAs.

After the United States expressed concern to Microsoft about its NDA provisions and sought correction, Microsoft provided the Antitrust Division with a letter clarifying that it "does not interpret its license agreements or non-disclosure agreements as requiring its licensees or NDA signatories to inform [Microsoft] of any discussions or dealings with the Department of Justice." See App. Exhibit 32, Microsoft letter to Kenneth W. Gaul, dated Sepember 8, 1997.

This concession, while a positive step, is not sufficient to counteract the inhibiting effects of the Microsoft NDAs. First, it is an informal letter and presumably subject to change or withdrawal by Microsoft at any time. Second, whatever usefulness the letter has, that usefulness is limited to instances where the United States first approaches a company or individual and in the process makes them aware of Microsoft's recently stated interpretation.

Third, and most troubling, the letter does not alter the substantial risk that some NDA requirements have chilled, and unless terminated will continue to chill, disclosure of information about possible unlawful Microsoft conduct by companies or individuals that have not been contacted by the government, but are contemplating approaching the government to volunteer information. Such companies will have no way of knowing ahead of time of the existence or substance of Microsoft's waiver letter and thus may be likely to conclude that the blanket prohibitions of their NDA do not permit voluntary disclosure at all. This conclusion would be a natural one, in light of the fact that some NDAs expressly require advance notice to Microsoft of disclosure even in response to court order or compulsory government process. Signatories also might well conclude that, if they wanted to volunteer information to the United States, they could do so only if they in essence confessed to Microsoft, in advance, that they were preparing to report Microsoft's potential misconduct to the Justice Department.

The Final Judgment grants the United States the responsibility and authority to monitor and investigate whether Microsoft is complying with the Final Judgment; this is an inherent purpose of the Judgment. Section V of the Final Judgment provides the United States with various additional tools for conducting necessary investigations to "determine or secure compliance with this Final Judgment."

Given the likely chilling effect of some NDAs and the threat they may pose to unfettered review and enforcement of compliance with the Final Judgment, it is an appropriate and warranted use of the Court's power to order that they not be enforced. The Final Judgment grants the Court the authority to ensure that its Order is followed, and Section VII(A) of the Final Judgment expressly empowers the Court to issue "further orders and directions" to carry out, construe, or enforce compliance with the Judgment. Accordingly, the United States requests that the Court impose relief that voids any existing requirement for NDA signatories to notify Microsoft of any contacts or discussions with, or disclosure of information to, government investigative agencies, that ensures Microsoft informs all NDA signatories that there is no such requirement, and that bars any such requirement in future Microsoft NDAs or other contracts.

VII.	RELIEF REQUESTED

The United States respectfully requests this Court to issue an Order to Show Cause why Microsoft should not be held in civil contempt based on its violation of the Final Judgment. The United States further asks that the Court hold a hearing to determine if additional relief is appropriate to remedy the effects of Microsoft's violation of the Final Judgment. Finally, the United States requests that the Court thereafter grant the relief described in the Petition and enter the proposed order.

Date:	Respectfully submitted,

JOEL I. KLEIN

Assistant Attorney General

A. DOUGLAS MELAMED

Principal Deputy Assistant Attorney General

REBECCA P. DICK

Director of Civil Non-Merger Enforcement

CHRISTOPHER S CROOK

Chief

PHILLIP R. MALONE

STEVEN C. HOLTZMAN

PAULINE T. WAN

KARMA M. GIULIANELLI

MICHAEL C. WILSON

SANDY L. ROTH

Attorneys

Attorneys for the United States