Excerpt #2, U. S. Court of Appeals, February 27, 2001
"Let the Bitch Slapping Begin"
DOJ Explains Why and How Microsoft should be Broken Up

 
What happens when your case is filled with utter stupidity
(Image from www.bitchslapped.com)

Let's hop over to another topic that the Court of Appeals judges reamed the DOJ on. This is also on February 27th, and goes into the DOJ's reasoning of why Microsoft has to be broken up, and how it should be done.  The items in red parenthesis are my sarcastic interpretation of what the Appeals Court Justices must be thinking to themselves.

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THE COURT: Is Microsoft correct that in the entire history of the Sherman Act, there's never been a unitary company, not formed by mergers or acquisitions, that has ever been broken up?

MR. FREDERICK: I think the closest case is the Grinnell case which I cited to you, although I concede that ..

THE COURT: Grinnell was the sprinkler alarms, but that was all acquisitions. (Let's see, the DOJ wants to compare a sprinkler alarm trial with breaking up the most successful company in the world?)

MR. FREDERICK: It was not all acquisitions. It was in part also formed by exclusionary acts that allowed monopolization to occur.

THE COURT: They bought stock in those other companies. That's how they acquired them, isn't it? (okay, maybe if I lead these clowns on, they won't look so stupid)

MR. FREDERICK: Judge Randolph, I don't want to push back too hard ..

THE COURT: Justice Douglas's opinion says you have to divest yourself of the stockholdings. So the answer is .. your brief says Standard Oil, but what you did was answer Microsoft's argument by misstating it. Microsoft was not claiming that any company that claims to be unitary can't be broken up. They were claiming that there's never been a case in the history of the United States where a court has ordered a company broken up when that company was not formed by mergers and acquisitions. (Okay, I lead them on, so they won't look stupid, but then they still end up looking stupid)

MR. FREDERICK: Judge Randolph, I cannot cite you a case that is on all fours with this one. I have cited you the closest to what I think. And I think that the important point here is whether the way a corporation chooses to organize itself will allow it to be exempt from Sherman Antitrust Act divestiture. That is the question, whether it is precedented or unprecedented.

THE COURT: No, no, no. The question that's being raised is whether a company that has not grown through combinations can be perforated along the lines proposed by the government without a hearing into the problems that might create. (These DOJ guys and Judge Jackson want to break up the world's most successful software company by just saying, "Eeny Meeny Miney Moe, you go here and you go there"? What were they thinking?)

MR. FREDERICK: I can cite you no case, Judge Ginsburg, for that proposition. What I would like to say, though, is that I am not aware of a case in which a company has grown and protected its monopoly through the range of anticompetitive acts that were proved at trial in this case, ranging from contractual and technological bundling, from paying bounties so that competitors' products would not be permitted in the marketplace, to threatening companies with the nonlicensure of products if they did not stop competing with the monopolist's other products. And so yes, it's true, Judge Ginsburg, I cannot cite you a case in which a monopolist has been broken up by the government, nor can I cite you a case in the history of the Sherman Act in which a company has engaged in the full range of anticompetitive conduct proved at trial.

THE COURT: Stranger still, even after the remedy, Microsoft retains the monopoly. You cited Grinnell, and I think there's a point in the Supreme Court's opinion in Grinnell that says the first order of business when there's been a Section 2 violation is to issue a remedy that will destroy the monopoly power. This remedy doesn't do that. (So the DOJ wants to claim a monopoly, then break up the company, but still allow them to have the same "claim to monopoly power" that they originally broke the company up in the first place? Huh?)

MR. FREDERICK: Yes, it does. It destroys the ability of Microsoft to maintain illegally the applications barriers to entry. The way Microsoft has done ..

THE COURT: I can understand splitting it into three companies, each one of which get Windows, and they all compete against each other. That I can understand. But this, all it does is give rise to the potential of competition that in the end might in fact weaken the monopoly hold that they have on operating systems.  (You spend 3 years on this case, and you have no adequate remedy for the injustice that you perceive?)

MR. FREDERICK: I think the Supreme Court has made clear that the remedy should be tailored to the violation. That's the proposition in Dupont and the National Society of Professional Engineers case. That's what the District Court entered in this case. Chief Judge Edwards, by the way, the case that I was searching for earlier is the Dupont case.

THE COURT: Mr. Frederick, the applications, what would be the principle asset of the applications company? (Let's give the guy an easy question. Maybe he can get this one right)

MR. FREDERICK: Microsoft Office.

THE COURT: Microsoft Office. (Okay, he is 1 for 55 so far on answers)

MR. FREDERICK: Yes.

THE COURT: Would it not serve the application company's interests to see the Windows platform on which it rides be ubiquitous? (So if they split up the company into APPS Co. and OPS Co., but the APPS only ride on the operating systems that the OPS Co. already has in place, and OPS co. owns 90% of the market, why would APPS Co. want another competing OPS Co. to succeed? Now the DOJ argument is really confusing us.  Did these guys graduate from high school?  If so, which high school, because I am issuing a court order to shut the high school down)

MR. FREDERICK: Not necessarily. It would depend on what direction OPS Co. took the Windows platform.

THE COURT: Well, I can tell you one, when we just have the current OS and the current applications. (No wonder their argument is confusing. These guys are SO DUMB)

MR. FREDERICK: Yes. The difference, though, is that when the OPS Co. goes, for instance, to IBM .. this was proved at the trial .. and says if you don't stop using a competitive product to Microsoft Office, we will cancel your license for Windows, Office has an incentive to go to IBM and said we still .. or sorry, rather, to react to that kind of competitive situation. The incentive structures of these two companies are altered by the divestiture because they .. Office, for instance, would have an incentive to work with a less expensive operating system vendor if that had the effect of increasing sales of Office. And Office also has an incentive to develop Internet Explorer as the kind of cross.platform middleware threat that Microsoft crushed in '95 in following ..

THE COURT: What happens to the code that has the nonbrowser functionality of IE? (I mean, the developers still have to hook their APPS into the Internet functionality of the operating system)

MR. FREDERICK: The decree deals with the question of intellectual property in the first instance. And I would make this point, because this is a general point of importance in dealing with the kinds of harms that Mr. Holley identified. The court entered the decree to allow Microsoft to propose the form of reorganization to comply with the general provisions, and the intellectual ..

THE COURT: I'm just trying to think what the theory of the government was. If you have code that is doing browser and nonbrowser functions, what on the government's idea here should guide the court in deciding such a thing? (Answer my fucking question)

MR. FREDERICK: Well, the question is who gets what.

THE COURT: And here's something which belongs in both places apparently. In terms of functionality, it belongs in both places. (We can see this. Microsoft can see this. Developers can see this. Why can't YOU see this)

MR. FREDERICK: APPS Co. gets the intellectual property of IE with a license for such aspects as would be pertinent here to OPS Co. in perpetuity. The point ..

THE COURT: How is that decided? Why is the code performing both functions thought by the government to belong with the APPS Co. firm? (Show me how you think. Cause so far, you are still doing the Eeeny Meeny Miney Moe way of figuring out what goes where)

MR. FREDERICK: The point is to address the violation which was to use the browser as a means of protecting the monopoly. OPS Co. will not have the power to do that if progress and development with the browser going forward is with APPS Co., because APPS Co. does not have an economic incentive to protect the operating system monopoly. So, for instance, APPS Co. could develop IE as a cross.platform middleware threat to OPS Co., and there would be no economic incentive for APPS Co. not to do that, as there is now. So with respect to ..

THE COURT: You are saying both could enter into the operating system business; right? (For some reason, these DOJ guys think that suddenly the APPS co will build a "middleware layer" that will replace the Operating System? I gotta see how this argument goes….)

MR. FREDERICK: I beg your pardon?

THE COURT: You are saying it could enter into the operating system business and become a competitor.

MR. FREDERICK: Well, that's a different point, Judge Ginsburg. Yes, there is nothing in the decree that constrains that. My point is one addressed to the violation which we proved at trial which is that they use the browser to snuff out cross.platform middleware competition. And what I'm saying is that the decree creates an incentive for APPS Co. to become what Navigator was not allowed to become because of Microsoft's anticompetitive conduct.

THE COURT: Which is? (I still don't get what you are thinking)

MR. FREDERICK: A cross.platform middleware threat that would allow other operating systems to be used in that vehicle.

THE COURT: Now, there was some doubt expressed about whether Netscape was going to do that. What reason do we have to think that APPS Co., simply because it could, would? (There they go with that Crystal Ball, Psychic Developer Trends again.  For some reason they think APPS Co has a reason to build a cross development platform to host their apps on, despite the fact that there is already an operating system that contains 30 million lines of code that does all this plumbing for them?)

MR. FREDERICK: The point is to restore the competitive conditions that existed in '95 when Microsoft altered them as a result of the browser war, or in the words of Mr. Chase, the jihad launched by Microsoft against Netscape. And that's why the structural ..

THE COURT: If the newly formed APPS Co. would have an incentive to write operating systems programs, then why aren't the incumbents in the market now? Why don't they have that incentive? (I don't see anyone else trying to write a Windows Competitor on the X86 Platform. Why the hell would APPS Co. try to build a development platform to be a competitor against OPS Co?)

MR. FREDERICK: Well, I'm not sure that they do, Judge Randolph. APPS Co. has that incentive. It has a powerful suite of products. As we proved at trial, all of the barriers to entry exist. Judge Ginsburg asked me whether as an additional aspect of APPS Co.'s possible ..

THE COURT: My question is why wouldn't market participants today have the same incentive that you're predicting this newly.formed company will have? (In other words, why aren't more companies writing operating systems for X86 platform?)

MR. FREDERICK: Because of the applications barrier to entry. What I'm saying is that ..

THE COURT: But the applications barrier to entry will still exist with respect to Windows. (You didn't change anything. You just tried to convince someone to write an operating system that has no APPS for it. Kinda like OS/2. Or Taligent)

MR. FREDERICK: It will be lowered as a result of the changed incentives, Judge Randolph, in several ways. One is that IE becomes the potential to be cross.platform middleware in the hands of the company that has as its business purpose not protecting the monopoly profit stream of the operating system.

THE COURT: So why do you need both the conduct remedies and the structural remedy if you restructure the conduct remedies to reflect the incumbent? (Your argument is falling apart, dickhead)

MR. FREDERICK: Judge Sentelle, the conduct remedies in this decree are intended and are written as only interim measures so that the kinds of competitive conditions that would be a result of a divestiture would have a chance. And we recognize that implementing a divestiture decree will require careful thought on Microsoft's part in offering the proposal and on the part of the government and the court in doing that.

THE COURT: Well, maybe you could address Mr. Holley's final point about Office. (Because obviously you can't address any other concern we have) You said earlier that this decree is designed to correct the violations identified at trial. Right?

MR. FREDERICK: Yes.

THE COURT: Okay. Is there evidence in the record that Microsoft used Office to perpetuate its platform monopoly?

MR. FREDERICK: Yes, Apple. The court found the evidence showed that Microsoft went to Apple and said we will cancel Mac Office if you do not make IE the default browser.

THE COURT: And that's the basis for the part of the remedy that requires the new applications company to write the version of Office for clients?

MR. FREDERICK: Judge Tatel, the point of having Office .. and I would also cite the IBM example where Microsoft went to IBM and said if you don't stop competing with Office, we will not give you a Windows license. There's leveraging going on here. We are using the application's arm not only in the form of Office but in other application devices. And that's what the browser war really was all about. It was leveraging monopoly power in the operating system by using this other product and that as an application. That's the theory of the government's case and that's the theory of the remedy.

THE COURT: Well, where in the record did the District Court take account of the practical problems of writing an Office version for Linux? (We did our homework. It would probably take 1000 hot shot developers 4 years to re-write Office for Linux, who will then need 2000 people to test and do quality testing on the project, require a huge beta program to help get the bugs out, require 1000 developers and testers to write code for Linux to make sure all the correct API calls are in that Office needs,  and cost a billion dollars, and then it would only have the functionality of Office as it is today, instead of new features that Office XP will have)

MR. FREDERICK: I .. well, I have several responses to that. I'm not sure that the question is a relevant one for this reason: because it assumes that Linux is the only possible competitor in the operating system market. That was not .. you know, what the market will do tomorrow is completely unknowable. Our point is that we are trying to restore competitive conditions to minimize market power and abuses of market power. This was the way, one of the ways, that Microsoft leveraged its applications arm to protect its operating system monopoly. So Linux may not be the right example. I would concede that, Your Honor. It may be OS. It may be some other operating system. It may be the Mac. The point is the market ought to decide, and Microsoft should not be able to maintain its monopoly power by using its ability to leverage its applications to protect its operating system. By lowering the applications barrier to entry, the decree also provides incentives for Navigator perhaps to come back as a cross.platform threat. It provides an ability for Sun and Java to have at least a spark of life.

THE COURT: Would the shareholders of the two companies be the same on day one?

MR. FREDERICK: With I believe it's three exceptions, and those would be the shareholders that owned more than five percent of the company. And what the ..

THE COURT: They would not be the same. (I'll answer my own question, since you clearly can't answer it)

MR. FREDERICK: As to those three shareholders, they would have to choose, that's correct. But, you know, the declaration put in by Mr. Greenhill suggested that shareholders would not be harmed by this divestiture and in fact would likely see an improvement in shareholder value as a result of restoring better competitive conditions and making these companies leaner. I mean I would just point out this is outside the record, but the divestiture leads to a Fortune 84 company becoming essentially two Fortune 200 companies. So it's not as though these are two small companies unable to address ..

THE COURT: Mr. Frederick, in response to Judge Tatel's question you responded, which was indeed responsive, but the bulk of leveraging in the case is leveraging the operating system. And OPS Co. ends up with the operating system. And after divestiture is completed, you boast .. and I'm sure that was aimed at this court .. the no line of business restrictions, which this court is very familiar with from AT&T. So it's a puzzle as to why you think this is effective since it is precisely Windows which is the source of what the government says it's worrying about. (You claim monopoly in operating systems in your brief. But when you split up the company……there is still a company that owns the Operating System)

MR. FREDERICK: Well, the answer, Judge Williams, is that after the divestiture, OPS Co. was not able to use the kinds of leverage they used in the sense that ..

THE COURT: I mean you assume that a new, very large company, is unable to move in to other software activities. Why not?

MR. FREDERICK: Well, it doesn't have the same market power when it starts from zero as when it starts from an $8 billion company.

THE COURT: If the operating system is what you say it is, it starts with a huge amount of market power. (If they own 90% of the operating system market now, after you split them up, OPS Co. still owns 90% of the operating system market, you dumbass)

MR. FREDERICK: It has market power with respect to operating systems. We concede that. It doesn't have market power to stop cross.platform middleware threats in the way that it did ..

THE COURT: It used the operating system. The theory of your complaint is the use of the operating system enabled it to stifle competition and cross.platform technology.

MR. FREDERICK: Yes, and it used applications to do that.

THE COURT: Could it devise IE 2? (I mean, if the OPS guys are so smart and powerful, why can't they write IE 2 to replace the existing IE before the APPS guys come out with their new IE?)

MR. FREDERICK: Well, that's a complicated question, Judge Ginsburg. The way the decree is worded, Microsoft OPS Co. has a license to the existence of IE. The intellectual property rests with APPS Co. The decree further provides ..

THE COURT: Well, I don't mean to say using its intellectual property. Could it device a new browser from scratch?  (I will repeat the question, you dim wit)

MR. FREDERICK: Yes.

THE COURT: And then it would have the same combination that you've just broken up? (You stupid, ignorant, human being. You ain't ever going to become an Appeals Judge, as we will personally shoot your ass if there was any chance in hell that would happen.)

MR. FREDERICK: Yes. And it's starting from scratch to do so. And that's the important point.

THE COURT: But it's got the leverage of the operating system. It can go from zero to 80 in 20 minutes; right? (These Microsoft guys are pretty smart.  If we take the browser away from the OPS guys, they can turn around and just rewrite a new browser, right? And then we are back where we started five years ago)

MR. FREDERICK: No, but the expectation and the incentives in the market would be fundamentally altered.

THE COURT: Why, when you agree that the platform is nascent at best, and they don't have any of what they need to be able to do what you think is necessary to compete whereas Windows has.

MR. FREDERICK: No. The difference, Chief Judge Edwards, is that APPS Co. has IE which has .. is obviously a Windows platform, has been developed for Macintosh. And APPS Co., which would then have an incentive to develop IE as true cross.platform middleware, has an incentive that Microsoft currently does not have. Moreover, Navigator, which is undisputably used on at least 15 different operating systems, the record shows, has an incentive and an ability to fight back in the market on the merits of cross.platform middleware without being snuffed out.

THE COURT: You answered to Judge Ginsburg that the remaining company holding the operating system could develop its own browser.

MR. FREDERICK: From scratch.

THE COURT: From scratch. And then sell it as a package; right?

MR. FREDERICK: Yes.

THE COURT: Except that it wouldn't be able to sell it separately.

MR. FREDERICK: Well, that depends on what the court holds with respect to ..

THE COURT: No, no. There's a provision in the decree that prohibits it from .. that any product that is sold separately cannot be .. that you cannot require a buyer of Windows to also buy that product. You can't bundle if you sell the product separately. Isn't there a provision in the decree that says that? (Ha ha. Trapped ya, you simpleton)

MR. FREDERICK: No. I think respectfully, Judge Randolph, the provision defines middleware products, and it says that if you have a middleware product and you bundle it, you have to sell it separately.

THE COURT: I think what he's talking about is an interim provision.

MR. FREDERICK: That's what I'm talking about, the conduct interim provision and which would, of course, expire within three years after the divestiture occurs. The whole point of the divestiture, and I would say respectfully the elegance of it, is that it is one that addresses the violation that we proved. It allows the market to determine competitive conditions going forward. And it is the one least likely to result in the kind of intrusive oversight process with which this court is well aware. Unless the court has further questions, thank you.

THE COURT: Thank you. (Thanks for nothing. Thanks for wasting our time playing Eeny Meeny Miney Mo in breaking up America's Prized company, the company that will keep the rest of the world bowing down to the USA)

MR. HOLLEY (Note: this is the Microsoft lawyer): Mr. Frederick referred to the April 4th transcript as authority for the proposition that everyone understood that the affidavits were the minimum required in support of proposals. Actually, if you look at joint appendix 2447 to 2448, Mr. Boies asked the following question: "One question that I think Mr. Borden was asking that I also have an interest in is when we submit our preferred proposed form of permanent injunction, would the court contemplate that that be submitted with supporting affidavits, for example, or just a form?" And the court's response is: "That certainly is a matter that we could talk about, Tim." He is referring to his law clerk Tim Ehrlich. "And I have talked about this morning. Maybe affidavits might perhaps be the least support that we would be looking for. We might also replicate the procedure at trial with testimony in written form subject to cross.examination. The more abbreviated the process, the better I think. But I am open to suggestions." So there's no basis for saying that anyone could take from that colloquy that affidavits were required. Both the Paramount Pictures cases and the Schine Theaters case, which Mr. Frederick referred to several times, were remanded by the U.S. Supreme Court to the District Court because there were no findings of fact sufficient to support the remedy in those cases. Mr. Frederick did not even attempt to defend the District Court's failure to have any findings on the issue of relief, and I think that's dispositive here. In particular, there was no finding that Microsoft ever used its development of both Windows and Office in an improper way. If you look at both .. if you look at the government's brief, both times they make that assertion there's no support. There's no reference to the findings of fact. There's reference to the testimony of Mr. Tevanian or reference to documents, but it would have been very simple to write which finding of fact there is that Microsoft ever improperly used its development of both Windows and Office, and there is none.

Despite Mr. Frederick's statement that the breakup would cure the anticompetitive violations found, as the questions made clear, the operating system company after the divestiture could do exactly what Microsoft does now and would do exactly what Microsoft does now because it would be a platform company, competing with other platform companies, and it would have an incentive to add new features to Windows, which the government now says is all right.

You can add new features to Windows. But it would also have the same incentive to vigorously promote those features, both the software developers and end users. And in doing that, it would have the same incentive that Microsoft has not to allow distributors to get in the way of that process of promoting those features. The notion that divestiture is the presumptive remedy for Section 2 violations of all kinds is flatly wrong. Judge Posner looked at all of the Section 2 cases that resulted in divestiture, all of them, since the passage of the Sherman Act, and came up with four where divestiture was ordered in cases principally involving conduct. They are the Kansas City Star case, the 1952 IBM Consent Decree, the United Shoe case, and the AT&T case. None of those cases bears any resemblance to this case.

THE COURT: You said those are court cases in which there was a divestiture. Did you qualify that?

MR. HOLLEY: What Judge Posner said, Your Honor, was that these were cases in which divestiture was ordered where the conduct at issue was not the acquisition of competitors but unilateral behavior.

THE COURT: Was the 1952 IBM case the Service Bureau case?

MR. HOLLEY: That was the tabulating machine and card case. And IBM agreed that if by 1953 its share of cards had not hit a certain percentage, it could divest itself of certain card.making ability. And it missed the target and so it divested some of its card.making ability.

THE COURT: The public has been safe ever since. (We reviewed that case. It looks like Judge Jackson's Father was the presiding judge on that case.)

MR. HOLLEY (Microsoft's Lawyer): Yes, Your Honor. Mr. Frederick said that IE could easily become cross.platform. But this is another example of a fundamental factual mistake that underlies the government's remedy proposal and that never got explored in the trial. The version of Internet Explorer for the Macintosh operating system and the version of Internet Explorer for UNIX bear no resemblance to Internet Explorer for Windows because they expose no programmatic interfaces to developers. They are monolithic applications, just like Navigator was on Windows. So the idea that these three very different products, although they happen to share the trade name Internet Explorer, would become cross.platform middleware is wrong. And it would have been easy for Microsoft to demonstrate that. (Microsoft doesn't write middleware for other operating systems. Instead, when building an application like Mac Office, you use the APIs inherent in the Mac Operating System to build an application. Building a cross platform middleware layer is futile. Microsoft knows that, developers know that, it looks like the Court of Appeals knows that…..but obviously Judge Jackson and the DOJ can't comprehend this fact….)