UNIT IV: DOMINANT FIRM BEHAVIOR UNITED STATES v. ALUMINUM CO. OF AMERICA 148 F.2d 416 (2d Cir. 1945) L. HAND, Circuit Judge. This … action was brought … praying the district court to adjudge that the defendant, Aluminum Company of America [Alcoa], was monopolizing interstate and foreign commerce, particularly in the manufacture and sale of ‘virgin’ aluminum ingot, and that it be dissolved…. The plaintiff filed its complaint on April 23, 1937…. The action came to trial on June 1, 1938, and proceeded without much interruption until August 14, 1940, when the case was closed after more than 40,000 pages of testimony had been taken. The judge took time to consider the evidence, and delivered an oral opinion which occupied him from September 30, to October 9, 1941. Again he took time to prepare findings of fact and conclusions of law which he filed on July 14, 1942; and he entered final judgment dismissing the complaint on July 23rd, of that year. … [T]he Supreme Court, declaring that a quorum of six justices qualified to hear the case was wanting, referred the appeal to this court …. I. ‘ALCOA’S MONOPOLY OF ‘Virgin’ Ingot. ‘Alcoa’ is … engaged in the production and sale of ‘ingot’ aluminum, and … also in the fabrication of the metal into many finished and semi-finished articles. [Because of ownership of relevant patents,] until February 2, 1909, ‘Alcoa’ had either a monopoly of the manufacture of ‘virgin’ aluminum ingot or the monopoly of a [manufacturing] process which eliminated all competition. The extraction of aluminum … requires a very large amount of electrical energy, which is ordinarily, though not always, most cheaply obtained from water power. Beginning at least as early as 1895, ‘Alcoa’ secured such power from several companies by contracts, containing in at least three instances, covenants binding the power companies not to sell or let power to anyone else for the manufacture of aluminum. 275

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UNITED STATES v. ALUMINUM CO. OF AMERICA148 F.2d 416 (2d Cir. 1945)

L. HAND, Circuit Judge. This … action was brought … praying the district court to adjudge that the defendant, Aluminum Company of America [Alcoa], was monopolizing interstate and foreign commerce, particularly in the manufacture and sale of ‘virgin’ alu-minum ingot, and that it be dissolved…. The plaintiff filed its complaint on April 23, 1937…. The action came to trial on June 1, 1938, and proceeded without much interrup-tion until August 14, 1940, when the case was closed after more than 40,000 pages of tes-timony had been taken. The judge took time to consider the evidence, and delivered an oral opinion which occupied him from September 30, to October 9, 1941. Again he took time to prepare findings of fact and conclusions of law which he filed on July 14, 1942; and he entered final judgment dismissing the complaint on July 23rd, of that year. … [T]he Supreme Court, declaring that a quorum of six justices qualified to hear the case was wanting, referred the appeal to this court ….

I. ‘ALCOA’S MONOPOLY OF ‘Virgin’ Ingot. ‘Alcoa’ is … engaged in the produc-tion and sale of ‘ingot’ aluminum, and … also in the fabrication of the metal into many finished and semi-finished articles. [Because of ownership of relevant patents,] until Feb-ruary 2, 1909, ‘Alcoa’ had either a monopoly of the manufacture of ‘virgin’ aluminum in-got or the monopoly of a [manufacturing] process which eliminated all competition.

The extraction of aluminum … requires a very large amount of electrical energy, which is ordinarily, though not always, most cheaply obtained from water power. Begin-ning at least as early as 1895, ‘Alcoa’ secured such power from several companies by contracts, containing in at least three instances, covenants binding the power companies not to sell or let power to anyone else for the manufacture of aluminum. ‘Alcoa’–either itself or by a subsidiary–also entered into four successive ‘cartels’ with foreign manufac-turers of aluminum by which, in exchange for certain limitations upon its import into for-eign countries, it secured covenants from the foreign producers, either not to import into the United States at all, or to do so under restrictions, which in some cases involved the fixing of prices. These ‘cartels’ and restrictive covenants and certain other practices were the subject of a suit filed by the United States against ‘Alcoa’ on May 16, 1912, in which a decree was entered by consent on June 7, 1912, declaring several of these covenants un-lawful and enjoining their performance….

None of the foregoing facts are in dispute, and the most important question in the case is whether the monopoly in ‘Alcoa’s’ production of ‘virgin’ ingot, secured by the two patents until 1909, and in part perpetuated between 1909 and 1912 by the unlawful practices, forbidden by the decree of 1912, continued for the ensuing twenty-eight years; and whether, if it did, it was unlawful under §2 of the Sherman Act…. It is undisputed that throughout this period ‘Alcoa’ continued to be the single producer of ‘virgin’ ingot in the United States; and the plaintiff argues that this without more was enough to make it an unlawful monopoly. It also takes an alternative position: that in any event during this period ‘Alcoa’ consistently pursued unlawful exclusionary practices, which made its


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dominant position certainly unlawful, even though it would not have been, had it been re-tained only by ‘natural growth.’ …

‘Alcoa’s’ position is that the fact that it alone continued to make ‘virgin’ ingot in this country did not, and does not, give it a monopoly of the market; that it was always subject to the competition of imported ‘virgin’ ingot, and of what is called ‘secondary’ ingot; and that even if it had not been, its monopoly would not have been retained by un-lawful means, but would have been the result of a growth which the Act does not forbid, even when it results in a monopoly. We shall first consider the amount and character of this competition; next, how far it established a monopoly; and finally, if it did, whether that monopoly was unlawful under §2 of the Act.

From 1902 onward until 1928 ‘Alcoa’ was making ingot in Canada through a wholly owned subsidiary; so much of this as it imported into the United States it is proper to include with what it produced here. In the year 1912 the sum of these two items repre-sented nearly ninety-one per cent of the total amount of ‘virgin’ ingot available for sale in this country. This percentage varied year by year up to and including 1938: in 1913 it was about seventy-two per cent; in 1921 about sixty-eight per cent; in 1922 about sev-enty-two; with these exceptions it was always over eighty per cent of the total and for the last five years (1934-1938 inclusive) it averaged over ninety per cent. The effect of such a proportion of the production upon the market we reserve for the time being, for it will be necessary first to consider the nature and uses of ‘secondary’ ingot, the name by which the industry knows ingot made from aluminum scrap. This is of two sorts, though for our purposes it is not important to distinguish between them. One of these is the clippings and trimmings of ‘sheet’ aluminum, when patterns are cut out of it, as a suit is cut from a bolt of cloth. …[T]here is an appreciable ‘sales resistance’ … to this kind of scrap, and for some uses (airplanes and cables among them), fabricators absolutely insist upon ‘vir-gin’…. The other source of scrap is aluminum which has once been fabricated and the article, after being used, is discarded and sent to the junk heap, as for example, cooking utensils, like kettles and pans, and the pistons or crank cases of motorcars. These are made with a substantial alloy and to restore the metal to its original purity costs more than it is worth. However, if the alloy is known both in quality and amount, scrap, when remelted, can be used again for the same purpose as before. In spite of this, as in the case of clippings and trimmings, the industry will ordinarily not accept ingot so salvaged upon the same terms as ‘virgin.’ …

There are various ways of computing ‘Alcoa’s’ control of the aluminum market–as distinct from its production–depending upon what one regards as competing in that market. The judge figured its share–during the years 1929-1938, inclusive–as only about thirty-three percent; to do so he included ‘secondary,’ and excluded that part of ‘Alcoa’s own production which it fabricated and did not therefore sell as ingot. If, on the other hand, ‘Alcoa’s’ total production, fabricated and sold, be included, and balanced against the sum of imported ‘virgin’ and ‘secondary,’ its share of the market was in the neighbor-hood of sixty-four per cent for that period. The percentage we have already mentioned–over ninety–results only if we both include all ‘Alcoa’s’ production and exclude ‘sec-ondary’. That percentage is enough to constitute a monopoly; it is doubtful whether sixty or sixty-four percent would be enough; and certainly thirty-three per cent is not. Hence it is necessary to settle what he shall treat as competing in the ingot market.


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That part of its production which ‘Alcoa’ itself fabricates, does not of course ever reach the market as ingot; and we recognize that it is only when a restriction of produc-tion either inevitably affects prices, or is intended to do so, that it violates §1 of the Act. However, even though we were to assume that a monopoly is unlawful under Sec. 2 only in case it controls prices, the ingot fabricated by ‘Alcoa,’ necessarily had a direct effect upon the ingot market. All ingot–with trifling exceptions–is used to fabricate intermediate or end, products; and therefore all intermediate, or end, products which ‘Alcoa’ fabricates and sell, pro tanto reduce the demand for ingot itself. … We cannot therefore agree that the computation of the percentage of ‘Alcoa’s’ control over the ingot market should not include the whole of its ingot production.

As to ‘secondary,’ as we have said, for certain purposes the industry will not ac-cept it at all; but for those for which it will, the difference in price is ordinarily not very great; the judge found that it was between one and two cents a pound, hardly enough margin on which to base a monopoly. Indeed, there are times when all differential disap-pears, and ‘secondary’ will actually sell at a higher price: i.e. when there is a supply available which contains just the alloy that a fabricator needs for the article which he pro-poses to make. Taking the industry as a whole, we can say nothing more definite than that, although ‘secondary’ does not compete at all in some uses, (whether because of ‘sales resistance’ only, or because of actual metallurgical inferiority), for most purposes it competes upon a substantial equality with ‘virgin.’ On these facts the judge found that ‘every pound of secondary or scrap aluminum which is sold in commerce displaces a pound of virgin aluminum which otherwise would, or might have been, sold.’ We agree: so far as ‘secondary’ supplies the demand of such fabricators as will accept it, it increases the amount of ‘virgin’ which must seek sale elsewhere; and it therefore results that the supply of that part of the demand which will accept only ‘virgin’ becomes greater in pro-portion as ‘secondary’ drives away ‘virgin’ from the demand which will accept ‘sec-ondary.’ (This is indeed the same argument which we used a moment ago to include in the supply that part of ‘virgin’ which ‘Alcoa’ fabricates; it is not apparent to us why the judge did not think it applicable to that item as well.) At any given moment therefore ‘secondary’ competes with ‘virgin’ in the ingot market; further, it can, and probably does, set a limit or ‘ceiling’ beyond which the price of ‘virgin’ cannot go, for the cost of its production will in the end depend only upon the expense of scavenging and recondition-ing. It might seem for this reason that in estimating ‘Alcoa’s’ control over the ingot mar-ket, we ought to include the supply of ‘secondary,’ as the judge did. Indeed, it may be thought a paradox to say that anyone has the monopoly of a market in which at all times he must meet a competition that limits his price. We shall show that it is not.

In the case of a monopoly of any commodity which does not disappear in use and which can be salvaged, the supply seeking sale at any moment will be made up of two components: (1) the part which the putative monopolist can immediately produce and sell; and (2) the part which has been, or can be, reclaimed out of what he has produced and sold in the past. By hypothesis he presently controls the first of these components; the second he has controlled in the past, although he no longer does. During the period when he did control the second, if he was aware of his interest, he was guided, not alone by its effect at that time upon the market, but by his knowledge that some part of it was likely to be reclaimed and seek the future market. That consideration will to some extent always affect his production until he decides to abandon the business, or for some other


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reason ceases to be concerned with the future market. Thus, in the case at bar ‘Alcoa’ al-ways knew that the future supply of ingot would be made up in part of what it produced at the time, and, if it was as far-sighted as it proclaims itself, that consideration must have had its share in determining how much to produce. How accurately it could forecast the effect of present production upon the future market is another matter. Experience, no doubt, would help; but it makes no difference that it had to guess; it is enough that it had an inducement to make the best guess it could, and that it would regulate that part of the future supply, so far as it should turn out to have guessed right. The competition of ‘sec-ondary’ must therefore be disregarded, as soon as we consider the position of ‘Alcoa’ over a period of years; it was as much within ‘Alcoa’s’ control as was the production of the ‘virgin’ from which it had been derived. This can be well illustrated by the case of a lawful monopoly: e.g. a patent or a copyright. The monopolist cannot prevent those to whom he sells from reselling at whatever prices they please. Nor can he prevent their re-conditioning articles worn by use, unless they in fact make a new article. At any moment his control over the market will therefore be limited by that part of what he has formerly sold, which the price he now charges may bring upon the market, as second hand or re-claimed articles. Yet no one would think of saying that for this reason the patent or the copyright did not confer a monopoly. …

We conclude therefore that ‘Alcoa’s’ control over the ingot market must be reck-oned at over ninety per cent; that being the proportion which its production bears to im-ported ‘virgin’ ingot. If the fraction which it did not supply were the produce of domestic manufacture there could be no doubt that this percentage gave it a monopoly–lawful or unlawful, as the case might be. The producer of so large a proportion of the supply has complete control within certain limits. It is true that, if by raising the price he reduces the amount which can be marketed–as always, or almost always, happens–he may invite the expansion of the small producers who will try to fill the place left open; nevertheless, not only is there an inevitable lag in this, but the large producer is in a strong position to check such competition; and, indeed, if he has retained his old plant and personnel, he can inevitably do so. There are indeed limits to his power; substitutes are available for almost all commodities, and to raise the price enough is to evoke them. Moreover, it is difficult and expensive to keep idle any part of a plant or of personnel; and any drastic contraction of the market will offer increasing temptation to the small producers to ex-pand. But these limitations also exist when a single producer occupies the whole market: even then, his hold will depend upon his moderation in exerting his immediate power.

The case at bar is however different, because, for aught that appears there may well have been a practically unlimited supply of imports as the price of ingot rose. As-suming that there was no agreement between ‘Alcoa’ and foreign producers not to im-port, they sold what could bear the handicap of the tariff and the cost of transportation. For the period of eighteen years – 1920-1937 – they sold at times a little above ‘Alcoa’s’ prices, at times a little under; but there was substantially no gross difference between what they received and what they would have received, had they sold uniformly at ‘Al-coa’s’ prices. While the record is silent, we may therefore assume–the plaintiff having the burden–that, had ‘Alcoa’ raised its prices, more ingot would have been imported. Thus there is a distinction between domestic and foreign competition: the first is limited in quantity, and can increase only by an increase in plant and personnel; the second is of producers who, we must assume, produce much more than they import, and whom a rise


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in price will presumably induce immediately to divert to the American market what they have been selling elsewhere. It is entirely consistent with the evidence that it was the threat of greater foreign imports which kept ‘Alcoa’s’ prices where they were, and pre-vented it from exploiting its advantage as sole domestic producer; indeed, it is hard to re-sist the conclusion that potential imports did put a ‘ceiling’ upon those prices. Neverthe-less, within the limits afforded by the tariff and the cost of transportation, ‘Alcoa’ was free to raise its prices as it chose, since it was free from domestic competition, save as it drew other metals into the market as substitutes. Was this a monopoly within the mean-ing of §2?

The judge found that, over the whole half century of its existence, ‘Alcoa’s’ prof-its upon capital invested, after payment of income taxes, had been only about ten per cent…. A profit of ten per cent in such an industry, dependent, in part at any rate, upon continued tariff protection, and subject to the vicissitudes of new demands, to the obso-lescence of plant and process–which can never be accurately gauged in advance–to the chance that substitutes may at any moment be discovered which will reduce the demand, and to the other hazards which attend all industry; a profit of ten per cent, so conditioned, could hardly be considered extortionate.

There are however, two answers to any such excuse; and the first is that the profit on ingot was not necessarily the same as the profit of the business as a whole, and that we have no means of allocating its proper share to ingot. … It may be retorted that it was for the plaintiff to prove what was the profit upon ingot in accordance with the general bur-den of proof. We think not. Having proved that ‘Alcoa’ had a monopoly of the domestic ingot market, the plaintiff had gone far enough; if it was an excuse, that ‘Alcoa’ had not abused its power, it lay upon ‘Alcoa’ to prove that it had not. But the whole issue is irrel-evant anyway, for it is no excuse for ‘monopolizing’ a market that the monopoly has not been used to extract from the consumer more than a ‘fair’ profit. The Act has wider pur-poses. Indeed, even though we disregard all but economic considerations, it would by no means follow that such concentration of producing power is to be desired, when it has not been used extortionately. Many people believe that possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone. Such people believe that competitors, versed in the craft as no consumer can be, will be quick to detect opportunities for saving and new shifts in production, and be eager to profit by them. In any event the mere fact that a producer, having command of the do-mestic market, has not been able to make more than a ‘fair’ profit, is no evidence that a ‘fair’ profit could not have been made at lower prices. True, it might have been thought adequate to condemn only those monopolies which could not show that they had exer-cised the highest possible ingenuity, had adopted every possible economy, had antici-pated every conceivable improvement, stimulated every possible demand. No doubt, that would be one way of dealing with the matter, although it would imply constant scrutiny and constant supervision, such as courts are unable to provide. Be that as it may, that was not the way that Congress chose; it did not condone ‘good trusts’ and condemn ‘bad’ ones; it forbad all. Moreover, in so doing it was not necessarily actuated by economic motives alone. It is possible, because of its indirect social or moral effect, to prefer a sys-tem of small producers, each dependent for his success upon his own skill and character,


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to one in which the great mass of those engaged must accept the direction of a few. These considerations, which we have suggested only as possible purposes of the Act, we think the decisions prove to have been in fact its purposes.

… Starting … with the authoritative premise that all contracts fixing prices are unconditionally prohibited, the only possible difference between them and a monopoly is that while a monopoly necessarily involves an equal, or even greater, power to fix prices, its mere existence might be thought not to constitute an exercise of that power. That dis-tinction is nevertheless purely formal; it would be valid only so long as the monopoly re-mained wholly inert; it would disappear as soon as the monopoly began to operate; for, when it did–that is, as soon as it began to sell at all–it must sell at some price and the only price at which it could sell is a price which it itself fixed. Thereafter the power and its ex-ercise must needs coalesce. Indeed it would be absurd to condemn such contracts uncon-ditionally, and not to extend the condemnation to monopolies; for the contracts are only steps toward that entire control which monopoly confers: they are really partial monopo-lies. … [T]here can be no doubt that the vice of restrictive contracts and of monopoly is really one, it is the denial to commerce of the supposed protection of competition. …

We have been speaking only of the economic reasons which forbid monopoly; but, as we have already implied, there are others, based upon the belief that great indus-trial consolidations are inherently undesirable, regardless of their economic results. In the debates in Congress Senator Sherman himself … showed that among the purposes of Congress in 1890 was a desire to put an end to great aggregations of capital because of the helplessness of the individual before them.1 … Throughout the history of these statutes it has been constantly assumed that one of their purposes was to perpetuate and preserve, for its own sake and in spite of possible cost, an organization of industry in small units which can effectively compete with each other. We hold that ‘Alcoa’s’ mo-nopoly of ingot was of the kind covered by §2.

It does not follow because ‘Alcoa’ had such a monopoly, that it ‘monopolized’ the ingot market: it may not have achieved monopoly; monopoly may have been thrust upon it. … [F]rom the very outset the courts have at least kept in reserve the possibility that the origin of a monopoly may be critical in determining its legality…. This notion has usu-ally been expressed by saying that size does not determine guilt; that there must be some ‘exclusion’ of competitors; that the growth must be something else than ‘natural’ or ‘nor-mal’; that there must be a ‘wrongful intent,’ or some other specific intent; or that some ‘unduly’ coercive means must be used. At times there has been emphasis upon the use of 1 “If the concerted powers of this combination are intrusted to a single man, it is a kingly prerog -ative, inconsistent with our form of government, and should be subject to the strong resistance of the State and national authorities…. The popular mind is agitated with problems that may disturb social order, and among them all none is more threatening than the inequality of condition, of wealth, and opportunity that has grown within a single generation out of the concentration of cap-ital into vast combinations to control production and trade and to break down competition. These combinations already defy or control powerful transportation corporations and reach State author-ities. They reach out their Briarean arms to every part of our country. They are imported from abroad. Congress alone can deal with them, and if we are unwilling or unable there will soon be a trust for every production and a master to fix the price for every necessity of life.” 21 Cong. Record 2457, 2460.


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the active verb, ‘monopolize’…. What engendered these compunctions is reasonably plain; persons may unwittingly find themselves in possession of a monopoly, automati-cally so to say: that is, without having intended either to put an end to existing competi -tion, or to prevent competition from arising when none had existed; they may become monopolists by force of accident. Since the Act makes ‘monopolizing’ a crime, as well as a civil wrong, it would be not only unfair, but presumably contrary to the intent of Congress, to include such instances. A market may, for example, be so limited that it is impossible to produce at all and meet the cost of production except by a plant large enough to supply the whole demand. Or there may be changes in taste or in cost which drive out all but one purveyor. A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that, although the result may expose the public to the evils of monopoly, the Act does not mean to condemn the resultant of those very forces which it is its prime object to foster…. The successful competitor, having been urged to compete, must not be turned upon when he wins. …

It would completely misconstrue ‘Alcoa’s’ position in 1940 to hold that it was the passive beneficiary of a monopoly, following upon an involuntary elimination of com-petitors by automatically operative economic forces. Already in 1909, when its last law-ful monopoly ended, it sought to strengthen its position by unlawful practices, and these concededly continued until 1912. In that year it had two plants in New York, at which it produced less than 42 million pounds of ingot; in 1934 it had five plants (the original two, enlarged; one in Tennessee; one in North Carolina; one in Washington), and its pro-duction had risen to about 327 million pounds, an increase of almost eight-fold. Mean-while not a pound of ingot had been produced by anyone else in the United States. This increase, and this continued and undisturbed control, did not fall undesigned into ‘Al-coa’s’ lap; obviously it could not have done so. It could only have resulted, as it did re-sult, from a persistent determination to maintain the control, with which it found itself vested in 1912. There were at least one or two abortive attempts to enter the industry, but ‘Alcoa’ effectively anticipated and forestalled all competition, and succeeded in holding the field alone. True, it stimulated demand and opened new uses for the metal, but not without making sure that it could supply what it had evoked. There is no dispute as to this; ‘Alcoa’ avows it as evidence of the skill, energy and initiative with which it has al-ways conducted its business; as a reason why, having won its way by fair means, it should be commended, and not dismembered. We need charge it with no moral derelic-tions after 1912; we may assume that all it claims for itself is true. The only question is whether it falls within the exception established in favor of those who do not seek, but cannot avoid, the control of a market. It seems to us that that question scarcely survives its statement. It was not inevitable that it should always anticipate increases in the de-mand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never ex-cluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capac-ity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel. Only in case we interpret ‘exclusion’ as limited to maneuvres not honestly industrial, but actuated solely by a desire to prevent competition, can such a course, indefatigably pursued, be deemed not ‘exclusionary.’ So to limit it


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would in our judgment emasculate the Act; would permit just such consolidations as it was designed to prevent.

‘Alcoa’ answers that it positively assisted competitors, instead of discouraging them. That may be true as to fabricators of ingot; but what of that? They were its market for ingot, and it is charged only with a monopoly of ingot. We can find no instance of its helping prospective ingot manufacturers. …

We disregard any question of ‘intent.’ … Although the primary evil was monop-oly, the Act also covered preliminary steps, which, if continued, would lead to it. These may do no harm of themselves; but, if they are initial moves in a plan or scheme which, carried out, will result in monopoly, they are dangerous and the law will nip them in the bud. For this reason conduct falling short of monopoly, is not illegal unless it is part of a plan to monopolize, or to gain such other control of a market as is equally forbidden. To make it so, the plaintiff must prove what in the criminal law is known as a ‘specific in-tent’; an intent which goes beyond the mere intent to do the act. [However,] no monopo-list monopolizes unconscious of what he is doing. So here, ‘Alcoa’ meant to keep, and did keep, that complete and exclusive hold upon the ingot market with which it started. That was to ‘monopolize’ that market, however innocently it otherwise proceeded. So far as the judgment held that it was not within §2, it must be reversed.

* * *

IV. The Remedies. Nearly five years have passed since the evidence was closed; during that time the aluminum industry, like most other industries, has been revo-lutionized by the nation’s efforts in a great crisis. That alone would make it impossible to dispose of the action upon the basis of the record as we have it; and so both sides agree; both appeal to us to take ‘judicial notice’ of what has taken place meanwhile, though they differ as to what should be the result. The plaintiff wishes us to enter a judgment that ‘Alcoa’ shall be dissolved, and that we shall direct it presently to submit a plan, whose execution, however, is to be deferred until after the war. It also asks a termination of all shareholding in common between ‘Alcoa’ and ‘Limited’; and that injunctions shall go against any resumption of the putative unlawful practices. On the other hand, ‘Alcoa’ ar-gues that, when we look at the changes that have taken place- particularly the enormous capacity of plaintiff’s aluminum plants–it appears that, even though we should conclude that-it had ‘monopolized’ the ingot industry up to 1941, the plaintiff now has in its hands the means to prevent any possible ‘monopolization’ of the industry after the war, which it may use as it wills; and that the occasion has therefore passed forever which might call for, or justify, a dissolution: the litigation has become moot. … We do not agree with ei-ther side….

[I]t is impossible to say what will be ‘Alcoa’s’ position in the industry after the war. The plaintiff has leased to it all its new plants and the leases do not expire until 1947 and 1948, though they may be surrendered earlier. No one can now forecast in the remotest way what will be the form of the industry after the plaintiff has disposed of these plants, upon their surrender. It may be able to transfer all of them to persons who can effectively compete with ‘Alcoa’; it may be able to transfer some; conceivably, it may be unable to dispose of any. The measure of its success will be at least one condi-tion upon the propriety of dissolution, and upon the form which it should take, if there is


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to be any. It is as idle for the plaintiff to assume that dissolution will be proper, as it is for ‘Alcoa’ to assume that it will not be; and it would be particularly fatuous to prepare a plan now, even if we could be sure that eventually some form of dissolution is not a penalty but a remedy; if the industry will not need it for its protection, it will be a disser -vice to break up an aggregation which has for so long demonstrated its efficiency. The need for such a remedy will be for the district court in the first instance….


506 U.S. 447 (1993)

Justice WHITE delivered the opinion of the Court. Section 2 of the Sherman Act … makes it an offense for any person to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part or the trade or com-merce among the several States.” The jury in this case returned a verdict finding that pe-titioners had monopolized, attempted to monopolize, and/or conspired to monopolize. The District Court entered a judgment ruling that petitioners had violated §2, and the Court of Appeals affirmed on the ground that petitioners had attempted to monopolize. The issue we have before us is whether the District Court and the Court of Appeals cor-rectly defined the elements of that offense.

I. Sorbothane is a patented elastic polymer whose shock-absorbing characteristics make it useful in a variety of medical, athletic, and equestrian products. BTR, Inc. (BTR), owns the patent rights to sorbothane, and its wholly owned subsidiaries manufacture the product in the United States and Britain. Hamilton-Kent Manufacturing Company (Hamilton-Kent) and Sorbothane, Inc. (S.I.) were at all relevant times owned by BTR. S.I. was formed in 1982 to take over Hamilton-Kent’s sorbothane business. Respondents Shirley and Larry McQuillan, doing business as Sorboturf Enterprises, were regional dis-tributors of sorbothane products from 1981 to 1983. Petitioner Spectrum Sports, Inc. (Spectrum), was also a distributor of sorbothane products. Petitioner Kenneth B. Leighton, Jr., is a co-owner of Spectrum. Kenneth Leighton, Jr., is the son of Kenneth Leighton, Sr., the president of Hamilton-Kent and S.I. at all relevant times.

In 1980, respondents Shirley and Larry McQuillan signed a letter of intent with Hamilton-Kent, which then owned all manufacturing and distribution rights to sorboth-ane. The letter of intent granted the McQuillans exclusive rights to purchase sorbothane for use in equestrian products. Respondents were designing a horseshoe pad using sor-bothane.

In 1981, Hamilton-Kent decided to establish five regional distributorships for sor-bothane. Respondents were selected to be distributors of all sorbothane products, includ-ing medical products and shoe inserts, in the Southwest. Spectrum was selected as dis-tributor for another region.

In January 1982, Hamilton-Kent shifted responsibility for selling medical prod-ucts from five regional distributors to a single national distributor. In April 1982, Hamil-ton-Kent told respondents that it wanted them to relinquish their athletic shoe distributor-


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ship as a condition for retaining the right to develop and distribute equestrian products. As of May 1982, BTR had moved the sorbothane business from Hamilton-Kent to S.I. In May, the marketing manager of S.I. again made clear that respondents had to sell their athletic distributorship to keep their equestrian distribution rights. At a meeting sched-uled to discuss the sale of respondents’ athletic distributorship to petitioner Leighton, Jr., Leighton, Jr., informed Shirley McQuillan that if she did not come to agreement with him she would be “‘looking for work.’” Respondents refused to sell and continued to distrib-ute athletic shoe inserts.

In the fall of 1982, Leighton, Sr., informed respondents that another concern had been appointed as the national equestrian distributor, and that they were “no longer in-volved in equestrian products.” In January 1983, S.I. began marketing through a national distributor a sorbothane horseshoe pad allegedly indistinguishable from the one designed by respondents. In August 1983, S.I. informed respondents that it would no longer accept their orders. Spectrum thereupon became national distributor of sorbothane athletic shoe inserts. Respondents sought to obtain sorbothane from the BTR’s British subsidiary, but were informed by that subsidiary that it would not sell sorbothane in the United States. Respondents’ business failed.

Respondents sued petitioners seeking damages for alleged violations of §§1 and 2 of the Sherman Act, §3 of the Clayton Act, the Racketeer Influenced and Corrupt Organi-zations Act, and two provisions of California business law. Respondents also alleged fraud, breach of oral contract, interference with prospective business advantage, bad faith denial of the existence of an oral contract, and conversion.

The case was tried to a jury, which returned a verdict against one or more of the defendants on each of the 11 alleged violations on which it was to return a verdict. All of the defendants were found to have violated §2 by, in the words of the verdict sheet, “mo-nopolizing, attempting to monopolize, and/or conspiring to monopolize.” Petitioners were also found to have violated civil RICO and the California unfair practices law, but not §1 of the Sherman Act. The jury awarded $1,743,000 in compensatory damages on each of the violations found to have occurred. This amount was trebled under §4 of the Clayton Act. The District Court also awarded nearly $1 million in attorneys’ fees and de-nied motions for judgment notwithstanding the verdict and for a new trial.

The Court of Appeals for the Ninth Circuit affirmed the judgment in an unpub-lished opinion. The court expressly ruled that the trial court had properly instructed the jury on the Sherman Act claims and found that the evidence supported the liability ver-dicts as well as the damages awards on these claims. The court then affirmed the judg-ment of the District Court, finding it unnecessary to rule on challenges to other violations found by the jury. On the §2 issue that petitioners present here, the Court of Appeals, noting that the jury had found that petitioners had violated §2 without specifying whether they had monopolized, attempted to monopolize, or conspired to monopolize, held that the verdict would stand if the evidence supported any one of the three possible violations of §2. The court went on to conclude that a case of attempted monopolization had been established.4 The court rejected petitioners’ argument that attempted monopolization had not been established because respondents had failed to prove that petitioners had a spe-

4 The District Court’s jury instructions were transcribed as follows:


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cific intent to monopolize a relevant market. The court also held that in order to show that respondents’ attempt to monopolize was likely to succeed it was not necessary to present evidence of the relevant market or of the defendants’ market power. In so doing, the Ninth Circuit relied on Lessig v. Tidewater Oil Co., 327 F.2d 459 (CA9), cert. denied, 377 U.S. 993 (1964), and its progeny. The Court of Appeals noted that these cases, in dealing with attempt to monopolize claims, had ruled that “if evidence of unfair or preda-tory conduct is presented, it may satisfy both the specific intent and dangerous probability elements of the offense, without any proof of relevant market or the defendant’s market-power [sic].” If, however, there is insufficient evidence of unfair or predatory conduct, there must be a showing of “relevant market or the defendant’s marketpower [sic].” The court went on to find:

There is sufficient evidence from which the jury could conclude that the S.I. Group and Spectrum Group engaged in unfair or predatory conduct and thus inferred that they had the specific intent and the dangerous probability of success and, therefore, McQuillan did not have to prove relevant market or the defendant’s marketing power.

The decision below, and the Lessig line of decisions on which it relies, conflicts with holdings of courts in other Circuits. Every other Court of Appeals has indicated that proving an attempt to monopolize requires proof of a dangerous probability of monopo-lization of a relevant market. We granted certiorari to resolve this conflict among the Circuits. We reverse.

II. While §1 of the Sherman Act forbids contracts or conspiracies in restraint of trade or commerce, §2 addresses the actions of single firms that monopolize or attempt to mo-nopolize, as well as conspiracies and combinations to monopolize. Section 2 does not de-fine the elements of the offense of attempted monopolization. Nor is there much guid-ance to be had in the scant legislative history of that provision, which was added late in the legislative process. The legislative history does indicate that much of the interpreta-tion of the necessarily broad principles of the Act was to be left for the courts in particu-lar cases.

This Court first addressed the meaning of attempt to monopolize under §2 in Swift & Co. v. U.S., 196 U.S. 375 (1905). The Court’s opinion, written by Justice Holmes, contained the following passage:

Where acts are not sufficient in themselves to produce a result which the law seeks to prevent–for instance, the monopoly–but require further acts in addition to the mere forces of nature to bring that result to pass, an intent to bring it to pass is necessary in order to produce a dangerous probability that it will happen. … But when that intent and the con-

In order to win on the claim of attempted monopoly, the Plaintiff must prove each of the following elements by a preponderance of the evidence: first, that the Defendants had a specific intent to achieve monopoly power in the relevant market; second, that the Defendants engaged in exclu-sionary or restrictive conduct in furtherance of its specific intent; third, that there was a dangerous probability that Defendants could sooner or later achieve [their] goal of monopoly power in the relevant market; fourth, that the Defendants' conduct occurred in or affected interstate commerce; and, fifth, that the Plaintiff was injured in the business or property by the Defendants' exclusionary or restrictive conduct. … If the Plaintiff has shown that the Defendant engaged in predatory conduct, you may infer from that evidence the specific intent and the dangerous probability element of the offense without any proof of the relevant market or the Defendants' marketing [sic] power.


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sequent dangerous probability exist, this statute, like many others and like the common law in some cases, directs itself against that dangerous probability as well as against the completed result.

The Court went on to explain, however, that not every act done with intent to pro-duce an unlawful result constitutes an attempt. “It is a question of proximity and degree.” Swift thus indicated that intent is necessary, but alone is not sufficient, to establish the dangerous probability of success that is the object of §2’s prohibition of attempts.7

The Court’s decisions since Swift have reflected the view that the plaintiff charg-ing attempted monopolization must prove a dangerous probability of actual monopoliza-tion, which has generally required a definition of the relevant market and examination of market power. In Walker Process Equipment v. Food Machinery & Chemical Corp., 382 U.S. 172, 177 (1965), we found that enforcement of a fraudulently obtained patent claim could violate the Sherman Act. We stated that, to establish monopolization or attempt to monopolize under §2 of the Sherman Act, it would be necessary to appraise the exclu-sionary power of the illegal patent claim in terms of the relevant market for the product involved. The reason was that “[w]ithout a definition of that market there is no way to measure [the defendant’s] ability to lessen or destroy competition.”

Similarly, this Court reaffirmed in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984), that “Congress authorized Sherman Act scrutiny of sin-gle firms only when they pose a danger of monopolization. Judging unilateral conduct in this manner reduces the risk that the antitrust laws will dampen the competitive zeal of a single aggressive entrepreneur.” Thus, the conduct of a single firm, governed by §2, “is unlawful only when it threatens actual monopolization.”

The Courts of Appeals other than the Ninth Circuit have followed this approach. Consistent with our cases, it is generally required that to demonstrate attempted monopo-lization a plaintiff must prove (1) that the defendant has engaged in predatory or anticom-petitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power. In order to determine whether there is a dangerous proba-bility of monopolization, courts have found it necessary to consider the relevant market and the defendant’s ability to lessen or destroy competition in that market.

Notwithstanding the array of authority contrary to Lessig, the Court of Appeals in this case reaffirmed its prior holdings; indeed, it did not mention either this Court’s deci-sions discussed above or the many decisions of other Courts of Appeals reaching contrary results. Respondents urge us to affirm the decision below. We are not at all inclined, however, to embrace Lessig’s interpretation of §2, for there is little if any support for it in the statute or the case law, and the notion that proof of unfair or predatory conduct alone is sufficient to make out the offense of attempted monopolization is contrary to the purpose and policy of the Sherman Act.

7 Justice Holmes confirmed that this was his interpretation of Swift in Hyde v. U.S., 225 U.S. 347, 387-388. In dissenting in that case on other grounds, the Justice, citing Swift, stated that an at-tempt may be found where the danger of harm is very great; however, “combination, intention and overt act may all be present without amounting to a criminal attempt.... There must be dan -gerous proximity to success.”


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The Lessig opinion claimed support from the language of §2, which prohibits at-tempts to monopolize “any part” of commerce, and therefore forbids attempts to monopo-lize any appreciable segment of interstate sales of the relevant product. The “any part” clause, however, applies to charges of monopolization as well as to attempts to monopo-lize, and it is beyond doubt that the former requires proof of market power in a relevant market. Grinnell; DuPont.

In support of its determination that an inference of dangerous probability was per-missible from a showing of intent, the Lessig opinion cited, and added emphasis to, this Court’s reference in its opinion in Swift to “intent and the consequent dangerous probabil-ity.” 327 F.2d at 474 n.46, quoting 196 U.S. at 396. But any question whether dangerous probability of success requires proof of more than intent alone should have been removed by the subsequent passage in Swift which stated that “not every act that may be done with an intent to produce an unlawful result ... constitutes an attempt. It is a question of prox-imity and degree.” 196 U.S. at 402. …

It is also our view that Lessig and later Ninth Circuit decisions refining and apply-ing it are inconsistent with the policy of the Sherman Act. The purpose of the Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself. It does so not out of solicitude for private concerns but out of concern for the public inter-est. Thus, this Court and other courts have been careful to avoid constructions of §2 which might chill competition, rather than foster it. It is sometimes difficult to distin-guish robust competition from conduct with long-term anticompetitive effects; more-over, single-firm activity is unlike concerted activity covered by §1, which “inherently is fraught with anticompetitive risk.” Copperweld, 467 U.S., at 767-769. For these reasons, §2 makes the conduct of a single firm unlawful only when it actually monopolizes or dangerously threatens to do so. The concern that §2 might be applied so as to further anti-competitive ends is plainly not met by inquiring only whether the defendant has engaged in “unfair” or “predatory” tactics. Such conduct may be sufficient to prove the necessary intent to monopolize, which is something more than an intent to compete vigorously, but demonstrating the dangerous probability of monopolization in an attempt case also re-quires inquiry into the relevant product and geographic market and the defendant’s eco-nomic power in that market.

III. We hold that petitioners may not be liable for attempted monopolization under §2 of the Sherman Act absent proof of a dangerous probability that they would monopolize a particular market and specific intent to monopolize. In this case, the trial instructions al-lowed the jury to infer specific intent and dangerous probability of success from the de-fendants’ predatory conduct, without any proof of the relevant market or of a realistic probability that the defendants could achieve monopoly power in that market. In this re-spect, the instructions misconstrued §2, as did the Court of Appeals in affirming the judg-ment of the District Court. Since the affirmance of the §2 judgment against petitioners rested solely on the legally erroneous conclusion that petitioners had attempted to monop-olize in violation of §2 and since the jury’s verdict did not negate the possibility that the §2 verdict rested on the attempt to monopolize ground alone, the judgment of the Court


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of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.


472 U.S. 585 (1985)

Justice STEVENS delivered the opinion of the Court: In a private treble-damages ac-tion, the jury found that petitioner Aspen Skiing Company (Ski Co.) had monopolized the market for downhill skiing services in Aspen, Colorado. The question presented is whether … a firm with monopoly power has a duty to cooperate with its smaller rivals in a marketing arrangement….

I. Aspen is a destination ski resort…. Between 1945 and 1960, private investors in-dependently developed three major facilities for downhill skiing: Aspen Mountain (Ajax), Aspen Highlands (Highlands), and Buttermilk. A fourth mountain, Snowmass, opened in 1967. The development of any major additional facilities is hindered by practi-cal considerations and regulatory obstacles….

Between 1958 and 1964, three independent companies operated Ajax, Highlands, and Buttermilk. In the early years, each company offered its own day or half-day tickets for use of its mountain. In 1962, however, the three competitors also introduced an inter-changeable ticket. The 6-day, all-Aspen ticket provided convenience to the vast majority of skiers who visited the resort for weekly periods, but preferred to remain flexible about what mountain they might ski each day during the visit. It also emphasized the unusual variety in ski mountains available in Aspen.

As initially designed, the all-Aspen ticket program consisted of booklets contain-ing six coupons, each redeemable for a daily lift ticket at Ajax, Highlands, or Buttermilk. The price of the booklet was often discounted from the price of six daily tickets, but all six coupons had to be used within a limited period of time–seven days, for example. The revenues from the sale of the 3-area coupon books were distributed in accordance with the number of coupons collected at each mountain.

In 1964, Buttermilk was purchased by Ski Co., but the interchangeable ticket pro-gram continued. In *most seasons after it acquired Buttermilk, Ski Co. offered 2-area, 6- or 7-day tickets featuring Ajax and Buttermilk in competition with the 3-area, 6-coupon booklet. Although it sold briskly, the all-Aspen ticket did not sell as well as Ski Co.’s multiarea ticket until Ski Co. opened Snowmass in 1967. Thereafter, the all-Aspen coupon booklet began to outsell Ski Co.’s ticket featuring only its mountains.

In the 1971-1972 season, the coupon booklets were discontinued and an “around the neck” all-Aspen ticket was developed. This refinement on the interchangeable ticket was advantageous to the skier, who no longer found it necessary to visit the ticket win-dow every morning before gaining access to the slopes. Lift operators at Highlands mon-itored usage of the ticket in the 1971-1972 season by recording the ticket numbers of per-sons going onto the slopes of that mountain. Highlands officials periodically met with


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Ski Co. officials to review the figures recorded at Highlands, and to distribute revenues based on that count.

There was some concern that usage of the all-Aspen ticket should be monitored by a more scientific method than the one used in the 1971-1972 season. After a one-sea-son absence, the 4-area ticket returned in the 1973-1974 season with a new method of al-locating revenues based on usage. Like the 1971-1972 ticket, the 1973-1974 4-area ticket consisted of a badge worn around the skier’s neck. Lift operators punched the ticket when the skier first sought access to the mountain each day. A random-sample survey was commissioned to determine how many skiers with the 4-area ticket used each mountain, and the parties allocated revenues from the ticket sales in accordance with the survey’s results.

In the next four seasons, Ski Co. and Highlands used such surveys to allocate the revenues from the 4-area, 6-day ticket. Highlands’ share of the revenues from the ticket was 17.5% in 1973-1974, 18.5% in 1974-1975, 16.8% in 1975-1976, and 13.2% in 1976-1977. During these four seasons, Ski Co. did not offer its own 3-area, multi-day ticket in competition with the all-Aspen ticket. By 1977, multi-area tickets accounted for nearly 35% of the total market. ...

Between 1962 and 1977, Ski Co. and Highlands had independently offered vari-ous mixes of 1-day, 3-day, and 6-day passes at their own mountains. In every season ex-cept one, however, they had also offered some form of all-Aspen, 6-day ticket, and di-vided the revenues from those sales on the basis of usage. Nevertheless, for the 1977-1978 season, Ski Co. offered to continue the all-Aspen ticket only if Highlands would ac-cept a 13.2% fixed share of the ticket’s revenues.

Although that had been Highlands’ share of the ticket revenues in 1976-1977, Highlands contended that that season was an inaccurate measure of its market perfor-mance since it had been marked by unfavorable weather and an unusually low number of visiting skiers. Moreover, Highlands wanted to continue to divide revenues on the basis of actual usage, as that method of distribution allowed it to compete for the daily loyalties of the skiers who had purchased the tickets. Fearing that the alternative might be no in-terchangeable ticket at all, and hoping to persuade Ski Co. to reinstate the usage division of revenues, Highlands eventually accepted a fixed percentage of 15% for the 1977-1978 season. No survey was made during that season of actual usage of the 4-area ticket at the two competitors’ mountains.

In the 1970’s the management of Ski Co. increasingly expressed their dislike for the all-Aspen ticket. They complained that a coupon method of monitoring usage was administratively cumbersome. They doubted the accuracy of the survey and decried the “appearance, deportment, [and] attitude” of the college students who were conducting it. In addition, Ski Co.’s president had expressed the view that the 4-area ticket was siphon-ing off revenues that could be recaptured by Ski Co. if the ticket was discontinued. In fact, Ski Co. had reinstated its 3-area, 6-day ticket during the 1977-1978 season, but that ticket had been outsold by the 4-area, 6-day ticket nearly two to one.

In March 1978, the Ski Co. management recommended to the board of directors that the 4-area ticket be discontinued for the 1978-1979 season. The board decided to of-fer Highlands a 4-area ticket provided that Highlands would agree to receive a 12.5%


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fixed percentage of the revenue–considerably below Highlands’ historical average based on usage. Later in the 1978-1979 season, a member of Ski Co.’s board of directors can-didly informed a Highlands official that he had advocated making Highlands “an offer that [it] could not accept.”

Finding the proposal unacceptable, Highlands suggested a distribution of the rev-enues based on usage to be monitored by coupons, electronic counting, or random sample surveys. If Ski Co. was concerned about who was to conduct the survey, Highlands pro-posed to hire disinterested ticket counters at its own expense–”somebody like Price Wa-terhouse”–to count or survey usage of the 4-area ticket at Highlands. Ski Co. refused to consider any counterproposals, and Highlands finally rejected the offer of the fixed per-centage.

As far as Ski Co. was concerned, the all-Aspen ticket was dead. In its place Ski Co. offered the 3-area, 6-day ticket featuring only its mountains. In an effort to promote this ticket, Ski Co. embarked on a national advertising campaign that strongly implied to people who were unfamiliar with Aspen that Ajax, Buttermilk, and Snowmass were the only ski mountains in the area. … Ski Co. took additional actions that made it extremely difficult for Highlands to market its own multiarea package to replace the joint offering. Ski Co. discontinued the 3-day, 3-area pass for the 1978-1979 season,13 and also refused to sell Highlands any lift tickets, either at the tour operator’s discount or at retail. High-lands finally developed an alternative product, the “Adventure Pack,” which consisted of a 3-day pass at Highlands and three vouchers, each equal to the price of a daily lift ticket at a Ski Co. mountain. The vouchers were guaranteed by funds on deposit in an Aspen bank, and were redeemed by Aspen merchants at full value. Ski Co., however, refused to accept them.

Later, Highlands redesigned the Adventure Pack to contain American Express Traveler’s Checks or money orders instead of vouchers. Ski Co. eventually accepted these negotiable instruments in exchange for daily lift tickets. Despite some strengths of the product, the Adventure Pack met considerable resistance from tour operators and con-sumers who had grown accustomed to the convenience and flexibility provided by the all-Aspen ticket.

… Highlands’ share of the market for downhill skiing services in Aspen declined steadily after the 4-area ticket based on usage was abolished in 1977: from 20.5% in 1976-1977 … to 11% in 1980-1981. Highlands’ revenues from associated skiing services like the ski school, ski rentals, amateur racing events, and restaurant facilities declined sharply as well.

II. In 1979, Highlands filed a complaint [alleging] that Ski Co. had monopolized the market for downhill skiing services at Aspen in violation of §2 of the Sherman Act, and prayed for treble damages. The case was tried to a jury which rendered a verdict finding

13 Highlands’ owner explained that there was a key difference between the 3-day, 3-area ticket and the 6-day, 3-area ticket: “with the three day ticket, a person could ski on the ... Aspen Skiing Corporation mountains for three days and then there would be three days in which he could ski on our mountain; but with the six-day ticket, we are absolutely locked out of those people.” As a re-sult of “tremendous consumer demand” for a 3-day ticket, Ski Co. reinstated it late in the 1978-1979 season, but without publicity or a discount off the daily rate.


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Ski Co. guilty of the §2 violation and calculating Highlands’ actual damages at $2.5 mil-lion.

In her instructions to the jury, the District Judge explained that the offense of mo-nopolization under §2 of the Sherman Act has two elements: (1) the possession of mo-nopoly power in a relevant market, and (2) the willful acquisition, maintenance, or use of that power by anticompetitive or exclusionary means or for anticompetitive or exclusion-ary purposes. Although the first element was vigorously disputed at the trial and in the Court of Appeals, in this Court Ski Co. does not challenge the jury’s special verdict find-ing that it possessed monopoly power.20 Nor does Ski Co. criticize the trial court’s in-structions to the jury concerning the second element of the §2 offense.

On this element, the jury was instructed that it had to consider whether “Aspen Skiing Corporation willfully acquired, maintained, or used that power by anti-competitive or exclusionary means or for anti-competitive or exclusionary purposes.” The instruc-tions elaborated:

In considering whether the means or purposes were anti-competitive or exclusionary, you must draw a distinction here between practices which tend to exclude or restrict competi-tion on the one hand and the success of a business which reflects only a superior product, a well-run business, or luck, on the other. The line between legitimately gained monop-oly, its proper use and maintenance, and improper conduct has been described in various ways. It has been said that obtaining or maintaining monopoly power cannot represent monopolization if the power was gained and maintained by conduct that was honestly in-dustrial. Or it is said that monopoly power which is thrust upon a firm due to its superior business ability and efficiency does not constitute monopolization.

For example, a firm that has lawfully acquired a monopoly position is not barred from taking advantage of scale economies by constructing a large and efficient factory. These benefits are a consequence of size and not an exercise of monopoly power. Nor is a cor-poration which possesses monopoly power under a duty to cooperate with its business ri-vals. Also a company which possesses monopoly power and which refuses to enter into a joint operating agreement with a competitor or otherwise refuses to deal with a competi -tor in some manner does not violate Section 2 if valid business reasons exist for that re -fusal.

In other words, if there were legitimate business reasons for the refusal, then the defen-dant, even if he is found to possess monopoly power in a relevant market, has not vio-lated the law. We are concerned with conduct which unnecessarily excludes or handicaps competitors. This is conduct which does not benefit consumers by making a better prod-uct or service available–or in other ways–and instead has the effect of impairing competi-tion.

To sum up, you must determine whether Aspen Skiing Corporation gained, maintained, or used monopoly power in a relevant market by arrangements and policies which rather than being a consequence of a superior product, superior business sense, or historic ele-ment, were designed primarily to further any domination of the relevant market or sub-market.

20 The jury found that the relevant product market was "[d]ownhill skiing at destination ski re-sorts," that the "Aspen area" was a relevant geographic submarket, and that during the years 1977-1981, Ski Co. possessed monopoly power, defined as the power to control prices in the rele-vant market or to exclude competitors.


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The jury answered a specific interrogatory finding the second element of the offense as defined in these instructions.

Ski Co. filed a motion for judgment notwithstanding the verdict, contending that the evidence was insufficient to support a §2 violation as a matter of law. … The District Court denied Ski Co.’s motion and entered a judgment awarding Highlands treble dam-ages of $7,500,000, costs and attorney’s fees. The Court of Appeals affirmed in all re-spects. …

III. In this Court, Ski Co. contends that even a firm with monopoly power has no duty to engage in joint marketing with a competitor, that a violation of §2 cannot be estab-lished without evidence of substantial exclusionary conduct, and that none of its activities can be characterized as exclusionary. …

“The central message of the Sherman Act is that a business entity must find new customers and higher profits through internal expansion–that is, by competing success-fully rather than by arranging treaties with its competitors.” U.S. v. Citizens & Southern National Bank, 422 U.S. 86, 116 (1975). Ski Co., therefore, is surely correct in submit-ting that even a firm with monopoly power has no general duty to engage in a joint mar-keting program with a competitor. Ski Co. is quite wrong, however, in suggesting that the judgment in this case rests on any such proposition of law. For the trial court unam-biguously instructed the jury that a firm possessing monopoly power has no duty to coop-erate with its business rivals.

The absence of an unqualified duty to cooperate does not mean that every time a firm declines to participate in a particular cooperative venture, that decision may not have evidentiary significance, or that it may not give rise to liability in certain circumstances. The absence of a duty to transact business with another firm is, in some respects, merely the counterpart of the independent businessman’s cherished right to select his customers and his associates. The high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified.27

In Lorain Journal Co. v. U.S., 342 U.S. 143 (1951), we squarely held that this right was not unqualified. Between 1933 and 1948 the publisher of the Lorain Journal, a newspaper, was the only local business disseminating news and advertising in that Ohio town. In 1948, a small radio station was established in a nearby community. In an effort to destroy its small competitor, and thereby regain its “pre-1948 substantial monopoly over the mass dissemination of all news and advertising,” the Journal refused to sell ad-vertising to persons that patronized the radio station.

In holding that this conduct violated §2 of the Sherman Act, the Court dispatched the same argument raised by the monopolist here:

The publisher claims a right as a private business concern to select its customers and to refuse to accept advertisements from whomever it pleases. We do not dispute that gen-eral right. ‘But the word “right” is one of the most deceptive of pitfalls; it is so easy to slip from a qualified meaning in the premise to an unqualified one in the conclusion. … The right claimed by the publisher is neither absolute nor exempt from regulation. Its exercise as a purposeful means of monopolizing interstate commerce is prohibited by the

27 Under §1 of the Sherman Act, a business “generally has a right to deal, or refuse to deal, with whomever it likes, as long as it does so independently.” Monsanto; Colgate.


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Sherman Act. The operator of the radio station, equally with the publisher of the newspa-per, is entitled to the protection of that Act. ‘In the absence of any purpose to create or maintain a monopoly, the act does not restrict the long recognized right of trader or man-ufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.’ … U.S. v. Colgate & Co., 250 U.S. 300, 307.

The Court approved the entry of an injunction ordering the Journal to print the advertise-ments of the customers of its small competitor. …

The qualification on the right of a monopolist to deal with whom he pleases is not so narrow that it encompasses no more than the circumstances of Lorain Journal. In the actual case that we must decide, the monopolist did not merely reject a novel offer to par-ticipate in a cooperative venture that had been proposed by a competitor. Rather, the mo-nopolist elected to make an important change in a pattern of distribution that had origi-nated in a competitive market and had persisted for several years. The all-Aspen, 6-day ticket with revenues allocated on the basis of usage was first developed when three inde-pendent companies operated three different ski mountains in the Aspen area. It continued to provide a desirable option for skiers when the market was enlarged to include four mountains, and when the character of the market was changed by Ski Co.’s acquisition of monopoly power. Moreover, since the record discloses that interchangeable tickets are used in other multi-mountain areas which apparently are competitive, it seems appropri-ate to infer that such tickets satisfy consumer demand in free competitive markets.

Ski Co.’s decision to terminate the all-Aspen ticket was thus a decision by a mo-nopolist to make an important change in the character of the market.31 Such a decision is not necessarily anticompetitive, and Ski Co. contends that neither its decision, nor the conduct in which it engaged to implement that decision, can fairly be characterized as ex-clusionary in this case. It recognizes, however, that as the case is presented to us, we must interpret the entire record in the light most favorable to Highlands and give to it the benefit of all inferences which the evidence fairly supports, even though contrary infer-ences might reasonably be drawn.

Moreover, we must assume that the jury followed the court’s instructions. The jury must, therefore, have drawn a distinction “between practices which tend to exclude or restrict competition on the one hand, and the success of a business which reflects only a superior product, a well-run business, or luck, on the other.” Since the jury was unam-biguously instructed that Ski Co.’s refusal to deal with Highlands “does not violate Sec-tion 2 if valid business reasons exist for that refusal,” we must assume that the jury con-3 1 In any business, patterns of distribution develop over time; these may reasonably be thought

to be more efficient than alternative patterns of distribution that do not develop. The patterns that do develop and persist we may call the optimal patterns. By disturbing optimal distribution pat-terns one rival can impose costs upon another, that is, force the other to accept higher costs.


In §1 cases where this Court has applied the per se approach to invalidity to concerted re-fusals to deal, “the boycott often cut off access to a supply, facility or market necessary to enable the boycotted firm to compete, ... and frequently the boycotting firms possessed a dominant posi-tion in the relevant market.” Northwest Wholesale Stationers.


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cluded that there were no valid business reasons for the refusal. The question then is whether that conclusion finds support in the record.

IV. The question whether Ski Co.’s conduct may properly be characterized as exclu-sionary cannot be answered by simply considering its effect on Highlands. In addition, it is relevant to consider its impact on consumers and whether it has impaired competition in an unnecessarily restrictive way.32 If a firm has been “attempting to exclude rivals on some basis other than efficiency,” [R. BORK, THE ANTITRUST PARADOX 138 (1978)] it is fair to characterize its behavior as predatory. It is, accordingly, appropriate to examine the effect of the challenged pattern of conduct on consumers, on Ski Co.’s smaller rival, and on Ski Co. itself.

Superior Quality of the All-Aspen Ticket. The average Aspen visitor “is a well-educated, relatively affluent, experienced skier who has skied a number of times in the past....” Over 80% of the skiers visiting the resort each year have been there before–40% of these repeat visitors have skied Aspen at least five times. Over the years, they devel-oped a strong demand for the 6-day, all-Aspen ticket in its various refinements. Most ex-perienced skiers quite logically prefer to purchase their tickets at once for the whole pe-riod that they will spend at the resort; they can then spend more time on the slopes and enjoying apres-ski amenities and less time standing in ticket lines. The 4-area attribute of the ticket allowed the skier to purchase his 6-day ticket in advance while reserving the right to decide in his own time and for his own reasons which mountain he would ski on each day. It provided convenience and flexibility, and expanded the vistas and the num-ber of challenging runs available to him during the week’s vacation.34

While the 3-area, 6-day ticket offered by Ski Co. possessed some of these at-tributes, the evidence supports a conclusion that consumers were adversely affected by the elimination of the 4-area ticket. In the first place, the actual record of competition be-tween a 3-area ticket and the all-Aspen ticket in the years after 1967 indicated that skiers demonstrably preferred four mountains to three. Highlands’ expert marketing witness tes-tified that many of the skiers who come to Aspen want to ski the four mountains, and the abolition of the 4-area pass made it more difficult to satisfy that ambition. A consumer

32 “Thus, ‘exclusionary’ comprehends at the most behavior that not only (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way.” 3 P. AREEDA & D. TURNER, ANTITRUST LAW 78 (1978).

34 Highlands’ expert marketing witness testified that visitors to the Aspen resort

are looking for a variety of skiing experiences, partly because they are going to be there for a week and they are going to get bored if they ski in one area for very long; and also they come with peo-ple of varying skills. They need some variety of slopes so that if they want to go out and ski the difficult areas, their spouses or their buddies who are just starting out skiing can go on the bunny hill or the not-so-difficult slopes.

The owner of a condominium management company added:

The guest is coming for a first-class destination ski experience, and part of that, I think, is the ex-pectation of perhaps having available to him the ability to ski all of what is there; i.e., four moun-tains vs. three mountains. It helps enhance the quality of the vacation experience.


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survey undertaken in the 1979-1980 season indicated that 53.7% of the respondents wanted to ski Highlands, but would not; 39.9% said that they would not be skiing at the mountain of their choice because their ticket would not permit it.

Expert testimony and anecdotal evidence supported these statistical measures of consumer preference. A major wholesale tour operator asserted that he would not even consider marketing a 3-area ticket if a 4-area ticket were available. During the 1977-1978 and 1978-1979 seasons, people with Ski Co.’s 3-area ticket came to Highlands “on a very regular basis” and attempted to board the lifts or join the ski school.36 Highlands officials were left to explain to angry skiers that they could only ski at Highlands or join its ski school by paying for a 1-day lift ticket. Even for the affluent, this was an irritating situation because it left the skier the option of either wasting 1 day of the 6-day, 3-area pass or obtaining a refund which could take all morning and entailed the forfeit of the 6-day discount. An active officer in the Atlanta Ski Club testified that the elimination of the 4-area pass “infuriated” him.

Highlands’ Ability to Compete. The adverse impact of Ski Co.’s pattern of con-duct on Highlands is not disputed in this Court. Expert testimony described the extent of its pecuniary injury. The evidence concerning its attempt to develop a substitute product either by buying Ski Co.’s daily tickets in bulk, or by marketing its own Adventure Pack, demonstrates that it tried to protect itself from the loss of its share of the patrons of the all-Aspen ticket. The development of a new distribution system for providing the experi-ence that skiers had learned to expect in Aspen proved to be prohibitively expensive. As a result, Highlands’ share of the relevant market steadily declined after the 4-area ticket was terminated. The size of the damages award also confirms the substantial character of the effect of Ski Co.’s conduct upon Highlands.38

Ski Co.’s Business Justification. Perhaps most significant, however, is the evi-dence relating to Ski Co. itself, for Ski Co. did not persuade the jury that its conduct was justified by any normal business purpose. Ski Co. was apparently willing to forgo daily ticket sales both to skiers who sought to exchange the coupons contained in Highlands’ Adventure Pack, and to those who would have purchased Ski Co. daily lift tickets from Highlands if Highlands had been permitted to purchase them in bulk. The jury may well have concluded that Ski Co. elected to forgo these short-run benefits because it was more

36 For example, the marketing director of Highlands’ ski school reported that one frustrated con-sumer was a dentist from

the Des Moines area [who] came out with two of his children, and he had been told by our base lift operator that he could not board. He became somewhat irate and she had referred him to my of-fice, which is right there on the ski slopes. He came into my office and started out, ‘Well, I want to go skiing here, and I don’t understand why I can’t.’ When we got the situation slowed down and explained that there were two different tickets, well, what came out is irritation occurred be-cause he had intended when he came to Aspen to be able to ski all areas....

38 In considering the competitive effect of Ski Co.’s refusal to deal or cooperate with Highlands, it is not irrelevant to note that similar conduct carried out by the concerted action of three indepen-dent rivals with a similar share of the market would constitute a per se violation of §1….


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interested in reducing competition in the Aspen market over the long run by harming its smaller competitor.

That conclusion is strongly supported by Ski Co.’s failure to offer any efficiency justification whatever for its pattern of conduct. In defending the decision to terminate the jointly offered ticket, Ski Co. claimed that usage could not be properly monitored. The evidence, however, established that Ski Co. itself monitored the use of the 3-area passes based on a count taken by lift operators, and distributed the revenues among its mountains on that basis. Ski Co. contended that coupons were administratively cumber-some, and that the survey takers had been disruptive and their work inaccurate. Coupons, however, were no more burdensome than the credit cards accepted at Ski Co. ticket win-dows. Moreover, in other markets Ski Co. itself participated in interchangeable lift tick-ets using coupons. As for the survey, its own manager testified that the problems were much overemphasized by Ski Co. officials, and were mostly resolved as they arose. Ski Co.’s explanation for the rejection of Highlands’ offer to hire–at its own expense–a rep-utable national accounting firm to audit usage of the 4-area tickets at Highlands’ moun-tain, was that there was no way to “control” the audit.

In the end, Ski Co. was pressed to justify its pattern of conduct on a desire to dis-associate itself from what it considered the inferior skiing services offered at Highlands. The all-Aspen ticket based on usage, however, allowed consumers to make their own choice on these matters of quality. Ski Co.’s purported concern for the relative quality of Highlands’ product was supported in the record by little more than vague insinuations, and was sharply contested by numerous witnesses. Moreover, Ski Co. admitted that it was willing to associate with what it considered to be inferior products in other markets.

… [T]he record in this case comfortably supports an inference that the monopolist made a deliberate effort to discourage its customers from doing business with its smaller rival. The sale of its 3-area, 6-day ticket, particularly when it was discounted below the daily ticket price, deterred the ticket holders from skiing at Highlands. The refusal to ac-cept the Adventure Pack coupons in exchange for daily tickets was apparently motivated entirely by a decision to avoid providing any benefit to Highlands even though accepting the coupons would have entailed no cost to Ski Co. itself, would have provided it with immediate benefits, and would have satisfied its potential customers. Thus the evidence supports an inference that Ski Co. was not motivated by efficiency concerns and that it was willing to sacrifice short-run benefits and consumer goodwill in exchange for a per-ceived long-run impact on its smaller rival. Because we are satisfied that the evidence in the record, construed most favorably in support of Highlands’ position, is adequate to support the verdict under the instructions given by the trial court, the judgment of the Court of Appeals is Affirmed.


540 U.S. 398 (2004)


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SCALIA, J., delivered the opinion of the Court. … Petitioner Verizon Communica-tions Inc. is the incumbent local exchange carrier (LEC) serving New York State. Before the 1996 Act, Verizon, like other incumbent LECs, enjoyed an exclusive franchise within its local service area. The 1996 Act sought to “uproo[t]” the incumbent LECs’ monopoly and to introduce competition in its place. Central to the scheme of the Act is the incum-bent LEC’s obligation under 47 U.S.C. §251(c) to share its network with competitors, in-cluding provision of access to individual elements of the network on an “unbundled” ba-sis. New entrants, so-called competitive LECs, resell these unbundled network elements (UNEs), recombined with each other or with elements belonging to the LECs.

Verizon, like other incumbent LECs, has taken two significant steps within the Act’s framework in the direction of increased competition. First, Verizon has signed in-terconnection agreements with rivals such as AT&T, as it is obliged to do under §252, detailing the terms on which it will make its network elements available. (Because Veri-zon and AT&T could not agree upon terms, the open issues were subjected to compul-sory arbitration under §§252(b) and (c).) In 1997, the state regulator, New York’s Public Service Commission (PSC), approved Verizon’s interconnection agreement with AT&T.

Second, Verizon has taken advantage of the opportunity provided by the 1996 Act for incumbent LECs to enter the long-distance market (from which they had long been excluded). That required Verizon to satisfy, among other things, a 14-item checklist of statutory requirements, which includes compliance with the Act’s network-sharing duties. Checklist item two, for example, includes “nondiscriminatory access to network elements in accordance with the requirements” of §251(c)(3). Whereas the state regulator approves an interconnection agreement, for long-distance approval the incumbent LEC applies to the Federal Communications Commission (FCC). In December 1999, the FCC approved Verizon’s [long-distance] application for New York..

Part of Verizon’s UNE obligation under §251(c)(3) is the provision of access to operations support systems (OSS), a set of systems used by incumbent LECs to provide services to customers and ensure quality. Verizon’s interconnection agreement and long-distance authorization each specified the mechanics by which its OSS obligation would be met. As relevant here, a competitive LEC sends orders for service through an elec-tronic interface with Verizon’s ordering system, and as Verizon completes certain steps in filling the order, it sends confirmation back through the same interface. Without OSS access a rival cannot fill its customers’ orders.

In late 1999, competitive LECs complained to regulators that many orders were going unfilled, in violation of Verizon’s obligation to provide access to OSS functions. The PSC and FCC opened parallel investigations, which led to a series of orders by the PSC and a consent decree with the FCC. Under the FCC consent decree, Verizon under-took to make a “voluntary contribution” to the U.S. Treasury in the amount of $3 million; under the PSC orders, Verizon incurred liability to the competitive LECs in the amount of $10 million. Under the consent decree and orders, Verizon was subjected to new per-formance measurements and new reporting requirements …, with additional penalties for continued noncompliance. In June 2000, the FCC terminated the consent decree. The next month the PSC relieved Verizon of the heightened reporting requirement.

Respondent Law Offices of Curtis V. Trinko, LLP, a New York City law firm, was a local telephone service customer of AT&T. The day after Verizon entered its con-sent decree with the FCC, respondent filed a complaint in the District Court for the


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Southern District of New York, on behalf of itself and a class of similarly situated cus-tomers. The complaint, as later amended, alleged that Verizon had filled rivals’ orders on a discriminatory basis as part of an anticompetitive scheme to discourage customers from becoming or remaining customers of competitive LECs, thus impeding the competitive LECs’ ability to enter and compete in the market for local telephone service. … The complaint set forth a single example of the alleged “failure to provide adequate access to [competitive LECs],” namely the OSS failure that resulted in the FCC consent decree and PSC orders. It asserted that the result of Verizon’s improper “behavior with respect to providing access…” was to “deter potential customers [of rivals] from switching.” The complaint sought damages and injunctive relief for violation of §2 of the Sherman Act…. The complaint also alleged violations of the 1996 Act, §202(a) of the Communications Act of 1934, and state law.

The District Court dismissed the complaint in its entirety. … The Court of Ap-peals for the Second Circuit reinstated the complaint in part, including the antitrust claim. We granted certiorari, limited to the question whether the Court of Appeals erred in re-versing the District Court’s dismissal of respondent’s antitrust claims.

To decide this case, we must first determine what effect (if any) the 1996 Act has upon the application of traditional antitrust principles. …[A] detailed regulatory scheme such as that created by the 1996 Act ordinarily raises the question whether the regulated entities are not shielded from antitrust scrutiny altogether by the doctrine of implied im-munity. … Congress, however, precluded that interpretation. Section 601(b)(1) of the 1996 Act is an antitrust-specific saving clause providing that “nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the ap-plicability of any of the antitrust laws.” This bars a finding of implied immunity. … But just as the 1996 Act preserves claims that satisfy existing antitrust standards, it does not create new claims that go beyond existing antitrust standards; that would be equally in-consistent with the saving clause’s mandate that nothing in the Act “modify, impair, or supersede the applicability” of the antitrust laws. We turn, then, to whether the activity of which respondent complains violates preexisting antitrust standards.

III. The complaint alleges that Verizon denied interconnection services to rivals in order to limit entry. If that allegation states an antitrust claim at all, it does so under §2 of the Sherman Act, which declares that a firm shall not “monopolize” or “attempt to monopo-lize.” It is settled law that this offense requires, in addition to the possession of monopoly power in the relevant market, “the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, busi-ness acumen, or historic accident.” Grinnell. The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an im-portant element of the free-market system. The opportunity to charge monopoly prices--at least for a short period--is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is ac-companied by an element of anticompetitive conduct.

Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it


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may lessen the incentive for the monopolist, the rival, or both to invest in those economi-cally beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing--a role for which they are ill-suited. Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion. Thus, as a general matter, the Sherman Act “does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to par-ties with whom he will deal.” Colgate.

However, “[t]he high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified.” Aspen Skiing. Under certain cir-cumstances, a refusal to cooperate with rivals can constitute anticompetitive conduct and violate §2. We have been very cautious in recognizing such exceptions, because of the uncertain virtue of forced sharing and the difficulty of identifying and remedying anti-competitive conduct by a single firm. The question before us today is whether the allega-tions of respondent’s complaint fit within existing exceptions or provide a basis, under traditional antitrust principles, for recognizing a new one.

The leading case for §2 liability based on refusal to cooperate with a rival … is Aspen Skiing. … Aspen Skiing is at or near the outer boundary of §2 liability. The Court there found significance in the defendant’s decision to cease participation in a coopera-tive venture. The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to achieve an anti-competitive end. Similarly, the defendant’s unwillingness to renew the ticket even if compensated at retail price revealed a distinctly anticompetitive bent.

The refusal to deal alleged in the present case does not fit within the limited ex-ception recognized in Aspen Skiing. The complaint does not allege that Verizon voluntar-ily engaged in a course of dealing with its rivals, or would ever have done so absent statu-tory compulsion. Here, therefore, the defendant’s prior conduct sheds no light upon the motivation of its refusal to deal--upon whether its regulatory lapses were prompted not by competitive zeal but by anticompetitive malice. The contrast between the cases is height-ened by the difference in pricing behavior. In Aspen Skiing, the defendant turned down a proposal to sell at its own retail price, suggesting a calculation that its future monopoly retail price would be higher. Verizon’s reluctance to interconnect at the cost-based rate of compensation available under §251(c)(3) tells us nothing about dreams of monopoly.

The specific nature of what the 1996 Act compels makes this case different from Aspen Skiing in a more fundamental way. In Aspen Skiing, what the defendant refused to provide to its competitor was a product that it already sold at retail--to oversimplify slightly, lift tickets representing a bundle of services to skiers. Similarly, in Otter Tail, another case relied upon by respondent, the defendant was already in the business of pro-viding a service to certain customers (power transmission over its network), and refused to provide the same service to certain other customers. In the present case, by contrast, the services allegedly withheld are not otherwise marketed or available to the public. The sharing obligation imposed by the 1996 Act created “something brand new”--”the whole-sale market for leasing network elements.” The unbundled elements offered pursuant to §251(c)(3) exist only deep within the bowels of Verizon; they are brought out on com-pulsion of the 1996 Act and offered not to consumers but to rivals, and at considerable


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expense and effort. New systems must be designed and implemented simply to make that access possible--indeed, it is the failure of one of those systems that prompted the present complaint. 3

We conclude that Verizon’s alleged insufficient assistance in the provision of ser-vice to rivals is not a recognized antitrust claim under this Court’s existing refusal-to-deal precedents. This conclusion would be unchanged even if we considered to be established law the “essential facilities” doctrine crafted by some lower courts, under which the Court of Appeals concluded respondent’s allegations might state a claim. See generally Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 Antitrust L.J. 841 (1989). We have never recognized such a doctrine and we find no need either to rec-ognize it or to repudiate it here. It suffices for present purposes to note that the indispens-able requirement for invoking the doctrine is the unavailability of access to the “essential facilities”; where access exists, the doctrine serves no purpose. Thus, it is said that “es-sential facility claims should ... be denied where a state or federal agency has effective power to compel sharing and to regulate its scope and terms.” P. AREEDA & H. HOVENKAMP, ANTITRUST LAW, p. 150, ¶773e (2003 Supp.). Respondent believes that the existence of sharing duties under the 1996 Act supports its case. We think the oppo-site: The 1996 Act’s extensive provision for access makes it unnecessary to impose a ju-dicial doctrine of forced access. To the extent respondent’s “essential facilities” argu-ment is distinct from its general §2 argument, we reject it.

IV. Finally, we do not believe that traditional antitrust principles justify adding the present case to the few existing exceptions from the proposition that there is no duty to aid competitors. Antitrust analysis must always be attuned to the particular structure and circumstances of the industry at issue. … One factor of particular importance is the exis-tence of a regulatory structure designed to deter and remedy anticompetitive harm. Where such a structure exists, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws con-template such additional scrutiny. Where, by contrast, “[t]here is nothing built into the regulatory scheme which performs the antitrust function,” Silver v. New York Stock Ex-change, 373 U.S. 341, 358 (1963), the benefits of antitrust are worth its sometimes con-siderable disadvantages. …

[Here, the regulatory scheme includes] statutory restrictions upon Verizon’s entry into the potentially lucrative market for long-distance service. To be allowed to enter the long-distance market in the first place, an incumbent LEC must be on good behavior in its local market. Authorization by the FCC requires state-by-state satisfaction of §271’s competitive checklist, which as we have noted includes the nondiscriminatory provision of access to UNEs. …

The FCC’s §271 authorization order for Verizon to provide long-distance service in New York discussed at great length Verizon’s commitments to provide access to UNEs, including the provision of OSS. Those commitments are enforceable by the FCC 3 Respondent also relies upon United States v. Terminal Railroad Assn. of St. Louis, 224 U.S. 383 (1912), and Associated Press v. United States, 326 U.S. 1 (1945). These cases involved con-certed action, which presents greater anticompetitive concerns and is amenable to a remedy that does not require judicial estimation of free-market forces: simply requiring that the outsider be granted nondiscriminatory admission to the club.


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through continuing oversight; a failure to meet an authorization condition can result in an order that the deficiency be corrected, in the imposition of penalties, or in the suspension or revocation of long-distance approval. Verizon also subjected itself to oversight by the PSC under a so-called “Performance Assurance Plan” (PAP). The PAP… provides spe-cific financial penalties in the event of Verizon’s failure to achieve detailed performance requirements. …

The regulatory response to the OSS failure complained of in respondent’s suit provides a vivid example of how the regulatory regime operates. When several competi-tive LECs complained about deficiencies in Verizon’s servicing of orders, the FCC and PSC responded. The FCC soon concluded that Verizon was in breach of its sharing du-ties under §251(c), imposed a substantial fine, and set up sophisticated measurements to gauge remediation, with weekly reporting requirements and specific penalties for failure. The PSC found Verizon in violation of the PAP even earlier, and imposed additional fi-nancial penalties and measurements with daily reporting requirements. In short, the regime was an effective steward of the antitrust function.

Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs. Under the best of circumstances, applying the requirements of §2 “can be difficult” because “the means of illicit exclusion, like the means of legitimate competition, are myriad.” United States v. Microsoft Corp., 253 F.3d 34, 58 (C.A.D.C.2001) (en banc) (per curiam). Mistaken inferences and the resulting false con-demnations “are especially costly, because they chill the very conduct the antitrust laws are designed to protect.” Matsushita. The cost of false positives counsels against an un-due expansion of §2 liability. One false-positive risk is that an incumbent LEC’s failure to provide a service with sufficient alacrity might have nothing to do with exclusion. Al-legations of violations of §251(c)(3) duties are difficult for antitrust courts to evaluate, not only because they are highly technical, but also because they are likely to be ex-tremely numerous, given the incessant, complex, and constantly changing interaction of competitive and incumbent LECs implementing the sharing and interconnection obliga-tions. … Judicial oversight under the Sherman Act would seem destined to distort invest-ment and lead to a new layer of interminable litigation, atop the variety of litigation routes already available to and actively pursued by competitive LECs.

Even if the problem of false positives did not exist, conduct consisting of anti-competitive violations of §251 may be, as we have concluded with respect to above-cost predatory pricing schemes, “beyond the practical ability of a judicial tribunal to control.” Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 223 (1993). Effective remediation of violations of regulatory sharing requirements will ordinarily re-quire continuing supervision of a highly detailed decree. We think that Professor Areeda got it exactly right: “No court should impose a duty to deal that it cannot explain or ade-quately and reasonably supervise. The problem should be deemed irremedia[ble] by an-titrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency.” Areeda, 58 Antitrust L. J., at 853. In this case, re-spondent has requested an equitable decree to “[p]reliminarily and permanently enjoi[n] [Verizon] from providing access to the local loop market ... to [rivals] on terms and con-


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ditions that are not as favorable” as those that Verizon enjoys. An antitrust court is un-likely to be an effective day-to-day enforcer of these detailed sharing obligations.4

The 1996 Act is in an important respect much more ambitious than the antitrust laws. It attempts “to eliminate the monopolies enjoyed by the inheritors of AT&T’s local franchises.” Verizon Communications Inc. v. FCC, 535 U.S., at 476 (emphasis added). Section 2 of the Sherman Act, by contrast, seeks merely to prevent unlawful monopoliza-tion. It would be a serious mistake to conflate the two goals. The Sherman Act is indeed the “Magna Carta of free enterprise,” Topco, but it does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition. We conclude that respondent’s complaint fails to state a claim under the Sherman Act.5 …

Justice STEVENS, with whom Justice SOUTER and Justice THOMAS join, con-curring in the judgment. In complex cases it is usually wise to begin by deciding whether the plaintiff has standing to maintain the action. Respondent, the plaintiff in this case, is a local telephone service customer of AT&T. Its complaint alleges that it has re-ceived unsatisfactory service because Verizon has engaged in conduct that adversely af-fects AT&T’s ability to serve its customers, in violation of §2 of the Sherman Act. Re-spondent seeks from Verizon treble damages, a remedy that §4 of the Clayton Act makes available to “any person who has been injured in his business or property.” The threshold question presented by the complaint is whether, assuming the truth of its allegations, re-spondent is a “person” within the meaning of §4.

Respondent would unquestionably be such a “person” if we interpreted the text of the statute literally. But we have eschewed a literal reading of §4, particularly in cases in which there is only an indirect relationship between the defendant’s alleged misconduct and the plaintiff’s asserted injury. Associated Gen. Contractors of Cal., Inc. v. Carpen-ters, 459 U.S. 519, 529-535 (1983). In such cases, “the importance of avoiding either the risk of duplicate recoveries on the one hand, or the danger of complex apportionment of damages on the other,” weighs heavily against a literal reading of §4. Id., at 543-544. Our interpretation of §4 has thus adhered to Justice Holmes’ observation that the “general tendency of the law, in regard to damages at least, is not to go beyond the first step.” Southern Pacific Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531, 533 (1918).

I would not go beyond the first step in this case. Although respondent contends that its injuries were, like the plaintiff’s injuries in Blue Shield of Va. v. McCready, 457 U.S. 465, 479 (1982), “the very means by which ... [Verizon] sought to achieve its illegal ends,” it remains the case that whatever antitrust injury respondent suffered because of Verizon’s conduct was purely derivative of the injury that AT&T suffered. And for that

4 The Court of Appeals also thought that respondent’s complaint might state a claim under a “monopoly leveraging” theory (a theory barely discussed by respondent). We disagree. To the extent the Court of Appeals dispensed with a requirement that there be a “dangerous probability of success” in monopolizing a second market, it erred, Spectrum Sports. In any event, leveraging presupposes anticompetitive conduct, which in this case could only be the refusal-to-deal claim we have rejected.5 Our disposition makes it unnecessary to consider petitioner’s alternative contention that respon-dent lacks antitrust standing.


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reason, respondent’s suit, unlike McCready, runs both the risk of duplicative recoveries and the danger of complex apportionment of damages. The task of determining the mon-etary value of the harm caused to respondent by AT&T’s inferior service, the portion of that harm attributable to Verizon’s misconduct, whether all or just some of such possible misconduct was prohibited by the Sherman Act, and what offset, if any, should be al-lowed to make room for a recovery that would make AT&T whole, is certain to be daunt-ing. AT&T, as the direct victim of Verizon’s alleged misconduct, is in a far better posi-tion than respondent to vindicate the public interest in enforcement of the antitrust laws. Denying a remedy to AT&T’s customer is not likely to leave a significant antitrust viola-tion undetected or unremedied, and will serve the strong interest “in keeping the scope of complex antitrust trials within judicially manageable limits.” Associated Gen. Contrac-tors, 459 U.S., at 543.

In my judgment, our reasoning in Associated General Contractors requires us to reverse the judgment of the Court of Appeals. I would not decide the merits of the §2 claim unless and until such a claim is advanced by either AT&T or a similarly situated competitive local exchange carrier.


Instructions: Below you will find an old exam problem that is roughly based on the Ninth Circuit case about BarBri found in your materials immediately following this over-view of the problem. Read through it and then prepare answers to the questions listed at the end. You may find it helpful to try to answer the questions before reading the Ninth Circuit case, basing your initial answers on the rest of the material in Unit IV. You then could add in any insights you glean from reading the case afterward. While answering the questions, keep in mind the following:

To the extent the facts in the problem differ from those in the case, you should use the facts of the problem.

The case is in the Supreme Court, so lower court cases are not binding but can be used as persuasive authority.

Trinko and some of the lower court cases we discussed were decided after the Ninth Cir -cuit case and after the exam problem was given.

Problem: American states generally require that attorneys-to-be pass a state-adminis-tered bar exam after they complete law school. Most state bar exams incorporate some multiple choice questions that are simultaneously administered nationwide. However, every state reserves at least half of the exam for questions it creates and administers itself, often on peculiarities of its own statutory and common law. Thus, studying for the bar exam differs to some extent in each state.


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A number of private firms offer review courses that prepare students to take the various state bar exams. Generally, the courses include a review of the subjects tested by the state in question, exam-taking tips, and practice questions and answers. Almost every student who takes a bar exam purchases one of these courses. The firms sell the courses to law students in association with a variety of promotional activities at the law schools. Industry practice is to give substantial discounts to students purchasing courses early in their law school careers. Because each state bar is different, many of the firms that pro-vide review courses only operate in a single state. However, firms can achieve some economies of scale by preparing materials geared toward the national portion of the bar exam and using them in several states.

Between 1993 and the present, only two firms have operated bar courses in every state. BarGreed, established in the 1970’s, currently sells 63% of the bar review courses purchased in the U.S. Its closest rival, Eastbar, only in existence since 1993, sells 11% of the courses purchased nationwide. Both BarGreed and Eastbar hire famous professors from top 20 law schools to travel the country lecturing on the national portions of the bar. These professors also do videotaped supplemental lectures that are tailored to the state portions of the exams. BarGreed and Eastbar compete with a variety of local and re-gional firms that vary greatly in popularity from state to state.

As of Summer 1993, BarGreed sold 88% of the courses geared to the Florida bar. In that year, it was joined in the market both by Eastbar and by a local firm called Robyn, Rodriguez & Rosenblatt, which did business under the trade name “3R’S.” 3R’S, a sub-sidiary of the educational testing firm Learning Limited, tried to distinguish its course from BarGreed by using popular local law professors. Its marketing included the slogan, “Back to Basics with 3R’S: Let Florida’s Best Prep You For Florida’s Bar.” By Summer 1996, this campaign had succeeded sufficiently that 3R’S sold 17% of the bar review courses for the Florida Bar compared to 65% for BarGreed and 9% for Eastbar. In addi -tion, 3R’S had sold even greater percentages of the Florida courses for 1997 and 1998 purchased at a discount by first and second year students. In light of this success, 3R’S began exploring the possibility of applying its strategy in other states.

In the late Spring of 1996, worried by the decline in its share of the sales of Flor -ida bar review courses, BarGreed launched an intensive investigation of 3R’S and of the Florida market. As a result, it developed a marketing plan for Florida courses that it im-plemented during the 1996-97 school year. The plan, known internally as “Operation Kill-R’S,” had three components:

(1) Hiring: BarGreed hired five popular professors who had taught major subjects for 3R’S’ courses in prior years. None of the five was yet under contract with 3R’S for Sum-mer 1997. BarGreed continued to use its regular teachers to teach the national portions of the bar courses and contracted with the new hires only to teach the Florida portions. Al -though their contracts contained no exclusivity provisions, the five Florida professors were effectively precluded from working for other bar review courses by the time needed to meet their contractual commitments to BarGreed.

(2) Advertising: BarGreed’s investigations revealed that 3R’S’ parent company, Learn-ing Limited, had fairly serious financial problems and had entered bankruptcy in the spring of 1996. However, the investigations also revealed that the bankruptcy would not


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affect 3R’S, which was in good shape financially and easily was able to meet its obliga-tions to its employees and students. BarGreed passed out flyers on law school campuses that emphasized Learning Limited’s problems and suggested, without actually saying so, that 3R’S would be affected. For example, one flyer read:

Federal Judge Appoints Receiver To Run Parent of 3R’S:


None of the advertising was untrue and BarGreed never violated state laws regarding false advertising or defamation.

(3) Discounting: During the 1996-97 school year BarGreed lowered prices only on sales of its Florida courses. The sale price was above BarGreed’s own costs, but below the costs of 3R’S. BarGreed was aware of 3R’S’ cost structure because of its investigations.

Operation Kill-R’S was highly successful for BarGreed. During the 1996-97 school year, it sold 80% of Florida bar review courses. Eastbar sold 10%, and 3R’S share declined to just 6%.

3R’S sued BarGreed in federal court, claiming that its implementation of Opera-tion Kill-R’S had monopolized the market for Florida bar review courses in violation of Sherman Act §2. After a trial at which 3R’S introduced evidence supporting the facts laid out above, the jury found for 3R’S. On appeal, the 11 th Circuit Court of Appeals re-versed. It characterized each of the components of Operation Kill-Rs as “robust competi-tion” and thus held that there was insufficient evidence of bad conduct to support a Sec-tion 2 claim. 3R’S petitioned for certiorari. The Supreme Court granted the petition.


(1) Based on the problem and your own knowledge of the operation of bar review cour-ses, what barriers to entry arguably exist in the market for Florida bar review courses? What are the best arguments for each side as to whether these barriers are significant?

(2) Based on the authorities in Unit IV, antitrust policy, and your own knowledge of the operation of bar review courses, and assuming for this question that BarGreed has mo-nopoly power in the relevant market, identify the best arguments for each side as to whether the following aspects of BarGreed’s conduct violate §2 of the Sherman Act, and be ready to state which position is stronger (and why).

(a) The hiring of the five Florida law professors.

(b) The misleading advertising about 3R’S’ financial condition.

(c) The discounts on sales of Florida courses.

(d) The three types of conduct taken together.

$ $ $ $ $ $ $


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PUBLICATIONS108 F.3d 1147 (9th Cir. 1997)

O’SCANNLAIN, Circuit Judge: We must decide whether the sponsor of BAR/BRI, the nation’s dominant bar review course, violated the Sherman Act by distributing dis-paraging fliers about, and hiring a faculty member away from, the sponsor of Barpassers, one of its competitors.

I. … American Professional Testing Service, Inc. (“American”) provides full service bar review courses under the name Barpassers, offers supplemental bar review courses under the name APTS Multistate Maximizer, and publishes legal study aids under the name Sum & Substance. Harcourt Brace Jovanovich Legal and Professional Publications, Inc. (“Harcourt”) provides full service bar review courses under the name BAR/BRI, offers supplemental bar review courses under the name Gilbert Multistate Workshop, and pub-lishes legal study aids under the name Gilbert Legal Summaries.

Harcourt offers its BAR/BRI course in 46 states and enrolls far more students than its nearest competitor. Harcourt owns and operates BAR/BRI bar review courses in 26 jurisdictions and has license agreements with licensees in another 20 states.1

Barpassers was first offered in California in preparation for the Winter 1986 bar examina-tion. Barpassers has been offered continuously in California since that time, in Arizona since 1992, and in Nevada and Florida since 1993.

In September 1991, American became a wholly-owned subsidiary of College Bound, Inc. (“CBI”). Seven months later, a receiver was appointed for CBI in an action commenced by the U.S. Securities and Exchange Commission. CBI, under fire from fed-eral regulators for overstating revenue and earnings by millions of dollars, filed for bank-ruptcy protection and was subsequently placed under the control of a Chapter 11 Trustee. In July 1992, CBI disposed of its entire interest in American.

According to American, Harcourt seized on CBI’s troubles to “launch a campaign to forestall competition from American” through the distribution on law school campuses of anonymous advertising fliers that suggested that American was implicated in the SEC investigation and might not be able to continue to offer its bar review courses because of CBI’s bankruptcy. However, American and its officers were never the subject of the SEC investigation or even accused of fraud or securities violations. Nonetheless, Ameri-1 In 1967, the Bar Review Institute, Inc. (“BRI”) bar review course was founded in Illinois by Richard Conviser and others. In the early 1970s, Bay Area Review, Inc. (“BAR”) offered a bar review course in California. In 1974, Harcourt Brace Jovanovich, Inc., acquired BAR and BRI. BAR and BRI merged into Harcourt and began doing business under the trade name “BAR/BRI.” By 1974, BAR and BRI were offering full service bar review courses in various jurisdictions. BRI was offering full service bar review courses in Illinois, Arizona, Colorado, Washington D.C., Georgia, New Jersey, Texas, Pennsylvania, Virginia, and Maryland (as a joint venture). BAR was offering full service bar review courses in California and other Western states. BAR and BRI, as part of a joint venture, began offering a bar review course in New York in 1973 under the name BAR/BRI.


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can allegedly suffered “a tremendous drop in enrollments and concomitant loss of prof-its.” American claims Harcourt offered its courses at below-cost prices, provided gratu-ities to law school administrators to obtain preferential treatment, and ripped down Amer-ican’s advertising materials. American also maintains that Harcourt’s alleged predatory hiring of American Professor Robert Jarvis, who also taught at BAR/BRI, “crippled American’s effort to compete in the Florida market.”

… American filed this action alleging that Harcourt engaged in actual and at-tempted monopolization under Section 2 of the Sherman Act; unlawful mergers and ac-quisitions in violation of Section 7 of the Clayton Act; price discrimination in violation of the Robinson-Patman Act; false advertising in violation of Section 43(a) of the Lan-ham Act; unfair competition; tortious interference with contractual relations; trade libel; and violations of California’s Unfair Practices Act. …

[T]he case was tried before a jury, which returned special verdicts for American on its claims under §2, the Lanham Act, tortious interference and unfair competition, but against American and for Harcourt on its claims that American had violated the Lanham Act and had engaged in tortious interference and unfair competition. Trial testimony lasted 11 days, during which the jury heard 29 witnesses and the court admitted over 140 exhibits into evidence. The jury was given a detailed 37-page special verdict form to guide its deliberations. After finding injury proximately caused by Harcourt’s exclusion-ary conduct, the jury awarded American damages (before trebling) of $784,753 for injury in California, $121,000 for injury in Florida, and $110,000 for injury in New York.

The district court subsequently granted Harcourt’s motion for judgment as a mat-ter of law (“JMOL”) on the Sherman Act claim, concluding that there was insufficient evidence that Harcourt either (i) engaged in exclusionary conduct in violation of the Sherman Act or (ii) possessed monopoly power or a dangerous probability of obtaining monopoly power in any market. The district court also denied a motion for a new trial. American and Harcourt each filed timely notices of appeal. After the jury verdicts, the parties settled all claims except for American’s §2 allegation ….

II. … [W]e must determine whether the district court erred in overturning the jury’s fac-tual findings that: (a) Harcourt’s disparagement of American constituted exclusionary conduct in California; (b) Harcourt’s predatory hiring of American’s faculty member constituted exclusionary conduct in Florida; and (c) Harcourt’s anti-competitive conduct in the relevant markets resulted in a dangerous probability of monopolization.

While the disparagement of a rival or compromising a rival’s employee may be unethical and even impair the opportunities of a rival, its harmful effects on competitors are ordinarily not significant enough to warrant recognition under §2 of the Sherman Act. See, e.g., Brown & Williamson (“Even an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition or ‘purport to afford remedies for all torts committed by or against persons engaged in interstate commerce.’”); Spec-trum Sports (“The law directs itself not against conduct which is competitive, even se-verely so, but against conduct which unfairly tends to destroy competition itself.... Thus, this Court and other courts have been careful to avoid constructions of §2 which might chill competition, rather than foster it.”) … We therefore insist on a “preliminary show-


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ing of significant and more-than-temporary harmful effects on competition (and not merely upon a competitor or customer)” before these practices can rise to the level of ex-clusionary conduct. 3 P. AREEDA & D. TURNER, ANTITRUST LAW ¶737b at 278 (1978).

To succeed on its claim for actual monopolization under §2, American must prove Harcourt: (i) possessed monopoly power in the relevant markets; (ii) willfully acquired or maintained its monopoly power through exclusionary conduct; and (iii) caused an-titrust injury. American urges that it has made a preliminary showing of two grounds of exclusionary conduct and a dangerous probability of monopolization.2

A. American first argues that the district court erred in overturning the jury’s fac-tual determination that Harcourt’s implementation of a campaign designed to disparage American’s bar review courses … through the distribution of anonymous, false, and de-ceptive advertising fliers on law school campuses constituted exclusionary conduct. We disagree.

While false or misleading advertising directed solely at a single competitor may not be competition on the merits, the fliers in question must have a significant and endur-ing adverse impact on competition itself in the relevant markets to rise to the level of an antitrust violation.

False statements about rivals can obstruct competition on the merits and possess no off-setting redeeming virtues. But distinguishing false statements on which buyers do, or ought reasonably to, rely from customary puffing is not easy. … More importantly, the effects upon a rival would usually be very speculative, especially when disparage-ment is not systematic. Many buyers, moreover, recognize disparagement as non-objec-tive and highly biased. Although hardly a justification for falsehood, buyer distrust of a seller’s disparaging comments about a rival seller should caution us against attaching much weight to isolated examples of disparagement. …

To prove that Harcourt’s false and misleading advertising constituted exclusion-ary conduct, the disparagement must overcome a presumption that the effect on competi-tion of the fliers was de minimis. National Ass’n of Pharmaceutical Mfrs. v. Ayerst Labs., 850 F.2d 904, 916 (2d Cir.1988). “[A] plaintiff may overcome de minimis pre-sumption ‘by cumulative proof that the representations were [1] clearly false, [2] clearly material, [3] clearly likely to induce reasonable reliance, [4] made to buyers without knowledge of the subject matter, [5] continued for prolonged periods, and [6] not readily susceptible of neutralization or other offset by rivals.’” Id. American must satisfy all six elements to overcome [the] de minimis presumption. …

2 American alleged that Harcourt intended to monopolize the full service bar review market of those states in which it possesses monopoly power. BAR/BRI allegedly enjoyed a complete mo-nopoly or control, either by itself or through an affiliation, of over 70% of the full service bar re-view markets in Georgia, Minnesota, Alabama, Nevada, Hawaii, North Carolina, Colorado, Ken-tucky, Mississippi, Tennessee, South Carolina, Wyoming, Florida, New Jersey and Pennsylvania. In those states where it has substantial competition, Harcourt allegedly has pursued a policy of of -fering students substantial discounts from the price which they would pay for a full service bar re -view course if they contracted for the course at a time early in their education.


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Assuming American’s testimony and evidence at trial is correct, the entire dispar-agement claim hinges on [the following] fliers:

SEC Sues BARPASSERS’ Parent Company, Questions Its Enrollment, Financial Health

CAN BARPASSERS AFFORD TO KEEP THE LIGHTS ON?Federal Judge Appoints Receiver To Run Parent of APTS, Barpassers

BARPASSERS’, APTS’ parent files for BANKRUPTCYThese fliers were distributed on law school campuses during a two-month period.

American also relied on a survey … to demonstrate how the fliers suggested to law stu-dents that American was in “financial trouble, might be unable to operate its bar review courses, and had been accused of fraud by the SEC.” For example, 53 percent of the sur-vey respondents had some belief in or agreed with the statement that “because of its fi-nancial circumstances, I would expect the Barpassers course in the future to be less bene-ficial to me.” Furthermore, the district court found that the “fliers came at a bad time for [American]; they surfaced at California (also Arizona and Florida) law schools during the time third year law students had to make financial decisions and pay the tuition for bar re-view courses, and there is evidence that the usual increase in sign-ups for [American’s] course did not occur for that year, substantially injuring profitability for that year.”

However, American presented little evidence, other than the survey, that law stu-dents were “clearly likely” to rely on the fliers or that Harcourt’s false advertising was not readily susceptible to neutralization or other offset by American. The argument that its neutralization efforts were not completely successful is unavailing; the test refers to “susceptible to neutralization” not “successful in neutralization.” … [W]e conclude that the district court did not err in its judgment as to the disparagement of rival issue.

B. American next argues that the jury properly found Harcourt guilty of preda-tory conduct in Florida for hiring Professor Robert Jarvis, a well-known Florida law pro-fessor, away from American. Jarvis, who began working for American in March 1992, agreed to teach Florida constitutional law for Barpassers in August 1992. In 1991 and 1992, Jarvis also taught for BAR/BRI. After Jarvis accepted American’s offer to teach the Florida Barpassers course, Harcourt countered with an offer that precluded Jarvis’ continued work for American or any other bar review course. Jarvis accepted Harcourt’s offer which included increased compensation and greater lecturing and administrative du-ties.

American does not allege that Harcourt hired any other Barpassers instructor. Ab-sent a continued pattern of compromising American’s employees, this one-time hiring of Jarvis by Harcourt is not sufficient to constitute an antitrust violation: “Nor should the actual compromising of rival employees be grounds for §2 liability in the absence of a continued pattern of such behavior or of reason to believe that the actual effect was prob-ably significant.” ANTITRUST LAW, ¶737b at 281.

Most importantly, this court’s decision in Universal Analytics, Inc. v. MacNeal-Schwendler Corp., 914 F.2d 1256 (9th Cir.1990) is controlling on these facts. There, we reviewed whether there were any genuine issues of material fact with respect to Univer-sal’s claim that MacNeal’s hiring of five of Universal’s six key technical employees in


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1986 and 1987 was predatory in violation of §2. This was the first reported case of a claimed §2 violation as a result of alleged employee raiding or predatory hiring. Univer-sal Analytics held that an internal memo of the producer referring to “wounding” of a competitor by hiring key technical employees showed at most that a secondary motiva-tion of the hirings was to disadvantage competition and was insufficient to show preda-tory conduct in violation of the Sherman Act. “Unlawful predatory hiring occurs when talent is acquired not for purposes of using that talent but for purposes of denying it to a competitor. Such cases can be proved by showing the hiring was made with such preda-tory intent, i.e. to harm the competition without helping the monopolist, or by showing a clear nonuse in fact.” Id. at 1258. Absent either of those circumstances, the court agreed with Professors Areeda and Turner that the hiring should not be held exclusionary:

Acquiring talent not to use it but to deny it to possible rivals is exclusionary. Such an ar-rangement has the same harmful tendency and the same lack of redeeming virtue as the promise by a non-employee that he will not compete with the monopolist. But unlike the latter agreement whose existence or nonexistence is a rather clear-cut question, exclu-sionary employment would be hard to identify. A monopolist would probably use impor-tant talent once acquired. And the court should not try to judge whether the acquired tal -ent was used more effectively than readily available alternative personnel. Nor should it try to do so when the defendant pursues a hard-to-match, if not unmatchable, program of recruiting, say, young researchers in his field. In the absence, therefore, of the monopo-list’s proved subjective intent to hire talent preclusively or of clear nonuse in fact, em-ployment should not be held exclusionary.

Id. (quoting from ANTITRUST LAW, ¶702b at 110). Because American failed to meet the two-prong test set forth in Universal Analytics (harm American without helping Harcourt or Harcourt did not use Jarvis’ services), we conclude that the district court did not err in its judgment as to the predatory hiring issue.

C. American next argues that the district court erred in overturning the jury’s fac-tual finding that Harcourt’s anti-competitive conduct resulted in a dangerous probability of monopolization. To establish a §2 violation for an attempt to monopolize, American must show, inter alia, that there is a dangerous probability that Harcourt will achieve mo-nopoly power. See Spectrum Sports. … Mere proof of exclusionary conduct is not suffi-cient to prove Harcourt’s dangerous probability of success; other proof of market power is required. [Id.]

Even if Harcourt has a high market share, neither monopoly power nor a danger-ous probability of achieving monopoly power can exist absent evidence of barriers to new entry or expansion. … The only entry barrier upon which American relies on appeal is Harcourt’s reputation for offering high quality courses. Contrary to American’s argu-ment, reputation alone does not constitute a sufficient entry barrier in this Circuit. See Syufy Enterprises (“We fail to see how the existence of good will achieved through effec-tive service is an impediment to, rather than the natural result of, competition.”). More-over, the existence of 29 bar review courses in California suggests that any barriers to en-try may not be that significant. … [W]e conclude that there was insufficient evidence of a dangerous probability of monopoly power in the relevant markets. …


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Justice STEVENS delivered the opinion of the Court: At issue in this case is the va-lidity of an exclusive contract between a hospital and a firm of anesthesiologists. We must decide whether the contract gives rise to a per se violation of §1 of the Sherman Act because every patient undergoing surgery at the hospital must use the services of one firm of anesthesiologists, and, if not, whether the contract is nevertheless illegal because it un-reasonably restrains competition among anesthesiologists.

… [R]espondent Edwin G. Hyde, a board certified anesthesiologist, applied for admission to the medical staff of East Jefferson Hospital. The … hospital board denied the application because the hospital was a party to a contract providing that all anesthesi-ological services required by the hospital’s patients would be performed by Roux & As-sociates…. Respondent then commenced this action seeking a declaratory judgment that the contract is unlawful and an injunction ordering petitioners to appoint him to the hos-pital staff. After trial, the District Court denied relief, finding that the anticompetitive consequences of the Roux contract were minimal and outweighed by benefits in the form of improved patient care. The Court of Appeals reversed because it was persuaded that the contract was illegal “per se.” We granted certiorari, and now reverse.

I. In February 1971, shortly before East Jefferson Hospital opened, it entered into an “Anesthesiology Agreement” with Roux & Associates (“Roux”)…. The hospital agreed to “restrict the use of its anesthesia department to Roux & Associates and [that] no other persons, parties or entities shall perform such services within the Hospital for the term of this contract.”

The 1971 contract provided for a one-year term automatically renewable for suc-cessive one-year periods unless either party elected to terminate. In 1976, a second writ-ten contract was executed containing most of the provisions of the 1971 agreement. Its term was five years and the clause excluding other anesthesiologists from the hospital was deleted; the hospital nevertheless continued to regard itself as committed to a closed anesthesiology department. Only Roux was permitted to practice anesthesiology at the hospital. At the time of trial the department included four anesthesiologists. The hospital usually employed 13 or 14 certified registered nurse anesthetists.

The exclusive contract had an impact on two different segments of the economy: consumers of medical services, and providers of anesthesiological services. Any con-sumer of medical services who elects to have an operation performed at East Jefferson Hospital may not employ any anesthesiologist not associated with Roux. No anesthesiol-ogists except those employed by Roux may practice at East Jefferson.

There are at least 20 hospitals in the New Orleans metropolitan area and about 70 per cent of the patients living in Jefferson Parish go to hospitals other than East Jefferson. Because it regarded the entire New Orleans metropolitan area as the relevant geographic market in which hospitals compete, this evidence convinced the District Court that East Jefferson does not possess any significant “market power”; therefore it concluded that petitioners could not use the Roux contract to anticompetitive ends. The same evidence led the Court of Appeals to draw a different conclusion. Noting that 30 percent of the res-


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idents of the Parish go to East Jefferson Hospital, and that in fact “patients tend to choose hospitals by location rather than price or quality,” the Court of Appeals concluded that the relevant geographic market was the East Bank of Jefferson Parish. The conclusion that East Jefferson Hospital possessed market power in that area was buttressed by the facts that the prevalence of health insurance eliminates a patient’s incentive to compare costs, that the patient is not sufficiently informed to compare quality, and that family con-venience tends to magnify the importance of location.

The Court of Appeals held that the case involves a “tying arrangement” because the “users of the hospital’s operating rooms (the tying product) are also compelled to pur-chase the hospital’s chosen anesthesia service (the tied product).” Having defined the rel-evant geographic market for the tying product as the East Bank of Jefferson Parish, the court held that the hospital possessed “sufficient market power in the tying market to co-erce purchasers of the tied product.” Since the purchase of the tied product constituted a “not insubstantial amount of interstate commerce,” under the Court of Appeals’ reading of our decision in Northern Pac. R. Co. v. U.S., 356 U.S. 1, 11 (1957), the tying arrange-ment was therefore illegal “per se.”

II. Certain types of contractual arrangements are deemed unreasonable as a matter of law. The character of the restraint produced by such an arrangement is considered a suffi-cient basis for presuming unreasonableness without the necessity of any analysis of the market context in which the arrangement may be found. A price fixing agreement be-tween competitors is the classic example of such an arrangement. It is far too late in the history of our antitrust jurisprudence to question the proposition that certain tying ar-rangements pose an unacceptable risk of stifling competition and therefore are unreason-able “per se.”12 The rule was first enunciated in International Salt Co. v. U.S., 332 U.S. 392, 396 (1947), and has been endorsed by this Court many times since. The rule also re-flects congressional policies underlying the antitrust laws. In enacting §3 of the Clayton Act, Congress expressed great concern about the anticompetitive character of tying ar-rangements.15 While this case does not arise under the Clayton Act, the congressional

12 The District Court intimated that the principles of per se liability might not apply to cases in -volving the medical profession. The Court of Appeals rejected this approach. In this Court, peti -tioners “assume” that the same principles apply to the provision of professional services as apply to other trades or businesses. See generally Professional Engineers.15 … For example, the House Report on the Clayton Act stated:

The public is compelled to pay a higher price and local customers are put to the inconve-nience of securing many commodities in other communities or through mail-order houses that can not be procured at their local effect. Where the concern making these contracts is already great and powerful, such as the United Shoe Machinery Co., the American To-bacco Co., and the General Film Co., the exclusive or ‘tying’ contract made with local dealers becomes one of the greatest agencies and instrumentalities of monopoly ever de-vised by the brain of man. It completely shuts out competitors, not only from trade in which they are already engaged, but from the opportunities to build up trade in any com-munity where these great and powerful combinations are operating under this system and practice. By this method and practice the Shoe Machinery Co. has built up a monopoly that owns and controls the entire machinery now being used by all great shoe-manufac-turing houses of the United States. No independent manufacturer of shoe machines has the slightest opportunity to build up any considerable trade in this country while this con-


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finding made therein concerning the competitive consequences of tying is illuminating, and must be respected.

It is clear, however, that every refusal to sell two products separately cannot be said to restrain competition. If each of the products may be purchased separately in a competitive market, one seller’s decision to sell the two in a single package imposes no unreasonable restraint on either market, particularly if competing suppliers are free to sell either the entire package or its several parts.17 For example, we have written that “if one of a dozen food stores in a community were to refuse to sell flour unless the buyer also took sugar it would hardly tend to restrain competition if its competitors were ready and able to sell flour by itself.” Northern Pac. R. Co., 356 U.S. at 7. Buyers often find pack-age sales attractive; a seller’s decision to offer such packages can merely be an attempt to compete effectively–conduct that is entirely consistent with the Sherman Act. See Fortner Enterprises v. U.S. Steel Corp. (Fortner I), 394 U.S. 495, 517-518 (1969) (White, J., dissenting); id., at 524-525 (Fortas, J., dissenting).

Our cases have concluded that the essential characteristic of an invalid tying ar-rangement lies in the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms. When such “forcing” is present, competition on the merits in the market for the tied item is restrained and the Sherman Act is violated. Accordingly, we have condemned tying arrangements when the seller has some special ability–usually called “market power”–to force a purchaser to do some-

dition obtains. If a manufacturer who is using machines of the Shoe Machinery Co. were to purchase and place a machine manufactured by any independent company in his estab-lishment, the Shoe Machinery Co. could under its contract withdraw all their machinery from the establishment of the shoe manufacturer and thereby wreck the business of the manufacturer. The General Film Co., by the same method practiced by the Shoe Machin-ery Co. under the lease system, has practically destroyed all competition and acquired a virtual monopoly of all films manufactured and sold in the United States. When we con-sider contracts of sales made under this system, the result to the consumer, the general public, and the local dealer and his business is even worse than under the lease system.

Similarly, Rep. Mitchell said that monopoly has been built up by these ‘tying’ contracts so that in order to get one machine one must take all of the essential machines, or practically all. Independent companies who have sought to enter the field have found that the markets have been preempted .... The manufacturers do not want to break their contracts with these giant monopolies, be-cause, if they should attempt to install machinery, their business might be jeopardized and all of the machinery now leased by these giant monopolies would be removed from their places of business. No situation cries more urgently for relief than does this situa -tion, and this bill seeks to prevent exclusive ‘tying’ contracts that have brought about a monopoly, alike injurious to the small dealers, to the manufacturers, and grossly unfair to those who seek to enter the field of competition and to the millions of consumers.

17 “Of course where the buyer is free to take either product by itself there is no tying problem even though the seller may also offer the two items as a unit at a single price .” Northern Pac. R. Co. 356 U.S. at 6, n.4.


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thing that he would not do in a competitive market. When “forcing” occurs, our cases have found the tying arrangement to be unlawful.

Thus, the law draws a distinction between the exploitation of market power by merely enhancing the price of the tying product, on the one hand, and by attempting to impose restraints on competition in the market for a tied product, on the other. When the seller’s power is just used to maximize its return in the tying product market, where pre-sumably its product enjoys some justifiable advantage over its competitors, the competi-tive ideal of the Sherman Act is not necessarily compromised. But if that power is used to impair competition on the merits in another market, a potentially inferior product may be insulated from competitive pressures. This impairment could either harm existing competitors or create barriers to entry of new competitors in the market for the tied prod-uct and can increase the social costs of market power by facilitating price discrimination, thereby increasing monopoly profits over what they would be absent the tie.23 And from the standpoint of the consumer–whose interests the statute was especially intended to serve–the freedom to select the best bargain in the second market is impaired by his need to purchase the tying product, and perhaps by an inability to evaluate the true cost of ei-ther product when they are available only as a package. …

Per se condemnation–condemnation without inquiry into actual market condi-tions–is only appropriate if the existence of forcing is probable. Thus, application of the per se rule focuses on the probability of anticompetitive consequences. Of course, as a threshold matter there must be a substantial potential for impact on competition in order to justify per se condemnation. If only a single purchaser were “forced” with respect to the purchase of a tied item, the resultant impact on competition would not be sufficient to warrant the concern of antitrust law. It is for this reason that we have refused to condemn tying arrangements unless a substantial volume of commerce is foreclosed thereby. Simi-larly, when a purchaser is “forced” to buy a product he would not have otherwise bought even from another seller in the tied product market, there can be no adverse impact on competition because no portion of the market which would otherwise have been available to other sellers has been foreclosed.

Once this threshold is surmounted, per se prohibition is appropriate if anticompet-itive forcing is likely. For example, if the government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power. Any effort to enlarge the scope of the patent monopoly by using the market power it confers to restrain competition in the market for a second product will undermine competition on the merits in that second market. Thus, the sale or lease of a patented item on condition that the buyer make all his purchases of a separate tied product from the patentee is unlawful.

The same strict rule is appropriate in other situations in which the existence of market power is probable. When the seller’s share of the market is high, or when the seller offers a unique product that competitors are not able to offer, the Court has held that the likelihood that market power exists and is being used to restrain competition in a separate market is sufficient to make per se condemnation appropriate. Thus, in Northern 23 Sales of the tied item can be used to measure demand for the tying item; purchasers with greater needs for the tied item make larger purchases and in effect must pay a higher price to ob-tain the tying item.


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Pac. R. Co., we held that the railroad’s control over vast tracts of western real estate, al-though not itself unlawful, gave the railroad a unique kind of bargaining power that en-abled it to tie the sales of that land to exclusive, long term commitments that fenced out competition in the transportation market over a protracted period. When, however, the seller does not have either the degree or the kind of market power that enables him to force customers to purchase a second, unwanted product in order to obtain the tying prod-uct, an antitrust violation can be established only by evidence of an unreasonable restraint on competition in the relevant market.

In sum, any inquiry into the validity of a tying arrangement must focus on the market or markets in which the two products are sold, for that is where the anticompeti-tive forcing has its impact. Thus, in this case our analysis of the tying issue must focus on the hospital’s sale of services to its patients, rather than its contractual arrangements with the providers of anesthesiological services. In making that analysis, we must con-sider whether petitioners are selling two separate products that may be tied together, and, if so, whether they have used their market power to force their patients to accept the tying arrangement.

III. The hospital has provided its patients with a package that includes the range of facili-ties and services required for a variety of surgical operations. At East Jefferson Hospital the package includes the services of the anesthesiologist. Petitioners argue that the pack-age does not involve a tying arrangement at all–that they are merely providing a function-ally integrated package of services. Therefore, petitioners contend that it is inappropriate to apply principles concerning tying arrangements to this case.

Our cases indicate, however, that the answer to the question whether one or two products are involved turns not on the functional relation between them, but rather on the character of the demand for the two items.30 … [The] cases make it clear that a tying ar-rangement cannot exist unless two separate product markets have been linked.

The requirement that two distinguishable product markets be involved follows from the underlying rationale of the rule against tying. The definitional question depends on whether the arrangement may have the type of competitive consequences addressed by the rule. The answer to the question whether petitioners have utilized a tying arrangement must be based on whether there is a possibility that the economic effect of the arrange-ment is that condemned by the rule against tying–that petitioners have foreclosed compe-tition on the merits in a product market distinct from the market for the tying item. Thus, in this case no tying arrangement can exist unless there is a sufficient demand for the pur-

30 The fact that anesthesiological services are functionally linked to the other services provided by the hospital is not in itself sufficient to remove the Roux contract from the realm of tying arrange-ments. We have often found arrangements involving functionally linked products at least one of which is useless without the other to be prohibited tying devices. See … Morton Salt Co. v. Sup-piger Co., 314 U.S. 488 (1942) (salt machine and salt); … International Business Machines Corp. v. U.S., 298 U.S. 131 (1936) (computer and computer punch cards); … FTC v. Sinclair Refining Co., 261 U.S. 463 (1923) (gasoline and underground tanks and pumps)…. In fact, in some situa-tions the functional link between the two items may enable the seller to maximize its monopoly return on the tying item as a means of charging a higher rent or purchase price to a larger user of the tying item. See n.23 supra.


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chase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital services.

Unquestionably, the anesthesiological component of the package offered by the hospital could be provided separately and could be selected either by the individual pa-tient or by one of the patient’s doctors if the hospital did not insist on including anesthesi-ological services in the package it offers to its customers. As a matter of actual practice, anesthesiological services are billed separately from the hospital services petitioners pro-vide. There was ample and uncontroverted testimony that patients or surgeons often re-quest specific anesthesiologists to come to a hospital and provide anesthesia, and that the choice of an individual anesthesiologist separate from the choice of a hospital is particu-larly frequent in respondent’s specialty, obstetric anesthesiology. The District Court found that “[t]he provision of anesthesia services is a medical service separate from the other services provided by the hospital.” The Court of Appeals agreed with this finding, and went on to observe that “an anesthesiologist is normally selected by the surgeon, rather than the patient, based on familiarity gained through a working relationship. Obvi-ously, the surgeons who practice at East Jefferson Hospital do not gain familiarity with any anesthesiologists other than Roux and Associates.” The record amply supports the conclusion that consumers differentiate between anesthesiological services and the other hospital services provided by petitioners.

Thus, the hospital’s requirement that its patients obtain necessary anesthesiologi-cal services from Roux combined the purchase of two distinguishable services in a single transaction.40 Nevertheless, the fact that this case involves a required purchase of two ser-vices that would otherwise be purchased separately does not make the Roux contract ille-gal. … Only if patients are forced to purchase Roux’s services as a result of the hospi-tal’s market power would the arrangement have anticompetitive consequences. If no forcing is present, patients are free to enter a competing hospital and to use another anes-thesiologist instead of Roux.41 …

40 This is not to say that §1 of the Sherman Act gives a purchaser the right to buy a product that the seller does not wish to offer for sale. A grocer may decide to carry four brands of cookies and no more. If the customer wants a fifth brand, he may go elsewhere but he cannot sue the grocer even if there is no other in town. However, in such a case the customer is free to purchase no cookies at all, while buying other needed food. If the grocer required the customer to buy an un -wanted brand of cookies in order to buy other items which the customer needs and cannot readily obtain elsewhere, then a tying question arises. … Here, the question is whether patients are forced to use an unwanted anesthesiologist in order to obtain needed hospital services.41 An examination of the reason or reasons why petitioners denied respondent staff privileges will not provide the answer to the question whether the package of services they offered to their pa -tients is an illegal tying arrangement. As a matter of antitrust law, petitioners may give their anesthesiology business to Roux because he is the best doctor available, because he is willing to work long hours, or because he is the son-in-law of the hospital administrator without violating the per se rule against tying. Without evidence that petitioners are using market power to force Roux upon patients there is no basis to view the arrangement as unreasonably restraining compe-tition whatever the reasons for its creation. Conversely, with such evidence, the per se rule against tying may apply. Thus, we reject the view of the District Court that the legality of an ar-rangement of this kind turns on whether it was adopted for the purpose of improving patient care.


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IV. … Respondent’s only basis for invoking the per se rule against tying and thereby avoiding analysis of actual market conditions is by relying on the preference of persons residing in Jefferson Parish to go to East Jefferson, the closest hospital. A preference of this kind, however, is not necessarily probative of significant market power.

Seventy per cent of the patients residing in Jefferson Parish enter hospitals other than East Jefferson. Thus East Jefferson’s “dominance” over persons residing in Jefferson Parish is far from overwhelming. The fact that a substantial majority of the parish’s resi-dents elect not to enter East Jefferson means that the geographic data does not establish the kind of dominant market position that obviates the need for further inquiry into actual competitive conditions. The Court of Appeals acknowledged as much; it recognized that East Jefferson’s market share alone was insufficient as a basis to infer market power, and buttressed its conclusion by relying on “market imperfections” that permit petitioners to charge noncompetitive prices for hospital services: the prevalence of third party payment for health care costs reduces price competition, and a lack of adequate information ren-ders consumers unable to evaluate the quality of the medical care provided by competing hospitals. While these factors may generate “market power” in some abstract sense,46

they do not generate the kind of market power that justifies condemnation of tying.

Tying arrangements need only be condemned if they restrain competition on the merits by forcing purchases that would not otherwise be made. A lack of price or quality competition does not create this type of forcing. If consumers lack price consciousness, that fact will not force them to take an anesthesiologist whose services they do not want–their indifference to price will have no impact on their willingness or ability to go to an-other hospital where they can utilize the services of the anesthesiologist of their choice. Similarly, if consumers cannot evaluate the quality of anesthesiological services, it fol-lows that they are indifferent between certified anesthesioligists even in the absence of a tying arrangement–such an arrangement cannot be said to have foreclosed a choice that would have otherwise been made “on the merits.”

Thus, neither of the “market imperfections” relied upon by the Court of Appeals forces consumers to take anesthesiological services they would not select in the absence of a tie. It is safe to assume that every patient undergoing a surgical operation needs the services of an anesthesiologist; at least this record contains no evidence that the hospital

46 As an economic matter, market power exists whenever prices can be raised above the levels that would be charged in a competitive market.


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“forced” any such services on unwilling patients.47 The record therefore does not provide a basis for applying the per se rule against tying to this arrangement.

V. In order to prevail in the absence of per se liability, respondent has the burden of proving that the Roux contract violated the Sherman Act because it unreasonably re-strained competition. That burden necessarily involves an inquiry into the actual effect of the exclusive contract on competition among anesthesiologists. This competition takes place in a market that has not been defined. The market is not necessarily the same as the market in which hospitals compete in offering services to patients; it may encompass competition among anesthesiologists for exclusive contracts such as the Roux contract and might be statewide or merely local.48 There is, however, insufficient evidence in this record to provide a basis for finding that the Roux contract, as it actually operates in the market, has unreasonably restrained competition. The record sheds little light on how this arrangement affected consumer demand for separate arrangements with a specific anes-thesiologist. The evidence indicates that some surgeons and patients preferred respon-dent’s services to those of Roux, but there is no evidence that any patient who was so-phisticated enough to know the difference between two anesthesiologists was not also able to go to a hospital that would provide him with the anesthesiologist of his choice.50

In sum, all that the record establishes is that the choice of anesthesiologists at East Jefferson has been limited to one of the four doctors who are associated with Roux and

47 Nor is there an indication in the record that respondents’ practices have increased the social costs of its market power. Since patients’ anesthesiological needs are fixed by medical judgment, respondent does not argue that the tying arrangement facilitates price discrimination. Where vari-able-quantity purchasing is unavailable as a means to enable price discrimination, commentators have seen less justification for condemning tying.

While tying arrangements like the one at issue here are unlikely to be used to facilitate price discrimination, they could have the similar effect of enabling hospitals “to evade price con-trol in the tying product through clandestine transfer of the profit to the tied product....” Fortner I, 394 U.S. at 513 (WHITE, J., dissenting). Insurance companies are the principal source of price restraint in the hospital industry; they place some limitations on the ability of hospitals to exploit their market power. Through this arrangement, petitioners may be able to evade that restraint by obtaining a portion of the anesthesioligists’ fees and therefore realize a greater return than they could in the absence of the arrangement. This could also have an adverse effect on the anesthesi-ology market since it is possible that only less able anesthesiologists would be willing to give up part of their fees in return for the security of an exclusive contract. However, there are no find -ings of either the District Court or the Court of Appeals which indicate that this type of exploita-tion of market power has occurred here. …48 While there was some rather impressionistic testimony that the prevalence of exclusive con-tracts tended to discourage young doctors from entering the market, the evidence was equivocal and neither the District Court nor the Court of Appeals made any findings concerning the con-tract’s effect on entry barriers. Respondent does not press the point before this Court. It is possi-ble that under some circumstances an exclusive contract could raise entry barriers since anesthesi-oligists could not compete for the contract without raising the capital necessary to run a hospital-wide operation. However, since the hospital has provided most of the capital for the exclusive contractor in this case, that problem does not appear to be present.50 If, as is likely, it is the patient’s doctor and not the patient who selects an anesthesiologist, the doctor can simply take the patient elsewhere if he is dissatisfied with Roux. The District Court found that most doctors in the area have staff privileges at more than one hospital.


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therefore have staff privileges.51 Even if Roux did not have an exclusive contract, the range of alternatives open to the patient would be severely limited by the nature of the transaction and the hospital’s unquestioned right to exercise some control over the iden-tity and the number of doctors to whom it accords staff privileges. If respondent is ad-mitted to the staff of East Jefferson, the range of choice will be enlarged from four to five doctors, but the most significant restraints on the patient’s freedom to select a specific anesthesiologist will nevertheless remain.52 Without a showing of actual adverse effect on competition, respondent cannot make out a case under the antitrust laws, and no such showing has been made.

VI. Petitioners’ closed policy may raise questions of medical ethics, and may have in-convenienced some patients who would prefer to have their anesthesia administered by someone other than a member of Roux & Associates, but it does not have the obviously unreasonable impact on purchasers that has characterized the tying arrangements that this Court has branded unlawful. There is no evidence that the price, the quality, or the sup-ply or demand for either the “tying product” or the “tied product” involved in this case has been adversely affected by the exclusive contract between Roux and the hospital. It may well be true that the contract made it necessary for Dr. Hyde and others to practice elsewhere, rather than at East Jefferson. But there has been no showing that the market as a whole has been affected at all by the contract. Indeed, as we previously noted, the record tells us very little about the market for the services of anesthesiologists. Yet that is the market in which the exclusive contract has had its principal impact. There is sim-ply no showing here of the kind of restraint on competition that is prohibited by the Sher-man Act. Accordingly, the judgment of the Court of Appeals is reversed and the case is remanded to that court for further proceedings consistent with this opinion.

Justice BRENNAN, with whom Justice MARSHALL joins, concurring: As the opin-ion for the Court demonstrates, we have long held that tying arrangements are subject to evaluation for per se illegality under §1 of the Sherman Act. Whatever merit the policy arguments against this longstanding construction of the Act might have, Congress, pre-sumably aware of our decisions, has never changed the rule by amending the Act. In such circumstances, our practice usually has been to stand by a settled statutory interpre-51 The effect of the contract has, of course, been to remove the East Jefferson Hospital from the market open to Roux’s competitors. Like any exclusive requirements contract, this contract could be unlawful if it foreclosed so much of the market from penetration by Roux’s competitors as to unreasonably restrain competition in the affected market, the market for anesthesiological ser-vices. See generally Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961); U.S. v. Standard Oil Co., 337 U.S. 293 (1949). However, respondent has not attempted to make this showing.52 The record simply tells us little if anything about the effect of this arrangement on price or quality of anesthesiological services. As to price, the arrangement did not lead to an increase in the price charged to the patient. As to quality, the record indicates little more than that there have never been any complaints about the quality of Roux’s services, and no contention that his ser-vices are in any respect inferior to those of respondent. Moreover, the self interest of the hospital, as well as the ethical and professional norms under which it operates, presumably protect the quality of anesthesiological services.


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tation and leave the task of modifying the statute’s reach to Congress. See Monsanto (BRENNAN, J., concurring). I see no reason to depart from that principle in this case and therefore join the opinion and judgment of the Court.


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Justice O’CONNOR, with whom Chief Justice BURGER, Justice POWELL, and Justice REHNQUIST join, concurring in the judgment: … I concur in the Court’s decision to reverse but write separately to explain why I believe the Hospital-Roux con-tract … is properly analyzed under the Rule of Reason.

I. … Under the usual logic of the per se rule, a restraint on trade that rarely serves any purposes other than to restrain competition is illegal without proof of market power or anti-competitive effect. In deciding whether an economic restraint should be declared il-legal per se, “the probability that anticompetitive consequences will result from a practice and the severity of those consequences [is] balanced against its pro-competitive conse-quences. Cases that do not fit the generalization may arise, but a per se rule reflects the judgment that such cases are not sufficiently common or important to justify the time and expense necessary to identify them.” Sylvania. Only when there is very little loss to soci-ety from banning a restraint altogether is an inquiry into its costs in the individual case considered to be unnecessary.

Some of our earlier cases did indeed declare that tying arrangements serve “hardly any purpose beyond the suppression of competition.” Standard Oil Co. of California v. U.S., 337 U.S. 293, 305-306 (1949) (dictum). However, this declaration was not taken literally even by the cases that purported to rely upon it. In practice, a tie has been illegal only if the seller is shown to have “sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product....” Northern Pacific R. Co., 356 U.S. at 6. Without “control or dominance over the tying product,” the seller could not use the tying product as “an effectual weapon to pressure buyers into taking the tied item,” so that any restraint of trade would be “insignificant.” Id. The Court has never been willing to say of tying arrangements, as it has of price-fix-ing, division of markets and other agreements subject to per se analysis, that they are al-ways illegal, without proof of market power or anticompetitive effect.

The “per se” doctrine in tying cases has thus always required an elaborate inquiry into the economic effects of the tying arrangement. As a result, tying doctrine incurs the costs of a rule of reason approach without achieving its benefits: the doctrine calls for the extensive and time-consuming economic analysis characteristic of the rule of reason, but then may be interpreted to prohibit arrangements that economic analysis would show to be beneficial. Moreover, the per se label in the tying context has generated more confu-sion than coherent law because it appears to invite lower courts to omit the analysis of economic circumstances of the tie that has always been an necessary element of tying analysis.

The time has therefore come to abandon the “per se” label and refocus the inquiry on the adverse economic effects, and the potential economic benefits, that the tie may have. The law of tie-ins will thus be brought into accord with the law applicable to all other allegedly anticompetitive economic arrangements, except those few horizontal or


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quasi-horizontal restraints that can be said to have no economic justification whatsoever.2

This change will rationalize rather than abandon tie-in doctrine as it is already applied.

II. … Tying may be economically harmful primarily in the rare cases where power in the market for the tying product is used to create additional market power in the market for the tied product.4 The antitrust law is properly concerned with tying when, for example, the flour monopolist threatens to use its market power to acquire additional power in the sugar market, perhaps by driving out competing sellers of sugar, or by making it more difficult for new sellers to enter the sugar market. But such extension of market power is unlikely, or poses no threat of economic harm, unless the two markets in question and the nature of the two products tied satisfy three threshold criteria.

First, the seller must have power in the tying product market. Absent such power tying cannot conceivably have any adverse impact in the tied-product market, and can be only pro-competitive in the tying product market.7 …

Second, there must be a substantial threat that the tying seller will acquire market power in the tied-product market. No such threat exists if the tied-product market is oc-cupied by many stable sellers who are not likely to be driven out by the tying, or if entry barriers in the tied product market are low. If, for example, there is an active and vibrant market for sugar–one with numerous sellers and buyers who do not deal in flour–the flour monopolist’s tying of sugar to flour need not be declared unlawful. If, on the other hand, the tying arrangement is likely to erect significant barriers to entry into the tied-product market, the tie remains suspect.

Third, there must be a coherent economic basis for treating the tying and tied products as distinct. … For products to be treated as distinct, the tied product must, at a minimum, be one that some consumers might wish to purchase separately without also 2 Tying law is particularly anomalous in this respect because arrangements largely indistinguish-able from tie-ins are generally analyzed under the rule of reason. For example, the “per se “ anal-ysis of tie-ins subjects restrictions on a franchisee’s freedom to purchase supplies to a more searching scrutiny than restrictions on his freedom to sell his products. Compare, e.g., Siegel v. Chicken Delight, 448 F.2d 43 (9th Cir 1971), cert. denied, 405 U.S. 955 (1972), with Sylvania. And exclusive contracts, that, like tie-ins, require the buyer to purchase a product from one seller, are subject only to the rule of reason.4 Tying might be undesirable in two other instances, but the Hospital-Roux arrangement involves neither one. In a regulated industry a firm with market power may be unable to extract a super-competitive profit because it lacks control over the prices it charges for regulated products or ser-vices. Tying may then be used to extract that profit from sale of the unregulated, tied products or services. … Tying may also help the seller engage in price discrimination by “metering” the buyer’s use of the tying product. … Price discrimination may be independently unlawful, see 15 U.S.C. §13. Price discrimination may, however, decrease rather than increase the economic costs of a seller’s market power. …7 A common misconception has been that a patent or copyright, a high market share, or a unique product that competitors are not able to offer suffice to demonstrate market power. While each of these three factors might help to give market power to a seller, it is also possible that a seller in these situations will have no market power: for example, a patent holder has no market power in any relevant sense if there are close substitutes for the patented product. Similarly, a high market share indicates market power only if the market is properly defined to include all reasonable sub-stitutes for the product. …


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purchasing the tying product. When the tied product has no use other than in conjunction with the tying product, a seller of the tying product can acquire no additional market power by selling the two products together. If sugar is useless to consumers except when used with flour, the flour seller’s market power is projected into the sugar market whether or not the two products are actually sold together; the flour seller can exploit what market power it has over flour with or without the tie. The flour seller will therefore have little incentive to monopolize the sugar market unless it can produce and distribute sugar more cheaply than other sugar sellers. And in this unusual case, where flour is monopolized and sugar is useful only when used with flour, consumers will suffer no further economic injury by the monopolization of the sugar market.

Even when the tied product does have a use separate from the tying product, it makes little sense to label a package as two products without also considering the eco-nomic justifications for the sale of the package as a unit. When the economic advantages of joint packaging are substantial the package is not appropriately viewed as two prod-ucts, and that should be the end of the tying inquiry. The lower courts largely have adopted this approach.10

These three conditions–market power in the tying product, a substantial threat of market power in the tied product, and a coherent economic basis for treating the products as distinct–are only threshold requirements. Under the Rule of Reason a tie-in may prove acceptable even when all three are met. Tie-ins may entail economic benefits as well as economic harms, and if the threshold requirements are met these benefits should enter the Rule of Reason balance.

Tie-ins ... may facilitate new entry into fields where established sellers have wedded their customers to them by ties of habit and custom. ... They may permit clandestine price cutting in products which otherwise would have no price competition at all because of fear of retaliation from the few other producers dealing in the market. They may protect the reputation of the tying product if failure to use the tied product in conjunction with it may cause it to misfunction. ... And, if the tied and tying products are functionally re-lated, they may reduce costs through economies of joint production and distribution.

10 The examination of the economic advantages of tying may properly be conducted as part of the Rule of Reason analysis, rather than at the threshold of the tying inquiry. This approach is con-sistent with this Court’s occasional references to the problem. The Court has not heretofore had occasion to set forth any general criteria for determining when two apparently separate products are components of a single product for tying analysis. In Times-Picayune Co., the Court held that advertising space in a morning newspaper was the same product as advertising space in the evening newspaper—access to readership of the respective newspapers--because the subscribers had no reason to distinguish among the readers of the two papers. 345 U.S., at 613-616. In Fort-ner I, the Court, reversing the grant of a motion for summary judgment, rejected the contention that credit could never be separate from the product for whose purchase credit was extended. 394 U.S., at 506-507. The Court disclaimed any determination of “the standards for determining ex-actly when a transaction involves only a single product.” Id., at 507. These cases indicate that consideration of whether a buyer might prefer to purchase one component without the other is one of the factors in tying analysis and, more generally, that economic analysis rather than mere conventional separability into different markets should determine whether one or two products are involved in the alleged tie.


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Fortner I, 394 U.S. at 514 n.9 (Justice WHITE, dissenting).

The ultimate decision whether a tie-in is illegal under the antitrust laws should de-pend upon the demonstrated economic effects of the challenged agreement. It may, for example, be entirely innocuous that the seller exploits its control over the tying product to “force” the buyer to purchase the tied product. For when the seller exerts market power only in the tying product market, it makes no difference to him or his customers whether he exploits that power by raising the price of the tying product or by “forcing” customers to buy a tied product. On the other hand, tying may make the provision of packages of goods and services more efficient. A tie-in should be condemned only when its anticom-petitive impact outweighs its contribution to efficiency.

III. Application of these criteria to the case at hand is straightforward. Although the is-sue is in doubt, we may assume that the Hospital does have market power in the provi-sion of hospital services in its area…. Second, in light of the Hospital’s presumed market power, we may also assume that there is a substantial threat that East Jefferson will ac-quire market power over the provision of anesthesiological services in its market. …

But the third threshold condition for giving closer scrutiny to a tying arrangement is not satisfied here: there is no sound economic reason for treating surgery and anesthe-sia as separate services. Patients are interested in purchasing anesthesia only in conjunc-tion with hospital services,12 so the Hospital can acquire no additional market power by selling the two services together. Accordingly, the link between the Hospital’s services and anesthesia administered by Roux will affect neither the amount of anesthesia pro-vided nor the combined price of anesthesia and surgery for those who choose to become the Hospital’s patients. In these circumstances, anesthesia and surgical services should probably not be characterized as distinct products for tying purposes.

Even if they are, the tying should not be considered a violation of §1 of the Sher-man Act because tying here cannot increase the seller’s already absolute power over the volume of production of the tied product, which is an inevitable consequence of the fact that very few patients will choose to undergo surgery without receiving anesthesia. The Hospital-Roux contract therefore has little potential to harm the patients. On the other side of the balance, the District Court found, and the Court of Appeals did not dispute, that the tie-in conferred significant benefits upon the hospital and the patients that it served.

The tie-in improves patient care and permits more efficient hospital operation in a number of ways. From the viewpoint of hospital management, the tie-in ensures 24 hour anesthesiology coverage, aids in standardization of procedures and efficient use of equip-ment, facilitates flexible scheduling of operations, and permits the hospital more effec-tively to monitor the quality of anesthesiological services. Further, the tying arrangement is advantageous to patients because, as the District Court found, the closed anesthesiol-ogy department places upon the hospital, rather than the individual patient, responsibility to select the physician who is to provide anesthesiological services. The hospital also as-sumes the responsibility that the anesthesiologist will be available, will be acceptable to the surgeon, and will provide suitable care to the patient. In assuming these responsibili -

12 While the record appears to be devoid of factual findings on this point the assumption is a safe one, and certainly one that finds no contradiction in the record.


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ties–responsibilities that a seriously ill patient frequently may be unable to discharge–the hospital provides a valuable service to its patients. And there is no indication that pa-tients were dissatisfied with the quality of anesthesiology that was provided at the hospi-tal or that patients wished to enjoy the services of anesthesiologists other than those that the hospital employed. Given this evidence of the advantages and effectiveness of the closed anesthesiology department, it is not surprising that, as the District Court found, such arrangements are accepted practice in the majority of hospitals of New Orleans and in the health care industry generally. Such an arrangement, that has little anti-competi-tive effect and achieves substantial benefits in the provision of care to patients, is hardly one that the antitrust law should condemn. This conclusion reaffirms our threshold deter-mination that the joint provision of hospital services and anesthesiology should not be viewed as involving a tie between distinct products, and therefore should require no addi-tional scrutiny under the antitrust law. …


504 U.S. 451 (1992)

Justice BLACKMUN delivered the opinion of the Court: This is yet another case that concerns the standard for summary judgment in an antitrust controversy. The principal issue here is whether a defendant’s lack of market power in the primary equipment mar-ket precludes–as a matter of law–the possibility of market power in derivative aftermar-kets. Petitioner Eastman Kodak Company manufactures and sells photocopiers and mi-crographic equipment. Kodak also sells service and replacement parts for its equipment. Respondents are 18 independent service organizations (ISO’s) that in the early 1980’s be-gan servicing Kodak copying and micrographic equipment. Kodak subsequently adopted policies to limit the availability of parts to ISO’s and to make it more difficult for ISO’s to compete with Kodak in servicing Kodak equipment.

Respondents instituted this action … alleging that Kodak’s policies were unlawful under both §1 and §2 of the Sherman Act…. [T]he District Court granted summary judg-ment for Kodak. The Court of Appeals for the Ninth Circuit reversed. The appellate court found that respondents had presented sufficient evidence to raise a genuine issue concerning Kodak’s market power in the service and parts markets. It rejected Kodak’s contention that lack of market power in service and parts must be assumed when such power is absent in the equipment market. Because of the importance of the issue, we granted certiorari.

I. A. … Kodak manufactures and sells complex business machines–as relevant here, high-volume photocopiers and micrographic equipment. … Kodak parts are not compati-ble with other manufacturers’ equipment, and vice versa. Kodak equipment, although ex-pensive when new, has little resale value.

Kodak provides service and parts for its machines to its customers. It produces some of the parts itself; the rest are made to order for Kodak by independent original-equipment manufacturers (OEM’s). Kodak does not sell a complete system of original


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equipment, lifetime service, and lifetime parts for a single price. Instead, Kodak provides service after the initial warranty period either through annual service contracts, which in-clude all necessary parts, or on a per-call basis. It charges, through negotiations and bid-ding, different prices for equipment, service, and parts for different customers. Kodak provides 80% to 95% of the service for Kodak machines.

Beginning in the early 1980’s, ISO’s began repairing and servicing Kodak equip-ment. They also sold parts and reconditioned and sold used Kodak equipment. Their customers were federal, state, and local government agencies, banks, insurance compa-nies, industrial enterprises, and providers of specialized copy and microfilming services. ISO’s provide service at a price substantially lower than Kodak does. Some customers found that the ISO service was of higher quality. Some ISO customers purchase their own parts and hire ISO’s only for service. Others choose ISO’s to supply both service and parts. ISO’s keep an inventory of parts, purchased from Kodak or other sources, pri-marily the OEM’s.

In 1985 and 1986, Kodak implemented a policy of selling replacement parts for micrographic and copying machines only to buyers of Kodak equipment who use Kodak service or repair their own machines. As part of the same policy, … Kodak and the OEM’s agreed that the OEM’s would not sell parts that fit Kodak equipment to anyone other than Kodak. Kodak also pressured Kodak equipment owners and independent parts distributors not to sell Kodak parts to ISO’s. … Kodak intended, through these policies, to make it more difficult for ISO’s to sell service for Kodak machines. It succeeded. ISOs were unable to obtain parts from reliable sources, and many were forced out of business, while others lost substantial revenue. Customers were forced to switch to Ko-dak service even though they preferred ISO service.

B. In 1987, the ISO’s filed the present action … alleging, inter alia, that Kodak had unlawfully tied the sale of service for Kodak machines to the sale of parts, in violation of §1 of the Sherman Act, and had unlawfully monopolized and attempted to monopolize the sale of service for Kodak machines, in violation of §2 of that Act. Kodak filed a mo-tion for summary judgment….[and] the District Court granted summary judgment in fa-vor of Kodak.

As to the §1 claim, the court found that respondents had provided no evidence of a tying arrangement between Kodak equipment and service or parts. The court, however, did not address respondents’ §1 claim that is at issue here. Respondents allege a tying ar-rangement not between Kodak equipment and service, but between Kodak parts and ser-vice. As to the §2 claim, the District Court concluded that although Kodak had a “natural monopoly over the market for parts it sells under its name,” a unilateral refusal to sell those parts to ISO’s did not violate §2.

The Court of Appeals for the Ninth Circuit … reversed. With respect to the §1 claim, the court first found that whether service and parts were distinct markets and whether a tying arrangement existed between them were disputed issues of fact. Having found that a tying arrangement might exist, the Court of Appeals considered a question not decided by the District Court: Was there “an issue of material fact as to whether Ko-dak has sufficient economic power in the tying product market [parts] to restrain compe-tition appreciably in the tied product market [service].” The court agreed with Kodak


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that competition in the equipment market might prevent Kodak from possessing power in the parts market, but refused to uphold the District Court’s grant of summary judgment “on this theoretical basis” because “market imperfections can keep economic theories about how consumers will act from mirroring reality.” Noting that the District Court had not considered the market power issue, and that the record was not fully developed through discovery, the court declined to require respondents to conduct market analysis or to pinpoint specific imperfections in order to withstand summary judgment. “It is enough that [respondents] have presented evidence of actual events from which a reason-able trier of fact could conclude that ... competition in the [equipment] market does not, in reality, curb Kodak’s power in the parts market.” …

As to the §2 claim, the Court of Appeals concluded that sufficient evidence ex-isted to support a finding that Kodak’s implementation of its parts policy was “anticom-petitive” and “exclusionary” and “involved a specific intent to monopolize.” It held that the ISO’s had come forward with sufficient evidence, for summary judgment purposes, to disprove Kodak’s business justifications. …

II. A tying arrangement … violates §1 of the Sherman Act if the seller has “appreciable economic power” in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market. Fortner Enterprises, Inc. v. U.S. Steel Corp., 394 U.S. 495, 503 (1969). Kodak did not dispute that its arrangement affects a substan-tial volume of interstate commerce. It, however, did challenge whether its activities con-stituted a “tying arrangement” and whether Kodak exercised “appreciable economic power” in the tying market. We consider these issues in turn.

A. For respondents to defeat a motion for summary judgment on their claim of a tying arrangement, a reasonable trier of fact must be able to find … that service and parts are two distinct products… For service and parts to be considered two distinct products, there must be sufficient consumer demand so that it is efficient for a firm to provide ser-vice separately from parts. Jefferson Parish. Evidence in the record indicates that service and parts have been sold separately in the past and still are sold separately to self-service equipment owners.5 Indeed, the development of the entire high-technology service in-dustry is evidence of the efficiency of a separate market for service.

Kodak insists that because there is no demand for parts separate from service, there cannot be separate markets for service and parts. By that logic, we would be forced to conclude that there can never be separate markets, for example, for cameras and film, computers and software, or automobiles and tires. That is an assumption we are unwill-ing to make. “We have often found arrangements involving functionally linked products at least one of which is useless without the other to be prohibited tying devices.” Jeffer-son Parish.

Kodak’s assertion also appears to be incorrect as a factual matter. At least some consumers would purchase service without parts, because some service does not require parts, and some consumers, those who self-service for example, would purchase parts

5 The Court of Appeals found: “Kodak’s policy of allowing customers to purchase parts on con-dition that they agree to service their own machines suggests that the demand for parts can be separated from the demand for service.”


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without service. Enough doubt is cast on Kodak’s claim of a unified market that it should be resolved by the trier of fact. …

B. Having found sufficient evidence of a tying arrangement, we consider the other necessary feature of an illegal tying arrangement: appreciable economic power in the tying market. Market power is the power “to force a purchaser to do something that he would not do in a competitive market.” Jefferson Parish. It has been defined as “the ability of a single seller to raise price and restrict output.” Fortner, 394 U.S. at 503; duPont. The existence of such power ordinarily is inferred from the seller’s possession of a predominant share of the market.

1. Respondents contend that Kodak has more than sufficient power in the parts market to force unwanted purchases of the tied market, service. Respondents pro-vide evidence that certain parts are available exclusively through Kodak. Respondents also assert that Kodak has control over the availability of parts it does not manufacture. According to respondents’ evidence, Kodak has prohibited independent manufacturers from selling Kodak parts to ISO’s, [and] pressured Kodak equipment owners and inde-pendent parts distributors to deny ISO’s the purchase of Kodak parts….

Respondents also allege that Kodak’s control over the parts market has excluded service competition, boosted service prices, and forced unwilling consumption of Kodak service. Respondents offer evidence that consumers have switched to Kodak service even though they preferred ISO service, that Kodak service was of higher price and lower quality than the preferred ISO service, and that ISO’s were driven out of business by Ko-dak’s policies. Under our prior precedents, this evidence would be sufficient to entitle re-spondents to a trial on their claim of market power.

2. Kodak counters that even if it concedes monopoly share of the relevant parts market, it cannot actually exercise the necessary market power for a Sherman Act violation … because competition exists in the equipment market. Kodak argues that it could not have the ability to raise prices of service and parts above the level that would be charged in a competitive market because any increase in profits from a higher price in the aftermarkets at least would be offset by a corresponding loss in profits from lower equipment sales as consumers began purchasing equipment with more attractive service costs. Kodak does not present any actual data on the equipment, service, or parts mar-kets. Instead, it urges the adoption of a substantive legal rule that “equipment competi-tion precludes any finding of monopoly power in derivative aftermarkets.”…11

Legal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law. This Court has preferred to resolve an-titrust claims on a case-by-case basis…. In determining the existence of market power, and specifically the “responsiveness of the sales of one product to price changes of the

11 Kodak argues that such a rule would be per se, with no opportunity for respondents to rebut the conclusion that market power is lacking in the parts market. … As an apparent second-best alter-native, Kodak suggests elsewhere in its brief that the rule would permit a defendant to meet its summary judgment burden…; the burden would then shift to the plaintiffs to “prove ... that there is specific reason to believe that normal economic reasoning does not apply.” This is the United States’ position.


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other,” duPont, this Court has examined closely the economic reality of the market at is-sue.

Kodak contends that there is no need to examine the facts when the issue is mar-ket power in the aftermarkets. A legal presumption against a finding of market power is warranted in this situation, according to Kodak, because the existence of market power in the service and parts markets absent power in the equipment market “simply makes no economic sense,” and the absence of a legal presumption would deter procompetitive be-havior. Matsushita. …

The Court’s requirement in Matsushita that the plaintiffs’ claims make economic sense did not introduce a special burden on plaintiffs facing summary judgment in an-titrust cases. The Court did not hold that if the moving party enunciates any economic theory supporting its behavior, regardless of its accuracy in reflecting the actual market, it is entitled to summary judgment. Matsushita demands only that the nonmoving party’s inferences be reasonable in order to reach the jury, a requirement that was not invented, but merely articulated, in that decision. If the plaintiff’s theory is economically senseless, no reasonable jury could find in its favor, and summary judgment should be granted.

Kodak, then, bears a substantial burden in showing that it is entitled to summary judgment. It must show that despite evidence of increased prices and excluded competi-tion, an inference of market power is unreasonable. To determine whether Kodak has met that burden, we must unravel the factual assumptions underlying its proposed rule that lack of power in the equipment market necessarily precludes power in the aftermar-kets.

The extent to which one market prevents exploitation of another market depends on the extent to which consumers will change their consumption of one product in re-sponse to a price change in another, i.e., the “cross-elasticity of demand.” See Du Pont. Kodak’s proposed rule rests on a factual assumption about the cross-elasticity of demand in the equipment and aftermarkets: “If Kodak raised its parts or service prices above competitive levels, potential customers would simply stop buying Kodak equipment. Perhaps Kodak would be able to increase short term profits through such a strategy, but at a devastating cost to its long term interests.”16 Kodak argues that the Court should ac-cept, as a matter of law, this “basic economic realit[y],” that competition in the equip-ment market necessarily prevents market power in the aftermarkets.17

Even if Kodak could not raise the price of service and parts one cent without los-ing equipment sales, that fact would not disprove market power in the aftermarkets. The 16 The United States as amicus curiae in support of Kodak echoes this argument:

The ISOs’ claims are implausible because Kodak lacks market power in the markets for its copier and micrographic equipment. Buyers of such equipment regard an increase in the price of parts or service as an increase in the price of the equipment, and sellers recognize that the revenues from sales of parts and service are attributable to sales of the equipment. In such circumstances, it is not apparent how an equipment manufacturer such as Kodak could exercise power in the aftermar-kets for parts and service.

17 It is clearly true, as the United States claims, that Kodak “cannot set service or parts prices without regard to the impact on the market for equipment.” The fact that the cross-elasticity of demand is not zero proves nothing; the disputed issue is how much of an impact an increase in parts and service prices has on equipment sales and on Kodak’s profits.


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sales of even a monopolist are reduced when it sells goods at a monopoly price, but the higher price more than compensates for the loss in sales. Kodak’s claim that charging more for service and parts would be “a short-run game,” is based on the false dichotomy that there are only two prices that can be charged–a competitive price or a ruinous one. But there could easily be a middle, optimum price at which the increased revenues from the higher priced sales of service and parts would more than compensate for the lower revenues from lost equipment sales. … Thus, contrary to Kodak’s assertion, there is no immutable physical law–no “basic economic reality”–insisting that competition in the equipment market cannot coexist with market power in the aftermarkets.

We next consider the more narrowly drawn question: Does Kodak’s theory de-scribe actual market behavior so accurately that respondents’ assertion of Kodak market power in the aftermarkets, if not impossible, is at least unreasonable?

To review Kodak’s theory, it contends that higher service prices will lead to a dis-astrous drop in equipment sales. Presumably, the theory’s corollary is to the effect that low service prices lead to a dramatic increase in equipment sales. According to the the-ory, one would have expected Kodak to take advantage of lower priced ISO service as an opportunity to expand equipment sales. Instead, Kodak adopted a restrictive sales policy consciously designed to eliminate the lower priced ISO service, an act that would be ex-pected to devastate either Kodak’s equipment sales or Kodak’s faith in its theory. Yet, according to the record, it has done neither. Service prices have risen for Kodak cus-tomers, but there is no evidence or assertion that Kodak equipment sales have dropped.

Kodak and the United States attempt to reconcile Kodak’s theory with the con-trary actual results by describing a “marketing strategy of spreading over time the total cost to the buyer of Kodak equipment.” In other words, Kodak could charge subcompeti-tive prices for equipment and make up the difference with supra-competitive prices for service, resulting in an overall competitive price. This pricing strategy would provide an explanation for the theory’s descriptive failings–if Kodak in fact had adopted it. But Ko-dak never has asserted that it prices its equipment or parts subcompetitively and recoups its profits through service. Instead, it claims that it prices its equipment comparably to its competitors and intends that both its equipment sales and service divisions be profitable. Moreover, this hypothetical pricing strategy is inconsistent with Kodak’s policy toward its self-service customers. If Kodak were underpricing its equipment, hoping to lock in customers and recover its losses in the service market, it could not afford to sell cus-tomers parts without service. In sum, Kodak’s theory does not explain the actual market behavior revealed in the record.

Respondents offer a forceful reason why Kodak’s theory, although perhaps intu-itively appealing, may not accurately explain the behavior of the primary and derivative markets for complex durable goods: the existence of significant information and switch-ing costs. These costs could create a less responsive connection between service and parts prices and equipment sales.

For the service-market price to affect equipment demand, consumers must inform themselves of the total cost of the “package”–equipment, service, and parts–at the time of purchase; that is, consumers must engage in accurate lifecycle pricing. Lifecycle pricing of complex, durable equipment is difficult and costly. In order to arrive at an accurate


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price, a consumer must acquire a substantial amount of raw data and undertake sophisti-cated analysis. The necessary information would include data on price, quality, and availability of products needed to operate, upgrade, or enhance the initial equipment, as well as service and repair costs, including estimates of breakdown frequency, nature of repairs, price of service and parts, length of “downtime,” and losses incurred from down-time. Much of this information is difficult–some of it impossible–to acquire at the time of purchase. During the life of a product, companies may change the service and parts prices, and develop products with more advanced features, a decreased need for repair, or new warranties. In addition, the information is likely to be customer-specific; lifecycle costs will vary from customer to customer with the type of equipment, degrees of equip-ment use, and costs of down-time.

Kodak acknowledges the cost of information, but suggests, again without eviden-tiary support, that customer information needs will be satisfied by competitors in the equipment markets. It is a question of fact, however, whether competitors would provide the necessary information. A competitor in the equipment market may not have reliable information about the lifecycle costs of complex equipment it does not service or the needs of customers it does not serve. Even if competitors had the relevant information, it is not clear that their interests would be advanced by providing such information to con-sumers.21

Moreover, even if consumers were capable of acquiring and processing the com-plex body of information, they may choose not to do so. Acquiring the information is ex-pensive. If the costs of service are small relative to the equipment price, or if consumers are more concerned about equipment capabilities than service costs, they may not find it cost efficient to compile the information. Similarly, some consumers, such as the Federal Government, have purchasing systems that make it difficult to consider the complete cost of the “package” at the time of purchase. State and local governments often treat service as an operating expense and equipment as a capital expense, delegating each to a differ-ent department. These governmental entities do not lifecycle price, but rather choose the lowest price in each market.

As Kodak notes, there likely will be some large-volume, sophisticated purchasers who will undertake the comparative studies and insist, in return for their patronage, that Kodak charge them competitive lifecycle prices. Kodak contends that these knowledge-able customers will hold down the package price for all other customers. There are rea-sons, however, to doubt that sophisticated purchasers will ensure that competitive prices are charged to unsophisticated purchasers, too. As an initial matter, if the number of so-phisticated customers is relatively small, the amount of profits to be gained by supracom-21 To inform consumers about Kodak, the competitor must be willing to forgo the opportunity to reap supracompetitive prices in its own service and parts markets. The competitor may anticipate that charging lower service and parts prices and informing consumers about Kodak in the hopes of gaining future equipment sales will cause Kodak to lower the price on its service and parts, canceling any gains in equipment sales to the competitor and leaving both worse off. Thus, in an equipment market with relatively few sellers, competitors may find it more profitable to adopt Kodak’s service and parts policy than to inform the consumers. … Even in a market with many sellers, any one competitor may not have sufficient incentive to inform consumers because the in-creased patronage attributable to the corrected consumer beliefs will be shared among other com-petitors.


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petitive pricing in the service market could make it profitable to let the knowledgeable consumers take their business elsewhere. More importantly, if a company is able to price discriminate between sophisticated and unsophisticated consumers, the sophisticated will be unable to prevent the exploitation of the uninformed. A seller could easily price dis-criminate by varying the equipment/parts/service package, developing different war-ranties, or offering price discounts on different components.

Given the potentially high cost of information and the possibility that a seller may be able to price discriminate between knowledgeable and unsophisticated consumers, it makes little sense to assume, in the absence of any evidentiary support, that equipment-purchasing decisions are based on an accurate assessment of the total cost of equipment, service, and parts over the lifetime of the machine.

Indeed, respondents have presented evidence that Kodak practices price discrimi-nation by selling parts to customers who service their own equipment, but refusing to sell parts to customers who hire third-party service companies. Companies that have their own service staff are likely to be high-volume users, the same companies for whom it is most likely to be economically worthwhile to acquire the complex information needed for comparative lifecycle pricing.

A second factor undermining Kodak’s claim that supracompetitive prices in the service market lead to ruinous losses in equipment sales is the cost to current owners of switching to a different product. If the cost of switching is high, consumers who already have purchased the equipment, and are thus “locked in,” will tolerate some level of ser-vice-price increases before changing equipment brands. Under this scenario, a seller profitably could maintain supracompetitive prices in the aftermarket if the switching costs were high relative to the increase in service prices, and the number of locked-in cus-tomers were high relative to the number of new purchasers.

Moreover, if the seller can price discriminate between its locked-in customers and potential new customers, this strategy is even more likely to prove profitable. The seller could simply charge new customers below-marginal cost on the equipment and recoup the charges in service, or offer packages with lifetime warranties or long-term service agreements that are not available to locked-in customers.

Respondents have offered evidence that the heavy initial outlay for Kodak equip-ment, combined with the required support material that works only with Kodak equip-ment, makes switching costs very high for existing Kodak customers. And Kodak’s own evidence confirms that it varies the package price of equipment/parts/service for different customers.

In sum, there is a question of fact whether information costs and switching costs foil the simple assumption that the equipment and service markets act as pure comple-ments to one another.24

24 The dissent disagrees based on its hypothetical case of a tie between equipment and service. “The only thing lacking” to bring this case within the hypothetical case, states the dissent, “is concrete evidence that the restrictive parts policy was ... generally known.” But the dissent’s “only thing lacking” is the crucial thing lacking–evidence. Whether a tie between parts and ser-vice should be treated identically to a tie between equipment and service, as the dissent and Ko-dak argue, depends on whether the equipment market prevents the exertion of market power in


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We conclude, then, that Kodak has failed to demonstrate that respondents’ infer-ence of market power in the service and parts markets is unreasonable, and that, conse-quently, Kodak is entitled to summary judgment. It is clearly reasonable to infer that Ko-dak has market power to raise prices and drive out competition in the aftermarkets, since respondents offer direct evidence that Kodak did so. It is also plausible, as discussed above, to infer that Kodak chose to gain immediate profits by exerting that market power where locked-in customers, high information costs, and discriminatory pricing limited and perhaps eliminated any long-term loss. Viewing the evidence in the light most favor-able to respondents, their allegations of market power “mak[e] ... economic sense.” Cf. Matsushita.

Nor are we persuaded by Kodak’s contention that it is entitled to a legal presump-tion on the lack of market power because, as in Matsushita, there is a significant risk of deterring procompetitive conduct. Plaintiffs in Matsushita attempted to prove the an-titrust conspiracy “through evidence of rebates and other price-cutting activities.” Be-cause cutting prices to increase business is “the very essence of competition,” the Court was concerned that mistaken inferences would be “especially costly” and would “chill the very conduct the antitrust laws are designed to protect.” Id. But the facts in this case are just the opposite. The alleged conduct–higher service prices and market foreclosure–is facially anticompetitive and exactly the harm that antitrust laws aim to prevent. In this situation, Matsushita does not create any presumption in favor of summary judgment for the defendant. Kodak contends that, despite the appearance of anti-competitiveness, its behavior actually favors competition because its ability to pursue innovative marketing plans will allow it to compete more effectively in the equipment market. A pricing strat-egy based on lower equipment prices and higher aftermarket prices could enhance equip-ment sales by making it easier for the buyer to finance the initial purchase.26 It is undis-puted that competition is enhanced when a firm is able to offer various marketing op-tions, including bundling of support and maintenance service with the sale of equipment. Nor do such actions run afoul of the antitrust laws.27 But the procompetitive effect of the specific conduct challenged here, eliminating all consumer parts and service options, is far less clear.28

We need not decide whether Kodak’s behavior has any procompetitive effects and, if so, whether they outweigh the anticompetitive effects. We note only that Kodak’s service and parts policy is simply not one that appears always or almost always to en-hance competition, and therefore to warrant a legal presumption without any evidence of its actual economic impact. In this case, when we weigh the risk of deterring procompet-

the parts market. Far from being “anomalous,” requiring Kodak to provide evidence on this fac-tual question is completely consistent with our prior precedent. 26 It bears repeating that in this case Kodak has never claimed that it is in fact pursuing such a pricing strategy.27 See Jefferson Parish (“Buyers often find package sales attractive; a seller’s decision to offer such packages can merely be an attempt to compete effectively–conduct that is entirely consistent with the Sherman Act”). …28 Two of the largest consumers of service and parts contend that they are worse off when the equipment manufacturer also controls service and parts. See Brief for State Farm Mutual Auto-mobile Insurance Co. et al. as Amici Curiae; Brief for State of Ohio et al. as Amici Curiae.


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itive behavior by proceeding to trial against the risk that illegal behavior will go unpun-ished, the balance tips against summary judgment. Cf. Matsushita. …29

III. Respondents also claim that they have presented genuine issues for trial as to whether Kodak has monopolized, or attempted to monopolize, the service and parts mar-kets in violation of §2 of the Sherman Act. “The offense of monopoly under §2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or his-toric accident.” Grinnell.

A. The existence of the first element, possession of monopoly power, is eas-ily resolved. As has been noted, respondents have presented a triable claim that service and parts are separate markets, and that Kodak has the “power to control prices or ex-clude competition” in service and parts. duPont. Monopoly power under §2 requires, of course, something greater than market power under §1. Respondents’ evidence that Ko-dak controls nearly 100% of the parts market and 80% to 95% of the service market, with no readily available substitutes, is, however, sufficient to survive summary judgment un-der the more stringent monopoly standard of §2. Cf. Grinnell (87% of the market is a mo-

29 The dissent urges a radical departure in this Court’s antitrust law. It argues that because Kodak has only an “inherent” monopoly in parts for its equipment, the antitrust laws do not apply to its efforts to expand that power into other markets. The dissent’s proposal to grant per se immunity to manufacturers competing in the service market would exempt a vast and growing sector of the economy from antitrust laws. Leaving aside the question whether the Court has the authority to make such a policy decision, there is no support for it in our jurisprudence or the evidence in this case.Even assuming, despite the absence of any proof from the dissent, that all manufacturers possess some inherent market power in the parts market, it is not clear why that should immunize them from the antitrust laws in another market. The Court has held many times that power gained through some natural and legal advantage such as a patent, copyright, or business acumen can give rise to liability if “a seller exploits his dominant position in one market to expand his empire into the next.” Times-Picayune Publishing Co. v. U.S., 345 U.S. 594, 611 (1953). Moreover, on the occasions when the Court has considered tying in derivative aftermarkets by manufacturers, it has not adopted any exception to the usual antitrust analysis, treating derivative aftermarkets as it has every other separate market. Our past decisions are reason enough to reject the dissent’s pro-posal. … Nor does the record in this case support the dissent’s proposed exemption for aftermar-kets. The dissent urges its exemption because the tie here “does not permit the manufacturer to project power over a class of consumers distinct from that which it is already able to exploit (and fully) without the inconvenience of the tie.” Beyond the dissent’s obvious difficulty in explaining why Kodak would adopt this expensive tying policy if it could achieve the same profits more conveniently through some other means, respondents offer an alternative theory, supported by the record, that suggests Kodak is able to exploit some customers who in the absence of the tie would be protected from increases in parts prices by knowledgeable customers. At bottom, whatever the ultimate merits of the dissent’s theory, at this point it is mere conjecture. Neither Kodak nor the dissent have provided any evidence refuting respondents’ theory of forced unwanted purchases at higher prices and price discrimination. While it may be, as the dissent predicts, that the equipment market will prevent any harms to consumers in the aftermarkets, the dissent never makes plain why the Court should accept that theory on faith rather than requiring the usual evidence needed to win a summary judgment motion.


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nopoly); American Tobacco Co. v. U.S., 328 U.S. 781, 797 (1946) (over two-thirds of the market is a monopoly).

Kodak also contends that, as a matter of law, a single brand of a product or ser-vice can never be a relevant market under the Sherman Act. We disagree. The relevant market for antitrust purposes is determined by the choices available to Kodak equipment owners. See Jefferson Parish. Because service and parts for Kodak equipment are not interchangeable with other manufacturers’ service and parts, the relevant market from the Kodak equipment owner’s perspective is composed of only those companies that service Kodak machines. See Du Pont (“The market is composed of products that have reason-able interchangeability”). This Court’s prior cases support the proposition that in some instances one brand of a product can constitute a separate market. See NCAA; Interna-tional Boxing Club of New York v. U.S., 358 U.S. 242, 249-252 (1959). The proper mar-ket definition in this case can be determined only after a factual inquiry into the “com-mercial realities” faced by consumers. Grinnell.

B. The second element of a §2 claim is the use of monopoly power “to foreclose competition, to gain a competitive advantage, or to destroy a competitor.” U.S. v. Grif-fith, 334 U.S. 100, 107 (1948). If Kodak adopted its parts and service policies as part of a scheme of willful acquisition or maintenance of monopoly power, it will have violated §2. Grinnell; [Alcoa]; Aspen Skiing.32

As recounted at length above, respondents have presented evidence that Kodak took exclusionary action to maintain its parts monopoly and used its control over parts to strengthen its monopoly share of the Kodak service market. Liability turns, then, on whether “valid business reasons” can explain Kodak’s actions. Aspen Skiing; Alcoa. …

Kodak first asserts that by preventing customers from using ISO’s, “it [can] best maintain high quality service for its sophisticated equipment” and avoid being “blamed for an equipment malfunction, even if the problem is the result of improper diagnosis, maintenance or repair by an ISO.” Respondents have offered evidence that ISO’s pro-vide quality service and are preferred by some Kodak equipment owners. This is suffi-cient to raise a genuine issue of fact. …

Moreover, there are other reasons to question Kodak’s proffered motive of com-mitment to quality service; its quality justification appears inconsistent with its thesis that consumers are knowledgeable enough to lifecycle price, and its self-service policy. Kodak claims the exclusive-service contract is warranted because customers would other-wise blame Kodak equipment for breakdowns resulting from inferior ISO service. Thus, Kodak simultaneously claims that its customers are sophisticated enough to make com-plex and subtle lifecycle-pricing decisions, and yet too obtuse to distinguish which break-downs are due to bad equipment and which are due to bad service. Kodak has failed to offer any reason why informational sophistication should be present in one circumstance and absent in the other. In addition, because self-service customers are just as likely as others to blame Kodak equipment for breakdowns resulting from (their own) inferior ser-vice, Kodak’s willingness to allow self-service casts doubt on its quality claim. In sum,

32 It is true that as a general matter a firm can refuse to deal with its competitors. But such a right is not absolute; it exists only if there are legitimate competitive reasons for the refusal. See As-pen Skiing.


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we agree with the Court of Appeals that respondents “have presented evidence from which a reasonable trier of fact could conclude that Kodak’s first reason is pretextual.” …

Nor does Kodak’s final justification entitle it to summary judgment on respon-dents’ §2 claim. Kodak claims that its policies prevent ISO’s from “exploit[ing] the in-vestment Kodak has made in product development, manufacturing and equipment sales in order to take away Kodak’s service revenues.” Kodak does not dispute that respondents invest substantially in the service market, with training of repair workers and investment in parts inventory. Instead, according to Kodak, the ISO’s are free-riding because they have failed to enter the equipment and parts markets. This understanding of free-riding has no support in our case law. To the contrary, as the Court of Appeals noted, one of the evils proscribed by the antitrust laws is the creation of entry barriers to potential competi-tors by requiring them to enter two markets simultaneously. Jefferson Parish. …

IV. In the end, of course, Kodak’s arguments may prove to be correct. It may be that its parts, service, and equipment are components of one unified market, or that the equip-ment market does discipline the aftermarkets so that all three are priced competitively overall, or that any anti-competitive effects of Kodak’s behavior are outweighed by its competitive effects. But we cannot reach these conclusions as a matter of law on a record this sparse. Accordingly, the judgment of the Court of Appeals denying summary judg-ment is affirmed.

Justice SCALIA, with whom Justice O’CONNOR and Justice THOMAS join, dis-senting: This is not, as the Court describes it, just “another case that concerns the stan-dard for summary judgment in an antitrust controversy.” Rather, the case presents a very narrow–but extremely important–question of substantive antitrust law: whether, for pur-poses of applying our per se rule condemning “ties,” and for purposes of applying our ex-acting rules governing the behavior of would-be monopolists, a manufacturer’s conceded lack of power in the interbrand market for its equipment is somehow consistent with its possession of “market,” or even “monopoly,” power in wholly derivative aftermarkets for that equipment. In my view, the Court supplies an erroneous answer to this question, and I dissent.

I. … The concerns … that have led the courts to heightened scrutiny both of the “exclu-sionary conduct” practiced by a monopolist and of tying arrangements subject to per se prohibition, are completely without force when the participants lack market power. … The Court today finds in the typical manufacturer’s inherent power over its own brand of equipment–over the sale of distinctive repair parts for that equipment, for example–the sort of “monopoly power” sufficient to bring the sledgehammer of §2 into play. And, not surprisingly in light of that insight, it readily labels single-brand power over aftermarket products “market power” sufficient to permit an antitrust plaintiff to invoke the per se rule against tying. In my opinion, this makes no economic sense. The holding that mar-ket power can be found on the present record causes these venerable rules of selective proscription to extend well beyond the point where the reasoning that supports them leaves off. Moreover, because the sort of power condemned by the Court today is pos-sessed by every manufacturer of durable goods with distinctive parts, the Court’s opinion threatens to release a torrent of litigation and a flood of commercial intimidation that will do much more harm than good to enforcement of the antitrust laws and to genuine com-


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petition. … [N]either logic nor experience suggests, let alone compels, application of the per se tying prohibition and monopolization doctrine to a seller’s behavior in its single-brand aftermarkets, when that seller is without power at the interbrand level.

II. … A. We must assume, for purposes of deciding this case, that petitioner is without market, much less monopoly, power in the interbrand markets for its micrographic and photocopying equipment. In the District Court, respondents did, in fact, include in their complaint an allegation which posited the interbrand equipment markets as the relevant markets; in particular, they alleged a §1 “tie” of micrographic and photocopying equip-ment to the parts and service for those machines. Though this allegation was apparently abandoned in pursuit of §§1 and 2 claims focused exclusively on the parts and service af-termarkets (about which more later), I think it helpful to analyze how that claim would have fared under the per se rule.

Had Kodak–from the date of its entry into the micrographic and photocopying equipment markets–included a lifetime parts and service warranty with all original equip-ment, or required consumers to purchase a lifetime parts and service contract with each machine, that bundling of equipment, parts, and service would no doubt constitute a tie under the tests enunciated in Jefferson Parish. Nevertheless, it would be immune from per se scrutiny under the antitrust laws because the tying product would be equipment, a market in which (we assume) Kodak has no power to influence price or quantity. The same result would obtain, I think, had Kodak–from the date of its market entry–consis-tently pursued an announced policy of limiting parts sales in the manner alleged in this case, so that customers bought with the knowledge that aftermarket support could be ob-tained only from Kodak. The foreclosure of respondents from the business of servicing Kodak’s micrographic and photocopying machines in these illustrations would be undeni-ably complete–as complete as the foreclosure described in respondents’ complaint. Nonetheless, we would inquire no further than to ask whether Kodak’s market power in the equipment market effectively forced consumers to purchase Kodak micrographic or photocopying machines subject to the company’s restrictive aftermarket practices. If not, that would end the case insofar as the per se rule was concerned. The evils against which the tying prohibition is directed would simply not be presented. Interbrand competition would render Kodak powerless to gain economic power over an additional class of con-sumers, to price discriminate by charging each customer a “system” price equal to the system’s economic value to that customer, or to raise barriers to entry in the interbrand equipment markets.

I have described these illustrations as hypothetical, but in fact they are not far re-moved from this case. The record below is consistent–in large part–with just this sort of bundling of equipment on the one hand, with parts and service on the other. …[A]ll post-1985 purchasers of micrographic equipment, like all post-1985 purchasers of new Kodak copiers, could have been aware of Kodak’s parts practices. The only thing lacking to bring all of these purchasers (accounting for the vast bulk of the commerce at issue here) squarely within the hypotheticals we have described is concrete evidence that the restric-tive parts policy was announced or generally known. Thus, under the Court’s approach the [lack of] existence … of such evidence is determinative of the legal standard (the per se rule versus the rule of reason) under which the alleged tie is examined. In my judg-ment, this makes no sense. It is quite simply anomalous that a manufacturer functioning


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in a competitive equipment market should be exempt from the per se rule when it bundles equipment with parts and service, but not when it bundles parts with service. This vast difference in the treatment of what will ordinarily be economically similar phenomena is alone enough to call today’s decision into question.

B. …[R]espondents sought to sidestep the impediment posed by interbrand com-petition to their invocation of the per se tying rule by zeroing in on the parts and service “aftermarkets” for Kodak equipment. By alleging a tie of parts to service, rather than of equipment to parts and service, they identified a tying product in which Kodak unques-tionably held a near-monopoly share: the parts uniquely associated with Kodak’s brand of machines. The Court today holds that such a facial showing of market share in a sin-gle-brand aftermarket is sufficient to invoke the per se rule. The existence of even vi-brant interbrand competition is no defense. I find this a curious form of market power on which to premise the application of a per se proscription. It is enjoyed by virtually every manufacturer of durable goods requiring aftermarket support with unique, or relatively unique, goods.1 Under the Court’s analysis, the per se rule may now be applied to single-brand ties effected by the most insignificant players in fully competitive interbrand mar-kets, as long as the arrangement forecloses aftermarket competitors from more than a de minimis amount of business. This seems to me quite wrong. A tying arrangement “forced” through the exercise of such power no more implicates … concerns behind the per se tying prohibition than does a tie of the foremarket brand to its aftermarket deriva-tives, which–as I have explained–would not be subject to per se condemnation.2 …

1 That there exist innumerable parts and service firms in such industries as the automobile indus-try … does not detract from this point. The question whether power to control an aftermarket ex-ists is quite distinct from the question whether the power has been exercised. Manufacturers in some markets have no doubt determined that exclusionary intrabrand conduct works to their dis -advantage at the competitive interbrand level, but this in no way refutes the self-evident reality that control over unique replacement parts for single-branded goods is ordinarily available to such manufacturers for the taking. It confounds sound analysis to suggest, as respondents do, that the asserted fact that Kodak manufactures only 10% of its replacement parts, and purchases the rest from original equipment manufacturers, casts doubt on Kodak’s possession of an inherent advan-tage in the aftermarkets. It does no such thing, any more than Kodak’s contracting with others for the manufacture of all constituent parts included in its original equipment would alone suggest that Kodak lacks power in the interbrand micrographic and photocopying equipment markets. The suggestion implicit in respondents’ analysis–that if a seller chooses to contract for the manu-facture of its branded merchandise, it must permit the contractors to compete in the sale of that merchandise–is plainly unprecedented.2 Even with interbrand power, I may observe, it is unlikely that Kodak could have incrementally exploited its position through the tie of parts to service alleged here. Most of the “service” at is-sue is inherently associated with the parts, i.e., that service involved in incorporating the parts into Kodak equipment, and the two items tend to be demanded by customers in fixed proportions (one part with one unit of service necessary to install the part). When that situation obtains, “ ‘no revenue can be derived from setting a higher price for the tied product which could not have been made by setting the optimum price for tying product.’” P.AREEDA & L. KAPLOW, ANTITRUST ANALYSIS ¶426(a), at 706 (4th ed. 1988) (quoting Bowman, Tying Arrangements and the Lever-age Problem, 67 YALE L.J. 19 (1957)). These observations strongly suggest that Kodak parts and the service involved in installing them should not be treated as distinct products for antitrust tying purposes. …


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In the absence of interbrand power, a seller’s predominant or monopoly share of its single-brand derivative markets does not connote the power to raise derivative market prices generally by reducing quantity. As Kodak and its principal amicus, the United States, point out, a rational consumer considering the purchase of Kodak equipment will inevitably factor into his purchasing decision the expected cost of aftermarket support. … If Kodak set generally supracompetitive prices for either spare parts or repair services without making an offsetting reduction in the price of its machines, rational consumers would simply turn to Kodak’s competitors for photocopying and micrographic systems. True, there are–as the Court notes –the occasional irrational consumers that consider only the hardware cost at the time of purchase (a category that regrettably includes the Federal Government, whose “purchasing system,” we are told, assigns foremarket purchases and aftermarket purchases to different entities). But we have never before premised the appli-cation of antitrust doctrine on the lowest common denominator of consumer.

The Court attempts to counter this theoretical point with a theory of its own. It says that there are “information costs”–the costs and inconvenience to the consumer of acquiring and processing life-cycle pricing data for Kodak machines–that “could create a less responsive connection between service and parts prices and equipment sales.” But this truism about the functioning of markets for sophisticated equipment cannot create “market power” of concern to the antitrust laws where otherwise there is none. “Informa-tion costs,” or, more accurately, gaps in the availability and quality of consumer informa-tion, pervade real-world markets; and because consumers generally make do with “rough cut” judgments about price in such circumstances, in virtually any market there are zones within which otherwise competitive suppliers may overprice their products without losing appreciable market share. We have never suggested that the principal players in a market with such commonplace informational deficiencies (and, thus, bands of apparent con-sumer pricing indifference) exercise market power in any sense relevant to the antitrust laws. …

Respondents suggest that, even if the existence of interbrand competition prevents Kodak from raising prices generally in its single-brand aftermarkets, there remain certain consumers who are necessarily subject to abusive Kodak pricing behavior by reason of their being “locked in” to their investments in Kodak machines. The Court agrees; in-deed, it goes further by suggesting that even a general policy of supracompetitive after-market prices might be profitable over the long run because of the “lock-in” phenome-non. “[A] seller profitably could maintain supracompetitive prices in the aftermarket,” the Court explains, “if the switching costs were high relative to the increase in service prices, and the number of locked-in customers were high relative to the number of new purchasers.” In speculating about this latter possibility, the Court is essentially repudiat-ing the assumption on which we are bound to decide this case, viz., Kodak’s lack of any power whatsoever in the interbrand market. If Kodak’s general increase in aftermarket prices were to bring the total “system” price above competitive levels in the interbrand market, Kodak would be wholly unable to make further foremarket sales–and would find itself exploiting an ever-dwindling aftermarket, as those Kodak micrographic and photo-copying machines already in circulation passed into disuse.

The Court’s narrower point, however, is undeniably true. There will be con-sumers who, because of their capital investment in Kodak equipment, “will tolerate some


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level of service-price increases before changing equipment brands,” ibid.; this is neces-sarily true for “every maker of unique parts for its own product.” AREEDA & HOVENKAMP, ANTITRUST LAW ¶525.1b, at 563. But this “circumstantial” leverage cre-ated by consumer investment regularly crops up in smoothly functioning, even perfectly competitive, markets, and in most–if not all–of its manifestations, it is of no concern to the antitrust laws. The leverage held by the manufacturer of a malfunctioning refrigerator (which is measured by the consumer’s reluctance to walk away from his initial invest-ment in that device) is no different in kind or degree from the leverage held by the swim-ming pool contractor when he discovers a 5-ton boulder in his customer’s backyard and demands an additional sum of money to remove it; or the leverage held by an airplane manufacturer over an airline that has “standardized” its fleet around the manufacturer’s models; or the leverage held by a drill press manufacturer whose customers have built their production lines around the manufacturer’s particular style of drill press; or the leverage held by an insurance company over its independent sales force that has invested in company-specific paraphernalia…. Leverage, in the form of circumstantial power, plays a role in each of these relationships; but in none of them is the leverage attributable to the dominant party’s market power in any relevant sense. …

The Court correctly observes that the antitrust laws do not permit even a natural monopolist to project its monopoly power into another market…. However, when a man-ufacturer uses its control over single-branded parts to acquire influence in single-branded service, the monopoly “leverage” is almost invariably of no practical consequence, be-cause of perfect identity between the consumers in each of the subject aftermarkets (those who need replacement parts for Kodak equipment and those who need servicing of Ko-dak equipment). When that condition exists, the tie does not permit the manufacturer to project power over a class of consumers distinct from that which it is already able to ex-ploit (and fully) without the inconvenience of the tie.

We have never before accepted the thesis the Court today embraces: that a seller’s inherent control over the unique parts for its own brand amounts to “market power” of a character sufficient to permit invocation of the per se rule against tying. As the Court observes, we have applied the per se rule to manufacturer ties of foremarket equipment to aftermarket derivatives–but only when the manufacturer’s monopoly power in the equipment, coupled with the use of derivative sales as “counting devices” to mea-sure the intensity of customer equipment usage, enabled the manufacturer to engage in price discrimination, and thereby more fully exploit its interbrand power. That sort of en-during opportunity to engage in price discrimination is unavailable to a manufacturer–like Kodak–that lacks power at the interbrand level. A tie between two aftermarket de-rivatives does next to nothing to improve a competitive manufacturer’s ability to extract monopoly rents from its consumers.3 …

3 The Court insists that the record in this case suggests otherwise , i.e., that a tie between parts and service somehow does enable Kodak to increase overall monopoly profits. Although the Court does not identify the record evidence on which it relies, the suggestion, apparently, is that such a tie facilitates price discrimination between sophisticated, “high-volume” users of Kodak equip-ment and their unsophisticated counterparts. The sophisticated users (who, the Court presumes, invariably self-service their equipment) are permitted to buy Kodak parts without also purchasing supracompetitively priced Kodak service, while the unsophisticated are–through the imposition of the tie–compelled to buy both.


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We have recognized in closely related contexts that the deterrent effect of inter-brand competition on the exploitation of intrabrand market power should make courts ex-ceedingly reluctant to apply rules of per se illegality to intrabrand restraints. For in-stance, we have refused to apply a rule of per se illegality to vertical nonprice restraints “because of their potential for a simultaneous reduction of intrabrand competition and stimulation of interbrand competition,” Sylvania, the latter of which we described as “the primary concern of antitrust law,” id. We noted, for instance, that “new manufacturers and manufacturers entering new markets can use the restrictions in order to induce com-petent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer,” and that “[e]sta-blished manufacturers can use them to induce retailers to engage in promotional activities or to provide service and repair facilities necessary to the efficient marketing of their products.” Id. The same assumptions, in my opinion, should govern our analysis of ties alleged to have been “forced” solely through intrabrand market power. In the absence of interbrand power, a manufacturer’s bundling of aftermarket products may serve a multi-tude of legitimate purposes: It may facilitate manufacturer efforts to ensure that the equipment remains operable and thus protect the seller’s business reputation; it may cre-ate the conditions for implicit consumer financing of the acquisition cost of the tying equipment through supracompetitively-priced aftermarket purchases; and it may, through the resultant manufacturer control of aftermarket activity, “yield valuable information about component or design weaknesses that will materially contribute to product im-provement,” 3 AREEDA & TURNER ¶733c, at 258-259. Because the interbrand market will generally punish intrabrand restraints that consumers do not find in their interest, we should not–under the guise of a per se rule–condemn such potentially procompetitive ar-rangements simply because of the antitrust defendant’s inherent power over the unique parts for its own brand.

I would instead evaluate the aftermarket tie alleged in this case under the rule of reason, where the tie’s actual anticompetitive effect in the tied product market, together with its potential economic benefits, can be fully captured in the analysis. Disposition of this case does not require such an examination, however, as respondents apparently waived any rule-of-reason claim they may have had in the District Court. I would thus reverse the Ninth Circuit’s judgment on the tying claim outright.

While superficially appealing, at bottom this explanation lacks coherence. Whether they self-ser-vice their equipment or not, rational foremarket consumers (those consumers who are not yet “locked in” to Kodak hardware) will be driven to Kodak’s competitors if the price of Kodak equipment, together with the expected cost of aftermarket support, exceeds competitive levels. This will be true no matter how Kodak distributes the total system price among equipment, parts, and service. Thus, as to these consumers, Kodak’s lack of interbrand power wholly prevents it from employing a tie between parts and service as a vehicle for price discrimination. Nor does a tie between parts and service offer Kodak incremental exploitative power over those consumers–sophisticated or not–who have the supposed misfortune of being “locked in” to Kodak equip-ment. If Kodak desired to exploit its circumstantial power over this wretched class by pressing them up to the point where the cost to each consumer of switching equipment brands barely ex-ceeded the cost of retaining Kodak equipment and remaining subject to Kodak’s abusive prac -tices, it could plainly do so without the inconvenience of a tie, through supracompetitive parts pricing alone. Since the locked-in sophisticated parts purchaser is as helpless as the locked-in un-sophisticated one, I see nothing to be gained by price discrimination in favor of the former. …


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III. These considerations apply equally to respondents’ §2 claims. An antitrust defen-dant lacking relevant “market power” sufficient to permit invocation of the per se prohi-bition against tying a fortiori lacks the monopoly power that warrants heightened scrutiny of his allegedly exclusionary behavior. Without even so much as asking whether the pur-poses of §2 are implicated here, the Court points to Kodak’s control of “100% of the parts market and 80% to 95% of the service market,” markets with “no readily available substitutes,” and finds that the proffer of such statistics is sufficient to fend off summary judgment. But this showing could easily be made, as I have explained, with respect to virtually any manufacturer of differentiated products requiring aftermarket support. By permitting antitrust plaintiffs to invoke §2 simply upon the unexceptional demonstration that a manufacturer controls the supplies of its single-branded merchandise, the Court transforms §2 from a specialized mechanism for responding to extraordinary agglomera-tions (or threatened agglomerations) of economic power to an all-purpose remedy against run-of-the-mill business torts.

In my view, if the interbrand market is vibrant, it is simply not necessary to enlist §2’s machinery to police a seller’s intrabrand restraints. In such circumstances, the inter-brand market functions as an infinitely more efficient and more precise corrective to such behavior, rewarding the seller whose intrabrand restraints enhance consumer welfare while punishing the seller whose control of the aftermarkets is viewed unfavorably by in-terbrand consumers. Because this case comes to us on the assumption that Kodak is with-out such interbrand power, I believe we are compelled to reverse the judgment of the Court of Appeals. I respectfully dissent.

$ $ $ $ $ $ $REVIEW PROBLEM 6: U.S. v. MICROSOFT


(1) To get an overview of some of the important questions raised by the Microsoft litiga-tion, read the introduction to the Network Issues chapter in The Antitrust Revolution (AR414-27).

(2) Skim the questions below to get a sense of what we’ll be discussing.

(3) Read U.S. v. Microsoft (CM329-62) and the Microsoft Case Study (AR476-501) fo-cusing on the issues highlighted in the questions.

(4) Skim the attached proposed final judgment (CM362-74) paying particular attention to the section on prohibited conduct.


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(1) Court’s Initial Questions: In the section entitled “Overview” (CM331-33), the court raises two concerns that are hotly debated in academic circles:

(a) Traditional antitrust analysis may not be well-designed to address fast-changing high technology markets.

(b) Traditional antitrust analysis may not be well-designed to address markets that ex-perience significant network effects.

Articulate in your own words how these concerns might affect the analysis in the Microsoft case. Be ready to discuss how the concerns might affect each of the following players in the legal system:

A Congressional committee considering amendments to the antitrust laws;

A government agency deciding whether to prosecute monopolization or tying claims

A court analyzing monopolization or tying claims in a case brought by a private plaintiff

(2) Monopolization and Conduct: On pages 339-53, the court holds that several different types of conduct engaged in by Microsoft violate Section 2. Which conduct discussed constitutes the strongest case for a violation? Which conduct that the court says violates the statute constitutes the weakest case for a violation? Is the court’s discussion consis-tent with the Supreme Court cases on the Section 2 conduct requirement?

(3) Tying Analysis: The unstated premise of the court’s tying analysis (pages 355-61) is that the tie in question would be per se illegal under a straightforward application of Jef-ferson Parish. Why does the court then choose to reject the use of the per se rule in this case? Is its reasoning persuasive?

(4) Remedy: The District Court had ordered Microsoft to split up, separating its operat-ing system business from its other software development and sales. The proposed judg-ment (agreed to by the federal government and some of the state plaintiffs, and largely adopted by the court) instead bans particular conduct that is similar to the conduct held to violate Section 2. Assuming the court of appeals’ holdings as to liability are correct, what are the pros and cons of each of these remedies?


(D.C. Cir. 2001) (en banc)

PER CURIAM: Microsoft Corporation appeals from judgments of the District Court finding the company in violation of §§1 and 2 of the Sherman Act and ordering various remedies. … The District Court determined that Microsoft had maintained a monopoly in the market for Intel compatible PC operating systems in violation of §2; attempted to gain a monopoly in the market for internet browsers in violation of §2; and illegally tied two purportedly separate products, Windows and Internet Explorer (“IE”), in violation of


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§1. … To remedy the Sherman Act violations, the District Court issued a Final Judgment requiring Microsoft to submit a proposed plan of divestiture, with the company to be split into an operating systems business and an applications business. The District Court’s re-medial order also contains a number of interim restrictions on Microsoft’s conduct. …

After carefully considering the voluminous record on appeal--including the Dis-trict Court’s Findings of Fact and Conclusions of Law, the testimony and exhibits submit-ted at trial, the parties’ briefs, and the oral arguments before this court--we find that some but not all of Microsoft’s liability challenges have merit. Accordingly, we affirm in part and reverse in part the District Court’s judgment that Microsoft violated §2 of the Sher-man Act by employing anticompetitive means to maintain a monopoly in the operating system market; we reverse the District Court’s determination that Microsoft violated §2 of the Sherman Act by illegally attempting to monopolize the internet browser market; and we remand the District Court’s finding that Microsoft violated §1 of the Sherman Act by unlawfully tying its browser to its operating system. …

We also find merit in Microsoft’s challenge to the Final Judgment embracing the District Court’s remedial order. There are several reasons supporting this conclusion. First, the District Court’s Final Judgment rests on a number of liability determinations that do not survive appellate review; therefore, the remedial order as currently fashioned cannot stand. Furthermore, we would vacate and remand the remedial order even were we to uphold the District Court’s liability determinations in their entirety, because the District Court failed to hold an evidentiary hearing to address remedies-specific factual disputes.

Finally, we vacate the Final Judgment on remedies, because the trial judge en-gaged in impermissible ex parte contacts by holding secret interviews with members of the media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom, giving rise to an appearance of partiality. Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process. We are therefore constrained to vacate the Final Judgment on reme-dies, remand the case for reconsideration of the remedial order, and require that the case be assigned to a different trial judge on remand. We believe that this disposition will be adequate to cure the cited improprieties. …


A. Background. In July 1994, officials at the Department of Justice (“DOJ”), on behalf of the U.S., filed suit against Microsoft, charging the company with, among other things, unlawfully maintaining a monopoly in the operating system market through anti-competitive terms in its licensing and software developer agreements. The parties subse-quently entered into a consent decree, thus avoiding a trial on the merits. (“Microsoft I”). Three years later, the Justice Department filed a civil contempt action against Microsoft for allegedly violating one of the decree’s provisions. On appeal from a grant of a pre-liminary injunction, this court held that Microsoft’s technological bundling of IE 3.0 and 4.0 with Windows 95 did not violate the relevant provision of the consent decree. (“Microsoft II”). We expressly reserved the question whether such bundling might inde-pendently violate §§1 or 2 of the Sherman Act.


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… [S]hortly before issuance of the Microsoft II decision, the U.S. and a group of State plaintiffs filed separate (and soon thereafter consolidated) complaints, asserting an-titrust violations by Microsoft…. Relying almost exclusively on Microsoft’s varied ef-forts to unseat Netscape Navigator as the preeminent internet browser, plaintiffs charged four distinct violations of the Sherman Act: (1) unlawful exclusive dealing arrangements in violation of §1; (2) unlawful tying of IE to Windows 95 and Windows 98 in violation of §1; (3) unlawful maintenance of a monopoly in the PC operating system market in vi-olation of §2; and (4) unlawful attempted monopolization of the internet browser market in violation of §2. …

The District Court scheduled the case on a “fast track.” The hearing on the pre-liminary injunction and the trial on the merits were consolidated…. The trial was then scheduled to commence … less than four months after the complaints had been filed. In a series of pretrial orders, the District Court limited each side to a maximum of 12 trial witnesses plus two rebuttal witnesses. It required that all trial witnesses’ direct testi-mony be submitted to the court in the form of written declarations. …

After a 76-day bench trial, the District Court issued its Findings of Fact. This trig-gered two independent courses of action. First, the District Court established a schedule for briefing on possible legal conclusions, inviting Professor Lawrence Lessig to partici-pate as amicus curiae. Second, the District Court referred the case to mediation to afford the parties an opportunity to settle their differences. The Honorable Richard A. Posner, Chief Judge of the U.S. Court of Appeals for the Seventh Circuit, was appointed to serve as mediator. The parties concurred in the referral to mediation and in the choice of me-diator.

Mediation failed after nearly four months of settlement talks between the parties. … [W]ith the parties’ briefs having been submitted and considered, the District Court is-sued its conclusions of law. The District Court found Microsoft liable on the §1 tying and §2 monopoly maintenance and attempted monopolization claims, while ruling that there was insufficient evidence to support a §1 exclusive dealing violation. …

Having found Microsoft liable on all but one count, the District Court then asked plaintiffs to submit a proposed remedy. Plaintiffs’ proposal for a remedial order was subsequently filed within four weeks, along with six supplemental declarations and over 50 new exhibits. In their proposal, plaintiffs sought specific conduct remedies, plus structural relief that would split Microsoft into an applications company and an operating systems company. The District Court rejected Microsoft’s request for further evidentiary proceedings and, following a single hearing on the merits of the remedy question, issued its Final Judgment…. The District Court adopted plaintiffs’ proposed remedy without substantive change. …

B. Overview. Before turning to the merits of Microsoft’s various arguments, we pause to reflect briefly on two matters of note, one practical and one theoretical. The practical matter relates to the temporal dimension of this case. The litigation timeline in this case is hardly problematic. Indeed, it is noteworthy that a case of this magnitude and complexity has proceeded from the filing of complaints through trial to appellate de-cision in a mere three years. …


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What is somewhat problematic, however, is that just over six years have passed since Microsoft engaged in the first conduct plaintiffs allege to be anticompetitive. As the record in this case indicates, six years seems like an eternity in the computer industry. By the time a court can assess liability, firms, products, and the marketplace are likely to have changed dramatically. This, in turn, threatens enormous practical difficulties for courts considering the appropriate measure of relief in equitable enforcement actions, both in crafting injunctive remedies in the first instance and reviewing those remedies in the second. Conduct remedies may be unavailing in such cases, because innovation to a large degree has already rendered the anticompetitive conduct obsolete (although by no means harmless). And broader structural remedies present their own set of problems, in-cluding how a court goes about restoring competition to a dramatically changed, and con-stantly changing, marketplace. That is just one reason why we find the District Court’s refusal in the present case to hold an evidentiary hearing on remedies--to update and flesh out the available information before seriously entertaining the possibility of dramatic structural relief--so problematic. We do not mean to say that enforcement actions will no longer play an important role in curbing infringements of the antitrust laws in technologically dynamic markets, nor do we assume this in assessing the merits of this case. Even in those cases where forward-looking remedies appear limited, the Government will continue to have an inter-est in defining the contours of the antitrust laws so that law-abiding firms will have a clear sense of what is permissible and what is not. And the threat of private damage ac-tions will remain to deter those firms inclined to test the limits of the law. The second matter of note is more theoretical in nature. We decide this case against a backdrop of significant debate amongst academics and practitioners over the ex-tent to which “old economy” §2 monopolization doctrines should apply to firms compet-ing in dynamic technological markets characterized by network effects. In markets char-acterized by network effects, one product or standard tends towards dominance, because “the utility that a user derives from consumption of the good increases with the number of other agents consuming the good.” Michael L. Katz & Carl Shapiro, Network Exter-nalities, Competition, and Compatibility, 75 AM. ECON. REV. 424, 424 (1985). For ex-ample, “[a]n individual consumer’s demand to use (and hence her benefit from) the tele-phone network ... increases with the number of other users on the network whom she can call or from whom she can receive calls.” Howard A. Shelanski & J. Gregory Sidak, An-titrust Divestiture in Network Industries, 68 U. CHI. L. REV. 1, 8 (2001). Once a product or standard achieves wide acceptance, it becomes more or less entrenched. Competition in such industries is “for the field” rather than “within the field.” See Harold Demsetz, Why Regulate Utilities?, 11 J.L. & ECON. 55, 57 & n.7 (1968) (emphasis omitted). In technologically dynamic markets, however, such entrenchment may be tempo-rary, because innovation may alter the field altogether. See JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM AND DEMOCRACY 81-90 (Harper Perennial 1976) (1942). Rapid technological change leads to markets in which “firms compete through innovation for temporary market dominance, from which they may be displaced by the next wave of product advancements.” Shelanski & Sidak at 11-12 (discussing Schumpeterian compe-tition, which proceeds “sequentially over time rather than simultaneously across a mar-ket”). Microsoft argues that the operating system market is just such a market.


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Whether or not Microsoft’s characterization of the operating system market is correct does not appreciably alter our mission in assessing the alleged antitrust violations in the present case. As an initial matter, we note that there is no consensus among com-mentators on the question of whether, and to what extent, current monopolization doc-trine should be amended to account for competition in technologically dynamic markets characterized by network effects. Compare Steven C. Salop & R. Craig Romaine, Pre-serving Monopoly: Economic Analysis, Legal Standards, and Microsoft, 7 GEO. MASON L. REV . 617, 654-55, 663-64 (1999) (arguing that exclusionary conduct in high-tech net-worked industries deserves heightened antitrust scrutiny in part because it may threaten to deter innovation), with Ronald A. Cass & Keith N. Hylton, Preserving Competition: Economic Analysis, Legal Standards and Microsoft, 8 Geo. Mason L. Rev. 1, 36-39 (1999) (equivocating on the antitrust implications of network effects and noting that the presence of network externalities may actually encourage innovation by guaranteeing more durable monopolies to innovating winners). Indeed, there is some suggestion that the economic consequences of network effects and technological dynamism act to offset one another, thereby making it difficult to formulate categorical antitrust rules absent a particularized analysis of a given market. See Shelanski & Sidak at 6-7 (“High profit margins might appear to be the benign and necessary recovery of legitimate investment returns in a Schumpeterian framework, but they might represent exploitation of customer lock-in and monopoly power when viewed through the lens of network economics.... The issue is particularly complex because, in network industries characterized by rapid innovation, both forces may be operating and can be difficult to isolate.”).

Moreover, it should be clear that Microsoft makes no claim that anticompetitive conduct should be assessed differently in technologically dynamic markets. It claims only that the measure of monopoly power should be different. For reasons fully dis-cussed below, we reject Microsoft’s monopoly power argument. …

II. MONOPOLIZATION. … The District Court … found that Microsoft possesses monopoly power in the market for Intel-compatible PC operating systems. Focusing pri-marily on Microsoft’s efforts to suppress Netscape Navigator’s threat to its operating sys-tem monopoly, the court also found that Microsoft maintained its power not through competition on the merits, but through unlawful means. Microsoft challenges both con-clusions. We defer to the District Court’s findings of fact, setting them aside only if clearly erroneous. We review legal questions de novo.

We begin by considering whether Microsoft possesses monopoly power, see in-fra Section II.A, and finding that it does, we turn to the question whether it maintained this power through anticompetitive means. Agreeing with the District Court that the company behaved anticompetitively, see infra Section II.B, and that these actions con-tributed to the maintenance of its monopoly power, see infra Section II.C, we affirm the court’s finding of liability for monopolization.

A. Monopoly Power. … The District Court … concluded that Microsoft possesses monopoly power in a relevant market. Defining the market as Intel-compatible PC oper-ating systems, the District Court found that Microsoft has a greater than 95% share. It also found the company’s market position protected by a substantial entry barrier. … Microsoft argues that the District Court incorrectly defined the relevant market. It also claims that there is no barrier to entry in that market. Alternatively, Microsoft argues


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that because the software industry is uniquely dynamic, direct proof, rather than circum-stantial evidence, more appropriately indicates whether it possesses monopoly power. Re-jecting each argument, we uphold the District Court’s finding of monopoly power in its entirety.

1. Market Structure

a. Market definition. … In this case, the District Court defined the market as “the licensing of all Intel-compatible PC operating systems worldwide,” find-ing that there are “currently no products—and ... there are not likely to be any in the near future—that a significant percentage of computer users worldwide could substitute for [these operating systems] without incurring substantial costs.” … Microsoft argues that the District Court improperly excluded three types of products: non-Intel compatible op-erating systems (primarily Apple’s Macintosh operating system, Mac OS), operating sys-tems for non-PC devices (such as handheld computers and portal websites), and “middle-ware” products, which are not operating systems at all.

We begin with Mac OS. Microsoft’s argument that Mac OS should have been in-cluded in the relevant market suffers from a flaw that infects many of the company’s mo-nopoly power claims: the company fails to challenge the District Court’s factual find-ings, or to argue that these findings do not support the court’s conclusions. The District Court found that consumers would not switch from Windows to Mac OS in response to a substantial price increase because of the costs of acquiring the new hardware needed to run Mac OS (an Apple computer and peripherals) and compatible software applications, as well as because of the effort involved in learning the new system and transferring files to its format. The court also found the Apple system less appealing to consumers because it costs considerably more and supports fewer applications. Microsoft responds only by saying: “the district court’s market definition is so narrow that it excludes Apple’s Mac OS, which has competed with Windows for years, simply because the Mac OS runs on a different microprocessor.” This general, conclusory statement falls far short of what is re-quired to challenge findings as clearly erroneous. Microsoft neither points to evidence contradicting the District Court’s findings nor alleges that supporting record evidence is insufficient. And since Microsoft does not argue that even if we accept these findings, they do not support the District Court’s conclusion, we have no basis for upsetting the court’s decision to exclude Mac OS from the relevant market.

Microsoft’s challenge to the District Court’s exclusion of non-PC based competi-tors, such as information appliances (handheld devices, etc.) and portal websites that host server-based software applications, suffers from the same defect: the company fails to challenge the District Court’s key factual findings. In particular, the District Court found that because information appliances fall far short of performing all of the functions of a PC, most consumers will buy them only as a supplement to their PCs. The District Court also found that portal websites do not presently host enough applications to induce con-sumers to switch, nor are they likely to do so in the near future. Again, because Microsoft does not argue that the District Court’s findings do not support its conclusion that infor-mation appliances and portal websites are outside the relevant market, we adhere to that conclusion.


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This brings us to Microsoft’s main challenge to the District Court’s market defini-tion: the exclusion of middleware. Because of the importance of middleware to this case, we pause to explain what it is and how it relates to the issue before us.

Operating systems perform many functions, including allocating computer mem-ory and controlling peripherals such as printers and keyboards. Operating systems also function as platforms for software applications. They do this by “exposing”—i.e., mak-ing available to software developers—routines or protocols that perform certain widely-used functions. These are known as Application Programming Interfaces, or “APIs.” For example, Windows contains an API that enables users to draw a box on the screen. Soft-ware developers wishing to include that function in an application need not duplicate it in their own code. Instead, they can “call”—i.e., use--the Windows API. Windows contains thousands of APIs, controlling everything from data storage to font display.

Every operating system has different APIs. Accordingly, a developer who writes an application for one operating system and wishes to sell the application to users of an-other must modify, or “port,” the application to the second operating system. This process is both time consuming and expensive.

“Middleware” refers to software products that expose their own APIs. Because of this, a middleware product written for Windows could take over some or all of Win-dows’s valuable platform functions—that is, developers might begin to rely upon APIs exposed by the middleware for basic routines rather than relying upon the API set in-cluded in Windows. If middleware were written for multiple operating systems, its im-pact could be even greater. The more developers could rely upon APIs exposed by such middleware, the less expensive porting to different operating systems would be. Ulti-mately, if developers could write applications relying exclusively on APIs exposed by middleware, their applications would run on any operating system on which the middle-ware was also present. Netscape Navigator and Java—both at issue in this case—are mid-dleware products written for multiple operating systems.

Microsoft argues that, because middleware could usurp the operating system’s platform function and might eventually take over other operating system functions (for instance, by controlling peripherals), the District Court erred in excluding Navigator and Java from the relevant market. The District Court found, however, that neither Naviga-tor, Java, nor any other middleware product could now, or would soon, expose enough APIs to serve as a platform for popular applications, much less take over all operating system functions. Again, Microsoft fails to challenge these findings, instead simply as-serting middleware’s “potential” as a competitor. The test of reasonable interchangeabil-ity, however, required the District Court to consider only substitutes that constrain pricing in the reasonably foreseeable future, and only products that can enter the market in a rela-tively short time can perform this function. … Whatever middleware’s ultimate potential, the District Court found that consumers could not now abandon their operating systems and switch to middleware in response to a sustained price for Windows above the com-petitive level. Nor is middleware likely to overtake the operating system as the primary platform for software development any time in the near future.

Alternatively, Microsoft argues that the District Court should not have excluded middleware from the relevant market because the primary focus of the plaintiffs’ §2


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charge is on Microsoft’s attempts to suppress middleware’s threat to its operating system monopoly. According to Microsoft, it is “contradict[ory]” to define the relevant market to exclude the “very competitive threats that gave rise” to the action. The purported con-tradiction lies between plaintiffs’ §2 theory, under which Microsoft preserved its monop-oly against middleware technologies that threatened to become viable substitutes for Windows, and its theory of the relevant market, under which middleware is not presently a viable substitute for Windows. Because middleware’s threat is only nascent, however, no contradiction exists. Nothing in §2 of the Sherman Act limits its prohibition to ac-tions taken against threats that are already well-developed enough to serve as present sub-stitutes. Because market definition is meant to identify products “reasonably interchange-able by consumers,” du Pont, and because middleware is not now interchangeable with Windows, the District Court had good reason for excluding middleware from the relevant market.

b. Market power. Having thus properly defined the relevant mar-ket, the District Court found that Windows accounts for a greater than 95% share. The court also found that even if Mac OS were included, Microsoft’s share would exceed 80%. Microsoft challenges neither finding, nor does it argue that such a market share is not predominant. Cf. Grinnell, (87% is predominant); Eastman Kodak (80%); du Pont (75%). Instead, Microsoft claims that even a predominant market share does not by itself indicate monopoly power. Although the “existence of [monopoly] power ordinarily may be inferred from the predominant share of the market,” Grinnell, we agree with Microsoft that because of the possibility of competition from new entrants, looking to current mar-ket share alone can be “misleading.”

In this case, however, the District Court was not misled. Considering the possi-bility of new rivals, the court focused not only on Microsoft’s present market share, but also on the structural barrier that protects the company’s future position. That barrier—the “applications barrier to entry”--stems from two characteristics of the software market: (1) most consumers prefer operating systems for which a large number of applications have already been written; and (2) most developers prefer to write for operating systems that already have a substantial consumer base. This “chicken-and-egg” situation ensures that applications will continue to be written for the already dominant Windows, which in turn ensures that consumers will continue to prefer it over other operating systems.

Challenging the existence of the applications barrier to entry, Microsoft observes that software developers do write applications for other operating systems, pointing out that at its peak IBM’s OS/2 supported approximately 2,500 applications. This misses the point. That some developers write applications for other operating systems is not at all inconsistent with the finding that the applications barrier to entry discourages many from writing for these less popular platforms. Indeed, the District Court found that IBM’s dif-ficulty in attracting a larger number of software developers to write for its platform seri-ously impeded OS/2’s success.

Microsoft does not dispute that Windows supports many more applications than any other operating system. It argues instead that “[i]t defies common sense” to suggest that an operating system must support as many applications as Windows does (more than 70,000 …) to be competitive. Consumers, Microsoft points out, can only use a very small percentage of these applications. As the District Court explained, however, the ap-


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plications barrier to entry gives consumers reason to prefer the dominant operating sys-tem even if they have no need to use all applications written for it:

The consumer wants an operating system that runs not only types of applications that he knows he will want to use, but also those types in which he might develop an inter -est later. Also, the consumer knows that if he chooses an operating system with enough demand to support multiple applications in each product category, he will be less likely to find himself straitened later by having to use an application whose fea -tures disappoint him. Finally, the average user knows that, generally speaking, appli-cations improve through successive versions. He thus wants an operating system for which successive generations of his favorite applications will be released--promptly at that. The fact that a vastly larger number of applications are written for Windows than for other PC operating systems attracts consumers to Windows, because it reassures them that their interests will be met as long as they use Microsoft’s product.

Thus, despite the limited success of its rivals, Microsoft benefits from the applications barrier to entry.

Of course, were middleware to succeed, it would erode the applications barrier to entry. Because applications written for multiple operating systems could run on any op-erating system on which the middleware product was present with little, if any, porting, the operating system market would become competitive. But as the District Court found, middleware will not expose a sufficient number of APIs to erode the applications barrier to entry in the foreseeable future.

Microsoft next argues that the applications barrier to entry is not an entry barrier at all, but a reflection of Windows’ popularity. It is certainly true that Windows may have gained its initial dominance in the operating system market competitively—through superior foresight or quality. But this case is not about Microsoft’s initial acquisition of monopoly power. It is about Microsoft’s efforts to maintain this position through means other than competition on the merits. Because the applications barrier to entry protects a dominant operating system irrespective of quality, it gives Microsoft power to stave off even superior new rivals. The barrier is thus a characteristic of the operating system market, not of Microsoft’s popularity, or, as asserted by a Microsoft witness, the com-pany’s efficiency. Finally, Microsoft argues that the District Court should not have considered the applications barrier to entry because it reflects not a cost borne disproportionately by new entrants, but one borne by all participants in the operating system market. According to Microsoft, it had to make major investments to convince software developers to write for its new operating system, and it continues to “evangelize” the Windows platform today. Whether costs borne by all market participants should be considered entry barriers is the subject of much debate. …

We need not resolve this issue, however, for even under the more narrow defini-tion it is clear that there are barriers. When Microsoft entered the operating system mar-ket with MS-DOS and the first version of Windows, it did not confront a dominant rival operating system with as massive an installed base and as vast an existing array of appli-cations as the Windows operating systems have since enjoyed. Moreover, when Microsoft introduced Windows 95 and 98, it was able to bypass the applications barrier to entry that protected the incumbent Windows by including APIs from the earlier ver-


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sion in the new operating systems. This made porting existing Windows applications to the new version of Windows much less costly than porting them to the operating systems of other entrants who could not freely include APIs from the incumbent Windows with their own.

2. Direct Proof. Having sustained the District Court’s conclusion that circumstantial evidence proves that Microsoft possesses monopoly power, we turn to Mi-crosoft’s alternative argument that it does not behave like a monopolist. Claiming that software competition is uniquely “dynamic,” the company suggests a new rule: that mo-nopoly power in the software industry should be proven directly, that is, by examining a company’s actual behavior to determine if it reveals the existence of monopoly power. According to Microsoft, not only does no such proof of its power exist, but record evi-dence demonstrates the absence of monopoly power. … Microsoft’s argument fails because, even assuming that the software market is uniquely dynamic in the long term, the District Court correctly applied the structural ap-proach to determine if the company faces competition in the short term. Structural mar-ket power analyses are meant to determine whether potential substitutes constrain a firm’s ability to raise prices above the competitive level; only threats that are likely to materialize in the relatively near future perform this function to any significant degree. The District Court expressly considered and rejected Microsoft’s claims that innovations such as handheld devices and portal websites would soon expand the relevant market be-yond Intel-compatible PC operating systems. Because the company does not challenge these findings, we have no reason to believe that prompt substitutes are available. The structural approach, as applied by the District Court, is thus capable of fulfilling its pur-pose even in a changing market. Microsoft cites no case, nor are we aware of one, re-quiring direct evidence to show monopoly power in any market. We decline to adopt such a rule now. Even if we were to require direct proof, moreover, Microsoft’s behavior may well be sufficient to show the existence of monopoly power. Certainly, none of the conduct Microsoft points to—its investment in R&D and the relatively low price of Windows—is inconsistent with the possession of such power. The R&D expenditures Microsoft points to are not simply for Windows, but for its entire company, which most likely does not possess a monopoly for all of its products. Moreover, because innovation can increase an already dominant market share and further delay the emergence of competition, even monopolists have reason to invest in R&D.

Microsoft’s pricing behavior is similarly equivocal. The company claims only that it never charged the short-term profit-maximizing price for Windows. … [But] a price lower than the short-term profit-maximizing price is not inconsistent with posses-sion or improper use of monopoly power. Cf. Berkey Photo (“[I]f monopoly power has been acquired or maintained through improper means, the fact that the power has not been used to extract [a monopoly price] provides no succor to the monopolist.”). Microsoft never claims that it did not charge the long-term monopoly price. Microsoft does argue that the price of Windows is a fraction of the price of an Intel-compatible PC system and lower than that of rival operating systems, but these facts are not inconsistent with the District Court’s finding that Microsoft has monopoly power. See Findings of Fact (“Intel-compatible PC operating systems other than Windows [would not] attract[ ] significant demand ... even if Microsoft held its prices substantially above the competi-


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tive level.”). More telling, the District Court found that some aspects of Microsoft’s behavior are difficult to explain unless Windows is a monopoly product. For instance, … the company set the price of Windows without considering rivals’ prices, something a firm without a monopoly would have been unable to do. The District Court also found that Microsoft’s pattern of exclusionary conduct could only be rational “if the firm knew that it possessed monopoly power.” It is to that conduct that we now turn.

B. Anticompetitive Conduct. … In this case, after concluding that Microsoft had monopoly power, the District Court held that Microsoft had violated §2 by engaging in a variety of exclusionary acts (not including predatory pricing), to maintain its monopoly by preventing the effective distribution and use of products that might threaten that mo-nopoly. …

Whether any particular act of a monopolist is exclusionary, rather than merely a form of vigorous competition, can be difficult to discern: the means of illicit exclusion, like the means of legitimate competition, are myriad. The challenge for an antitrust court lies in stating a general rule for distinguishing between exclusionary acts, which re-duce social welfare, and competitive acts, which increase it.

From a century of case law on monopolization under §2, however, several princi-ples do emerge. First, to be condemned as exclusionary, a monopolist’s act must have an “anticompetitive effect.” That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice. …

Second, … [i]n a case brought by a private plaintiff, the plaintiff must show that its injury is “of the type that the statute was intended to forestall,” Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 487-88, (1977) ; no less in a case brought by the Government, it must demonstrate that the monopolist’s conduct harmed competition, not just a competitor.

Third, if a plaintiff successfully establishes a prima facie case under §2 by demonstrating anticompetitive effect, then the monopolist may proffer a “procompetitive justification” for its conduct. If the monopolist asserts a procompetitive justification—a nonpretextual claim that its conduct is indeed a form of competition on the merits be-cause it involves, for example, greater efficiency or enhanced consumer appeal—then the burden shifts back to the plaintiff to rebut that claim.

Fourth, if the monopolist’s procompetitive justification stands unrebutted, then the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit. In cases arising under §1 of the Sherman Act, the courts rou-tinely apply a similar balancing approach under the rubric of the “rule of reason.” …

Finally, in considering whether the monopolist’s conduct on balance harms com-petition and is therefore condemned as exclusionary for purposes of §2, our focus is upon the effect of that conduct, not upon the intent behind it. Evidence of the intent behind the conduct of a monopolist is relevant only to the extent it helps us understand the likely effect of the monopolist’s conduct.

With these principles in mind, we now consider Microsoft’s objections to the Dis-trict Court’s holding that Microsoft violated § 2 of the Sherman Act in a variety of ways.


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1. Licenses Issued to Original Equipment Manufacturers. The District Court condemned a number of provisions in Microsoft’s agreements licensing Windows to OEMs, because it found that Microsoft’s imposition of those provisions (like many of Microsoft’s other actions at issue in this case) serves to reduce usage share of Netscape’s browser and, hence, protect Microsoft’s operating system monopoly. The reason market share in the browser market affects market power in the operating system market is com-plex, and warrants some explanation.

Browser usage share is important because … a browser (or any middleware prod-uct, for that matter) must have a critical mass of users in order to attract software devel-opers to write applications relying upon the APIs it exposes, and away from the APIs ex-posed by Windows. Applications written to a particular browser’s APIs, however, would run on any computer with that browser, regardless of the underlying operating sys-tem. “The overwhelming majority of consumers will only use a PC operating system for which there already exists a large and varied set of ... applications, and for which it seems relatively certain that new types of applications and new versions of existing applications will continue to be marketed....” If a consumer could have access to the applications he desired—regardless of the operating system he uses—simply by installing a particular browser on his computer, then he would no longer feel compelled to select Windows in order to have access to those applications; he could select an operating system other than Windows based solely upon its quality and price. In other words, the market for operat-ing systems would be competitive.

Therefore, Microsoft’s efforts to gain market share in one market (browsers) served to meet the threat to Microsoft’s monopoly in another market (operating systems) by keeping rival browsers from gaining the critical mass of users necessary to attract de-veloper attention away from Windows as the platform for software development. …

In evaluating the restrictions in Microsoft’s agreements licensing Windows to OEMs, we first consider whether plaintiffs have made out a prima facie case by demon-strating that the restrictions have an anticompetitive effect. In the next subsection, we conclude that plaintiffs have met this burden as to all the restrictions. We then consider Microsoft’s proffered justifications for the restrictions and, for the most part, hold those justifications insufficient.

a. Anticompetitive effect of the license restrictions . The restric-tions Microsoft places upon Original Equipment Manufacturers are of particular impor-tance in determining browser usage share because having an OEM pre-install a browser on a computer is one of the two most cost-effective methods by far of distributing brows-ing software. (The other is bundling the browser with internet access software distributed by an IAP.) The District Court found that the restrictions Microsoft imposed in licensing Windows to OEMs prevented many OEMs from distributing browsers other than IE. In particular, the District Court condemned the license provisions prohibiting the OEMs from: (1) removing any desktop icons, folders, or “Start” menu entries; (2) altering the initial boot sequence; and (3) otherwise altering the appearance of the Windows desktop.

The District Court concluded that the first license restriction—the prohibition upon the removal of desktop icons, folders, and Start menu entries—thwarts the distribu-


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tion of a rival browser by preventing OEMs from removing visible means of user access to IE. The OEMs cannot practically install a second browser in addition to IE, the court found, in part because “[p]re-installing more than one product in a given category ... can significantly increase an OEM’s support costs, for the redundancy can lead to confusion among novice users.” That is, a certain number of novice computer users, seeing two browser icons, will wonder which to use when and will call the OEM’s support line. Support calls are extremely expensive and, in the highly competitive original equipment market, firms have a strong incentive to minimize costs.

Microsoft denies the “consumer confusion” story; it observes that some OEMs do install multiple browsers and that executives from two OEMs that do so denied any knowledge of consumers being confused by multiple icons. Other testimony, however, supports the District Court’s finding that fear of such confusion deters many OEMs from pre-installing multiple browsers. Most telling, in presentations to OEMs, Microsoft itself represented that having only one icon in a particular category would be “less confusing for end users.” Accordingly, we reject Microsoft’s argument that we should vacate the District Court’s Finding of Fact … relate[d] to consumer confusion.

As noted above, the OEM channel is one of the two primary channels for distribu-tion of browsers. By preventing OEMs from removing visible means of user access to IE, the license restriction prevents many OEMs from pre-installing a rival browser and, therefore, protects Microsoft’s monopoly from the competition that middleware might otherwise present. Therefore, we conclude that the license restriction at issue is anticom-petitive. We defer for the moment the question whether that anticompetitive effect is outweighed by Microsoft’s proffered justifications.

The second license provision at issue prohibits OEMs from modifying the initial boot sequence—the process that occurs the first time a consumer turns on the computer. Prior to the imposition of that restriction, “among the programs that many OEMs inserted into the boot sequence were Internet sign-up procedures that encouraged users to choose from a list of IAPs assembled by the OEM.” Microsoft’s prohibition on any alteration of the boot sequence thus prevents OEMs from using that process to promote the services of IAPs, many of which—at least at the time Microsoft imposed the restriction--used Navi-gator rather than IE in their internet access software. Microsoft does not deny that the prohibition on modifying the boot sequence has the effect of decreasing competition against IE by preventing OEMs from promoting rivals’ browsers. Because this prohibi-tion has a substantial effect in protecting Microsoft’s market power, and does so through a means other than competition on the merits, it is anticompetitive. Again the question whether the provision is nonetheless justified awaits later treatment.

Finally, Microsoft imposes several additional provisions that, like the prohibition on removal of icons, prevent OEMs from making various alterations to the desktop: Microsoft prohibits OEMs from causing any user interface other than the Windows desk-top to launch automatically, from adding icons or folders different in size or shape from those supplied by Microsoft, and from using the “Active Desktop” feature to promote third-party brands. These restrictions impose significant costs upon the OEMs; prior to Microsoft’s prohibiting the practice, many OEMs would change the appearance of the desktop in ways they found beneficial. See, e.g. … March 1997 letter from Hewlett-Packard to Microsoft (“We are responsible for the cost of technical support of our cus-


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tomers, including the 33% of calls we get related to the lack of quality or confusion gen-erated by your product.... We must have more ability to decide how our system is pre-sented to our end users. If we had a choice of another supplier, based on your actions in this area, I assure you [that you] would not be our supplier of choice.”).

The dissatisfaction of the OEM customers does not, of course, mean the restric-tions are anticompetitive. The anticompetitive effect of the license restrictions is, as Microsoft itself recognizes, that OEMs are not able to promote rival browsers, which keeps developers focused upon the APIs in Windows. … This kind of promotion is not a zero-sum game; but for the restrictions in their licenses to use Windows, OEMs could promote multiple IAPs and browsers. By preventing the OEMs from doing so, this type of license restriction, like the first two restrictions, is anticompetitive: Microsoft reduced rival browsers’ usage share not by improving its own product but, rather, by preventing OEMs from taking actions that could increase rivals’ share of usage.

b. Microsoft’s justifications for the license restrictions . Microsoft argues that the license restrictions are legally justified because, in imposing them, Microsoft is simply “exercising its rights as the holder of valid copyrights.” Microsoft also argues that the licenses “do not unduly restrict the opportunities of Netscape to dis-tribute Navigator in any event.”

Microsoft’s primary copyright argument borders upon the frivolous. The com-pany claims an absolute and unfettered right to use its intellectual property as it wishes: “[I]f intellectual property rights have been lawfully acquired,” it says, then “their subse-quent exercise cannot give rise to antitrust liability.” That is no more correct than the proposition that use of one’s personal property, such as a baseball bat, cannot give rise to tort liability. As the Federal Circuit succinctly stated: “Intellectual property rights do not confer a privilege to violate the antitrust laws.” In re Indep. Serv. Orgs. Antitrust Litig., 203 F.3d 1322, 1325 (Fed.Cir.2000) .

Although Microsoft never overtly retreats from its bold and incorrect position on the law, it also makes two arguments to the effect that it is not exercising its copyright in an unreasonable manner, despite the anticompetitive consequences of the license restric-tions discussed above. In the first variation upon its unqualified copyright defense, Microsoft cites two cases indicating that a copyright holder may limit a licensee’s ability to engage in significant and deleterious alterations of a copyrighted work. … The only li-cense restriction Microsoft seriously defends as necessary to prevent a “substantial alter-ation” of its copyrighted work is the prohibition on OEMs automatically launching a sub-stitute user interface upon completion of the boot process. We agree that a shell that auto-matically prevents the Windows desktop from ever being seen by the user is a drastic al-teration of Microsoft’s copyrighted work, and outweighs the marginal anticompetitive ef-fect of prohibiting the OEMs from substituting a different interface automatically upon completion of the initial boot process. We therefore hold that this particular restriction is not an exclusionary practice that violates § 2 of the Sherman Act.

In a second variation upon its copyright defense, Microsoft argues that the license restrictions merely prevent OEMs from taking actions that would reduce substantially the value of Microsoft’s copyrighted work: that is, Microsoft claims each license restriction in question is necessary to prevent OEMs from so altering Windows as to undermine “the


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principal value of Windows as a stable and consistent platform that supports a broad range of applications and that is familiar to users.” Microsoft, however, never substanti-ates this claim, and, because an OEM’s altering the appearance of the desktop or promot-ing programs in the boot sequence does not affect the code already in the product, the practice does not self-evidently affect either the “stability” or the “ consistency” of the platform. Microsoft cites only one item of evidence in support of its claim that the OEMs’ alterations were decreasing the value of Windows. That document, prepared by Microsoft itself, states: “there are quality issues created by OEMs who are too liberal with the pre-install process,” referring to the OEMs’ installation of Windows and addi-tional software on their PCs, which the document says may result in “user concerns and confusion.” To the extent the OEMs’ modifications cause consumer confusion, of course, the OEMs bear the additional support costs. Therefore, we conclude Microsoft has not shown that the OEMs’ liberality reduces the value of Windows except in the sense that their promotion of rival browsers undermines Microsoft’s monopoly—and that is not a permissible justification for the license restrictions.

Apart from copyright, Microsoft raises one other defense of the OEM license agreements: It argues that, despite the restrictions in the OEM license, Netscape is not completely blocked from distributing its product. That claim is insufficient to shield Microsoft from liability for those restrictions because, although Microsoft did not bar its rivals from all means of distribution, it did bar them from the cost-efficient ones.

In sum, we hold that with the exception of the one restriction prohibiting automat-ically launched alternative interfaces, all the OEM license restrictions at issue represent uses of Microsoft’s market power to protect its monopoly, unredeemed by any legitimate justification. The restrictions therefore violate § 2 of the Sherman Act.

2. Integration of IE and Windows. Although Microsoft’s license restric-tions have a significant effect in closing rival browsers out of one of the two primary channels of distribution, the District Court found that “Microsoft’s executives believed ... its contractual restrictions placed on OEMs would not be sufficient in themselves to re-verse the direction of Navigator’s usage share. Consequently, in late 1995 or early 1996, Microsoft set out to bind [IE] more tightly to Windows 95 as a technical matter.”

Technologically binding IE to Windows, the District Court found, both prevented OEMs from pre-installing other browsers and deterred consumers from using them. In particular, having the IE software code as an irremovable part of Windows meant that pre-installing a second browser would “increase an OEM’s product testing costs,” be-cause an OEM must test and train its support staff to answer calls related to every soft-ware product preinstalled on the machine; moreover, pre-installing a browser in addition to IE would to many OEMs be “a questionable use of the scarce and valuable space on a PC’s hard drive.”

Although the District Court, in its Conclusions of Law, broadly condemned Mi-crosoft’s decision to bind “Internet Explorer to Windows with ... technological shackles,” Conclusions of Law, at 39, its findings of fact in support of that conclusion center upon three specific actions Microsoft took to weld IE to Windows: excluding IE from the “Add/Remove Programs” utility; designing Windows so as in certain circumstances to override the user’s choice of a default browser other than IE; and commingling code re-


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lated to browsing and other code in the same files, so that any attempt to delete the files containing IE would, at the same time, cripple the operating system. As with the license restrictions, we consider first whether the suspect actions had an anticompetitive effect, and then whether Microsoft has provided a procompetitive justification for them.

a. Anticompetitive effect of integration . As a general rule, courts are properly very skeptical about claims that competition has been harmed by a dominant firm’s product design changes. In a competitive market, firms routinely innovate in the hope of appealing to consumers, sometimes in the process making their products incom-patible with those of rivals; the imposition of liability when a monopolist does the same thing will inevitably deter a certain amount of innovation. This is all the more true in a market, such as this one, in which the product itself is rapidly changing. Judicial defer-ence to product innovation, however, does not mean that a monopolist’s product design decisions are per se lawful.

The District Court first condemned as anticompetitive Microsoft’s decision to ex-clude IE from the “Add/Remove Programs” utility in Windows 98. Microsoft had in-cluded IE in the Add/Remove Programs utility in Windows 95, but when it modified Windows 95 to produce Windows 98, it took IE out of the Add/Remove Programs utility. This change reduces the usage share of rival browsers not by making Microsoft’s own browser more attractive to consumers but, rather, by discouraging OEMs from distribut-ing rival products. Because Microsoft’s conduct, through something other than competi-tion on the merits, has the effect of significantly reducing usage of rivals’ products and hence protecting its own operating system monopoly, it is anticompetitive; we defer for the moment the question whether it is nonetheless justified.

Second, the District Court found that Microsoft designed Windows 98 “so that us-ing Navigator on Windows 98 would have unpleasant consequences for users” by, in some circumstances, overriding the user’s choice of a browser other than IE as his or her default browser. Plaintiffs argue that this override harms the competitive process by de-terring consumers from using a browser other than IE even though they might prefer to do so, thereby reducing rival browsers’ usage share and, hence, the ability of rival browsers to draw developer attention away from the APIs exposed by Windows. Microsoft does not deny, of course, that overriding the user’s preference prevents some people from using other browsers. Because the override reduces rivals’ usage share and protects Microsoft’s monopoly, it too is anticompetitive.

Finally, the District Court condemned Microsoft’s decision to bind IE to Win-dows 98 “by placing code specific to Web browsing in the same files as code that pro-vided operating system functions.” Putting code supplying browsing functionality into a file with code supplying operating system functionality “ensure[s] that the deletion of any file containing browsing-specific routines would also delete vital operating system rou-tines and thus cripple Windows....” As noted above, preventing an OEM from removing IE deters it from installing a second browser because doing so increases the OEM’s prod-uct testing and support costs; by contrast, had OEMs been able to remove IE, they might have chosen to pre-install Navigator alone. … [W]e conclude that such commingling has an anticompetitive effect; as noted above, the commingling deters OEMs from pre-installing rival browsers, thereby reducing the rivals’ usage share and, hence, developers’ interest in rivals’ APIs as an alternative to the API set exposed by Microsoft’s operating


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b. Microsoft’s justifications for integration . Microsoft proffers no justification for two of the three challenged actions that it took in integrating IE into Win-dows—excluding IE from the Add/Remove Programs utility and commingling browser and operating system code. Although Microsoft does make some general claims regard-ing the benefits of integrating the browser and the operating system, it neither specifies nor substantiates those claims. Nor does it argue that either excluding IE from the Add/Remove Programs utility or commingling code achieves any integrative benefit. Plaintiffs plainly made out a prima facie case of harm to competition in the operating sys-tem market by demonstrating that Microsoft’s actions increased its browser usage share and thus protected its operating system monopoly from a middleware threat and, for its part, Microsoft failed to meet its burden of showing that its conduct serves a purpose other than protecting its operating system monopoly. Accordingly, we hold that Micro-soft’s exclusion of IE from the Add/Remove Programs utility and its commingling of browser and operating system code constitute exclusionary conduct, in violation of §2.

As for the other challenged act that Microsoft took in integrating IE into Windows—causing Windows to override the user’s choice of a default browser in certain circum-stances—Microsoft argues that it has “valid technical reasons.” Specifically, Microsoft claims that it was necessary to design Windows to override the user’s preferences when he or she invokes one of “a few” out “of the nearly 30 means of accessing the Internet.” According to Microsoft:

The Windows 98 Help system and Windows Update feature depend on ActiveX controls not supported by Navigator, and the now-discontinued Channel Bar utilized Microsoft’s Channel Definition Format, which Navigator also did not support. Lastly, Windows 98 does not invoke Navigator if a user accesses the Internet through “My Computer” or “Windows Explorer” because doing so would defeat one of the purposes of those fea-tures--enabling users to move seamlessly from local storage devices to the Web in the same browsing window.

The plaintiff bears the burden not only of rebutting a proffered justification but also of demonstrating that the anticompetitive effect of the challenged action outweighs it. In the District Court, plaintiffs appear to have done neither, let alone both; in any event, upon appeal, plaintiffs offer no rebuttal whatsoever. Accordingly, Microsoft may not be held liable for this aspect of its product design.

3. Agreements with Internet Access Providers. The District Court also condemned as exclusionary Microsoft’s agreements with various IAPs. The IAPs in-clude both Internet Service Providers, which offer consumers internet access, and Online Services (“OLSs”) such as America Online (“AOL”), which offer proprietary content in addition to internet access and other services. …

The District Court condemned Microsoft’s actions in (1) offering IE free of charge to IAPs and (2) offering IAPs a bounty for each customer the IAP signs up for ser-vice using the IE browser. In effect, the court concluded that Microsoft is acting to pre-serve its monopoly by offering IE to IAPs at an attractive price. Similarly, the District Court held Microsoft liable for (3) developing the IE Access Kit (“IEAK”), a software package that allows an IAP to “create a distinctive identity for its service in as little as a few hours by customizing the [IE] title bar, icon, start and search pages,” and (4) offering


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the IEAK to IAPs free of charge, on the ground that those acts, too, helped Microsoft pre-serve its monopoly. Finally, the District Court found that (5) Microsoft agreed to provide easy access to IAPs’ services from the Windows desktop in return for the IAPs’ agree-ment to promote IE exclusively and to keep shipments of internet access software using Navigator under a specific percentage, typically 25%. We address the first four items—Microsoft’s inducements—and then its exclusive agreements with IAPs. Although offering a customer an attractive deal is the hallmark of competition, the Supreme Court has indicated that in very rare circumstances a price may be unlawfully low, or “predatory.” Plaintiffs argued before the District Court that Microsoft’s pricing was indeed predatory; but instead of making the usual predatory pricing argument … plaintiffs argued that by pricing below cost on IE (indeed, even paying people to take it), Microsoft was able simultaneously to preserve its stream of monopoly profits on Win-dows, thereby more than recouping its investment in below-cost pricing on IE. The Dis-trict Court did not assign liability for predatory pricing, however, and plaintiffs do not press this theory on appeal.

The rare case of price predation aside, the antitrust laws do not condemn even a monopolist for offering its product at an attractive price, and we therefore have no war-rant to condemn Microsoft for offering either IE or the IEAK free of charge or even at a negative price. Likewise, as we said above, a monopolist does not violate the Sherman Act simply by developing an attractive product. See Grinnell (“[G]rowth or develop-ment as a consequence of a superior product [or] business acumen” is no violation.). Therefore, Microsoft’s development of the IEAK does not violate the Sherman Act.

We turn now to Microsoft’s deals with IAPs concerning desktop placement. Microsoft concluded these exclusive agreements with all “the leading IAPs,” including the major OLSs. The most significant of the OLS deals is with AOL, which, when the deal was reached, “accounted for a substantial portion of all existing Internet access sub-scriptions and ... attracted a very large percentage of new IAP subscribers.” Under that agreement Microsoft puts the AOL icon in the OLS folder on the Windows desktop and AOL does not promote any non-Microsoft browser, nor provide software using any non- Microsoft browser except at the customer’s request, and even then AOL will not supply more than 15% of its subscribers with a browser other than IE. The Supreme Court most recently considered an antitrust challenge to an exclu-sive contract in Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961) . That case, which involved a challenge to a requirements contract, was brought under §3 of the Clayton Act and §§1 and 2 of the Sherman Act. The Court held that an exclusive contract does not violate the Clayton Act unless its probable effect is to “foreclose competition in a substantial share of the line of commerce affected.” … [T]he Court in Tampa Electric examined the record and, after defining the relevant market, determined that the contract affected less than one percent of that market. After concluding, under the Clayton Act, that this share was “conservatively speaking, quite insubstantial,” the Court went on sum-marily to reject the Sherman Act claims. “[I]f [the contract] does not fall within the broader prescription of §3 of the Clayton Act it follows that it is not forbidden by those of the [Sherman Act].” ….

Though what is “significant” may vary depending upon the antitrust provision un-der which an exclusive deal is challenged, it is clear that in all cases the plaintiff must both define the relevant market and prove the degree of foreclosure. … Because an ex-


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clusive deal affecting a small fraction of a market clearly cannot have the requisite harm-ful effect upon competition, the requirement of a significant degree of foreclosure serves a useful screening function.

In this case, plaintiffs challenged Microsoft’s exclusive dealing arrangements with the IAPs under both §§1 and 2 of the Sherman Act. The District Court, in analyzing the §1 claim, stated, “unless the evidence demonstrates that Microsoft’s agreements excluded Netscape altogether from access to roughly forty percent of the browser market, the Court should decline to find such agreements in violation of §1.” The court recognized that Microsoft had substantially excluded Netscape from “the most efficient channels for Navigator to achieve browser usage share,” and had relegated it to more costly and less effective methods (such as mass mailing its browser on a disk or offering it for download over the internet); but because Microsoft has not “completely excluded Netscape” from reaching any potential user by some means of distribution, however ineffective, the court concluded the agreements do not violate §1. Plaintiffs did not cross-appeal this holding. Turning to §2, the court stated: “the fact that Microsoft’s arrangements with vari-ous [IAPs and other] firms did not foreclose enough of the relevant market to constitute a §1 violation in no way detracts from the Court’s assignment of liability for the same ar-rangements under §2.... [A]ll of Microsoft’s agreements, including the non-exclusive ones, severely restricted Netscape’s access to those distribution channels leading most ef-ficiently to the acquisition of browser usage share.” On appeal Microsoft argues that “courts have applied the same standard to alleged exclusive dealing agreements under both Section 1 and Section 2,” and it argues that the District Court’s holding of no liability under §1 necessarily precludes holding it liable un-der §2. ... [H]owever, we agree with plaintiffs that a monopolist’s use of exclusive con-tracts, in certain circumstances, may give rise to a §2 violation even though the contracts foreclose less than the roughly 40% or 50% share usually required in order to establish a §1 violation. In this case, plaintiffs allege that, by closing to rivals a substantial percentage of the available opportunities for browser distribution, Microsoft managed to preserve its monopoly in the market for operating systems. The IAPs constitute one of the two major channels by which browsers can be distributed. Microsoft has exclusive deals with “four-teen of the top fifteen access providers in North America[, which] account for a large ma-jority of all Internet access subscriptions in this part of the world.” By ensuring that the “majority” of all IAP subscribers are offered IE either as the default browser or as the only browser, Microsoft’s deals with the IAPs clearly have a significant effect in preserv-ing its monopoly; they help keep usage of Navigator below the critical level necessary for Navigator or any other rival to pose a real threat to Microsoft’s monopoly. Plaintiffs having demonstrated a harm to competition, the burden falls upon Microsoft to defend its exclusive dealing contracts with IAPs by providing a procompeti-tive justification for them. Significantly, Microsoft’s only explanation for its exclusive dealing is that it wants to keep developers focused upon its APIs—which is to say, it wants to preserve its power in the operating system market. That is not an unlawful end, but neither is it a procompetitive justification for the specific means here in question, namely exclusive dealing contracts with IAPs. Accordingly, we affirm the District Court’s decision holding that Microsoft’s exclusive contracts with IAPs are exclusionary devices, in violation of §2 of the Sherman Act.


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4. Dealings with … Independent Software Vendors, and Apple Com-puter. The District Court held that Microsoft engages in exclusionary conduct in its dealings with … ISVs, which develop software and Apple, which is both an OEM and a software developer. … The District Court described Microsoft’s deals with ISVs as fol-lows:

In dozens of “First Wave” agreements signed between the fall of 1997 and the spring of 1998, Microsoft has promised to give preferential support, in the form of early Windows 98 and Windows NT betas, other technical information, and the right to use certain Microsoft seals of approval, to important ISVs that agree to certain conditions. One of these conditions is that the ISVs use Internet Explorer as the default browsing software for any software they develop with a hypertext-based user interface. Another condition is that the ISVs use Microsoft’s “HTML Help,” which is accessible only with Internet Ex-plorer, to implement their applications’ help systems.

The District Court further found that the effect of these deals is to “ensure [ ] that many of the most popular Web-centric applications will rely on browsing technologies found only in Windows,” and that Microsoft’s deals with ISVs therefore “increase[ ] the likeli-hood that the millions of consumers using [applications designed by ISVs that entered into agreements with Microsoft] will use Internet Explorer rather than Navigator.” The District Court did not specifically identify what share of the market for browser distribution the exclusive deals with the ISVs foreclose. Although the ISVs are a relatively small channel for browser distribution, they take on greater significance be-cause, as discussed above, Microsoft had largely foreclosed the two primary channels to its rivals. In that light, one can tell from the record that by affecting the applications used by “millions” of consumers, Microsoft’s exclusive deals with the ISVs had a sub-stantial effect in further foreclosing rival browsers from the market. … Because, by keeping rival browsers from gaining widespread distribution (and potentially attracting the attention of developers away from the APIs in Windows), the deals have a substantial effect in preserving Microsoft’s monopoly, we hold that plaintiffs have made a prima fa-cie showing that the deals have an anticompetitive effect. Of course, that Microsoft’s exclusive deals have the anticompetitive effect of pre-serving Microsoft’s monopoly does not, in itself, make them unlawful. A monopolist, like a competitive firm, may have a perfectly legitimate reason for wanting an exclusive arrangement with its distributors. Accordingly, Microsoft had an opportunity to, but did not, present the District Court with evidence demonstrating that the exclusivity provisions have some such procompetitive justification. On appeal Microsoft likewise does not claim that the exclusivity required by the deals serves any legitimate purpose…. Microsoft having offered no procompetitive justification for its exclusive dealing ar-rangements with the ISVs, we hold that those arrangements violate §2 of the Sherman Act.

Finally, the District Court held that Microsoft’s dealings with Apple violated the Sherman Act. Apple is vertically integrated: it makes both software (including an oper-ating system, Mac OS), and hardware (the Macintosh line of computers). Microsoft pri-marily makes software, including, in addition to its operating system, a number of popu-lar applications. One, called “Office,” is a suite of business productivity applications that Microsoft has ported to Mac OS. The District Court found that “ninety percent of Mac OS users running a suite of office productivity applications [use] Microsoft’s Mac Of-


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fice.” Further, the District Court found that: In 1997, Apple’s business was in steep decline, and many doubted that the company would survive much longer.... [M]any ISVs questioned the wisdom of continuing to spend time and money developing applications for the Mac OS. Had Microsoft an-nounced in the midst of this atmosphere that it was ceasing to develop new versions of Mac Office, a great number of ISVs, customers, developers, and investors would have in-terpreted the announcement as Apple’s death notice.

Microsoft recognized the importance to Apple of its continued support of Mac Office. [Internal e-mail in evidence included the following:] “[We] need a way to push these guys[, i.e., Apple] and [threatening to cancel Mac Office] is the only one that seems to make them move.”; “[Microsoft Chairman Bill] Gates asked whether Microsoft could conceal from Apple in the coming month the fact that Microsoft was almost finished de-veloping Mac Office 97.”; “I think ... Apple should be using [IE] everywhere and if they don’t do it, then we can use Office as a club.”.

In June 1997 Microsoft Chairman Bill Gates determined that the company’s nego-tiations with Apple “‘have not been going well at all.... Apple let us down on the browser by making Netscape the standard install.’ Gates then reported that he had already called Apple’s CEO ... to ask ‘how we should announce the cancellation of Mac Office....’” The District Court further found that, within a month of Gates’ call, Apple and Microsoft had reached an agreement pursuant to which

Microsoft’s primary obligation is to continue releasing up-to-date versions of Mac Office for at least five years.... [and] Apple has agreed ... to “bundle the most current version of [IE] ... with [Mac OS]”... [and to] “make [IE] the default [browser]”.... Navigator is not installed on the computer hard drive during the default installation, which is the type of installation most users elect to employ.... [The] Agreement further provides that ... Apple may not position icons for non-Microsoft browsing software on the desktop of new Macintosh PC systems or Mac OS upgrades.

The agreement also prohibits Apple from encouraging users to substitute another browser for IE, and states that Apple will “encourage its employees to use [IE].”

This exclusive deal between Microsoft and Apple has a substantial effect upon the distribution of rival browsers. If a browser developer ports its product to a second oper-ating system, such as the Mac OS, it can continue to display a common set of APIs. Thus, usage share, not the underlying operating system, is the primary determinant of the platform challenge a browser may pose. Pre-installation of a browser … is one of the two most important methods of browser distribution, and Apple had a not insignificant share of worldwide sales of operating systems. Because Microsoft’s exclusive contract with Apple has a substantial effect in restricting distribution of rival browsers, and be-cause (as we have described several times above) reducing usage share of rival browsers serves to protect Microsoft’s monopoly, its deal with Apple must be regarded as anticom-petitive.

Microsoft offers no procompetitive justification for the exclusive dealing arrange-ment. It makes only the irrelevant claim that the IE-for-Mac Office deal is part of a mul-tifaceted set of agreements between itself and Apple; that does not mean it has any pro-competitive justification. Accordingly, we hold that the exclusive deal with Apple is ex-clusionary, in violation of §2 of the Sherman Act.


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5. Java. Java, a set of technologies developed by Sun Microsystems, is another type of middleware posing a potential threat to Windows’ position as the ubiqui-tous platform for software development. The Java technologies include: (1) a program-ming language; (2) a set of programs written in that language, called the “Java class li-braries,” which expose APIs; (3) a compiler, which translates code written by a devel-oper into “bytecode”; and (4) a Java Virtual Machine (“JVM”), which translates byte-code into instructions to the operating system. Programs calling upon the Java APIs will run on any machine with a “Java runtime environment,” that is, Java class libraries and a JVM.

In May 1995 Netscape agreed with Sun to distribute a copy of the Java runtime environment with every copy of Navigator, and “Navigator quickly became the principal vehicle by which Sun placed copies of its Java runtime environment on the PC systems of Windows users.” Microsoft, too, agreed to promote the Java technologies—or so it seemed. For at the same time, Microsoft took steps “to maximize the difficulty with which applications written in Java could be ported from Windows to other platforms, and vice versa.” Specifically, the District Court found that Microsoft took four steps to ex-clude Java from developing as a viable cross-platform threat: (a) designing a JVM in-compatible with the one developed by Sun; (b) entering into contracts, the so-called “First Wave Agreements,” requiring major ISVs to promote Microsoft’s JVM exclu-sively; (c) deceiving Java developers about the Windows-specific nature of the tools it distributed to them; and (d) coercing Intel to stop aiding Sun in improving the Java tech-nologies.

a. The incompatible JVM. The District Court held that Microsoft engaged in exclusionary conduct by developing and promoting its own JVM. … In or-der to violate the antitrust laws, the incompatible product must have an anticompetitive effect that outweighs any procompetitive justification for the design. Microsoft’s JVM is not only incompatible with Sun’s, it allows Java applications to run faster on Windows than does Sun’s JVM. Microsoft’s faster JVM lured Java developers into using Micro-soft’s developer tools, and Microsoft offered those tools deceptively, as we discuss be-low. The JVM, however, does allow applications to run more swiftly and does not itself have any anticompetitive effect. Therefore, we reverse the District Court’s imposition of liability for Microsoft’s development and promotion of its JVM.

b. The First Wave Agreements . The District Court also found that Microsoft entered into First Wave Agreements with dozens of ISVs to use Microsoft’s JVM. (“[I]n exchange for costly technical support and other blandishments, Microsoft induced dozens of important ISVs to make their Java applications reliant on Windows-specific technologies and to refrain from distributing to Windows users JVMs that com-plied with Sun’s standards.”). Again, we reject the District Court’s condemnation of low but non-predatory pricing by Microsoft.

To the extent Microsoft’s First Wave Agreements with the ISVs conditioned re-ceipt of Windows technical information upon the ISVs’ agreement to promote Micro-soft’s JVM exclusively, they raise a different competitive concern. The District Court found that, although not literally exclusive, the deals were exclusive in practice because they required developers to make Microsoft’s JVM the default in the software they devel-oped.


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While the District Court did not enter precise findings as to the effect of the First Wave Agreements upon the overall distribution of rival JVMs, the record indicates that Microsoft’s deals with the major ISVs had a significant effect upon JVM promotion. As discussed above, the products of First Wave ISVs reached millions of consumers. … Moreover, Microsoft’s exclusive deals with the leading ISVs took place against a back-drop of foreclosure: the District Court found that “[w]hen Netscape announced in May 1995 [prior to Microsoft’s execution of the First Wave Agreements] that it would include with every copy of Navigator a copy of a Windows JVM that complied with Sun’s stan-dards, it appeared that Sun’s Java implementation would achieve the necessary ubiquity on Windows.” As discussed above, however, Microsoft undertook a number of anticom-petitive actions that seriously reduced the distribution of Navigator, and the District Court found that those actions thereby seriously impeded distribution of Sun’s JVM. Because Microsoft’s agreements foreclosed a substantial portion of the field for JVM distribution and because, in so doing, they protected Microsoft’s monopoly from a middleware threat, they are anticompetitive. Microsoft offered no procompetitive justification for the default clause that made the First Wave Agreements exclusive as a practical matter. Because the cumulative effect of the deals is anticompetitive and because Microsoft has no procompetitive justification for them, we hold that the provisions in the First Wave Agreements requiring use of Mi-crosoft’s JVM as the default are exclusionary, in violation of the Sherman Act. c. Deception of Java developers . Microsoft’s “Java implementa-tion” included, in addition to a JVM, a set of software development tools it created to as-sist ISVs in designing Java applications. The District Court found that, not only were these tools incompatible with Sun’s cross-platform aspirations for Java—no violation, to be sure—but Microsoft deceived Java developers regarding the Windows-specific nature of the tools. Microsoft’s tools included “certain ‘keywords’ and ‘compiler directives’ that could only be executed properly by Microsoft’s version of the Java runtime environ-ment for Windows.” As a result, even Java “developers who were opting for portability over performance ... unwittingly [wrote] Java applications that [ran] only on Windows.” That is, developers who relied upon Microsoft’s public commitment to cooperate with Sun and who used Microsoft’s tools to develop what Microsoft led them to believe were cross-platform applications ended up producing applications that would run only on the Windows operating system. When specifically accused by a PC Week reporter of fragmenting Java standards so as to prevent cross-platform uses, Microsoft denied the accusation and indicated it was only “adding rich platform support” to what remained a cross-platform implementation. An e-mail message internal to Microsoft, written shortly after the conversation with the reporter, shows otherwise:

[O]k, i just did a followup call.... [The reporter] liked that i kept pointing customers to w3c standards [ (commonly observed internet protocols) ].... [but] he accused us of being schizo with this vs. our java approach, i said he misunderstood [--] that [with Java] we are merely trying to add rich platform support to an interop layer.... this plays well.... at this point its [sic] not good to create MORE noise around our win32 java classes. instead we should just quietly grow j++ [ (Microsoft’s development tools) ] share and assume that people will take more advantage of our classes without ever realizing they are building win32-only java apps.


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Finally, other Microsoft documents confirm that Microsoft intended to deceive Java developers, and predicted that the effect of its actions would be to generate Win-dows-dependent Java applications that their developers believed would be cross-plat-form; these documents also indicate that Microsoft’s ultimate objective was to thwart Java’s threat to Microsoft’s monopoly in the market for operating systems. One Microsoft document, for example, states as a strategic goal: “Kill cross-platform Java by grow[ing] the polluted Java market.”

Microsoft’s conduct related to its Java developer tools served to protect its mo-nopoly of the operating system in a manner not attributable either to the superiority of the operating system or to the acumen of its makers, and therefore was anticompetitive. Un-surprisingly, Microsoft offers no procompetitive explanation for its campaign to deceive developers. Accordingly, we conclude this conduct is exclusionary, in violation of §2 of the Sherman Act.

d. The threat to Intel . The District Court held that Microsoft also acted unlawfully with respect to Java by using its “monopoly power to prevent firms such as Intel from aiding in the creation of cross-platform interfaces.” In 1995 Intel was in the process of developing a high performance, Windows-compatible JVM. Microsoft wanted Intel to abandon that effort because a fast, cross-platform JVM would threaten Micro-soft’s monopoly in the operating system market. At an August 1995 meeting, Micro-soft’s Gates told Intel that its “cooperation with Sun and Netscape to develop a Java run-time environment ... was one of the issues threatening to undermine cooperation between Intel and Microsoft.” Three months later, “Microsoft’s Paul Maritz told a senior Intel executive that Intel’s [adaptation of its multimedia software to comply with] Sun’s Java standards was as inimical to Microsoft as Microsoft’s support for non-Intel microproces-sors would be to Intel.”

Intel nonetheless continued to undertake initiatives related to Java. By 1996 “In-tel had developed a JVM designed to run well ... while complying with Sun’s cross-plat-form standards.” In April of that year, Microsoft again urged Intel not to help Sun by dis-tributing Intel’s fast, Sun-compliant JVM. And Microsoft threatened Intel that if it did not stop aiding Sun on the multimedia front, then Microsoft would refuse to distribute Intel technologies bundled with Windows.

Intel finally capitulated in 1997, after Microsoft delivered the coup de grace. [O]ne of Intel’s competitors, called AMD, solicited support from Microsoft for its “3DX” technology.... Microsoft’s Allchin asked Gates whether Microsoft should support 3DX, despite the fact that Intel would oppose it. Gates responded: “If Intel has a real problem with us supporting this then they will have to stop supporting Java Multimedia the way they are. I would gladly give up supporting this if they would back off from their work on JAVA.”

Microsoft’s internal documents and deposition testimony confirm both the anti-competitive effect and intent of its actions. [One] Microsoft executive … included among Microsoft’s goals for Intel: “Intel to stop helping Sun create Java Multimedia APIs, especially ones that run well ... on Windows.” [The same executive later testified that,] “We were successful [in convincing Intel to stop aiding Sun] for some period of time.”


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Microsoft does not deny the facts found by the District Court, nor does it offer any procompetitive justification for pressuring Intel not to support cross-platform Java. Microsoft lamely characterizes its threat to Intel as “advice.” The District Court, how-ever, found that Microsoft’s “advice” to Intel to stop aiding cross-platform Java was backed by the threat of retaliation, and this conclusion is supported by the evidence cited above. Therefore we affirm the conclusion that Microsoft’s threats to Intel were exclu-sionary, in violation of §2 of the Sherman Act. …

C. Causation. As a final parry, Microsoft urges this court to reverse on the mo-nopoly maintenance claim, because plaintiffs never established a causal link between Mi-crosoft’s anticompetitive conduct, in particular its foreclosure of Netscape’s and Java’s distribution channels, and the maintenance of Microsoft’s operating system monopoly. … Microsoft points to no case, and we can find none, standing for the proposition that, as to §2 liability in an equitable enforcement action, plaintiffs must present direct proof that a defendant’s continued monopoly power is precisely attributable to its anticompetitive conduct. …

To require that §2 liability turn on a plaintiff’s ability or inability to reconstruct the hypothetical marketplace absent a defendant’s anticompetitive conduct would only encourage monopolists to take more and earlier anticompetitive action. We may infer causation when exclusionary conduct is aimed at producers of nascent competitive tech-nologies as well as when it is aimed at producers of established substitutes. Admittedly, in the former case there is added uncertainty, inasmuch as nascent threats are merely po-tential substitutes. But the underlying proof problem is the same—neither plaintiffs nor the court can confidently reconstruct a product’s hypothetical technological development in a world absent the defendant’s exclusionary conduct. To some degree, “the defendant is made to suffer the uncertain consequences of its own undesirable conduct.” 3 AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 651c, at 78.

[Thus,] the question in this case is not whether Java or Navigator would actually have developed into viable platform substitutes, but (1) whether as a general matter the exclusion of nascent threats is the type of conduct that is reasonably capable of contribut-ing significantly to a defendant’s continued monopoly power and (2) whether Java and Navigator reasonably constituted nascent threats at the time Microsoft engaged in the an-ticompetitive conduct at issue. As to the first, suffice it to say that it would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, al-beit unproven, competitors at will—particularly in industries marked by rapid technologi-cal advance and frequent paradigm shifts. As to the second, the District Court made am-ple findings that both Navigator and Java showed potential as middleware platform threats. Counsel for Microsoft admitted as much at oral argument:

There are no constraints on output. Marginal costs are essentially zero. And there are to some extent network effects. So a company like Netscape founded in 1994 can be by the middle of 1995 clearly a potentially lethal competitor to Windows because it can supplant its position in the market because of the characteristics of these markets.

Microsoft’s concerns over causation have more purchase in connection with the appropriate remedy issue, i.e., whether the court should impose a structural remedy or merely enjoin the offensive conduct at issue. … Absent some measure of confidence that there has been an actual loss to competition that needs to be restored, wisdom counsels


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against adopting radical structural relief. But these queries go to questions of remedy, not liability. In short, causation affords Microsoft no defense to liability for its unlawful ac-tions undertaken to maintain its monopoly in the operating system market.

III. ATTEMPTED MONOPOLIZATION. Microsoft further challenges the District Court’s determination of liability for “attempt[ing] to monopolize ... any part of the trade or commerce among the several States. To establish a §2 violation for attempted monopo-lization, “a plaintiff must prove (1) that the defendant has engaged in predatory or anti-competitive conduct with (2) a specific intent to monopolize and (3) a dangerous proba-bility of achieving monopoly power.” Spectrum Sports. Because a deficiency on any one of the three will defeat plaintiffs’ claim, we look no further than plaintiffs’ failure to prove a dangerous probability of achieving monopoly power in the putative browser mar-ket. …

To establish a dangerous probability of success, plaintiffs must as a threshold matter show that the browser market can be monopolized, i.e., that a hypothetical monop-olist in that market could enjoy market power. This, in turn, requires plaintiffs (1) to de-fine the relevant market and (2) to demonstrate that substantial barriers to entry protect that market. Because plaintiffs have not carried their burden on either prong, we reverse without remand.

A. Relevant Market. A court’s evaluation of an attempted monopolization claim must include a definition of the relevant market. Such a definition establishes a context for evaluating the defendant’s actions as well as for measuring whether the challenged conduct presented a dangerous probability of monopolization. The District Court omitted this element of the Spectrum Sports inquiry.

Defining a market for an attempted monopolization claim involves the same steps as defining a market for a monopoly maintenance claim, namely a detailed description of the purpose of a browser—what functions may be included and what are not—and an ex-amination of the substitutes that are part of the market and those that are not. The Dis -trict Court never engaged in such an analysis nor entered detailed findings defining what a browser is or what products might constitute substitutes. In the Findings of Fact, the District Court … stated only that “a Web browser provides the ability for the end user to select, retrieve, and perceive resources on the Web.” Furthermore, in discussing at-tempted monopolization in its Conclusions of Law, the District Court failed to demon-strate analytical rigor when it employed varying and imprecise references to the “market for browsing technology for Windows,” “the browser market,” and “platform-level browsing software.”

Because the determination of a relevant market is a factual question to be resolved by the District Court, we would normally remand the case so that the District Court could formulate an appropriate definition. A remand on market definition is unnecessary, how-ever, because the District Court’s imprecision is directly traceable to plaintiffs’ failure to articulate and identify evidence before the District Court as to (1) what constitutes a browser (i.e., what are the technological components of or functionalities provided by a browser) and (2) why certain other products are not reasonable substitutes (e.g., browser shells or viewers for individual internet extensions, such as Real Audio Player or Adobe Acrobat Reader). Indeed, when plaintiffs in their Proposed Findings of Fact attempted to


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define a relevant market for the attempt claim, they pointed only to their separate prod-ucts analysis for the tying claim. However, the separate products analysis for tying pur-poses is not a substitute for the type of market definition that Spectrum Sports requires. … Furthermore, in their brief and at oral argument before this court, plaintiffs did nothing to clarify or ameliorate this deficiency.

B. Barriers to Entry. Because a firm cannot possess monopoly power in a mar-ket unless that market is also protected by significant barriers to entry, it follows that a firm cannot threaten to achieve monopoly power in a market unless that market is, or will be, similarly protected. … Plaintiffs must not only show that barriers to entry protect the properly defined browser market, but that those barriers are “significant.” Whether there are significant barriers to entry cannot, of course, be answered absent an appropriate mar-ket definition; thus, plaintiffs’ failure on that score alone is dispositive. But even were we to assume a properly defined market, for example browsers consisting of a graphical interface plus internet protocols, plaintiffs nonetheless failed to carry their burden on bar-riers to entry. …

In contrast to their minimal effort on market definition, plaintiffs did at least offer proposed findings of fact suggesting that the possibility of network effects could poten-tially create barriers to entry into the browser market. The District Court did not adopt those proposed findings. However, the District Court did acknowledge the possibility of a different kind of entry barrier in its Conclusions of Law:

In the time it would have taken an aspiring entrant to launch a serious effort to compete against Internet Explorer, Microsoft could have erected the same type of barrier that pro-tects its existing monopoly power by adding proprietary extensions to the browsing soft-ware under its control and by extracting commitments from OEMs, IAPs and others simi-lar to the ones discussed in [the monopoly maintenance section].

Giving plaintiffs and the District Court the benefit of the doubt, we might remand if the possible existence of entry barriers resulting from the possible creation and ex-ploitation of network effects in the browser market were the only concern. That is not enough to carry the day, however, because the District Court did not make two key find-ings: (1) that network effects were a necessary or even probable, rather than merely pos-sible, consequence of high market share in the browser market and (2) that a barrier to entry resulting from network effects would be “significant” enough to confer monopoly power. Again, these deficiencies are in large part traceable to plaintiffs’ own failings. … Simply invoking the phrase “network effects” without pointing to more evidence does not suffice to carry plaintiffs’ burden in this respect. …

Because plaintiffs failed to make their case on attempted monopolization both in the District Court and before this court, there is no reason to give them a second chance to flesh out a claim that should have been fleshed out the first time around. Accordingly, we reverse the District Court’s determination of §2 liability for attempted monopoliza-tion.

IV. TYING. ... The facts underlying the tying allegation substantially overlap with those set forth in Section II.B in connection with the §2 monopoly maintenance claim. The key District Court findings are that (1) Microsoft required licensees of Windows 95 and 98 also to license IE as a bundle at a single price; (2) Microsoft refused to allow OEMs


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to uninstall or remove IE from the Windows desktop; (3) Microsoft designed Windows 98 in a way that withheld from consumers the ability to remove IE by use of the Add/Re-move Programs utility; and (4) Microsoft designed Windows 98 to override the user’s choice of default web browser in certain circumstances. The court found that these acts constituted a per se tying violation.

Microsoft does not dispute that it bound Windows and IE in the four ways the District Court cited. Instead it argues that Windows (the tying good) and IE browsers (the tied good) are not “separate products,” and that it did not substantially foreclose competing browsers from the tied product market. …

We first address the separate-products inquiry, a source of much argument be-tween the parties and of confusion in the cases. Our purpose is to highlight the poor fit between the separate-products test and the facts of this case. We then offer further rea-sons for carving an exception to the per se rule when the tying product is platform soft-ware. In the final section we discuss the District Court’s inquiry if plaintiffs pursue a rule of reason claim on remand.

A. Separate-Products Inquiry Under the Per Se Test. … The first case to give content to the separate-products test was Jefferson Parish [,which] resolved the matter in two steps. First, it clarified that “the answer to the question whether one or two products are involved” does not turn “on the functional relation between them....” In other words, the mere fact that two items are complements, that “one ... is useless without the other,” does not make them a single “product” for purposes of tying law. Second, rea-soning that the “definitional question [whether two distinguishable products are involved] depends on whether the arrangement may have the type of competitive consequences ad-dressed by the rule [against tying],” the Court decreed that “no tying arrangement can ex-ist unless there is a sufficient demand for the purchase of anesthesiological services sepa-rate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital service.” Id. (emphasis added). The Court proceeded to examine direct and indirect evidence of consumer de-mand for the tied product separate from the tying product. Direct evidence addresses the question whether, when given a choice, consumers purchase the tied good from the tying good maker, or from other firms. .. Indirect evidence includes the behavior of firms with-out market power in the tying good market, presumably on the notion that (competitive) supply follows demand. If competitive firms always bundle the tying and tied goods, then they are a single product. … To understand the logic behind the Court’s consumer demand test, consider first the postulated harms from tying. The core concern is that tying prevents goods from competing directly for consumer choice on their merits, i.e., being selected as a result of “buyers’ independent judgment.” With a tie, a buyer’s “freedom to select the best bargain in the second market [could be] impaired by his need to purchase the tying product, and perhaps by an inability to evaluate the true cost of either product....” Direct competition on the merits of the tied product is foreclosed when the tying product either is sold only in a bundle with the tied product or, though offered separately, is sold at a bundled price, so that the buyer pays the same price whether he takes the tied product or not. In both cases, a consumer buying the tying product becomes entitled to the tied product; he will therefore likely be unwilling to buy a competitor’s version of the tied product even if,


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making his own price/quality assessment, that is what he would prefer. But not all ties are bad. Bundling obviously saves distribution and consumer transaction costs. This is likely to be true, to take some examples from the computer in-dustry, with the integration of math co-processors and memory into microprocessor chips and the inclusion of spell checkers in word processors. Bundling can also capitalize on certain economies of scope. A possible example is the “shared” library files that perform OS and browser functions with the very same lines of code and thus may save drive space from the clutter of redundant routines and memory when consumers use both the OS and browser simultaneously. Indeed, if there were no efficiencies from a tie (including econo-mizing on consumer transaction costs such as the time and effort involved in choice), we would expect distinct consumer demand for each individual component of every good. In a competitive market with zero transaction costs, the computers on which this opinion was written would only be sold piecemeal—keyboard, monitor, mouse, central process-ing unit, disk drive, and memory all sold in separate transactions and likely by different manufacturers. Recognizing the potential benefits from tying, the Court in Jefferson Parish forged a separate-products test that, like those of market power and substantial foreclo-sure, attempts to screen out false positives under per se analysis. The consumer demand test is a rough proxy for whether a tying arrangement may, on balance, be welfare-en-hancing, and unsuited to per se condemnation. In the abstract, of course, there is always direct separate demand for products: assuming choice is available at zero cost, consumers will prefer it to no choice. Only when the efficiencies from bundling are dominated by the benefits to choice for enough consumers, however, will we actually observe con-sumers making independent purchases. In other words, perceptible separate demand is inversely proportional to net efficiencies. On the supply side, firms without market power will bundle two goods only when the cost savings from joint sale outweigh the value consumers place on separate choice. So bundling by all competitive firms implies strong net efficiencies. If a court finds either that there is no noticeable separate demand for the tied product or, there being no convincing direct evidence of separate demand, that the entire “competitive fringe” engages in the same behavior as the defendant, then the tying and tied products should be declared one product and per se liability should be rejected.

Before concluding our exegesis of Jefferson Parish’s separate-products test, we should clarify two things. First, Jefferson Parish does not endorse a direct inquiry into the efficiencies of a bundle. Rather, it proposes easy-to-administer proxies for net effi-ciency. In describing the separate-products test we discuss efficiencies only to explain the rationale behind the consumer demand inquiry. To allow the separate-products test to become a detailed inquiry into possible welfare consequences would turn a screening test into the very process it is expected to render unnecessary. Second, the separate-products test is not a one-sided inquiry into the cost savings from a bundle. Although Jefferson Parish acknowledged that prior lower court cases looked at cost-savings to decide separate products, the Court conspicuously did not adopt that approach in its disposition of tying arrangement before it. Instead it chose proxies that balance costs savings against reduction in consumer choice. With this background, we now turn to the separate products inquiry before us.


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The District Court found that many consumers, if given the option, would choose their browser separately from the OS. Turning to industry custom, the court found that, al-though all major OS vendors bundled browsers with their OSs, these companies either sold versions without a browser, or allowed OEMs or end-users either not to install the bundled browser or in any event to “uninstall” it. …

Microsoft does not dispute that many consumers demand alternative browsers. But on industry custom Microsoft contends that no other firm requires non-removal be-cause no other firm has invested the resources to integrate web browsing as deeply into its OS as Microsoft has. … Microsoft contends not only that its integration of IE into Windows is innovative and beneficial but also that it requires non-removal of IE. In our discussion of monopoly maintenance we find that these claims fail the efficiency balanc-ing applicable in that context. But the separate-products analysis is supposed to perform its function as a proxy without embarking on any direct analysis of efficiency. Accord-ingly, Microsoft’s implicit argument—that in this case looking to a competitive fringe is inadequate to evaluate fully its potentially innovative technological integration, that such a comparison is between apples and oranges—poses a legitimate objection to the opera-tion of Jefferson Parish’s separate- products test for the per se rule.

In fact there is merit to Microsoft’s broader argument that Jefferson Parish’s con-sumer demand test would “chill innovation to the detriment of consumers by preventing firms from integrating into their products new functionality previously provided by stand-alone products—and hence, by definition, subject to separate consumer demand.” The per se rule’s direct consumer demand and indirect industry custom inquiries are, as a general matter, backward-looking and therefore systematically poor proxies for overall efficiency in the presence of new and innovative integration. The direct consumer demand test fo-cuses on historic consumer behavior, likely before integration, and the indirect industry custom test looks at firms that, unlike the defendant, may not have integrated the tying and tied goods. Both tests compare incomparables—the defendant’s decision to bundle in the presence of integration, on the one hand, and consumer and competitor calculations in its absence, on the other. If integration has efficiency benefits, these may be ignored by the Jefferson Parish proxies. Because one cannot be sure beneficial integration will be protected by the other elements of the per se rule, simple application of that rule’s sepa-rate-products test may make consumers worse off.

In light of the monopoly maintenance section, obviously, we do not find that Mi-crosoft’s integration is welfare-enhancing or that it should be absolved of tying liability. Rather, we heed Microsoft’s warning that the separate-products element of the per se rule may not give newly integrated products a fair shake.

B. Per Se Analysis Inappropriate for this Case. We now address directly the larger question as we see it: whether standard per se analysis should be applied “off the shelf” to evaluate the defendant’s tying arrangement, one which involves software that serves as a platform for third-party applications. There is no doubt that “[i]t is far too late in the history of our antitrust jurisprudence to question the proposition that certain ty-ing arrangements pose an unacceptable risk of stifling competition and therefore are un-reasonable ‘per se.’” Jefferson Parish (emphasis added). But there are strong reasons to doubt that the integration of additional software functionality into an OS falls among these arrangements. Applying per se analysis to such an amalgamation creates undue


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risks of error and of deterring welfare-enhancing innovation.

The Supreme Court has warned that “‘[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations....’” BMI. Yet the sort of tying arrangement attacked here is unlike any the Supreme Court has con-sidered. … In none of these cases was the tied good physically and technologically inte-grated with the tying good. Nor did the defendants ever argue that their tie improved the value of the tying product to users and to makers of complementary goods. In those cases where the defendant claimed that use of the tied good made the tying good more valuable to users, the Court ruled that the same result could be achieved via quality stan-dards for substitutes of the tied good. See, e.g., Int’l Salt.

Here Microsoft argues that IE and Windows are an integrated physical product and that the bundling of IE APIs with Windows makes the latter a better applications platform for third-party software. It is unclear how the benefits from IE APIs could be achieved by quality standards for different browser manufacturers. We do not pass judg-ment on Microsoft’s claims regarding the benefits from integration of its APIs. We merely note that these and other novel, purported efficiencies suggest that judicial “expe-rience” provides little basis for believing that, “because of their pernicious effect on com-petition and lack of any redeeming virtue,” a software firm’s decisions to sell multiple functionalities as a package should be “conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” N. Pac. Ry. (emphasis added).

Nor have we found much insight into software integration among the decisions of lower federal courts. …While the paucity of cases examining software bundling suggests a high risk that per se analysis may produce inaccurate results, the nature of the platform software market affirmatively suggests that per se rules might stunt valuable innovation. We have in mind two reasons.

First, as we explained in the previous section, the separate-products test is a poor proxy for net efficiency from newly integrated products. Under per se analysis the first firm to merge previously distinct functionalities (e.g., the inclusion of starter motors in automobiles) or to eliminate entirely the need for a second function (e.g., the invention of the stain-resistant carpet) risks being condemned as having tied two separate products be-cause at the moment of integration there will appear to be a robust “distinct” market for the tied product. Rule of reason analysis, however, affords the first mover an opportu-nity to demonstrate that an efficiency gain from its “tie” adequately offsets any distortion of consumer choice.

The failure of the separate-products test to screen out certain cases of productive integration is particularly troubling in platform software markets such as that in which the defendant competes. Not only is integration common in such markets, but it is common among firms without market power. We have already reviewed evidence that nearly all competitive OS vendors also bundle browsers. Moreover, plaintiffs do not dispute that OS vendors can and do incorporate basic internet plumbing and other useful functionality into their OSs. Firms without market power have no incentive to package different pieces of software together unless there are efficiency gains from doing so. The ubiquity of bundling in competitive platform software markets should give courts reason to pause


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before condemning such behavior in less competitive markets.

Second, because of the pervasively innovative character of platform software markets, tying in such markets may produce efficiencies that courts have not previously encountered and thus the Supreme Court had not factored into the per se rule as originally conceived. For example, the bundling of a browser with OSs enables an independent software developer to count on the presence of the browser’s APIs, if any, on consumers’ machines and thus to omit them from its own package. It is true that software developers can bundle the browser APIs they need with their own products, but that may force con-sumers to pay twice for the same API if it is bundled with two different software pro-grams. It is also true that OEMs can include APIs with the computers they sell, but dif-fusion of uniform APIs by that route may be inferior. First, many OEMs serve special subsets of Windows consumers, such as home or corporate or academic users. If just one of these OEMs decides not to bundle an API because it does not benefit enough of its clients, ISVs that use that API might have to bundle it with every copy of their program. Second, there may be a substantial lag before all OEMs bundle the same set of APIs--a lag inevitably aggravated by the first phenomenon. In a field where programs change very rapidly, delays in the spread of a necessary element (here, the APIs) may be very costly.

Of course, these arguments may not justify Microsoft’s decision to bundle APIs in this case, particularly because Microsoft did not merely bundle with Windows the APIs from IE, but an entire browser application…. A justification for bundling a component of software may not be one for bundling the entire software package, especially given the malleability of software code. Furthermore, the interest in efficient API diffusion obvi-ously supplies a far stronger justification for simple price-bundling than for Microsoft’s contractual or technological bars to subsequent removal of functionality. But our qualms about redefining the boundaries of a defendant’s product and the possibility of consumer gains from simplifying the work of applications developers makes us question any hard and fast approach to tying in OS software markets.

There may also be a number of efficiencies that, although very real, have been ig-nored in the calculations underlying the adoption of a per se rule for tying. We fear that these efficiencies are common in technologically dynamic markets where product devel-opment is especially unlikely to follow an easily foreseen linear pattern. Take the fol-lowing example from ILC Peripherals, 448 F.Supp. 228, a case concerning the evolution of disk drives for computers. When IBM first introduced such drives in 1956, it sold an integrated product that contained magnetic disks and disk heads that read and wrote data onto disks. Consumers of the drives demanded two functions--to store data and to access it all at once. In the first few years consumers’ demand for storage increased rapidly, outpacing the evolution of magnetic disk technology. To satisfy that demand IBM made it possible for consumers to remove the magnetic disks from drives, even though that meant consumers would not have access to data on disks removed from the drive. This componentization enabled makers of computer peripherals to sell consumers removable disks. Over time, however, the technology of magnetic disks caught up with demand for capacity, so that consumers needed few removable disks to store all their data. At this point IBM reintegrated disks into their drives, enabling consumers to once again have im-mediate access to all their data without a sacrifice in capacity. A manufacturer of remov-


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able disks sued. But the District Court found the tie justified because it satisfied con-sumer demand for immediate access to all data, and ruled that disks and disk heads were one product. A court hewing more closely to the truncated analysis contemplated by Northern Pacific Railway would perhaps have overlooked these consumer benefits.

These arguments all point to one conclusion: we cannot comfortably say that bundling in platform software markets has so little “redeeming virtue,” N. Pac. Ry., … that “an inquiry into its costs in the individual case [can be] considered [ ] unnecessary.” Jefferson Parish (O’Connor, J., concurring). We do not have enough empirical evidence regarding the effect of Microsoft’s practice on the amount of consumer surplus created or consumer choice foreclosed by the integration of added functionality into platform soft-ware to exercise sensible judgment regarding that entire class of behavior. … [W]e will heed the wisdom that “easy labels do not always supply ready answers,” Broad. Music, and vacate the District Court’s finding of per se tying liability under Sherman Act §1. We remand the case for evaluation of Microsoft’s tying arrangements under the rule of rea-son. …

Our judgment regarding the comparative merits of the per se rule and the rule of reason is confined to the tying arrangement before us, where the tying product is software whose major purpose is to serve as a platform for third-party applications and the tied product is complementary software functionality. While our reasoning may at times ap-pear to have broader force, we do not have the confidence to speak to facts outside the record, which contains scant discussion of software integration generally. …

C. On Remand. Should plaintiffs choose to pursue a tying claim under the rule of reason, we note the following for the benefit of the trial court:

First, on remand, plaintiffs must show that Microsoft’s conduct unreasonably re-strained competition. Meeting that burden “involves an inquiry into the actual effect” of Microsoft’s conduct on competition in the tied good market, the putative market for browsers. To the extent that certain aspects of tying injury may depend on a careful defi-nition of the tied good market and a showing of barriers to entry other than the tying ar-rangement itself, plaintiffs would have to establish these points. … Of the harms left, plaintiffs must show that Microsoft’s conduct was, on balance, anticompetitive. Microsoft may of course offer procompetitive justifications, and it is plaintiffs’ burden to show that the anticompetitive effect of the conduct outweighs its benefit.

Second, the fact that we have already considered some of the behavior plaintiffs allege to constitute tying violations in the monopoly maintenance section does not resolve the §1 inquiry. The two practices that plaintiffs have most ardently claimed as tying vio-lations are, indeed, a basis for liability under plaintiffs’ § 2 monopoly maintenance claim. These are Microsoft’s refusal to allow OEMs to uninstall IE or remove it from the Windows desktop, and its removal of the IE entry from the Add/Remove Programs utility in Windows 98. In order for the District Court to conclude these practices also constitute §1 tying violations, plaintiffs must demonstrate that their benefits … are out-weighed by the harms in the tied product market. …


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[W]e also considered another alleged tying violation--the Windows 98 override of a consumer’s choice of default web browser. We concluded that this behavior does not provide a distinct basis for §2 liability because plaintiffs failed to rebut Microsoft’s prof-fered justification by demonstrating that harms in the operating system market outweigh Microsoft’s claimed benefits. On remand, however, although Microsoft may offer the same procompetitive justification for the override, plaintiffs must have a new opportunity to rebut this claim, by demonstrating that the anticompetitive effect in the browser market is greater than these benefits. …


Revised Proposed Final Judgment (11/6/01)

WHEREAS, plaintiffs United States of America (“United States”) and the States of New York, Ohio, Illi -nois, Kentucky, Louisiana, Maryland, Michigan, North Carolina and Wisconsin and defendant Microsoft Corporation (“microsoft”), by their respective attorneys, have consented to the entry of this Final Judg-ment;

AND WHEREAS, this Final Judgment does not constitute any admission by any party regarding any issue of fact or law;

AND WHEREAS, Microsoft agrees to be bound by the provisions of this Final Judgment pending its approval by the Court;NOW THEREFORE, upon remand from the United States Court of Appeals for the District of Columbia Circuit, and upon the consent of the aforementioned parties, it is hereby ORDERED, ADJUDGED, AND DECREED:

* * * * *

III. Prohibited ConductA. Microsoft shall not retaliate against an OEM by altering Microsoft’s commercial relations with that OEM, or by withholding newly introduced forms of non-monetary Consideration (including but not limited to new versions of existing forms of non-monetary Consideration) from that OEM, because it is known to Microsoft that the OEM is or is contemplating:

1. developing, distributing, promoting, using, selling, or licensing any soft-ware that competes with Microsoft Platform Software or any product or service that distributes or promotes any Non-Microsoft Middleware;

2. shipping a Personal Computer that (a) includes both a Windows Operating System Product and a non-Microsoft Operating System, or (b) will boot with more than one Operating System; or

3. exercising any of the options or alternatives provided for under this Final Judgment.

Nothing in this provision shall prohibit Microsoft from enforcing any provision of any li-cense with any OEM or any intellectual property right that is not inconsistent with this Final Judgment. Microsoft shall not terminate a Covered OEM’s license for a Windows Operating System Product without having first given the Covered OEM written notice of the reasons for the proposed termination and not less than thirty days’ opportunity to


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cure. Notwithstanding the foregoing, Microsoft shall have no obligation to provide such a termination notice and opportunity to cure to any Covered OEM that has received two or more such notices during the term of its Windows Operating System Product license.

Nothing in this provision shall prohibit Microsoft from providing Consideration to any OEM with respect to any Microsoft product or service where that Consideration is com-mensurate with the absolute level or amount of that OEM’s development, distribution, promotion, or licensing of that Microsoft product or service.

B. Microsoft’s provision of Windows Operating System Products to Covered OEMs shall be pursuant to uniform license agreements with uniform terms and conditions. Without limiting the foregoing, Microsoft shall charge each Covered OEM the applicable royalty for Windows Operating System Products as set forth on a schedule, to be estab-lished by Microsoft and published on a web site accessible to the Plaintiffs and all Cov-ered OEMs, that provides for uniform royalties for Windows Operating System Products, except that:

1. the schedule may specify different royalties for different language ver-sions;

2. the schedule may specify reasonable volume discounts based upon the ac-tual volume of licenses of any Windows Operating System Product or any group of such products; and

3. the schedule may include market development allowances, programs, or other discounts in connection with Windows Operating System Products, provided that:

a. such discounts are offered and available uniformly to all Covered OEMs, except that Microsoft may establish one uniform discount schedule for the ten largest Covered OEMs and a second uniform discount schedule for the eleventh through twentieth largest Cov-ered OEMs, where the size of the OEM is measured by volume of licenses;

b. such discounts are based on objective, verifiable criteria that shall be applied and enforced on a uniform basis for all Covered OEMs; and

c. such discounts or their award shall not be based on or impose any criterion or requirement that is otherwise inconsistent with any portion of this Final Judgment.

C. Microsoft shall not restrict by agreement any OEM licensee from exercising any of the following options or alternatives:

1. Installing, and displaying icons, shortcuts, or menu entries for, any Non-Microsoft Middleware or any product or service (including but not limited to IAP products or services) that distributes, uses, promotes, or supports any Non-Microsoft Middleware, on the desktop or Start menu, or any-where else in a Windows Operating System Product where a list of icons, shortcuts, or menu entries for applications are generally displayed, except


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that Microsoft may restrict an OEM from displaying icons, shortcuts and menu entries for any product in any list of such icons, shortcuts, or menu entries specified in the Windows documentation as being limited to pro-ducts that provide particular types of functionality, provided that the re-strictions are non-discriminatory with respect to non-Microsoft and Microsoft products.

2. Distributing or promoting Non-Microsoft Middleware by installing and displaying on the desktop shortcuts of any size or shape so long as such shortcuts do not impair the functionality of the user interface.

3. Launching automatically, at the conclusion of the initial boot sequence or subsequent boot sequences, or upon connections to or disconnections from the Internet, any Non-Microsoft Middleware if a Microsoft Middleware Product that provides similar functionality would otherwise be launched automatically at that time, provided that any such Non-Microsoft Middle-ware displays on the desktop no user interface or a user interface of simi-lar size and shape to the user interface displayed by the corresponding Microsoft Middleware Product.

4. Offering users the option of launching other Operating Systems from the Basic Input/Output System or a non-Microsoft boot-loader or similar pro-gram that launches prior to the start of the Windows Operating System Product.

5. Presenting in the initial boot sequence its own IAP offer provided that the OEM complies with reasonable technical specifications established by Microsoft, including a requirement that the end user be returned to the ini-tial boot sequence upon the conclusion of any such offer.

6. Exercising any of the options provided in Section III.H of this Final Judg-ment.

D. Starting at the earlier of the release of Service Pack 1 for Windows XP or 12 months after the submission of this Final Judgment to the Court, Microsoft shall disclose to ISVs, IHVs, IAPs, ICPs, and OEMs, for the sole purpose of interoperating with a Win-dows Operating System Product, via the Microsoft Developer Network (“MSDN”) or similar mechanisms, the APIs and related Documentation that are used by Microsoft Middleware to interoperate with a Windows Operating System Product. In the case of a new major version of Microsoft Middleware, the disclosures required by this Section II-I.D shall occur no later than the last major beta test release of that Microsoft Middleware. In the case of a new version of a Windows Operating System Product, the obligations im-posed by this Section III.D shall occur in a Timely Manner.

E. Starting nine months after the submission of this proposed Final Judgment to the Court, Microsoft shall make available for use by third parties, for the sole purpose of in-teroperating with a Windows Operating System Product, on reasonable and non-discrimi-natory terms (consistent with Section III.I), any Communications Protocol that is, on or after the date this Final Judgment is submitted to the Court, (i) implemented in a Win-dows Operating System Product installed on a client computer, and (ii) used to interoper-


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ate natively (i.e., without the addition of software code to the client operating system product) with a Microsoft server operating system product.

F. 1. Microsoft shall not retaliate against any ISV or IHV because of that ISV’s or IHV’s:

a. developing, using, distributing, promoting or supporting any soft-ware that competes with Microsoft Platform Software or any soft-ware that runs on any software that competes with Microsoft Plat-form Software, or

b. exercising any of the options or alternatives provided for under this Final Judgment.

2. Microsoft shall not enter into any agreement relating to a Windows Oper-ating System Product that conditions the grant of any Consideration on an ISV’s refraining from developing, using, distributing, or promoting any software that competes with Microsoft Platform Software or any software that runs on any software that competes with Microsoft Platform Software, except that Microsoft may enter into agreements that place limitations on an ISV’s development, use, distribution or promotion of any such software if those limitations are reasonably necessary to and of reasonable scope and duration in relation to a bona fide contractual obligation of the ISV to use, distribute or promote any Microsoft software or to develop software for, or in conjunction with, Microsoft.

3. Nothing in this section shall prohibit Microsoft from enforcing any provi-sion of any agreement with any ISV or IHV, or any intellectual property right, that is not inconsistent with this Final Judgment.

G. Microsoft shall not enter into any agreement with:

1. any IAP, ICP, ISV, IHV or OEM that grants Consideration on the condi-tion that such entity distributes, promotes, uses, or supports, exclusively or in a fixed percentage, any Microsoft Platform Software, except that Microsoft may enter into agreements in which such an entity agrees to dis-tribute, promote, use or support Microsoft Platform Software in a fixed percentage whenever Microsoft in good faith obtains a representation that it is commercially practicable for the entity to provide equal or greater dis-tribution, promotion, use or support for software that competes with Microsoft Platform Software, or

2. any IAP or ICP that grants placement on the desktop or elsewhere in any Windows Operating System Product to that IAP or ICP on the condition that the IAP or ICP refrain from distributing, promoting or using any soft-ware that competes with Microsoft Middleware.

Nothing in this section shall prohibit Microsoft from entering into (a) any bona fide joint venture or (b) any joint development or joint services arrangement with any ISV, IHV, IAP, ICP, or OEM for a new product, technology or service, or any material value-add to an existing product, technology or service, in which both Microsoft and the ISV, IHV, IAP, ICP, or OEM contribute significant developer or other resources, that prohibits such


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entity from competing with the object of the joint venture or other arrangement for a rea-sonable period of time.

This Section does not apply to any agreements in which Microsoft licenses intellectual property in from a third party.

H. Starting at the earlier of the release of Service Pack 1 for Windows XP or 12 months after the submission of this Final Judgment to the Court, Microsoft shall:

1. Allow end users (via a mechanism readily accessible from the desktop or Start menu such as an Add/Remove icon) and OEMs (via standard preinstallation kits) to enable or remove access to each Microsoft Middleware Product or Non-Microsoft Middleware Product by

(a) displaying or removing icons, shortcuts, or menu entries on the desktop or Start menu, or anywhere else in a Windows Operating System Product where a list of icons, shortcuts, or menu entries for applications are gener-ally displayed, except that Microsoft may restrict the display of icons, shortcuts, or menu entries for any product in any list of such icons, short-cuts, or menu entries specified in the Windows documentation as being limited to products that provide particular types of functionality, provided that the restrictions are non-discriminatory with respect to non-Microsoft and Microsoft products; and

(b) enabling or disabling automatic invocations pursuant to Section III.C.3 of this Final Judgment that are used to launch Non-Microsoft Middleware Products or Microsoft Middleware Products. The mechanism shall offer the end user a separate and unbiased choice with respect to enabling or re-moving access (as described in this subsection III.H.1) and altering default invocations (as described in the following subsection III.H.2) with regard to each such Microsoft Middleware Product or Non-Microsoft Middleware Product and may offer the end-user a separate and unbiased choice of en-abling or removing access and altering default configurations as to all Microsoft Middleware Products as a group or all Non-Microsoft Middle-ware Products as a group.

2. Allow end users (via a mechanism readily available from the desktop or Start menu), OEMs (via standard OEM preinstallation kits), and Non-Microsoft Middleware Products (via a mechanism which may, at Microsoft’s option, re-quire confirmation from the end user) to designate a Non-Microsoft Middle-ware Product to be invoked in place of that Microsoft Middleware Product (or vice versa) in any case where the Windows Operating System Product would otherwise launch the Microsoft Middleware Product in a separate Top-Level Window and display either (i) all of the user interface elements or (ii) the Trademark of the Microsoft Middleware Product.

3. Ensure that a Windows Operating System Product does not (a) automatically alter an OEM’s configuration of icons, shortcuts or menu entries installed or displayed by the OEM pursuant to Section III.C of this Final Judgment with-out first seeking confirmation from the user and (b) seek such confirmation


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from the end user for an automatic (as opposed to user-initiated) alteration of the OEM’s configuration until 14 days after the initial boot up of a new Per-sonal Computer. Microsoft shall not alter the manner in which a Windows Operating System Product automatically alters an OEM’s configuration of icons, shortcuts or menu entries other than in a new version of a Windows Op-erating System Product.

Notwithstanding the foregoing Section III.H.2, the Windows Operating System Product may invoke a Microsoft Middleware Product in any instance in which:

1. that Microsoft Middleware Product would be invoked solely for use in in-teroperating with a server maintained by Microsoft (outside the context of general Web browsing), or

2. that designated Non-Microsoft Middleware Product fails to implement a reasonable technical requirement (e.g., a requirement to be able to host a particular ActiveX control) that is necessary for valid technical reasons to supply the end user with functionality consistent with a Windows Operat-ing System Product, provided that the technical reasons are described in a reasonably prompt manner to any ISV that requests them.

Microsoft’s obligations under this Section III.H as to any new Windows Operating Sys-tem Product shall be determined based on the Microsoft Middleware Products which ex-ist seven months prior to the last beta test version (i.e., the one immediately preceding the first release candidate) of that Windows Operating System Product.

I. Microsoft shall offer to license to ISVs, IHVs, IAPs, ICPs, and OEMs any intel-lectual property rights owned or licensable by Microsoft that are required to exercise any of the options or alternatives expressly provided to them under this Final Judgment, pro-vided that

1. all terms, including royalties or other payment of monetary consideration, are reasonable and non-discriminatory;

2. the scope of any such license (and the intellectual property rights licensed thereunder) need be no broader than is necessary to ensure that an ISV, IHV, IAP, ICP or OEM is able to exercise the options or alternatives ex-pressly provided under this Final Judgment (e.g., an ISV’s, IHV’s, IAP’s, ICP’s and OEM’s option to promote Non-Microsoft Middleware shall not confer any rights to any Microsoft intellectual property rights infringed by that Non-Microsoft Middleware);

3. an ISV’s, IHV’s, IAP’s, ICP’s, or OEM’s rights may be conditioned on its not assigning, transferring or sublicensing its rights under any license granted under this provision;

4. the terms of any license granted under this section are in all respects con-sistent with the express terms of this Final Judgment; and

5. an ISV, IHV, IAP, ICP, or OEM may be required to grant to Microsoft on reasonable and nondiscriminatory terms a license to any intellectual prop-erty rights it may have relating to the exercise of their options or alterna-


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tives provided by this Final Judgment; the scope of such license shall be no broader than is necessary to insure that Microsoft can provide such op-tions or alternatives.

Beyond the express terms of any license granted by Microsoft pursuant to this section, this Final Judgment does not, directly or by implication, estoppel or otherwise, confer any rights, licenses, covenants or immunities with regard to any Microsoft intellectual prop-erty to anyone.

* * * * *

IV. Compliance and Enforcement Procedures

A. Enforcement Authority

1. The Plaintiffs shall have exclusive responsibility for enforcing this Final Judgment. Without in any way limiting the sovereign enforcement author-ity of each of the plaintiff States, the plaintiff States shall form a commit-tee to coordinate their enforcement of this Final Judgment. A plaintiff State shall take no action to enforce this Final Judgment without first con-sulting with the United States and with the plaintiff States’ enforcement committee.

* * * * *

4. The Plaintiffs shall have the authority to seek such orders as are necessary from the Court to enforce this Final Judgment, provided, however, that the Plaintiffs shall afford Microsoft a reasonable opportunity to cure alleged violations of Sections III.C, III.D, III.E and III.H, provided further that any action by Microsoft to cure any such violation shall not be a defense to enforcement with respect to any knowing, willful or systematic viola-tions.

B. Appointment of a Technical Committee

1. Within 30 days of entry of this Final Judgment, the parties shall create and recommend to the Court for its appointment a three-person Technical Committee (“TC”) to assist in enforcement of and compliance with this Final Judgment.

2. The TC members shall be experts in software design and programming. No TC member shall have a conflict of interest that could prevent him or her from performing his or her duties under this Final Judgment in a fair and unbiased manner. Without limitation to the foregoing, no TC member (absent the agreement of both parties):

a. shall have been employed in any capacity by Microsoft or any competitor to Microsoft within the past year, nor shall she or he be so employed during his or her term on the TC;

b. shall have been retained as a consulting or testifying expert by any person in this action or in any other action adverse to or on behalf of Microsoft; or


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c. shall perform any other work for Microsoft or any competitor of Microsoft for two years after the expiration of the term of his or her service on the TC.

3. Within 7 days of entry of this Final Judgment, the Plaintiffs as a group and Microsoft shall each select one member of the TC, and those two members shall then select the third member. …

4. Each TC member shall serve for an initial term of 30 months. At the end of a TC member’s initial 30-month term, the party that originally selected him or her may, in its sole discretion, either request re-appointment by the Court to a second 30-month term or replace the TC member ….

* * * * *

6. Promptly after appointment of the TC by the Court, the United States shall enter into a Technical Committee services agreement (“TC Services Agreement”) with each TC member that grants the rights, powers and au-thorities necessary to permit the TC to perform its duties under this Final Judgment. Microsoft shall indemnify each TC member and hold him or her harmless against any losses, claims, damages, liabilities or expenses arising out of, or in connection with, the performance of the TC’s duties, except to the extent that such liabilities, losses, damages, claims, or ex-penses result from misfeasance, gross negligence, willful or wanton acts, or bad faith by the TC member. The TC Services Agreements shall in-clude the following.

a. The TC members shall serve, without bond or other security, at the cost and expense of Microsoft on such terms and conditions as the Plaintiffs approve, including the payment of reasonable fees and expenses.

b. The TC Services Agreement shall provide that each member of the TC shall comply with the limitations provided for in Section IV.B.2 above.

7. Microsoft shall provide the TC with a permanent office, telephone, and other office support facilities at Microsoft’s corporate campus in Red-mond, Washington. Microsoft shall also, upon reasonable advance notice from the TC, provide the TC with reasonable access to available office space, telephone, and other office support facilities at any other Microsoft facility identified by the TC.

8. The TC shall have the following powers and duties:

a. The TC shall have the power and authority to monitor Microsoft’s compliance with its obligations under this final judgment.

b. The TC may, on reasonable notice to Microsoft:

(i) interview, either informally or on the record, any Microsoft personnel, who may have counsel present; any such inter-view to be subject to the reasonable convenience of such


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personnel and without restraint or interference by Microsoft;

(ii) inspect and copy any document in the possession, custody or control of Microsoft personnel;

(iii) obtain reasonable access to any systems or equipment to which Microsoft personnel have access;

(iv) obtain access to, and inspect, any physical facility, building or other premises to which Microsoft personnel have ac-cess; and

(v) require Microsoft personnel to provide compilations of documents, data and other information, and to submit re-ports to the TC containing such material, in such form as the TC may reasonably direct.

c. The TC shall have access to Microsoft’s source code, subject to the terms of Microsoft’s standard source code Confidentiality Agree-ment … The TC may study, interrogate and interact with the source code in order to perform its functions and duties, including the handling of complaints and other inquiries from non-parties.

d. The TC shall receive complaints from the Compliance Officer, third parties or the Plaintiffs and handle them in the manner speci-fied in Section IV.D below.

e. The TC shall report in writing to the Plaintiffs every six months until expiration of this Final Judgment the actions it has undertaken in performing its duties pursuant to this Final Judgment, including the identification of each business practice reviewed and any rec-ommendations made by the TC.

f. Regardless of when reports are due, when the TC has reason to believe that there may have been a failure by Microsoft to comply with any term of this Final Judgment, the TC shall immediately notify the Plaintiffs in writing setting forth the relevant details.

g. TC members may communicate with non-parties about how their complaints or inquiries might be resolved with Microsoft, so long as the confidentiality of information obtained from Microsoft is maintained.

h. The TC may hire at the cost and expense of Microsoft, with prior notice to Microsoft and subject to approval by the Plaintiffs, such staff or consultants … as are reasonably necessary for the TC to carry out its duties and responsibilities under this Final Judgment. The compensation of any person retained by the TC shall be based on reasonable and customary terms commensurate with the indi-vidual’s experience and responsibilities.


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i. The TC shall account for all reasonable expenses incurred, including agreed upon fees for the TC members’ services, subject to the approval of the Plaintiffs. …

9. Each TC member, and any consultants or staff hired by the TC, shall sign a confidentiality agreement prohibiting disclosure of any information ob-tained in the course of performing his or her duties as a member of the TC or as a person assisting the TC to anyone other than Microsoft, the Plain-tiffs, or the Court. …

10. No member of the TC shall make any public statements relating to the TC’s activities.

C. Appointment of a Microsoft Internal Compliance Officer

1. Microsoft shall designate, within 30 days of entry of this Final Judgment, an internal Compliance Officer who shall be an employee of Microsoft with responsibility for administering Microsoft’s antitrust compliance pro-gram and helping to ensure compliance with this Final Judgment.

2. The Compliance Officer shall supervise the review of Microsoft’s activi-ties to ensure that they comply with this Final Judgment. He or she may be assisted by other employees of Microsoft.

* * * * *

D. Voluntary Dispute Resolution

1. Third parties may submit complaints concerning Microsoft’s compliance with this Final Judgment to the Plaintiffs, the TC or the Compliance Offi-cer.

* * * * *

V. Termination

A. Unless this Court grants an extension, this Final Judgment will expire on the fifth anniversary of the date it is entered by the Court.

B. In any enforcement proceeding in which the Court has found that Microsoft has engaged in a pattern of willful and systematic violations, the Plaintiffs may apply to the Court for a one-time extension of this Final Judgment of up to two years, together with such other relief as the Court may deem appropriate.

VI. Definitions

A. “Application Programming Interfaces (APIs)” means the interfaces, including any associated callback interfaces, that Microsoft Middleware running on a Windows Operating System Product uses to call upon that Windows Operating System Product in order to obtain any services from that Windows Operating System Product.

B. “Communications Protocol” means the set of rules for information exchange to accomplish predefined tasks between a Windows Operating System Product and a server operating system product connected via a network, including, but not lim-ited to, a local area network, a wide area network or the Internet. These rules


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govern the format, semantics, timing, sequencing, and error control of messages exchanged over a network.

C. “Consideration” means any monetary payment or the provision of preferential li-censing terms; technical, marketing, and sales support; enabling programs; prod-uct information; information about future plans; developer support; hardware or software certification or approval; or permission to display trademarks, icons or logos.

D. “Covered OEMs” means the 20 OEMs with the highest worldwide volume of li-censes of Windows Operating System Products reported to Microsoft in Micro-soft’s fiscal year preceding the effective date of the Final Judgment. The OEMs that fall within this definition of Covered OEMs shall be recomputed by Microsoft as soon as practicable after the close of each of Microsoft’s fiscal years.

E. “Documentation” means all information regarding the identification and means of using APIs that a person of ordinary skill in the art requires to make effective use of those APIs. Such information shall be of the sort and to the level of specificity, precision and detail that Microsoft customarily provides for APIs it documents in the Microsoft Developer Network (“MSDN”).

F. “IAP” means an Internet access provider that provides consumers with a connec-tion to the Internet, with or without its own proprietary content.

G. “ICP” means an Internet content provider that provides content to users of the In-ternet by maintaining Web sites.

H. “IHV” means an independent hardware vendor that develops hardware to be in-cluded in or used with a Personal Computer running a Windows Operating Sys-tem Product.

I. “ISV” means an entity other than Microsoft that is engaged in the development or marketing of software products.

J. “Microsoft Middleware” means software code that1. Microsoft distributes separately from a Windows Operating System Prod-

uct to update that Windows Operating System Product;2. is Trademarked;3. provides the same or substantially similar functionality as a Microsoft

Middleware Product; and4. includes at least the software code that controls most or all of the user in-

terface elements of that Microsoft Middleware.Software code described as part of, and distributed separately to update, a Microsoft Middleware Product shall not be deemed Microsoft Middleware unless identified as a new major version of that Microsoft Middleware Product. A major version shall be identified by a whole number or by a number with just a single digit to the right of the decimal point.

K. “Microsoft Middleware Product” means


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1. the functionality provided by Internet Explorer, Microsoft’s Java Virtual Machine, Windows Media Player, Windows Messenger, Outlook Express and their successors in a Windows Operating System Product, and

2. for any functionality that is first licensed, distributed or sold by Microsoft after the entry of this Final Judgment and that is part of any Windows Op-erating System Producta. Internet browsers, email client software, networked audio/video

client software, instant messaging software orb. functionality provided by Microsoft software that C

i. is, or in the year preceding the commercial release of any new Windows Operating System Product was, distributed separately by Microsoft (or by an entity acquired by Microsoft) from a Windows Operating System Product;

ii. is similar to the functionality provided by a Non-Microsoft Middleware Product; and

iii. is Trademarked.Functionality that Microsoft describes or markets as being part of a Microsoft Middleware Product (such as a service pack, upgrade, or bug fix for Internet Ex-plorer), or that is a version of a Microsoft Middleware Product (such as Internet Explorer 5.5), shall be considered to be part of that Microsoft Middleware Prod-uct.

L. “Microsoft Platform Software” means (i) a Windows Operating System Product and/or (ii) a Microsoft Middleware Product.

M. “Non-Microsoft Middleware” means a non-Microsoft software product running on a Windows Operating System Product that exposes a range of functionality to ISVs through published APIs, and that could, if ported to or made interoperable with, a non-Microsoft Operating System, thereby make it easier for applications that rely in whole or in part on the functionality supplied by that software product to be ported to or run on that non-Microsoft Operating System.

N. “Non-Microsoft Middleware Product” means a non-Microsoft software product running on a Windows Operating System Product (i) that exposes a range of func-tionality to ISVs through published APIs, and that could, if ported to or made in-teroperable with, a non-Microsoft Operating System, thereby make it easier for applications that rely in whole or in part on the functionality supplied by that soft-ware product to be ported to or run on that non-Microsoft Operating System, and (ii) of which at least one million copies were distributed in the United States within the previous year.

O. “OEM” means an original equipment manufacturer of Personal Computers that is a licensee of a Windows Operating System Product.

P. “Operating System” means the software code that, inter alia, (i) controls the allo-cation and usage of hardware resources (such as the microprocessor and various peripheral devices) of a Personal Computer, (ii) provides a platform for develop-ing applications by exposing functionality to ISVs through APIs, and (iii) supplies


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a user interface that enables users to access functionality of the operating system and in which they can run applications.

Q. “Personal Computer” means any computer configured so that its primary purpose is for use by one person at a time, that uses a video display and keyboard (whether or not that video display and keyboard is included) and that contains an Intel x86 compatible (or successor) microprocessor. Servers, television set top boxes, handheld computers, game consoles, telephones, pagers, and personal digital as-sistants are examples of products that are not Personal Computers within the meaning of this definition.

R. “Timely Manner” means at the time Microsoft first releases a beta test version of a Windows Operating System Product that is distributed to 150,000 or more beta testers.

S. “Top-Level Window” means a window displayed by a Windows Operating Sys-tem Product that (a) has its own window controls, such as move, resize, close, minimize, and maximize, (b) can contain sub-windows, and (c) contains user in-terface elements under the control of at least one independent process.

T. “Trademarked” means distributed in commerce and identified as distributed by a name other than Microsoft® or Windows® that Microsoft has claimed as a trade-mark or service mark…. Any product distributed under descriptive or generic terms or a name comprised of the Microsoft® or Windows® trademarks together with descriptive or generic terms shall not be Trademarked as that term is used in this Final Judgment. Microsoft hereby disclaims any trademark rights in such de-scriptive or generic terms apart from the Microsoft® or Windows® trademarks, and hereby abandons any such rights that it may acquire in the future.

U. “Windows Operating System Product” means the software code (as opposed to source code) distributed commercially by Microsoft for use with Personal Com-puters as Windows 2000 Professional, Windows XP Home, Windows XP Profes-sional, and successors to the foregoing, including the Personal Computer versions of the products currently code named “Longhorn” and “Blackcomb” and their successors, including upgrades, bug fixes, service packs, etc. The software code that comprises a Windows Operating System Product shall be determined by Microsoft in its sole discretion.