[Federal Register Volume 59, Number 160 (Friday, August 19, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-20216] [[Page Unknown]] [Federal Register: August 19, 1994] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF JUSTICE Proposed Final Judgment and Competitive Impact Statement; United States of America vs. Microsoft Corporation Notice is hereby given pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b)-(h), that a proposed Final Judgment, Stipulation, and Competitive Impact Statement have been filed with the United States District Court for the District of Columbia in United States vs. Microsoft Corporation, Civ. No. 94-1564 (SS). The proposed Final Judgment is subject to approval by the Court after the expiration of the statutory 60-day public comment period and compliance with the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b)- (h). The Complaint alleges that Microsoft uses exclusionary and anticompetitive contracts to market certain of its personal computer operating system software products. By these contracts Microsoft has unlawfully maintained its monopoly of personal computer operating systems and has unreasonably restrained trade thereby violating Sections 1 and 2 of the Sherman Act, as amended, 15 U.S.C. Secs. 1, 2. The proposed Final Judgment not only bans Microsoft's unlawful practices, but also contains additional provisions which are prophylactic in nature, and are intended to ensure that the anticompetitive effects of those practices are not replicated through use by Microsoft of other exclusionary practices. The proposed Final Judgment includes four categories of limitations on Microsoft's contracting practices. First, it limits the duration of license agreements for operating system software between Microsoft and personal computer manufacturers. Microsoft is prohibited from entering into any such license with a term exceeding one year, except that a license may include a term permitting the computer manufacturer to renew the agreement for up to one additional year on the same terms and conditions as those applicable in the original license period. Second, the proposed Final Judgment restricts the manner in which Microsoft may charge royalties for the distribution of its operating system software with personal computers. Microsoft may not enter into any ``per processor'' license (i.e., license requiring the computer manufacturer to pay a royalty for each computer shipped with a specified microprocessor). Microsoft's revenue from a license may not be calculated on anything other than a per copy basis (i.e., royalty for each unit of Microsoft operating system software licensed, sold or distributed) or a per system basis (i.e., a royalty for each computer system bearing a particular model name or number). Should Microsoft enter into a per system agreement with a licensee it must provide a statement, the text of which is set forth in the Final Judgment, advising the licensee of its rights under the license. Third, the proposed Final Judgment bans Microsoft from entering into license agreements that prohibit or restrict a personal computer manufacturer from licensing, selling, or distributing competing operating system products. Microsoft may neither condition the licensing of its operating systems on the licensing or use of other products, nor may it enter into any license containing a minimum commitment, nor may it use lump sum pricing. Fourth, the proposed Final Judgment places limits on Microsoft's use of non-disclosure agreements for its operating system products. Microsoft is prohibited from entering into any non-disclosure agreement whose duration extends beyond (a) the commercial release of the covered product, (b) any prior public disclosure of information covered by the agreement authorized by Microsoft, or (c) one year from the date of disclosure of information covered by the agreement to a person subject to the non-disclosure agreement, whichever comes first. Also, non- disclosure agreements may not restrict persons subject to the agreement from developing software products that will run on competing operating systems, provided that such development does not entail the disclosure or use of Microsoft proprietary information during the term of the agreement. Nor may any non-disclosure agreement restrict the activities of persons subject to the agreement to whom no information covered by the agreement has been disclosed. Computer manufacturers that currently have licenses that are inconsistent with any provision of the Final Judgment may, without penalty, terminate the license or negotiate with Microsoft to amend the inconsistent provisions. Otherwise, Microsoft may enforce the license, subject to the following restrictions: (a) if the license is a per processor license, it must be treated as a per system license; and (b) Microsoft may not enforce prospectively any minimum commitment. Public comment is invited within the statutory 60-day comment period. Such comments, and the responses thereto, will be published in the Federal Register and filed with the Court. Written comments should be directed to Richard L. Rosen, Chief, Communications & Finance Section, Antitrust Division, Room 8104, 555 Forth Street NW., Washington, D.C. 20001 (202-514-5621). Copies of the Complaint, proposed Final Judgment and Competitive Impact Statement are available for inspection in Room 3233 of the Antitrust Division, Department of Justice, Tenth Street and Pennsylvania Avenue NW., Washington. D.C. 20530 (202-633-2481) and at the office of the Clerk of the United States District Court for the District of Columbia, Third Street and Constitution Avenue NW., Washington, D.C. 20001. Copies of any of these materials may be obtained upon request and payment of a copying fee. Mark C. Schechter, Deputy Director of Operations, Antitrust Division. In The United States District Court For The District of Columbia, United States of America, Plaintiff, v. Microsoft Corporation, Defendant. Civil Action No. 94-1564, Judge Charles R. Richey July 15, 1994. Complaint (For Violations of Sections 1 & 2 of the Sherman Act) The United States of America, acting under the direction of the Attorney General of the United States, brings this civil action to prevent and restrain the defendant Microsoft Corporation (``Microsoft'') from using exclusionary and anticompetitive contracts to market its personal computer operating system software. By these contracts, Microsoft has unlawfully maintained its monopoly of personal computer (``PC'') operating systems and has unreasonably restrained trade. Virtually all major PC manufacturers find it necessary to offer Microsoft operating systems on most of their PCs. Microsoft's monopoly power allows it to induce these manufacturers to enter into anticompetitive, long-term licenses under which they must pay royalties to Microsoft not only when they sell PCs containing Microsoft's operating systems, but also when they sell PCs containing non-Microsoft operating systems. These anticompetitive contracts help Microsoft maintain its dominance in the PC operating system market. By inhibiting competing operating systems' access to PC manufacturers, Microsoft's exclusionary contracts slow innovation and deprive consumers of an effective choice among competing PC operating systems. These contracts outlined below constitute illegal monopolization and unlawful restraints of trade, and the United States seeks this Court's order declaring Microsoft's anticompetitive contracts illegal and otherwise remedying the unlawful effects of Microsoft's anticompetitive conduct. Jurisdiction, Venue and Commerce 1. This Court has jurisdiction over this matter pursuant to Section 4 of the Sherman Act, 15 U.S.C. Sec. 4, and 28 U.S.C. Secs. 1331, 1337. 2. Venue is proper in this district under Section 12 of the Clayton Act, 15 U.S.C. Sec. 22, and under 28 U.S.C. Sec. 1391 because defendant Microsoft transacts business and is found within this district. 3. Microsoft sells and licenses operating systems for PCs throughout the United States and the world. Microsoft delivers copies of its operating systems to PC manufacturers and retail customers across state lines and international borders. Thus, Microsoft is engaged in, and its activities substantially affect, interstate and foreign commerce. The major developers of other PC operating systems are exclusively U.S. companies. The Defendant Microsoft and Its Products 4. Microsoft is a corporation organized and existing under the laws of the State of Washington, with its principal place of business located at One Microsoft Way, Redmond, Washington. 5. Microsoft develops, licenses, sells and supports several types of software products for PCs, including ``operating systems'' and ``applications.'' 6. PC operating systems control the operation of a computer by managing the interaction between the computer's microprocessor, memory and attached devices such as keyboards, display screens, disk drives, and printers. A PC operating system functions as the ``central nervous system'' of the PC. PC operating system software is designed to work with specific microprocessors, the integrated circuits that function as the ``brain'' of the computer. 7. Most of the personal computers in the world today use the x86 class of microprocessors, originally designed by Intel Corporation. The x86 class includes Intel 286, 386, 486, and Pentium microprocessors, as well as microprocessors manufactured by other companies that use a substantially similar architecture and instruction set. Unless otherwise specified, the term ``PC'' refers to personal computers that use the x86 class of microprocessors. 8. In 1980, Microsoft licensed from another company a PC operating system which it modified and introduced in 1981 as the Microsoft Disk Operating System (``MS-DOS''). According to Microsoft's 1993 Annual Report, as of June 30, 1993, approximately 120 million PCs in the world utilized MS-DOS. 9. In 1985, Microsoft introduced a more sophisticated PC operating system product it calls ``Windows.'' Windows has a ``graphical user interface'' which allows users to give instructions by pointing and clicking on their computer screen with a ``mouse'' or other similar device. Windows also allows users to run more than one application at a time. All versions of Windows released to date require the presence of an underlying operating system, either MS-DOS or a close substitute. Microsoft estimates that over 50 million PCs now use Windows. 10. Applications are software programs that work ``on top of'' PC operating systems to enable users to perform a broad range of functions. Applications communicate through the PC operating system with the computer's hardware. Commonly used applications include word processors and spreadsheets, such as WordPerfect, Lotus 1-2-3, and Quattro Pro among others. At least 50,000 applications now run on MS- DOS and over 5,000 have been written to run on Windows. Microsoft sells a variety of its own very successful and profitable applications. 11. Microsoft markets its PC operating system primarily through original equipment manufacturers (``OEMs''), which manufacture PCs. It also markets through independent, non-exclusive distributors. Microsoft has agreements with virtually all of the major microcomputer OEMs. 12. Microsoft generally distributes MS-DOS only to OEMs. To retail customers, Microsoft generally offers only upgrades for MS-DOS. In the first half of 1994, the share of Windows units sold by Microsoft through the OEM channel was approximately 80%. The Relevant Market and Microsoft's Monopoly Power 13. The relevant product market is personal computer operating systems for the x86 class of microprocessors (hereinafter the ``PC operating system market''). Because operating systems written for other microprocessors will not work on machines with an x86 class microprocessor, OEMs who sell x86 machines and customers who buy such machines cannot use other operating systems. 14. The relevant geographic market is the world. 15. Microsoft has monopoly power in the relevant market and has had monopoly power since at least the mid-1980s. For almost a decade Microsoft has retained an extremely high market share--consistently in excess of 70%. 16. Substantial barriers to entry and expansion exist in the relevant market. One barrier to entry and expansion is the considerable time and expense required to develop, test, and market a new PC operating system. Other interrelated barriers to entry and expansion include: a. the absence of a variety of high quality applications that run on a new operating system, and the difficulty of convincing independent software vendors (``ISVs'') to develop such applications; b. the lack of a sizable installed base of users; and c. the difficulty in convincing OEMs to offer and promote a non- Microsoft PC operating system, particularly one with a small installed base and relatively few applications designed to run on it. 17. These barriers magnify and reinforce each other because the value of an operating system to a consumer is directly related to two factors: the availability of a variety of high quality applications that run on that system, and the number of users who use that operating system and thus are able to share information and work with the system without additional training. ISVs, in turn, tend to develop applications for operating systems with a large installed base of users, and consumers gravitate towards operating systems with a large base of applications. 18. Microsoft's anticompetitive contracting practices described below significantly increase the already high barriers to entry and expansion facing competitors in the PC operating system market. These practices reduce the likelihood that OEMs will license and promote non- Microsoft PC operating systems, make it more difficult for Microsoft's competitors to persuade ISVs to develop applications for their operating systems, and impede the ability of a non-Microsoft PC operating system to expand its installed base of users. Microsoft's Exclusionary and Anticompetitive OEM Licenses Foreclose Access to the OEM Channel by Microsoft's PC Operating System Competitors 19. In 1980, IBM agreed to license the original version of MS-DOS from Microsoft for IBM's PC, which experienced considerable success. Other OEMs also used MS-DOS in order better to emulate the IBM PC. Microsoft quickly dominated and gained a monopoly in the market for PC operating systems. It then entered into a series of exclusionary and anticompetitive contract terms to maintain its monopoly. 20. Because of Microsoft's monopoly position in the marketplace, OEMs believe that they must offer MS-DOS and Windows to their customers. Profit margins in the computer hardware industry are very thin and OEMs want to obtain MS-DOS and Windows at the lowest possible cost. Microsoft has induced many OEMs to execute anticompetitive ``per processor'' contracts for MS-DOS and Windows, even though many would prefer to preserve their freedom to offer PCs with non-Microsoft operating systems. Microsoft's Licenses Impose a Penalty or Tax Paid to Microsoft on OEMs' Use of Non-Microsoft PC Operating Systems 21. Microsoft's licenses impose a penalty or ``tax'' paid to Microsoft upon OEMs' use of competing PC operating systems. ``Per processor'' licenses require OEMs to pay a royalty for each computer the OEM sells containing a particular processor (e.g., an Intel 386 microprocessor) whether or not the OEM has included a Microsoft operating system with that computer. 22. Microsoft's per processor contracts penalize OEMs, during the life of the contract, for installing a non-Microsoft operating system. OEMs that have signed per processor contracts with Microsoft are deterred from using competitive alternatives to Microsoft operating systems. The Contract Length of Microsoft's Anticompetitive Per Processor Contracts Magnifies Its Exclusionary Effects 23. Microsoft further impedes PC operating system competitors by executing long-term contracts with major OEMs, and by requiring minimum commitments and crediting unused balances to future contracts, which effectively extends the contract term and makes it economically unattractive for an OEM to install a non-Microsoft operating system. 24. Microsoft's exclusionary licenses are often for a duration of three years or more--a period of time equal to, or exceeding, the product life cycle of most PC operating system products. Microsoft often extends the term of its OEM licenses through amendment. Thus, Microsoft's anticompetitive per processor contracts can extend to beyond five years. Microsoft's Exclusionary Contracts Foreclose Other PC Operating System Vendors From a Substantial and Critically Important Segment of the Market 25. Access to the OEM channel is critical to the success of a competing operating system. The overwhelming majority of PCs are sold with a pre-installed operating system. Thus, to reach the ultimate consumer of an operating system, it is important that competitors have access to OEMs. Operating system vendors, as well as OEMs, confirm that successful entry is extremely difficult in the absence of ``proper support'' in the OEM channel in the form of public commitments to sell a new operating system. 26. Since 1988, Microsoft has induced major OEMs to execute per processor contracts, many of which extend for several years. These OEMs are critical to the success of a new operating system entrant; it would be virtually impossible for a new entrant to achieve commercial success solely through license agreements with small OEMs that are not covered by Microsoft's per processor agreements. According to Microsoft, in fiscal year 1993, per processor agreements accounted for an estimated 60% of Microsoft's MS-DOS sales to OEMs and 43% of Window sales to OEMs. 27. Competing operating system developers, finding the largest OEMs contractually bound by Microsoft's exclusionary licenses, are disadvantaged in their efforts to bring to the consumer less expensive and/or better quality operating system products. 28. The effect of Microsoft's licensing practices has been to exclude competitors by unreasonable and anticompetitive means and to lessen competition in the relevant market. Microsoft's practices deter OEMs from entering into licensing agreements with competing operating system providers, discourage OEMs who agree to sell non-Microsoft operating systems from promoting those products, and raise the price of computers sold with competing operating systems, thereby depressing the demand and restricting the output of these products. Microsoft's licensing practices have effectively foreclosed a substantial share of the relevant market; they are exclusionary, anticompetitive, and not justified by legitimate business considerations. Microsoft's Anticompetitive Non-Disclosure Agreements 29. ISVs develop applications, which motivate consumers to purchase PCs. Microsoft has sought to have several commercially important ISVs and their employees agree to non-disclosure agreements that would restrict their ability to work with competing PC operating systems as well as restrict their ability to develop competitive products. 30. Microsoft moved to impose these restrictions in connection with its ``beta tests'' of its new operating system, the next version of Windows, code-named Chicago. Microsoft anticipates commercially releasing Chicago in late 1994 or early 1995. Beta tests of new versions of an operating system, which are conducted prior to the commercial release of that new version, help both Microsoft and the ISVs. 31. For the ISVs, the beta tests provide, among other things, critical information about the interfaces in the operating system that connect with applications--information which the ISVs need to write applications that run on the operating system. Early access to the beta tests is especially valuable to the ISVs if they are to be able to release their applications within a short time after the commercial release of a new Microsoft operating system, such as Chicago. 32. For Microsoft, the beta tests enable ISVs, informed experts, and selected members of the media to provide important feedback about the advantages ad drawbacks of the operating system. In addition, the demand for Microsoft's operating systems depends to a significant extent on the availability of applications designed to work with it. Accordingly, it is in Microsoft's interest to provide ISVs early access to beta tests. 33. At the same time, because Microsoft necessarily must disclose certain confidential information during the course of the beta tests, it has legitimate interests in maintaining that confidentiality. In the past, Microsoft has protected its interests through non-disclosure agreements that prohibit those participating in the beta tests from disclosing such confidential information. 34. In connection with its beta tests of Chicago, however, Microsoft sought to impose on certain leading software companies far more restrictive non-disclosure agreements than it had previously used. The terms of these non-disclosure agreements would preclude developers at these companies from working with operating system companies, other competitors of Microsoft, and competing technologies for an unreasonably long period of time. The Anticompetitive Effects of Microsoft's Conduct 35. Microsoft's exclusionary contracting practices have had the effect of excluding competitors on a basis other than competition on the merits and have thereby allowed Microsoft illegally to perpetuate its monopoly in the PC operating system market. 36. Through the unlawful acts and practices described above Microsoft has harmed competition, consumers and innovation: a. Microsoft has unlawfully maintained a monopoly in the PC operating system market. b. Microsoft's exclusionary conduct has significantly impeded the ability of rival operating systems to compete in the PC operating system market. Competitors find it more difficult to convince OEMs to offer and/or promote their product and must incur greater marketing expenses to penetrate the market. Microsoft raised hurdles to fair competition even higher through unreasonably restrictive non-disclosure agreements. c. Microsoft's exclusionary licenses deprive rival PC operating systems of a significant number of sales that they might otherwise secure. These lost sales impede the ability of PC operating systems to develop an installed base sufficient to convince OEMs to bundle the new system with their hardware, to convince ISVs to write applications that run on the new system, and to convince users that the system is, and will remain, a viable alternative to the existing MS-DOS and Windows standard. d. Microsoft's conduct also substantially lengthens the period of time required for competitors to recover their development costs and earn a profit, and increases the risk that an entry attempt will fail. In combination, all of these factors deter entry by competitors and thus harm competition. 37. The harm to competition caused by Microsoft's unlawful conduct harms consumers. OEMs that do offer customers a choice of operating systems may charge customers a higher price for PCs with non-Microsoft operating systems in order to be able to pay the double royalty necessitated by the Microsoft per processor agreements. Thus, users who do not receive a Microsoft operating system are still, indirectly, paying Microsoft. 38. In addition, Microsoft's unlawful conduct has deterred the development of competing operating systems, depriving consumers of a choice of systems with possibly superior features. Similarly, the slower growth of competing operating systems has slowed the development and diffusion of applications designed to work on non-Microsoft operating systems and has limited choices of consumers and users of PCs. 39. Those injured by Microsoft's conduct will continue to suffer such injury unless the relief prayed for herein is granted. First Claim for Relief--Sherman Act Sec. 2 40. Plaintiff realleges and incorporates herein by reference the allegations set forth in paragraphs 1 through 39 above. 41. By engaging in the acts and practices described above, Microsoft has monopolized the market for PC operating systems in the United States. 42. Such conduct constitutes monopolization in violation of Section 2 of the Sherman Act, 15 U.S.C. Sec. 2. Second Claim for Relief--Sherman Act Sec. 1 43. Plaintiff realleges and incorporates by reference the allegations set forth in paragraphs 1 through 39 above. 44. The licensing agreements and unnecessarily restrictive non- disclosure agreements described above constitute contracts and combinations which unreasonably restrain trade in the market for PC operating systems, which affect interstate trade and commerce, in violation of Section 1 of the Sherman Act, 15 U.S.C. Sec. 1. Prayer for Relief Wherefore, Plaintiff Prays For Relief As Follows: 1. That the Court adjudge and decree that Microsoft has monopolized the interstate trade and commerce in the market for PC operating systems in violation of Section 2 of the Sherman Act. 2. That the Court adjudge and decree that Microsoft has entered into unlawful contracts and combinations which unreasonably restrain the trade in interstate commerce in PC operating systems, in violation of Section 1 of the Sherman Act. 3. That Microsoft and all persons, firms and corporations acting on its behalf and under its direction or control be permanently enjoined from engaging in, carrying out, renewing or attempting to engage, carry out or renew, any contracts, agreements, practices, or understandings in violation of the Sherman Act. 4. That plaintiff have such other relief that the Court may consider necessary or appropriate to restore competitive conditions in the markets affected by Microsoft's unlawful conduct. 5. That the plaintiff recover the cost of this action. Dated: July 15, 1994. Anne K. Bingaman, Assistant Attorney General. Robert E. Litan, Mark C. Schechter, Richard L. Rosen, James D. Bates, Assistant U.S. Attorney, Chief, Civil Division, District of Columbia, Washington, DC 20001. Samuel R. Miller, Donald J. Russell, Joyce Bartoo, Robert J. Zastrow, Richard L. Irvine, Peter A. Gray, Justin M. Dempsey, Gilad Y. Ohana, Lawrence M. Frankel, Attorneys, Antitrust Division, U.S. Department of Justice, 555 4th Street NW., (202) 514-2401. United States District Court for the District of Columbia, United States of America, Plaintiff vs. Microsoft Corporation, Defendant. Civil Action No. 94-1564, July 15, 1994. Stipulation It is stipulated by and between the undersigned parties, by their respective attorneys, that: 1. The Court has jurisdiction over the subject matter of this action and over each of the parties hereto, and venue of this action is proper in the District of Columbia. 2. The parties consent that a Final Judgment in the form hereto attached may be filed and entered by the Court, upon the motion of any party or upon the Court's own motion, at any time after compliance with the requirements of the Antitrust Procedures and Penalties Act (15 U.S.C. 16), and without further notice to any party or other proceedings, provided that Plaintiff has not withdrawn its consent, which it may do at any time before the entry of the proposed Final Judgment by serving notice thereof on the Defendant and by filing that notice with the Court; and 3. Defendant agrees to be bound by the provisions of the proposed Final Judgment pending its approval by the Court. If the Plaintiff withdraws its consent or if the proposed Final Judgment is not entered pursuant to this Stipulation, this Stipulation shall be of no effect whatsoever, and the making of this Stipulation shall be without prejudice to any party in this or in any other proceeding. Dated This 15th day of July 1994. For The Plaintiff The United States Of America. Anne K. Bingaman, Assistant Attorney General, Antitrust Division, U.S. Department of Justice. For The Defendant Microsoft Corporation. William H. Neukom, Senior Vice President, Law and Corporate Affairs, Microsoft Corporation. In the United States District Court for the District of the District of Columbia. United States of America, Plaintiff, v. Microsoft Corporation, Defendant. Civil Action No. 94-1564 (SS). Competitive Impact Statement. Received: July 27, 1994, Clerk, U.S. District Court, District of Columbia. Competitive Impact Statement Pursuant to Section 2(b) of the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b)-(h), the United States submits this Competitive Impact Statement relating to the proposed Final Judgment submitted for entry with the consent of defendant Microsoft Corporation in this civil antitrust proceeding. Nature and Purpose of the Proceeding On July 15, 1994, the United States filed a civil antitrust Complaint to prevent and restrain Microsoft Corporation (``Microsoft'') from using exclusionary and anticompetitive contracts to market its personal computer operating system software, in violation of Sections 1 and 2 of the Sherman Act, 15 U.S.C. 1, 2. As alleged in the Complaint, Microsoft has used these contracts to restrain trade and to monopolize the market for operating systems for personal computers using the x86 class of microprocessors, which comprise most of the world's personal computers. As used herein, ``PC'' refers to personal computers that use this class of microprocessor. The Complaint alleges that Microsoft has used its monopoly power to induce PC manufacturers to enter into anticompetitive, long-term licenses under which they must pay Microsoft not only when they sell PCs containing Microsoft's operating systems, but also when they sell PCs containing non-Microsoft operating systems. These anticompetitive, long-term licenses have helped Microsoft to maintain its monopoly. By inhibiting competing operating systems' access to PC manufacturers, Microsoft's exclusionary licenses slow innovation, raise prices, and deprive consumers of an effective choice among competing PC operating systems. The Complaint also alleges that in connection with pre-release testing of a new Microsoft operating system code-named ``Chicago,'' Microsoft sought to impose unreasonably restrictive and anticompetitive non-disclosure agreements on a number of leading developers of applications software products. These non-disclosure agreements would have unreasonably restricted the ability of software developers to work with competing operating systems or to develop competitive products or technologies. The Complaint seeks to prevent Microsoft from continuing or renewing any of the anticompetitive practices alleged to violate the Sherman Act, and thus to provide fair opportunities for other firms to compete in the market for PC operating systems. The United States and Microsoft have agreed that the proposed Final Judgment may be entered after compliance with the Antitrust Procedures and Penalties Act.\1\ Entry of the Final Judgment will terminate this civil action, except that the Court will retain jurisdiction for further proceedings that may be required to interpret, enforce, or modify the Judgment, or to punish violations of any of its provisions. --------------------------------------------------------------------------- \1\The proposed Final Judgment that was filed with the Complaint on July 15, 1994 contained several omissions and inconsistencies in the numbering of paragraphs and subparagraphs. With the Defendant's consent, a corrected version of the Final Judgment is being filed with this Competitive Impact Statement. See Attachment. Paragraph and sub-paragraph numbers in this Competitive Impact Statement refer to the numbers used in the corrected version of the Final Judgment. --------------------------------------------------------------------------- Description of the Practices Involved in the Alleged Violations If this case were to proceed to trial, the United State would prove the following: Microsoft develops, licenses, sells, and supports several types of software products for personal computers, including operating systems and applications. An operating system is software that controls the basic operations of the personal computer. Applications software, such as word processing programs and spread sheets, runs ``on top of'' an operating system to enable the computer to perform a broad range of useful functions. Operating systems are designed to work with specific microprocessors, the integrated circuits that function as the ``brain'' of the computer. Most of the personal computers in the world today use the x86 class of microprocessors, originally designed by Intel, and now including microprocessors manufactured by other companies that use a substantially similar architecture and instruction set. Original equipment manufacturers (``OEMs'') that sell PCs and customers who buy such machines cannot use operating systems written for other microprocessors. In 1981, Microsoft introduced a PC operating system called the Microsoft Disk Operating System (``MS-DOS''), the original version of which Microsoft licensed to IBM for use in IBM's PC. As IBM's PC experienced considerable commercial success, other OEMs also used MS- DOS in order better to emulate the IBM PC. In 1985, Microsoft introduced ``Windows,'' a more sophisticated PC operating system product designed for use in conjunction with MS-DOS. Windows allowed users to give instructions with a ``mouse'' or similar device and also to run more than one application at a time. Microsoft quickly gained a monopoly in the market for PC operating systems worldwide. For almost a decade, Microsoft's market share has consistently exceeded 70%.\2\ --------------------------------------------------------------------------- \2\In 1993, Microsoft's MS-DOS operating system constituted approximately 79% of the operating systems sold to PC manufacturers. PC-DOS accounted for approximately 13% of such sales, OS/2 constituted approximately 4%, DR-DOS constituted approximately 3%, and Unix operating systems constituted approximately 1%. A chart showing these market shares is attached as Exh. 1. --------------------------------------------------------------------------- Development, testing, and marketing of a new PC operating system involves considerable time and expense. A new operating system faces additional barriers to entry, including the absence of a variety of high quality applications to run on the system; the small number of people trained on and using the system, which discourages customers from buying it and software companies from writing applications to run on it; and, since the overwhelming majority of PCs are sold with a pre- installed operating system, the difficulty of convincing OEMs to offer and promote the system. Microsoft has used exclusionary and anticompetitive contract terms to maintain its monopoly. OEMs believe that a substantial portion of their customers will want a PC with MS-DOS and Windows, and therefore feel that they must be able to offer their customers MS-DOS and Windows. With thin profit margins, OEMs want to obtain these products at the lowest possible cost. Beginning in 1988, and continuing until July 15, 1994, Microsoft induced many OEMs to execute anticompetitive ``per processor'' licenses. Under a per processor license, an OEM pays Microsoft a royalty for each computer it sells containing a particular microprocessor, whether the OEM sells the computer with a Microsoft operating system or a non-Microsoft operating system. In effect, the royalty payment to Microsoft when no Microsoft product is being used acts as a penalty, or tax, on the OEM's use of a competing PC operating system. Since 1988, Microsoft's use of per processor licenses has increased. In fiscal year 1993, per processor licenses accounted for an estimated 60% of MS-DOS sales to OEMs and 43% of Window sales to OEMs.\3\ Collectively, the OEMs who have such per processor contracts are critical to the success of competing operating system vendors, but those OEMs effectively are foreclosed to Microsoft's competitors. --------------------------------------------------------------------------- \3\Per processor licenses accounted for an increasing proportion of Microsoft's operating system sales in the 1988-1993 period. Twenty per cent of all units of MS-DOS that were sold to OEMs in FY 1989 were sold pursuant to per processor licenses. That percentage increased to 22% in FY 1990; 27% in FY 1991; 50% in FY 1992; and to 60% in FY 1993. A chart showing this increasing use of per-processor licenses is attached as Exh. 2. --------------------------------------------------------------------------- Microsoft has further foreclosed the OEM channel through the use of long-term contracts with major OEMs, some expiring as long as five years from their original negotiation date. In some cases, these contracts have left OEMs with unused balances on their minimum commitments, which Microsoft can allow to be used if the contract is extended, but which would be forfeited if the OEM does not extend the contract. These practices have allowed Microsoft to extend the effective duration of its OEM contracts, further impeding the access of PC operating system competitors to the OEM channel. In addition to using anticompetitive OEM licenses, Microsoft has also employed anticompetitive restrictions in certain of its non- disclosure agreements (``NDAs''). Microsoft anticipates commercially releasing Chicago, the next version of Windows, in late 1994 or early 1995. In preparation for its release, Microsoft has allowed certain third parties, including independent software vendors (``ISVs'') who write applications, to have access to pre-release versions of Chicago, a process known in the software industry as ``beta testing.'' This permits Microsoft to receive feedback from the beta testers, and the ISVs to begin writing applications for Chicago prior to its release. In connection with beta testing Chicago, Microsoft employed, as it has in prior beta tests, NDAs prohibiting disclosure of confidential information. In this instance, however, Microsoft sought to impose on certain leading software companies far more restrictive NDAs than it had previously used. These NDAs would have precluded developers from working on competitive products and technologies for an unreasonably long period of time. Through these practices, Microsoft has excluded competitors by unreasonable and anticompetitive means, thereby lessening competition and maintaining a monopoly in the PC operating system market. Microsoft's licensing practices deter OEMs from entering into licensing agreements with operating system rivals and discourage OEMs who agree to sell non-Microsoft operating systems from promoting those systems. By depriving rivals of a significant number of sales that they might otherwise secure, Microsoft makes it more difficult for its rivals to convince ISVs to write applications for their systems, for OEMs to offer and promote their systems, and for users to believe that their systems will remain viable alternatives to MS-DOS and Windows. Microsoft's exclusionary contracts harm consumers. OEMs that sign Microsoft's exclusionary licenses but offer consumers a choice of operating systems may charge a higher price, in order to cover the double royalty, for PCs using a non-Microsoft operating system. Even consumers who do not receive a Microsoft operating system still pay Microsoft indirectly. Thus, Microsoft's licensing practices have raised the cost of personal computers to consumers. Microsoft's conduct also substantially lengthens the period of time required for competitors to recover their development costs and earn a profit, and thereby increases the risk that an entry attempt will fail. In combination, all these factors deter entry by competitors and thus harm competition. By deterring the development of competitive operating systems, Microsoft has deprived consumers of a choice of potentially superior products. Similarly, the slower growth of competing operating systems has retarded the development of applications for such systems. Explanation of the Proposed Final Judgment The proposed Final Judgment will end Microsoft's unlawful practices that restrain trade and perpetuate its monopoly power in the market for PC operating systems. In addition, the proposed Final Judgment contains provisions that are remedial in nature and designed to assure that Microsoft will not engage in the future in exclusionary practices designed to produce the same or similar effects as those set forth in the Complaint. In particular, Sections IV (A), (C), and (F) prohibit Mirosoft's use of the specific exclusionary practices alleged in the complaint-- ``per processor'' contracts, lengthy terms, and minimum commitments-- that foreclose competing PC operating system vendors from much of the OEM channel. Sections IV (K)-(L) prohibit the use of anticompetitive non-disclosure agreements in conjunction with Mirosoft's distribution of pre-commercial releases of operating system software products. Sections IV (B), (E), (G), and (H) impose prohibitions that go beyond the alleged exclusionary practices in order to ensure that Microsoft's future contracting practices--not challenged here because not yet used--do not unreasonably impede competition. Sections IV (J) and (M) are designed to bring existing contracts into immediate compliance with the proposed Final Judgment. Scope of the Final Judgment The injunctions in Section IV generally apply to ``covered products'' which are defined, in Section II(A), as the binary code of MS-DOS 6.22; Microsoft Windows 3.11; Windows for Workgroups 3.11; predecessor versions of those products; the product currently code- named ``Chicago'' (the planned successor to Microsoft Windows 3.11); and other successor versions of or products marketed as replacements for the aforementioned products. This definition includes all Microsoft's PC operating system products in which the defendant currently possesses a substantial degree of market power. The definition does not encompass and specifically excludes, Windows NT Workstation and Windows NT Advanced Server, neither of which has a significant share of a relevant market at this time. The definition of ``covered product'' was drafted with the recognition that Microsoft will continue to modify its operating system products throughout the duration of the Final Judgment. The prohibitions in the decree will apply to the successor and replacement products of those existing operating system products that have substantial market power. The decree will govern the licensing of such products if they are made available as stand-alone products to OEMs pursuant to license agreements, or as unbundled products that perform operating system software functions now embodied in the specifically listed existing products. Moreover, the decree will govern the licensing of successor versions of or products marketed as replacements for MS-DOS 6.22, Microsoft Windows 3.11, Windows for Workgroups 3.11, and ``Chicago,'' even if such successor or replacement products could also be characterized as successors or replacements of operating system software products that are not covered, such as windows NT Workstation or Windows NT Advanced Server. Prohibition of the Licensing Violations The three anticompetitive factors of Microsoft's license agreements that are challenged in the complaint--the excessive duration of those agreements, the requirement of royalty payments on a ``per processor'' basis, and large minimum commitments--are addressed principally in Sections IV(A), IV(C) and (IV)(F) of the Final Judgment. Duration: Section IV(A) limits the duration of Microsoft's license agreements with OEMs to one year, with OEMs having the option to renew a license for one additional one year term on the same terms and conditions as in the first year. This limitation on the duration of license agreements, along with the safeguards provided in Section IV(G), will ensure that vendors of competing operating systems will have regular and frequent opportunities to attempt to market their products to OEMs. Absent such opportunities, Microsoft's competitors might be unable to reach the level of market penetration needed for profitable operation in a reasonable period of time, even if they are offering products that are deemed superior by those customers who have an opportunity to buy them. Per Processor Licenses: Section IV(C) prohibits the use of per processor licenses.\4\ Section II(K) defines per processor licenses as licenses that require the OEM to pay a royalty for all personal computer systems that contain specified microprocessors. As noted above, the requirement to pay a royalty to Microsoft on the sale of a PC that has a non-Microsoft operating system is comparable, in its economic effect, to the imposition of a ``tax'' on the competing operating system. Per processor licenses are also very similar to exclusive dealing or requirements contracts; the OEM in effect is obtaining the right to use Microsoft's operating system, and is paying an operating system royalty, for all of its operating system ``requirements'' for use on PCs using the designated microprocessors. --------------------------------------------------------------------------- \4\Section IV(J)(1) converts all per processor licenses to per system licenses, except those models which an OEM excludes, which will thereafter be subject to the limitations imposed on Microsoft by Section IV(G). --------------------------------------------------------------------------- Minimum Commitments: Section IV(F) will bar Microsoft from entering into any license agreement containing a minimum commitment.\5\ While minimum commitments are not in and of themselves illegal, they can be used to achieve a similar effect as that accomplished through per processor licenses or exclusive dealing contracts. If the minimum commitment is greater than the number of units of Microsoft software that the OEM expects or would otherwise desire to use at any time during the term of the contract, the minimum commitment creates a disincentive for an OEM to make incremental purchases of non-Microsoft operating systems. In that context, the minimum commitment also operates in effect to require a royalty payment to Microsoft, even for PCs that use a non-Microsoft operating system. This effect will be ended by Section (IV)(F). --------------------------------------------------------------------------- \5\Section IV(J)(2) prohibits Microsoft from prospectively enforcing minimum commitments in existing license agreements. --------------------------------------------------------------------------- Restoring Competition to the Market Through Prophylactic Additional Relief The proposed Final Judgment not only bans Microsoft's unlawful practices, but also contains additional provisions which are prophylactic in nature, and are intended to ensure that the anticompetitive effects of those practices are not replicated through use by Microsoft of other exclusionary practices. Microsoft Prohibited From Limiting OEM Sales of Competing Operating System Products: Section IV (B) bars Microsoft from entering into license agreements that prohibit or restrict an OEM from licensing, selling, or distributing competing operating system products. In addition, Section IV (E) prohibits Microsoft from expressly or impliedly conditioning its licenses of operating systems on the licensing, purchase, use or distribution not only of other covered products, but also any other Microsoft product, or non-Microsoft product. Without these provisions Microsoft could force OEMs to purchase covered products and thus accomplish anticompetitive effects similar to those achieved through its unlawful licensing practices, or attempt to extend or protect its monopoly in any covered product by conditioning its licensing, purchase or use of other products. Microsoft Limited to Per Copy and Per System Licenses: Sections IV (D) and IV (G) require Microsoft to use either ``per copy'' or ``per system'' licenses. Per copy licenses, if used in conjunction with pro- competitive volume discounts, pose few competitive concerns. Per system licenses, if not carefully fenced in, could be used by Microsoft to accomplish anticompetitive ends similar to ``per processor'' licenses. However, if an OEM easily can designate models not subject to a per system license, it can use non-Microsoft operating systems on those models without incurring a royalty obligation to Microsoft. If an OEM need not pay a royalty to Microsoft for anything but the number of copies of the Microsoft operating system that it actually uses, that OEM will not be deterred from licensing, purchasing or using competing operating system products. Restriction on Per System Licenses: The Final Judgment also places restrictions on the use of per system licenses to ensure that they are not used in an exclusionary manner. In particular, Section IV (G) specifies that per system licenses must allow the licensee to create ``new systems'' that can be sold without incurring a royalty obligation to Microsoft if they do not utilize a Microsoft product. Under Section IV (G), an OEM need only designate a new model name or number to create a ``new system.'' Microsoft may not require the OEM even to notify Microsoft of the creation of a new system; nor may Microsoft impose requirements relating to the marketing or advertising of a new system, or penalize an OEM for creating a new system. Section IV (G)(4) requires Microsoft to notify within 30 days following entry of this Final Judgment all existing OEM licensees under per system licenses and all OEM licensees with per processor licenses who choose to let them to be converted to per system licenses (a provision discussed below) of their rights to create new systems that will not be subject to any existing per system license. This notice provision ensures that existing licensees promptly know of their rights to avoid royalty payments under per system contracts if they choose to create new systems. Microsoft Prohibited From Using Lump Sum Pricing: Section IV (H) also serves a prophylactic function, prohibiting the use of lump sum pricing in license agreements for covered products. As defined in Section II (F), lump sum pricing is any royalty payment that does not vary with the number of copies of the covered product (under per copy licenses) or the number of personal computer systems (under per system licenses) that are licensed, sold, or distributed by the OEM. This restriction, like the prohibitions on minimum commitments and requirements contracts, restricts conduct that could be used by Microsoft to achieve effects comparable to the effects of the conduct challenged by the government, and for that reason is enjoined.\6\ --------------------------------------------------------------------------- \6\If a license agreement established a minimum commitment greater than the OEM's requirements for operating systems (an agreement that would be prohibited under this decree), the minimum commitment would constitute, in effect, a lump sum payment. Regardless of the number of copies distributed by the OEM, its royalty payment to Microsoft would not vary. A lump sum pricing arrangement imposed by a monopolist that allowed unlimited use of the licensed product for a single fee calibrated to the anticipated total operating system needs of a particular OEM would also produce a similar economic effect as a requirements contract or a per processor license: the OEM would owe the same royalty to Microsoft whether it chose to use a Microsoft operating system on all of the PCs it sold, or only on some of the PCs it sold, and would, in effect, ``pay twice'' if it chose to purchase a non-Microsoft operating system for some of its PCs. --------------------------------------------------------------------------- Neither Section IV (H) nor any other provision of the proposed Final Judgment prohibits the use of royalty rates, including rates embodying volume discounts, agreed upon in advance with respect to each individual OEM, each specific version or language of a covered products, and each designated personal computer system model. Nothing in the Final Judgment, however, in any way sanctions Microsoft structuring any volume discount whose purpose or effect is to impose de facto requirements contracts or exclusive arrangements on the OEM. As discussed below in connection with alternatives to the proposed Final Judgment, given Microsoft's monopoly power in operating systems, such practices can violate the antitrust laws. Transition Rules In the Stipulation consenting to the entry of the proposed Final Judgment, Microsoft agreed to abide by the provisions of the proposed Final Judgment immediately upon the filing of the Complaint, i.e., as of July 15, 1994. Among other things, the transition provisions described herein will require Microsoft to abide by the foregoing limitations and prohibitions when entering into any license agreements with OEMs after July 15, 1994. Certain additional provisions of the proposed Final Judgment also apply to existing license agreements that are inconsistent with the proposed Final Judgment's requirements for new license agreements. Under Section IV (I), existing OEM licensees may terminate or negotiate with Microsoft to amend their agreements to make them consistent with the requirements of the Final Judgment. Section IV (J) provides that if an OEM chooses not to exercise either of these options, Microsoft must abide by the following rules. First, under Section IV (J)(1), a per processor license must be treated as a ``per system'' license' OEM models that contain the microprocessor(s) specified in such a per processor license will be considered to be covered by the ``per system'' license unless the OEM opts in writing to exclude such model from coverage. As already noted, OEMs may freely sell PCs with non-Microsoft operating systems, and avoid any obligation to pay royalties to Microsoft under a per system license, simply by designating such PCs as a new system with a separate model number or name. Second, under Section IV (J)(2), Microsoft may not enforce any minimum commitment in an existing license agreement. These provisions further two consistent goals. Opportunities for competition in the PC operating system market are fostered by a rapid end to the unlawful practices embodied in existing licenses. At the same time, the transition rules avoid creating hardships for OEMs by not unnecessarily disrupting established commercial relationships with Microsoft. Indeed, OEMs are not required to terminate or amend their existing contracts with Microsoft; the choice to do so is theirs alone. Microsoft, however, may not enforce the per processor or minimum commitment features of any existing contract. Providing OEMs with this choice minimizes the costs of the transition from existing license agreements that are inconsistent with the decree to new license agreements, while ensuring that any unavoidable transition costs be borne largely by Microsoft. To ensure that existing licensees learn of their rights under the proposed Final Judgment, Section IV (M) requires Microsoft to provide a copy of the Final Judgment to all OEMs with which it has license agreements, except for those who have licenses only under Microsoft's Small Volume Easy Distribution program or the Delivery Service Partner program. Non-Disclosure Agreements Finally, the proposed Final Judgment contains provisions that prevent Microsoft from imposing unlawfully restrictive NDAs on developers of applications software. Sections IV(K)(l) limits the duration of any NDA to the earliest of (a) the commercial release of the product covered by the NDA, (b) an earlier public disclosure of the information covered by the NDA, or (c) one year after the information is disclosed to the person subject to the NDA. Section IV(K)(2) provides that NDAs may not restrict subject parties from developing software products that will run on competing operating systems, if such development does not entail the use or disclosure of Microsoft proprietary information during the term of the NDA. In combination, these provisions recognize that whatever Microsoft's legitimate interest in protecting the confidentiality of proprietary information covered by the NDAs, the need for any such protection must be balanced against the competitive consequences of any restriction imposed on others concerning disclosure and use of the information. The proposed Final Judgment ensures that any NDA imposed by Microsoft will not extend beyond the point that the information has been released to the public or has otherwise been in the hands of parties for more than one year. Section IV(L) requires that the form of all standard NDAs must be approved by a Microsoft corporate officer, and that non-standard language in an NDA relating to matters covered in Section (K) must be approved by a Microsoft senior attorney. These provisions are designed to ensure that NDAs will be reviewed by company officials mindful of the requirements of the Final Judgment. Enforcement Section V of the proposed Final Judgment establishes standards and procedures by which the Department of Justice may obtain access to documents and information from Microsoft related to its compliance with the Final Judgment. In particular, Section V(D) contains provisions under which the Department can obtain information and documents relating to any Undertaking by or Decision against Microsoft arising from parallel antitrust proceedings of the Directorate-General for Competition of the European Commission (``DG-IV''). This provision will allow the Department to coordinate its monitoring and enforcement of compliance of the Final Judgment with DG-IV's monitoring and enforcement of parallel provisions contained in an Undertaking with DG-IV signed by Microsoft on July 15, 1994. Duration Section VI of the proposed Final Judgment provides that the Final Judgment will expire on the seventy-eighth month after its entry. Jurisdiction will be retained by the Court to conduct further proceedings relating to the Final Judgment, as specified in Section VI. Remedies Available to Potential Private Litigants Section 4 of the Clayton Act, 15 U.S.C. Sec. 15, provides that any person who has been injured as a result of conduct prohibited by the antitrust laws may bring suit in federal court to recover three times the damages suffered, as well as costs and reasonable attorney's fees. Entry of the proposed Final Judgment will neither impair nor assist the bringing of such actions. Under the provisions of Section 5(a) of the Clayton Act, 15 U.S.C. Sec. 16(a), the Judgment has no prima facie effect in any subsequent lawsuit that may be brought against the defendant in this matter. Procedures Available for Modification of the Proposed Judgment As provided by the Antitrust Procedures and Penalties Act, any person believing that the proposed Final Judgment should be modified may submit written comments to Richard L. Rosen, Chief, Communications and Finance Section, United States Department of Justice, Antitrust Division, 555 4th Street N.W., Room 8104, Washington, D.C. 20001, within the 60-day period provided by the Act. These comments, and the Department's responses, will be filed with the Court and published in the Federal Register. All comments will be given due consideration by the Department of Justice, which remains free to withdraw its consent to the proposed Final Judgment at any time prior to entry. If the Department does not withdraw its consent to the proposed Final Judgment, it will file with the Court a Certificate of Compliance after the requirements of the Antitrust Procedures and Penalties Act have been satisfied. The Court then must determine whether the proposed decree is in the public interest, pursuant to Section 5(e) of the Clayton Act, 15 U.S.C. Sec. 16(e).\7\ --------------------------------------------------------------------------- \7\In making this public interest determination, ``[t]he balancing of competing social and political interests affected by a proposed antitrust consent decree must be left, in the first instance, to the discretion of the Attorney General. The court's role in protecting the public interest is one of insuring that the government has not breached its duty to the public in consenting to the decree. The court is required to determine not whether a particular decree is the one that will best serve society, but whether the settlement is `within the reaches of the public interest.''' United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir.), cert. denied, 454 U.S. 1083 (1981) (citations and internal quotations omitted). Accord United States v. Western Electric Co., 993 F.2d 1572, 1576 (D.C. Cir. 1993); United States v. American Tel. and Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983). --------------------------------------------------------------------------- Alternatives to the Proposed Final Judgment In addition to the remedies provided in the proposed Final Judgment, the Department also considered whether to require limitations on the manner in which Microsoft could structure volume discount pricing arrangements for covered products. While the Department recognizes that volume discount pricing can be and normally is pro- competitive, volume discounts also can be structured by a seller with monopoly power (such as Microsoft) in such a way that buyers, who must purchase some substantial quantity from the monopolist, effectively are coerced by the structure of the discount schedule (as opposed to the level of the price) to buy all or substantially all of the supplies they need from the monopolist. Where such a result occurs, the Department believes that the volume discount structure would unlawfully foreclose competing suppliers from the marketplace--in this case, competing operating systems--and thus may be challenged. The Department ultimately concluded that it would not require provisions in the Final Judgment to attempt to proscribe in advance the various means by which Microsoft could attempt to structure volume discounts as a means to thwart competition rather than as a means of promoting competition. The Department reached this conclusion because it does not have evidence that Microsoft has, to date, in fact structured its volume discounts to achieve anticompetitive ends. The Department did, however, communicate to Microsoft its concern and stated its intent to initiate an investigation and antitrust enforcement proceeding, if warranted, should Microsoft adopt anticompetitive volume discount structures in its future license agreements. Given the procompetitive impact of the provisions of the proposed Final Judgment, the normally procompetitive nature of volume discount pricing, and the absence of any evidence that Microsoft has used volume discounting in an anticompetitive manner to date, the Department believes that this resolution is appropriate on the record at this time. Another alternative to the proposed Final Judgment would be a full trial of this case. The Department of Justice believes that such a trial would involve substantial cost to the United States and is not warranted since the proposed Final Judgment provides all of the relief that the United States seeks in its Complaint and includes substantial additional prophylactic measures as well. Determinative Materials and Documents No materials or documents of the type described in Section 2(b) of the Antitrust Procedures and Penalties Act, 15 U.S.C. Sec. 16(b), were considered in formulating the proposed Final Judgment. Dated: July 27, 1994. Respectfully submitted, Anne K. Bingaman, Assistant Attorney General, Antitrust Division. Donald J. Russell, U.S. Department of Justice, Antitrust Division, Communications & Finance Section, Judiciary Center Building, 555 Fourth Street, N.W., Washington, DC 20001, (202) 514-5814. United States District Court for the District of Columbia, United States of America, Plaintiff, v. Microsoft Corporation, Defendant. Civil Action No. 94-1564 (SS) Final Judgment Whereas Plaintiff, United States of America, having filed its Complaint in this action on July 15, 1994, and Plaintiff and Defendant, by their respective attorneys, having consented to the entry of this Final Judgment without trial or adjudication of any issue of fact or law; and without this Final Judgment constituting any evidence or admission by any party with respect to any issue of fact or law; Now, Therefore, before any testimony is taken, and without trial or adjudication of any issue of fact or law, and upon consent of the parties, it is hereby Ordered, Adjudged and Decreed as follows: I. Jurisdiction This Court has jurisdiction of the subject matter of this action and of the person of the Defendant, Microsoft Corporation (``Microsoft''). The Complaint states a claim upon which relief may be granted against the Defendant under Sections 1 and 2 of the Sherman Act, 15 U.S.C. Secs. 1, 2. II. Definitions (A) Covered Product(s) means the binary code of (1) MS-DOS 6.22, (2) Microsoft Windows 3.11, (3) Windows for Workgroups 3.11, (4) predecessor versions of the aforementioned products, (5) the product currently code-named ``Chicago,'' and (6) successor versions of or replacement products marketed as replacements for the aforementioned products, whether or not such successor versions or replacement products could also be characterized as successor versions or replacement products of other Microsoft Operating System Software products that are made available (a) as stand-alone products to OEMs pursuant to License Agreements, or (b) as unbundled products that perform Operating System Software functions now embodied in the products listed in subsections (1) through (5). The term ``Covered Products'' shall not include ``Customized'' versions of the aforementioned products developed by Microsoft; nor shall it apply to Windows NT Workstation and its successor versions, or Windows NT Advanced Server. (B) Customized means the substantial modification of a product by Microsoft to meet the particular and specialized requirements of a final customer of a computer system. It does not include the adaptation of such a product in order to optimize its performance in connection with a Personal Computer System manufactured by an OEM. (C) Duration means, with respect to a License Agreement, the period of time during which an OEM is authorized to license, sell or distribute any of the Covered Products. (D) A License Agreement means 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). (E) A Minimum Commitment means an obligation of an OEM to pay Microsoft a minimum amount under a License Agreement, regardless of actual sales. (F) Lump Sum Pricing means any royalty payment for a Covered Product that does not vary with the number of copies of the Covered Product that are licensed, sold or distributed by the OEM or of Personal Computer Systems distributed by the OEM. (G) New System means a system not included or designated in a Per System License. (H) NDA means any non-disclosure agreement for any pre-commercial release of a Covered Product that imposes any restriction on the disclosure or use of any such pre-commercial release of any Covered Product or any information relating thereto. (I) OEM means an original equipment manufacturer or assembler of Personal Computer Systems or Personal Computer System components (such as motherboards or sound cards) or peripherals (e.g., printers or mice) that is a party to a License Agreement. (J) Per Copy License means any License Agreement pursuant to which the OEM's royalty payments are calculated by multiplying (1) the number of copies of each Covered Product licensed, sold or distributed during the term of the License Agreement, by (2) a per copy royalty rate agreed upon by the OEM and Microsoft, which rate may be determined as provided in Section IV (H). (K) Per Processor License means a License Agreement under which Microsoft requires the OEM to pay Microsoft a royalty for all Personal Computer Systems that contain the particular microprocessor type(s) specified in the License Agreement. (L) Per System License means a License Agreement under which Microsoft requires the OEM to pay Microsoft a royalty for all Personal Computer Systems which bear the particular model name(s) or number(s) which are included or designated in the License Agreement by the OEM to Microsoft, at the OEM's sole option and under the terms and conditions as set forth herein. (M) Personal Computer System means a computer designed to use a video display and keyboard (whether or not the video display and keyboard are actually included) which contains an Intel x86, or Intel x86-compatible microprocessor. (N) Operating System Software means any set of instructions, codes, and ancillary information that controls the operation of a Personal Computer System and manages the interaction between the computer's memory and attached devices such as keyboards, display screens, disk drives, and printers. III. Applicability This Final Judgment applies to Microsoft and to each of its officers, directors, agents, employees, subsidiaries, successors and assigns; and to all other persons in active concert or participation with any of them who shall have received actual notice of this Final Judgment by personal service or otherwise. IV. Prohibited Conduct Microsoft is enjoined and restrained as follows: (A) Microsoft shall not enter into any License Agreement for any Covered Product that has a total Duration that exceeds one year (measured from the end of the calendar quarter in which the agreement is executed). Microsoft may include as a term in any such License Agreement that the OEM may, at its sole discretion, at any time between 90 and 120 days prior to the expiration of the original License Agreement, renew such License Agreement for up to one additional year on the same terms and conditions as those applicable in the original license period. The License Agreement shall not impose a penalty or charge of any kind on an OEM for its election not to renew all or any portion of a License Agreement. In the event that an OEM does not exercise the option to renew a License Agreement as provided above, and a new License Agreement is entered between Microsoft and the OEM, the arm's length negotiation of different terms and conditions, specifically including a higher royalty rate(s), will not by itself constitute a penalty or other charge within the meaning of the foregoing sentence. The Duration of any License Agreement with an OEM not domiciled in the United States or the European Economic Area that will not be effective prior to regulatory approval in the country of its domicile may be extended at the option of Microsoft or the OEM during the time required for any such regulatory approval. License Agreement provisions that do not bear on the licensing or distribution of the Covered Products may survive expiration or termination of the License Agreement. (B) Microsoft shall not enter into any License Agreement that by its terms prohibits or restricts the OEM's licensing, sale or distribution of any non-Microsoft Operating System Software product. (C) Microsoft shall not enter into any Per Processor License. (D) Except to the extent permitted by Section IV (G) below, Microsoft shall not enter into any License Agreement other than a Per Copy License. (E) Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon: (1) 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); or (2) the OEM not licensing, purchasing, using or distributing any non-Microsoft product. (F) Microsoft shall not enter into any License Agreement containing a Minimum Commitment. However, nothing contained herein shall prohibit Microsoft and any OEM from developing non-binding estimates of projected sales of Microsoft's Covered Products for use in calculating royalty payments. (G) Microsoft's revenue from a License Agreement for any Covered Product shall not be derived from other than Per Copy or Per System Licenses, as defined herein. In any Per System License: (1) Microsoft shall not explicitly or implicitly require as a condition of entering into any License Agreement, or for purposes of applying any volume discount, or otherwise, that any OEM include under its Per System License more than one of its Personal Computer Systems; (2) Microsoft shall not charge or collect royalties for any Covered Product on any Personal Computer System unless the Personal Computer System is designated by the OEM in the License Agreement or in a written amendment. Microsoft shall not require an OEM which creates a New System to notify Microsoft of the existence of such a New System, or to take any particular actions regarding marketing or advertising of that New System, other than creation of a unique model name or model number that the OEM shall use for internal and external identification purposes. The requirement of external identification may be satisfied by placement of the unique model name or model number on the machine and its container (if any), without more. The OEM and Microsoft may agree to amend the License Agreement to include any new model of Personal Computer System in a Per System License. Nothing in this clause shall be deemed to preclude Microsoft from seeking compensation from an OEM that makes or distributes copies of a Covered Product in breach of its License Agreement or in violation of copyright law; (3) The License Agreement shall not impose a penalty or charge on account of an OEM's choosing at any time to create a New System. Addition of a New System to the OEM's License Agreement so that Covered Products are licensed for distribution with such New System and royalties are payable with respect thereto shall not be deemed to constitute a penalty or other charge of any kind within the meaning of the foregoing sentence; (4) All OEMs with existing Per System Licenses, or Per Processor Licenses treated by Microsoft under Section IV (J) as Per System Licenses, will be sent within 30 days following entry of this Final Judgment in a separately mailed notice printed in bold, boxed type which shall begin with the sentence ``You are operating under a Microsoft Per System License,'' and shall continue with the language contained in the first four quoted paragraphs below. All new or amended Per System Licenses executed after September 1, 1994 shall contain a provision that appears on the top half of the signature page in bold, boxed type shall begin with the sentence ``This is a Microsoft Per System License,'' and which shall continue with the language contained in the first four quoted paragraphs below. ``As a Customer, you may create a `New System' at any time that does not require the payment of a royalty to Microsoft unless the Customer and Microsoft agree to add it to the Licensing Agreement.'' ``Any New System created may be identical in every respect to a system as to which the Customer pays a Per System royalty to Microsoft provided that the New System has a unique model number or model name for internal and external identification purposes which distinguishes it from any system the Customer sells that is included in a Per System License. The requirement of external identification may be satisfied by placement of the unique model name or model number on the machine and its container (if any), without more.'' ``If the customer does not intend to include a Microsoft operating system product with a New System, the Customer does not need to notify Microsoft at any time of the creation, use or sale of any such New System, nor does it need to take any particular steps to market or advertise the New System.'' ``Under Microsoft's License Agreement, there is no charge or penalty if a Customer chooses at any time to create a New System incorporating a non-Microsoft operating system. If the Customer intends to include a Microsoft operating system product with the New System, the Customer must so notify Microsoft, after which the parties may enter into arm's length negotiation with respect to a license to apply to the New System.'' In the case of OEMs with Per Processor Licenses treated as Per System Licenses pursuant to Section IV (J), the notice shall include the following paragraph at the beginning of the notice: ``All models covered by your Per Processor License are now treated as subject to a Per System License. You may exclude any such model from being treated as subject to a Per System License by notifying Microsoft in writing. Such notice to Microsoft must include the model designation to be excluded from the Per System License. Such exclusion shall take effect on the first day of the calendar quarter next following Microsoft's receipt of such notice.'' (H) Microsoft may not use any form of Lump Sum Pricing in any License Agreement of Covered Product(s) executed after the date of this Final Judgment. It is not a violation of this Final Judgment for Microsoft to use royalty rates, including rates embodying volume discounts, agreed upon in advance with respect to each individual OEM, each specific version or language of a Covered Product, and each designated Personal Computer System model subject to the License Agreement. (I) OEMs that currently have a License Agreement that is inconsistent with any provision of this Final Judgment may, without penalty, terminate the License Agreement or negotiate with Microsoft to amend the License Agreement to eliminate such inconsistent provisions. An OEM desiring to terminate or amend such a License Agreement shall give Microsoft ninety (90) days written notice at any time prior to January 1, 1995. (J) If an OEM has a License Agreement that is inconsistent with any provision of this Final Judgment, Microsoft may enforce that License Agreement subject to the following: (1) if the License Agreement is a Per Processor License, Microsoft shall treat it as a Per System License for all existing OEM models that contain the microprocessor type(s) specified in the License Agreement except those models that the OEM opts in writing to exclude and such exclusion shall take effect on the first day of the calendar quarter net following Microsoft's receipt of such notice, and (2) Microsoft may not enforce prospectively any Minimum Commitment. (K) Microsoft shall not enter into any NDA: (1) whose duration extends beyond (a) commercial release of the product covered by the NDA, (b) an earlier public disclosure authorized by Microsoft of information covered by the NDA, or (c) one year from the date of disclosure of information covered by the NDA to a person subject to the NDA, whichever comes first; or (2) that would restrict in any manner any person subject to the NDA from developing software products that will run on competing Operating System Software products, provided that such development efforts do not entail the disclosure or use of any Microsoft proprietary information during the term of the NDA; or (3) that would restrict any activities of any person subject to the NDA to whom no information covered by the NDA has been disclosed. (L) The form of standard NDAs will be approved by a Microsoft corporate officer and all non-standard language in NDAs that pertains to matters covered in Section (k) above will be approved by a Microsoft senior corporate attorney. (M) Within thirty (30) days of the entry of this Final Judgment, Microsoft will provide a copy of this Final Judgment to all OEMs with whom it has License Agreements at that time except for those with licenses solely under the Small Volume Easy Distribution (SVED) program or the Delivery Service Partner (DSP) program. V. Reporting (A) To determine or secure compliance with this Final Judgment, duly authorized representatives of the Plaintiff shall, upon written request of the Assistant Attorney General in charge of the Antitrust Division, on reasonable notice given to Defendant at its principal office, subject to any lawful privilege, be permitted: (1) Access during normal office hours to inspect and copy all books, ledgers, accounts, correspondence, memoranda and other documents and records in the possession, custody, or control of Defendant, which may have counsel present, relating to any matters contained in this Final Judgment. (2) Subject to the reasonable convenience of Defendant and without restraint or interference from it, to interview officers, employees, or agents of Defendant, who may have counsel present, regarding any matters contained in this Final Judgment. (B) Upon written request of the Assistant Attorney General in charge of the Antitrust Division, on reasonable notice given to Defendant at its principal office, subject to any lawful privilege, Defendant shall submit such written reports, under oath if requested, with respect to any matters contained in this Final Judgment. (C) No information or documents obtained by the means provided by this Section shall be divulged by the Plaintiff to any person other than a duly authorized representative of the Executive Branch of the United States government, except in the course of legal proceedings to which the United States is a party, or for the purpose of securing compliance with the Final Judgment, or as otherwise required by law. (D) Defendant shall produce to plaintiff, within forty-five (45) days, any documents provided to the Directorate-General for Competition of the European Commission (``DG-IV'') in connection with its monitoring or securing of compliance with any Undertaking by or Decision against Microsoft that relates to Microsoft's licensing of any Covered Product. In addition, Defendant shall not object to disclosure to Plaintiff by DG-IV of any other information provided by defendant to DG-IV, or to cooperation between DG-IV and Plaintiff in the enforcement of this Judgment, provided that Microsoft shall receive in advance a detailed description of the information to be provided and the Plaintiff will accord any Microsoft information received from DG-IV the maximum confidentiality protection available under applicable law. Specifically, Plaintiff will treat Microsoft information that it receives from DG-IV as ``confidential business information'' within the meaning of the Freedom of Information Act, 5 U.S.C. Sec. 552, with Microsoft deemed a ``submitter'' of the information under the statute. Plaintiff shall take precautions to ensure the security and confidentiality of Microsoft information provided in electronic form. (E) If at the time information or documents are furnished by Defendant to Plaintiff, Defendant represents and identifies in writing the material in any such information or document to which a claim of protection may be asserted under Rule 26(c)(7) of the Federal Rules of Civil Procedure, and Defendant marks each pertinent page of such material ``Subject to claim of protection under Rule 26(c)(7) of the Federal Rules of Civil Procedure,'' then ten days notice shall be given by Plaintiff to Defendant prior to divulging such material in any legal proceeding (other than a grand jury proceeding) to which Defendant is not a party. VI. Further Elements of Judgment (A) This Final Judgment shall expire on the seventy eighth month after its entry. (B) 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. VII. Public Interest Entry of this Final Judgment is in the public interest. Entered:--------------------------------------------------------------- United States District Judge ---------------------------------------------------------------------- Page 15 of the Final Judgment Section VII Public Interest Entered and United States District Judge should be printed as is. This is not an omission. Cynthia Preston, Office of Operations. [FR Doc. 94-20216 Filed 8-18-94; 8:45 am] BILLING CODE 4410-01-M