Thursday, April 03, 2003

Reporting live from Richmond...

This morning I attended the latest round in Microsoft’s never-ending antirust defense. Today’s forum was a hearing before the United States Court of Appeals for the Fourth Circuit in Richmond, Virginia, in the case of Sun Microsystems v. Microsoft. This was actually an appeal of a preliminary injunction issued in the Sun case by Baltimore district judge J. Fredrick Motz (whose wife, incidentally, is a Fourth Circuit judge.) In January, Judge Motz granted a pretrial injunction forcing Microsoft to carry Sun’s Java platform in its future releases of Windows XP. Microsoft produces a competing “middleware” product called .Net. Motz’s order essentially said Microsoft could not distribute its own product unless it distributed its competitors as well.

Today’s appeal was heard by a three-judge panel composed of circuit judges H. Emory Widener, Paul Niemeyer, and Roger Gregory. Although Judge Widener presided over today’s hearing, for all intents and purposes this was Judge Niemeyer’s show. Aside from two brief interjections from Judge Gregory, Judge Niemeyer monopolized—no pun intended—this morning’s oral argument. He was particularly belligerent towards Sun’s counsel, and by the end of the one-hour hearing, I got the impression that Judge Niemeyer planned to catch a train to Baltimore and physically beat Judge Motz with a shovel for issuing his injunction in the first place. In other words, Judge Niemeyer seemed to favor Microsoft’s challenge.

Microsoft counsel David Tulchin presented a simple, straightforward argument: Never before had a court used the antitrust laws to grant a preliminary injunction altering the status quo to benefit a dominant competitor. In this case, Sun’s Java platform is dominant in middleware, while Microsoft’s .Net is a new entrant (a point Judge Niemeyer seemed caught up on throughout the argument.) The district court, Tulchin argued, relied on an unproven “tipping” theory. This means that Sun and Judge Motz believe the injunction is necessary to prevent Microsoft from unfairly “tipping” the market in its favor. This is entirely speculative, and requires one to believe Microsoft’s failure to carry Java while simultaneously distributing .Net will cause an immediate collapse of Java’s market. This would happen, we’re told, because middleware developers will flock to .Net once they realize Java won’t enjoy equal access on Windows-based machines.

But as Tulchin argued—and Sun never refuted—the only evidence presented to Judge Motz proved no such developer exodus was taking place. Indeed, Tulchin noted, Sun’s own internal documents show there are almost 1 million more Java developers today than when Microsoft introduced .Net. Furthermore, three studies presented to Judge Motz stated Java and .Net were equally viable competitors that would likely divide market share equally in the near future. Far from a “tipping” effect, Microsoft’s actions created, as Tulchin put it, “head-to-head competition of the sort the antitrust laws encourage,” or at least are supposed to encourage.

Judge Niemeyer’s questions to both sides expressed clear discomfort with Judge Motz’s “tipping” theory. If anything, Niemeyer said, the preliminary injunction would likely cause a tipping in favor of Sun, since Microsoft would lose its advantage in distributing .Net, a byproduct of Microsoft’s dominance in the operating system market. This led to Niemeyer’s other major concern: was this case about the Java-.Net market or the operating system market? The first problem, Judge Niemeyer explained, was that Sun’s initial complaint was not fully included in the record sent to the Fourth Circuit. For reasons that were not explained, the Court did not have a record of Count One of the complaint, which alleges Microsoft illegally maintained its operating system monopoly to the detriment of Sun. This led to Judge Niemeyer’s repeated questions to Sun’s counsel on what exactly they were complaining about. In other words, if Sun alleges monopolization of the operating system market, how does that entitle Sun to a preliminary injunction dealing with the middleware market?

At this point, Sun’s argument became: “Microsoft is evil, and we have to punish them.” Sun said that since another court—the U.S. Court of Appeals for the District of Columbia Circuit—already held that Microsoft illegally monopolized the operating system market, Sun could now rely on that decision to demand antitrust relief in any other market they competed against Microsoft in, even one where Sun already holds a dominant advantage. Throughout the argument, Sun counsel relied on what Judge Niemeyer deemed “overstatements”; that is, continued reference to Microsoft’s past antitrust defeats, “anticompetitive behavior,” and “monopolistic” actions. The hyperbole was arguably necessary because, as noted above, Sun produced little actual evidence in support of the injunction.

As Microsoft’s Tulchin argued, most of the factual allegations at the heart of Sun’s case deal with Microsoft’s alleged actions “six or seven years ago.” Sun’s case, in one sense, is nothing more than a breach of contract action in antitrust clothing, because Sun’s original problems with Microsoft were settled out of court. But, seizing on the D.C. Circuit ruling in the federal antitrust action, Sun clearly saw an opening to turn a state tort action into a federal antitrust case, no doubt eyeing potential triple damages, not to mention the far broader relief that typically accompanies an antitrust judgment.

At one point, Sun counsel resurrected a bizarre analogy first used by Judge Motz during the injunction hearing: Tonya Harding and Nancy Kerrigan. Sun said that Microsoft, in essence, had clubbed Sun in the kneecaps just prior to the U.S. figure skating championships, thus denying them a chance to compete. Tulchin countered that a better analogy would be to say that Harding injured Kerrigan’s knee (the Java market) but was asking for relief based on an injury to her elbow (the operating system market.) Alternatively, Tulchin suggested that Sun’s act was akin to Kerrigan seeking relief based on a knee injury suffered years earlier, a reference to Microsoft’s previous dispute with Sun.

In the end, Sun’s case for the injunction is meritless. Judge Motz relied entirely on unproven speculation as to what would happen to Sun if Microsoft was permitted to distribute .Net through its Windows operating system. More to the point, Motz impermissibly forced Microsoft to carry a competitor’s product for no reason other than that Microsoft possesses a large distribution network via its operating system. Sun, Judge Niemeyer observed, is trying to get a “free ride” from Microsoft via a preliminary injunction.

It’s obviously difficult to predict how a panel of judges will act, but given Judge Niemeyer’s forceful dissection of Sun counsel (I didn’t even get the name of Sun’s lawyer, as Niemeyer pounced on him before he could even introduce himself to the court) and the lack of serious opposition from the other judges on the panel, one has to believe Microsoft came out of this morning’s argument ahead. And given that overturning a preliminary injunction will not prejudice Sun’s chances on the merits (unfortunately), I would be surprised if the Fourth Circuit did not reverse Judge Motz.

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