UNITED STATES OF AMERICA, Petitioner.
vs.
MICROSOFT CORPORATION, Respondent.

MEMORANDUM AND ORDER:

I. On July 15, 1994, the United States sued Microsoft, charging it with an unlawful monopoly and restraint of trade in the market for personal computer ("PC") operating system software under Sections 1 and 2 of the Sherman Act.

The complaint alleged, among other things, that Microsoft had engaged in multiple anticompetitive marketing practices directed at PC manufacturers who preinstall operating system software on the PCs they produce for retail sale. The parties ultimately agreed, after extensive negotiations, to the terms of the consent decree that resolved most issues.

The government submits that this is the first post-judgment enforcement proceeding is necessitated by what it has lately discovered to be a pervasive and ongoing violation by Microsoft of a provision of the Final judgment. That provision ... in pertinent part, prohibits Microsoft from requiring original equipment manufacturers ("OEMS") of PCs to commit to licensing other Microsoft products in order to obtain licenses to install Microsoft's PC operating system products.

[...] The present controversy arises from Microsoft's practice of including, in its licensing agreements with OEMs, a requirement that, as a condition of acquiring the right to Windows 95, they also accept a product known as the Internet Explorer ("IE"), as Web "browser" that affords the PC user access to the Internet.

[...] In other words, the government charges that Microsoft coerces OEMs to license and distribute the Internet Explorer whether they want to or not.

[...]

II. A critical element of the present dispute, therefore, is whether Internet Explorer is to be deemed as "integrated" component of Windows 95, or, to the contrary, an "other product," distinct and severable from the operating system without otherwise impairing the system's operational integrity.

[...]

III. At the outset the Court is presented only with the limited question of whether it must adjudge Microsoft in civil contempt of the Final Judgment. Given the present record the Court cannot conclude by "clear and convincing evidence" that Microsoft violated a "clear and unambiguous" prohibition found in the consent decree.

[...] In short, Microsoft has demonstrated, at the very least, the ambiguity of the term "integrated product." Microsoft has advanced a plausible interpretation of the term, and has provided a reasonable explanation for its understanding that the consent decree did not preclude Microsoft's insistence that OEMs accept IE as part of Windows 95. The government has not clearly convinced the Court that Microsoft violated a "clear and unambiguous provision of the consent decree.

IV. Although the government has not satisfied the evidentiary burden necessary to sustain a finding of contempt, it does not necessarily follow that Microsoft's licensing practices are in fact in compliance with the terms of the Final Judgment.

Notwithstanding the court's conclusion that Microsoft's interpretation of [the pertinent provision of the earlier consent decree]... is plausible in the light of the circumstances surrounding the negotiation of the consent decree, the court is also not convinced that the interpretation is the correct one. The multifactor test proffered by the government to distinguish integrated products from other products employ criteria applied by other courts in analyzing tying claims generally. Considering the totality of the circumstances surround the initiation, negotiation, and execution of the consent decree, the court is preliminarily inclined to agree with the government's reasons for interpreting the [relevant provision of consent decree] as it does in light of its objective purpose.

To begin with, Microsoft acknowledges that [the consent decree] drafted in contemplation of the possibility that Microsoft was engaged in illegal "tying" -- licensing one product on the condition that a computer manufacturer also agree to license a separate stand-alone product. Considering the purpose of including such a provision in an antitrust consent decree, it seems reasonable to interpret its language as it its generally understood in similar contexts.

[...] In short, and contrary to Microsoft's claim to absolute discretion to [Image]dictate the composition of its operating system software, it appear not unlikely, as a matter of contract, that Microsoft's "unfettered liberty" to impose its idea of what has been "integrated" into its operating system stops at least at the point at which it would violate established antitrust law. At oral argument on Dec. 5, 1997, Microsoft's counsel conceded that the company could not declare that certain of its other products, such as its "Word" and "Excel" software, are "integrated elements" of its operating system. Under Microsoft's [interpretation] it is unclear what distinguishes those particular products from Internet Explorer. Adopting Microsoft's interpretation would appear to render [the relevant provision of the consent decree] essentially meaningless.

V. Disputed issues of technological fact, as well as contract interpretation, abound as the record presently stands.

[...] The Court will permit the parties an appropriate period in which to conduct discovery, following which the court will entertain further proceedings on the merits of the government's claims and its prayer for permanent injunctive relief.

[...] Based on the present record, the government appears to have an substantial likelihood of success on the merits. Microsoft admits that it conditions its Windows 95 license agreements on OEMs agreeing to license and distribute IE, and the government has show that there exists sufficient, independent consumer demand for operating systems and Internet access software "so that it is efficient for a firm to provide" those products "separately," as Microsoft has concededly done.

The balance of harms also favors the issuance of a preliminary injunction.

[...] Beginning in February 1998 (or possibly even earlier), Microsoft intends to require OEMs to license and preinstall IE. Enjoining Microsoft from imposing such conditions will not cause a significant hardship. Microsoft will remain free to market and promote IE 4.0 just as it presently does - or in any other manner as it sees fit - so long as OEMs are given the choice of whether or not to accept this product. Enjoining Microsoft pending from forcing OEMs to accept and preinstall the software code that Microsoft itself now separately distributes at retail as "Internet Explorer 3.0" similarly impose no undue hardship on Microsoft. If, on the other hand, Microsoft continues with its "integration" process in the expectation that its licensing practices will continue to make it even more profitable to do so, the cost of a compulsory unbridling of Windows 95 and IE in the future could be prohibitive.

Finally, the marketplace, and the public generally, will benefit from the issueable of a preliminary injunction. The government believes that Microsoft'' licensing strategy is motivated by a threat Microsoft apprehends in the foreseeable future to its operating system monopoly.

[...] Whether or not the government has correctly divined Microsoft's intentions, the probability that Microsoft sill not only continue to reinforce its operating system monopoly by it licensing practices, but might also acquire yet another monopoly in the Internet browsers market, is simply too great to tolerate indefinitely until the issue is finally resolves. Those practices should be abated until it is conclusively established that they are benign.

[...] For the reasons set forth above, it is, this 11th day of December, 1997,

ORDERED, that the petition of the United States for an order adjudging Microsoft Corporation in civil contempt of the Final Judgment of August 21, 1995, is denied; and it is

FURTHER ORDERED that the prayer for an order striking certain contract language is denied without prejudice; and it is

FURTHER ORDERED that the issues of fact and law raised hereby are referred to the Special Master appointed this date in accordance with a separate order to that end; and it is

FURTHER ORDERED ... that Microsoft Corporation, its officers, agents, servants, employees, attorneys, and all others in active concert or participation with them, are hereby enjoined, and shall cease and desist from and after the date hereof, from the practice of licensing the use of any Microsoft personal computer operating system software (including Windows 95 or any successor version thereof) on the condition, express or implied, that the licensee also license and preinstall any Microsoft Internet browser software (including Internet Explorer 3.0, 4.0, or any successor versions thereof) pending further order of the Court.

Thomas Penfield Jackson U.S. District Judge