Microsoft: Appeals Court Decision Rejects Government’s Limits on Innovation

REDMOND, Wash., June 23, 1998 — A three-judge United States Appeals Court panel Tuesday ruled in favor of Microsoft in its appeal of a district court decision concerning Microsoft’s Windows operating system software.

The Court overturned a preliminary injunction issued last December that ordered Microsoft to give personal computer manufacturers the option of licensing Microsoft’s Windows 95 operating system without its Internet Explorer software.

In overturning the injunction, the panel stated that Microsoft has
“clearly”
demonstrated
“benefits to its integrated design”
of Windows 95 with Web browsing functionality. The Court recognized that
“integration of functionality into the operating system can bring benefits”
for customers. As the Court explained,
“Antitrust scholars have long recognized the undesirability of having courts oversee product design, and any dampening of technological innovation would be at cross-purposes with antitrust law.”

“This decision is good news for consumers and the entire computer industry,”
said Bob Herbold, Microsoft executive vice president and chief operating officer.
“Our integration of Internet technology into Windows makes our operating system and the personal computer a more powerful and useful tool for our customers.”

Added William H. Neukom, Microsoft senior vice president for law and corporate affairs,
“We’re gratified the Appeals Court has agreed with Microsoft that there was no basis for the entry of a preliminary injunction against our efforts to add new Internet capabilities to Windows. The Court today has helped focus the legal issues squarely where they belong, by concentrating on whether a product innovation brings new benefits to consumers. We have long been confident that our Internet improvements to both Windows 95 and Windows 98 meet this test.”

The Appeals Court action effectively rejects the main claim that the Government made in its October 1997 lawsuit: that Windows and Internet Explorer are separate products. In its ruling today, the Appeals Court noted that
“the Department has not shown a reasonable probability of success on the merits,”
and added:
“Microsoft has clearly met the burden of ascribing facially plausible benefits to its integrated design as compared to an operating system combined with a stand-alone browser such as Netscape’s Navigator …[W]e are inclined to conclude that the Windows 95/IE package is a genuine integration; consequently, [the Consent Decree] does not bar Microsoft from offering it as one product.”

The Court also observed that,
“[T]he limited competence of courts to evaluate high-tech product designs and the high cost of error should make them wary of second-guessing the claimed benefits of a particular design decision.”
Therefore, it concluded that courts should avoid trying to balance the potential benefits and costs associated with a particular product design feature, but rather should focus merely on
“whether there is a plausible claim that it brings some advantage.”

“We’re pleased that the Appeals Court has affirmed our ability to innovate on behalf of consumers, and we are hopeful that today’s decision will help us to resolve the outstanding issues between the government and Microsoft,”
Neukom said.
“Many of the government’s arguments in the lawsuit filed last month are identical to their arguments in the case just decided in favor of Microsoft.”

Additionally, the Appeals Court reversed the trial court’s referral of the case to a special master, a broad delegation of the judicial authority of federal court that Microsoft had argued was impermissible under federal rules. On this point, the Appeals Court stated that the reference to a master was
“either a clear abuse of discretion or an exercise of wholly non-existent discretion.”

Herbold said,
“I am gratified that the Appeals Court has again upheld our right to innovate and integrate new features into Windows. This decision helps to vindicate the right of Microsoft and technology leaders throughout our economy to develop better products for our customers. Every day since Microsoft was founded 23 years ago, we have listened to our customers and worked constantly to improve our products so they, in turn, improve people’s lives. This decision will enable both Microsoft and the broader industry to move forward to produce the next great wave of innovation for work, home, and school.”

The case stems from a complaint brought by the Department of Justice in October 1997, which alleged that Microsoft had violated the terms of a 1995 consent decree by combining the developing Windows 95 operating system to include Internet Explorer browser technology. The Justice Department alleged that the browser was a separate product, and that Microsoft was illegally tying the browser to Windows 95 in licenses with computer manufacturers.

Microsoft denied the Department’s accusations, pointing out that Internet Explorer technology had been an integral feature in Windows 95 since the first copies of the operating system were shipped to computer manufacturers in July 1995. Since then, numerous independent software developers have made use of the browser components within Windows 95 to enhance their own programs, a point that the Court took note of in its decision today. The case is now remanded back to Judge Jackson for further consideration.

Founded in 1975, Microsoft (Nasdaq
“MSFT”
) is the worldwide leader in software for personal computers. The company offers a wide range of products and services for business and personal use, each designed with the mission to make it easier and more enjoyable for people to take advantage of the full power of personal computing every day.

Microsoft and Windows are either registered trademarks or trademarks of Microsoft Corp. in the United States and/or other countries.

Other product and company names herein may be trademarks of their respective owners.

For more information, press only:

Mark Murray, Microsoft, (425) 936-3306, mmurray@microsoft.com

Jim Cullinan, Microsoft, (425) 703-5913, jcull@microsoft.com

Heidi Rothauser, Waggener Edstrom, (425) 637-9097 x5125, heidir@wagged.com

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