The Appeals Court Ruling: What's in it for Linux?

For Linux and free software in general, this isn't an academic question. Microsoft has clearly decided to play hardball with Linux [1], and that isn't good news; after all, this is a company that does business by "cutting its competitors' legs off", as one industry observer recently put it. If the appeals court did its job, it finally clarified what a company possessing a monopoly may legally do and what it may not do in the information technology marketplace. If the court did its job really well, it defined how to deal with antitrust issues in a high-technology market in a way that doesn't threaten to stifle technological innovation. The good news is this: the appeals court may have succeeded on both counts. Maybe, just maybe, Microsoft's executives will figure out that the game is up.

Of course, the tale isn't fully told yet; the case could go to the Supreme Court. Even if the appeals court ruling stands, Microsoft could simply choose to ignore the rules and try to squash Linux by whatever means necessary. Still, it's worth considering exactly how the ruling alters the legal terrain: if Microsoft is engaging in potentially illegal actions against the Free Software community, it's up to the community to sound the alarm. For free software advocates outside the US, it's equally important to grasp what's at stake; antitrust regulators in Europe and elsewhere are waiting for US leadership.

In this article, I'll briefly summarize what I believe to be the core of the appeals court's innovative rule-making in this case. Next, I'll discuss a specific action undertaken by Microsoft only last week: the release of a beta version of Microsoft's "embraced and extended" toolkit for creating "smart" web forms, part of its .NET strategy, that forbids independent software vendors (ISVs) from using free software tools or distributing free software with toolkit-developed code. To put the issue posed by this license in plain English, the license essentially says that you can't use free software to develop a smart web forms page that interacts with Microsoft's software, and you can't include free software when you distribute a smart web form. If smart web forms become widely used on the Internet, as Microsoft clearly hopes, the effect could place ISVs in a position in which they are forced to choose between using GPL-licensed tools and writing .NET software for their customers.

While it's close to impossible to predict in advance how a given court will rule on a technological issue, the Free Software community has every right to ask whether this action crosses the line between legal (competitive) and illegal (exclusionary) actions, as the appeals court has innovatively defined such actions.

Here's some quick background. Under Section 2 of the Sherman Act, the cornerstone of US antitrust legislation, it's illegal for a company possessing a monopoly in a given market to "willfully acquire or maintain" monopoly power.

"Willful" acquisition or maintenance is defined in contrast to "growth or development as a consequence of a superior product, business acumen, or historic accident" (15 U.S.C. § 2). To constitute willful acquisition or maintenance, a specific corporate action must be exclusionary rather than merely competitive; an exclusionary act reduces social welfare by destroying competition itself, while a competitive act enhances social welfare, even if a specific competitor is destroyed in the process. That's a high standard, one that, according to the appeals court, has been met in this case. The appeals court agreed with the lower court that Microsoft indeed (1) possesses a monopoly in the PC operating system market and (2) engaged in a systematic pattern of illegal, exclusionary and sometimes outright deceptive actions undertaken for no other reason than to maintain its monopoly.

In short, Microsoft lost the core of the case, and this is a court that favored Microsoft in the past. Still, the appeals court didn't buy all of the lower court's findings. In particular, the appeals court found that merely tying separate products together, as Microsoft did with Internet Explorer and Windows 98, or developing incompatible products, as the company did with its Java virtual machine (JVM) for Windows, is not necessarily illegal even for a monopoly.

In considering whether incompatible products or product bundling constitute unlawful acts, the appeals court was mindful of the potential that the courts could stifle technological innovation. An incompatible product may represent a genuine technological advance. Product bundling may benefit consumers by lowering distribution and transaction costs. If all product bundling by monopolies was illegal, the court explained, consumers--including the terminally computer illiterate--might have been forced into absurdities such as purchasing all the various components (the keyboard, the CPU, etc.) from separate companies.

Even if carried out by a company possessing monopoly power, the appeals court reasoned, such actions are not necessarily anticompetitive; they are anticompetitive only when it can be shown that (1) there is no pro-competitive justification for the new product or the tying, such as greater efficiency, higher speed or reduced transaction costs; (2) the incompatibility or tying is introduced for no other reason than to destroy a competitor and (3) the action succeeded, that is, it materially reduced or eliminated competition. These are strict standards and, as the court explains them, I believe they are reasonable ones, considering the dangers involved in trying to regulate a fast-changing technological market. Under the appeals court's ruling, most of Microsoft's "embrace and extend" actions are probably quite legal unless it can be shown that they have no genuinely pro-competitive justification.

The appeals court's reversal of the findings regarding Microsoft's JVM for Windows, a Java virtual machine (interpreter) that is incompatible with Sun's offering, provides a case in point. The evidence clearly shows that Microsoft developed the Windows JVM in order to "pollute" Java and prevent Sun from developing the language to the point where Java-based applications could compete with the Windows application pool. However, Microsoft's JVM allows compatible Java applications to run faster than does Sun's. For this reason, the appeals court rejected the lower court's finding that the Windows JVM's incompatibilities, in themselves, are illegal under the Sherman Act.

Similarly, the appeals court rejected the lower court's finding that Microsoft violated the Sherman Act by tying Internet Explorer to Windows 98. Bundling browser technology with the operating system is an excellent and beneficial idea, one that has been emulated by the KDE and GNOME developers. To hold that bundling is illegal per se, without examining the total situation, carries with it the very real threat of stifling technological innovation.