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

by Bryan Pfaffenberger

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.

Understanding US Antitrust Law

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.

Is "Embrace and Extend" Inherently Anticompetitive?

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.

So What is Illegal?

According to the appeals court, introduced incompatibilities and product bundling aren't inherently illegal. What is illegal under the Sherman Act, however, is any exclusionary action undertaken by a monopoly that uses the introduced incompatibilities or bundling as a platform for engaging in anticompetitive actions or relationships. For example, there's nothing inherently illegal about bundling Internet Explorer with Microsoft Windows, the court ruled. It is illegal, however, for Microsoft to have excluded Internet Explorer from the Add/Remove Programs utility and combined code related to browsing and other code in the same files, so that any attempt to delete the files containing Internet Explorer would, at the same time, cripple the operating system. These actions were undertaken, the court concluded, for no other reason than to maintain Microsoft's monopoly position in the operating system market.

To illustrate the way the court drew this distinction, consider Microsoft's "First Wave" agreements, in which the company required independent software vendors (ISVs) to make Microsoft's JVM the default in any software they developed. In addition, these deals were deceptive and manipulative. At the same time that Microsoft was telling ISVs that the company intended to cooperate with Sun, it was secretly introducing incompatibilities that, taken together, would ensure that Java applications written with Microsoft's tools would run only Windows-equipped computers. The appeals court held that these deals were anticompetitive and illegal; they were undertaken for no other reason than to destroy Sun's marketing plan for Java--and Microsoft succeeded in its aim.

Microsoft's anticompetitive actions with respect to ISVs were paralleled by the firm's behavior with a key market ally, Intel, which was developing its own cross-platform Java interpreter. Microsoft threatened to retaliate against Intel unless the project was dropped, and in 1997, Intel complied. The appeals court held that Microsoft's actions with respect to Intel were also illegal under the Sherman Act. The appeals court's reasoning is admirably clear. For a company possessing monopoly power in a given market, it isn't necessarily illegal to introduce new, innovative technology, even if it's incompatible with other products or combines existing products in a new way. But it's quite illegal under the Sherman Act for a monopoly to engage in anticompetitive, deceptive or retaliatory practices that have no credible justification other than to squash competitors.

Toward .NET: What's Legal and What Isn't?

Coming as it does on the dawn of Microsoft's .NET and Hailstorm initiatives, the appeals court decision couldn't be more timely. One reading of the decision is that it's good news for Microsoft. As Microsoft executives enthused after learning of the decision, the court has clearly raised the bar for Microsoft's "embrace and extend" policy. You can bet that Windows XP (and .NET generally) will take the "embrace and extend" strategy to new highs--or new lows. The question is, will Microsoft be content to introduce innovative new technology, or will it continue to combine innovation with anticompetitive marketplace relationships, including exclusionary licensing, deception and threats of retaliation?

I wouldn't place bets on a change of heart. (As an industry observer recently noted, "Tigers don't change their stripes.") A New York Times editorial noted with concern that Microsoft has already engaged in talks with America Online and other firms in an effort to provide them with preferential access to Windows XP, in exchange for favoring Microsoft's products over competitors. And just last week, Microsoft released a beta version of key .NET software, the Mobile Internet Kit, that includes what would appear to be patently anticompetitive and exclusionary licensing restrictions aimed squarely at Microsoft's latest target: free software.

Microsoft to ISVs: Don't Use "Potentially Viral Software"

The restrictions in question are found in an End User License Agreement (EULA) for a downloadable beta version of Microsoft's Mobile Internet Toolkit, part of the company's still-developing .NET strategy. The license requires developers to refrain from using free software tools [2] to develop Mobile Internet software; it also requires them to refrain from distributing developed software with free software programs [3].

What's at stake here? Plenty. The Mobile Internet Toolkit is an "embraced and extended" version of HTML forms; with Toolkit-developed software (and the requisite server extensions), web pages will display forms that are far more interactive and visually attractive than the ones you're used to seeing on the Web.

Is this license illegally anticompetitive? Using the appeals court decision as guidance, one could argue that it all boils down to whether the licensing provision is included for no other reason than to squash Microsoft's competitors.

To be sure, Microsoft has a ready explanation for the anti-free-software provisions in this EULA, and they're contained in the EULA itself. Free software, in Microsoft's view, is "potentially viral software", that could "infect" Microsoft's software or give some third-party rights to Microsoft's intellectual property; the company could argue that it included this language for self-defense.

But this is balderdash. As the GPL FAQ states, merely developing software with free software tools does not affect the licensing of the developed software. Furthermore, distributing GPL-licensed programs with commercial code, even if done in a fashion that violates the GPL, has absolutely no effect whatsoever on the copyright or licensing of the commercial program. Lastly, you cannot steal someone else's copyrighted commercial code, include it in a derivative program developed from GPL code and then claim the GPL nullifies the commercial program's copyright. Microsoft's position on the GPL can be best described in one word: deceptive. (Sound familiar?)

The absurdity of Microsoft's contentions with respect to the GPL are deliciously lampooned in John Lettice's "Open Source Terror Stalks Microsoft's Lawyers" (The Register, 27 June 2001, available on-line at If Microsoft's position on the GPL's legal implications is correct, Lettice notes, Microsoft had better release the source code for NT 4.0, since the NT 4.0 Resource Kit reportedly contains POSIX utilities subject to the GPL.


The appeals court's decision proves very handy indeed when it comes to figuring out which of Microsoft's actions are legal and which might represent yet another violation of the Sherman Act.

<il>Probably legal: The monopoly introduces new software that's genuinely innovative or more efficient or faster, even if it's incompatible or bundles previous products in a way that puts a competitor out of business.

<il>Probably illegal: The monopoly uses technical "dirty tricks", exclusionary licensing provisions, industry alliances or threats of retaliation that are clearly anticompetitive and have no conceivable or defensible rationale other than squashing a competitor.

The Mobile Internet Kit's EULA appears to fall into the latter category. If so, it's yet another instance of a more general pattern of anticompetitive, deceptive actions that has been undertaken by Microsoft--a pattern that led a strongly pro-business appeals court to rule unanimously that the company has systematically violated the Sherman Act.

Bryan Pfaffenberger is Associate Professor of Technology, Culture and Communication at the University of Virginia, in Charlottesville, VA. You can visit his web page, and you can browse previous Currents articles under the Currents heading here. Bryan cautions that his schedule rarely permits him to reply to all the e-mail he receives concerning his Linux Journal articles, but they're appreciated nonetheless.


[1] Properly speaking, the term "Linux" refers to the kernel originally developed by Linus Torvalds beginning in 1991; the operating system that is popularly known as "Linux" should be called GNU/Linux (for more information, see the Linux and GNU Project web site).

[2] According to the EULA, such software "includes, without limitation, software licensed or distributed under any of the following licenses or distribution models, or licenses or distribution models similar to any of the following: (A) GNU's General Public License (GPL) or Lesser/Library GPL (LGPL), (B) The Artistic License (e.g., PERL), (C) the Mozilla Public License, (D) the Netscape Public License, (E) the Sun Community Source License (SCSL), and (F) the Sun Industry Standards License (SISL)" (seen at, June 29, 2001).

[3] "Recipient's license rights to the Software are conditioned upon Recipient (i) not distributing such Software, in whole or in part, in conjunction with Potentially Viral Software [including GPL-licensed software]; and (ii) not using Potentially Viral Software (e.g. tools) to develop Recipient software which includes the Software, in whole or in part" (seen at, June 29, 2001).

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