Revisiting the separate products issue.

• Author: Lam, David K.
• Position: United States v. Microsoft

United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998)

The Justice Department's tying claim against Microsoft Corporation boils down to one question: Is Internet Explorer a separate product from Windows 95? In United States v. Microsoft Corp.,(1) the government contended that Microsoft violated a consent decree by illegally tying(2) the sale of its Internet browser, Internet Explorer, to the sale of its operating software, Windows 95. The U.S. Court of Appeals for the District of Columbia, however, held that no tying arrangement existed because the two programs were part of a single, "integrated" software product.(3)

The difference between a single product and two tied products is known as the "separate products issue" in tying law. This Case Note argues that the discussion of the separate products issue in Microsoft was flawed on two levels. On a doctrinal level, the court's separate products test was not "consistent with tying law" as claimed.(4) It failed to adhere to the leading U.S. Supreme Court case on the issue, which requires courts to examine the nature of demand for two products rather than their functional relatedness when resolving the separate products question. On an analytical level, the court's test conflated the definitional question of a tie-in's existence with the question of whether a tie-in should be permissible on economic grounds. It thereby unwisely transformed the separate products test into a role-of-reason test, which directs courts to examine the efficiencies and other benefits of a challenged arrangement.(5) The Microsoft court may have manipulated the separate products test in this manner because of a desire to move judicial analysis away from per se condemnation of tying arrangements.

I

The separate products issue in Microsoft first arose when the government commenced a proceeding to hold Microsoft in civil contempt of a 1994 antitrust consent decree.(6) The decree prohibited Microsoft from entering "any License Agreement in which terms of that agreement are expressly or impliedly conditioned upon ... the licensing of any other [Microsoft product] ... (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products)...."(7) The government contended that Microsoft had violated this decree by tying the sale of Internet Explorer to the sale of Windows 95. The U.S. District Court for the District of Columbia rejected this argument, however, because it found the consent decree to be vague.(8) Nonetheless, it believed that there was a high probability that Microsoft had violated the Sherman Act by conditioning its license of Windows 95 on its license of Internet Explorer. In response, the court issued a preliminary injunction to prohibit this practice.(9)

A three-judge panel of the D.C. Circuit reversed. It unanimously found that the district court had issued the injunction without providing adequate notice.(10) Two of the judges on the panel further argued that the injunction was invalid because it was based on an erroneous reading of the consent decree. The decree forbade Microsoft from conditioning the sale of one product on the sale of another unless the two products added up to an "integrated product."(11) The two-judge majority argued that Internet Explorer and Windows 95 constituted an integrated product rather than a tie of two separate ones since their combination had "facially plausible benefits to its integrated design."(12) It also contended that this finding was "consistent with tying law," citing Areeda's influential treatise, which explains that "new products integrating functionalities in a useful way should be considered single products regardless of market structure."(13) The majority concluded that the government failed to show a reasonable probability of success in its antitrust suit to warrant a preliminary injunction against Microsoft, because a tying arrangement must at a minimum involve two products.

II

After the decision regarding the consent decree, the Justice Department commenced a Sherman Act proceeding against Microsoft, claiming among other things that the company had illegally tied Windows 95 and Internet Explorer in an attempt to monopolize the Internet browser market.(14) The separate products analysis in Microsoft suggests that the D.C. Circuit may reject this claim if and when it hears the claim on appeal. Even though the consent decree did not embody "the entirety of the Sherman Act or even all `tying' law under the Act,"(15) the Microsoft court acknowledged that the decree "emerged from antitrust claims,"(16) and that its understanding of "integrated products" was "consistent with tying law."(17) This suggests that the D.C. Circuit may apply a similar separate products analysis and hold that Windows 95 and Internet Explorer are two parts of an integrated product rather than two tied products.(18) The possibility that the Microsoft analysis will be used in the Sherman Act proceeding makes it important to consider its substantive weaknesses.

III

1. The Doctrinal Flaw of Microsoft

   In Jefferson Parish Hospital District No. 2 v. Hyde,(19) the U.S. Supreme Court held that "the answer to the question whether one or two products are involved turns not on the functional relation between them but rather on the character of demand for the two items."(20) Two products exist when the two product markets are "distinguishable in the eyes of buyers,"(21) and when there is sufficient demand for the tied product separate from the tying product so that it is "efficient" to offer them separately.(22) The functional relatedness of two items is not in itself sufficient to determine whether they constitute one or two products. The Court noted that prior tying cases involved...