News
Antitrust & Trade Reg.
Jun. 24, 2000
Microsoft: Why the Mediation Crashed
A Roundtable Discussion: Anyone who has used a computer, played the stock market or even mildly kept in the news loop has heard about the historic antitrust suit by the federal government and 19 states against corporate giant Microsoft Corp. United States v. Microsoft Corp., 98-1232 (U.S.D.C. filed Oct. 20, 1997). This may be a reflection of the expansive reach that Microsoft has across the world, the economic interests tied to the outcome of the case, the notoriety of multibillionaire Microsoft founder Bill Gates or the fact that much of the public is rooting for the "bad guy" Microsoft despite public outcries elsewhere to punish the tyrant company.
People speculating about the outcome were particularly interested in the appointment of Judge Richard Posner, legendary chief judge of the 7th U.S. Circuit Court of Appeals in Chicago, as mediator in the negotiations between Microsoft and government. The hope of settlement after Posner joined the discussions was clear in public opinion polls and in the stock market itself as shares of Microsoft increased in value. As a result, it came as a rather large disappointment when Posner declared on April 1 that the negotiations were at an impasse and that his role in the mediation had ended.
So on the eve of U.S. District Judge Thomas Penfield Jackson's order to split the company in two, Verdicts & Settlements decided to gather a panel of legal experts to discuss how the mediation went awry and what the government and Microsoft should do now to reach a resolution. The following is an edited version of that discussion.
Mediator Selection
Chu: Jackson's selection of Posner to mediate the case was a brilliant decision. He was the perfect person for the job despite the fact that the case did not settle. He commands the respect of all the parties and is well-schooled in antitrust issues.
Shults: Posner's appointment was shrewd. It was designed to take away objections that Microsoft might have had with other mediators and set up a maximum settlement dynamic while the government was attacking Microsoft.
Madigan-Herman: I agree. Judge Posner brought to the table some incredible capabilities, including knowledge of antitrust and economics and the ability to predict how other conservative judges, particularly in the D.C. Circuit, might review Jackson's decisions. He also brings independent stature.
But he might have been assisted by somebody who could structure a negotiation process and take the time to work with the multitude of government entities involved. There are hints in the press that the federal and the state governments were not acting together to engage in a concerted manner with Microsoft. To bring those different government agencies together would require an enormous amount of time, independent of the negotiations with Microsoft. I'm not sure that an appellate judge would have the time for that. It's more like a public policy mediation than it is a typical litigation settlement mediation.
It's not just a question of communication skills - it's knowing how to structure a process with all those different parties, particularly when their agendas consist not only of legal and economic arguments but a whole host of political concerns that may not seem significant to a respected jurist. Take, for example, Posner's attempt to "streamline" the process by excluding the states at some point so that a blueprint of the agreement would be forged, and then allowing them only a short response period. Not surprisingly, the states rebelled.
Kichaven: From a mediation standpoint, when Posner structures a process in which the only affirmative act that the 20 or so state attorneys general - who are very powerful people in their states and want to appear to their constituents as proactively doing something to protect them - can take is to veto a deal and say, "No, it's not strong enough to protect the citizens of our state," it's no surprise that that's what they did.
It strikes me that inexperienced mediators may think they are simplifying the process by taking these potentially troublesome parties and excluding them from the process. It's true that by including all of them, the complexities of the mediation increase geometrically. There are more relationships that have to be managed and more communications that have to be monitored and facilitated. But there's only one thing worse than including them - keeping them away. By trying to make the mediation more streamlined, as you saw in this case, you virtually guaranteed the failure of the process to yield an agreement.
Romero: The underlying question is, does the party with an in-depth knowledge in a particular area of law make the best mediator or best settlement judge in any setting? Not necessarily. The timing of the mediation is also a problem. It is difficult to get government entities to be flexible when Jackson is basically telling Microsoft, "You have lost." Microsoft has no leverage, which makes it much more difficult to settle the case.
Kichaven: Yet the press reports indicate that the Justice Department and Microsoft tentatively agreed to a settlement though the states were not happy with the blueprint that was emerging.
Romero: When you have an antitrust case, do you want a mediator that's an expert in the area or are you looking for someone who's going to bring the parties together and work out their differences?
Chu: I think the key is someone who is skillful and able to get the parties together to work out a settlement. That's more important than having someone with experience in the particular area. However, in many situations, one or more of the parties insist that the mediator have some experience with the area of law involved.
Madigan-Herman: Having substantive expertise in an area can be a wonderful tool for a mediator, particularly if part of what's driving the dispute is different predictions about what the law is or about how a court will rule or, as in the Microsoft matter, about how the economy will respond to structural or conduct changes. But you can't use substance as a substitute for process expertise, particularly when you're dealing with the complexities of a case that bring it outside a normal two-party settlement negotiation.
Shults: The key to any successful mediation is someone who has a real sense of the process and all the constituencies and knows how to bring them to the table. That's a set of negotiating skills that a mediator really needs.
A mediator's substantive expertise becomes relevant when it can move the process towards settlement. You want a person whose background is creating credibility with one party or another that might otherwise be reluctant to even engage in a mediation process, much less actually make it work. I think that was the call Jackson made here. Posner would have that kind of credibility, particularly with Microsoft; therefore, you had a dynamic biased toward settlement.
Kichaven: I wonder whether Posner was driving the case not toward settlement but toward his settlement, as opposed to helping the parties drive the case toward their settlement.
Barriers to Settlement
Romero: Do any of you think that the timing of the mediation, after Jackson issued the findings of fact, had something to do with the likelihood that it would be unproductive? It basically put Microsoft at a disadvantage and made it less likely that the department was going to be more willing to give in. Could making mediation mandatory instead of voluntary have had something to do with the outcome of what happened?
Madigan-Herman: I'm not sure that it was the inability of the Justice Department to make concessions that led to the falling apart of discussions. To the extent that Microsoft will be appealing certain things, it's going to be less the findings of facts and more the laws. To the extent that Jackson may have eliminated some uncertainty, he may have simplified the problem the parties had in terms of predicting what was likely to happen going forward if they didn't settle. So I'm not sure that the timing itself led to the difficulty in the negotiation encountered.
Chu: I don't think Jackson's actual findings had a material impact. Every single press report indicated that the department and the states were doing very well during the trial and that Jackson seemed very inclined to agree with the plaintiffs' position. The real question is not what Jackson was going to do or actually did with his findings of fact, but what would happen ultimately on appeal before the D.C. Circuit or U.S. Supreme Court. There remains great uncertainty for all the parties about what will happen on appeal.
Remedies Issues
Wallin: Jackson strikes me as more radical in his willingness to grant extreme remedies than perhaps most other judges would be, and Microsoft has a history of having obtained reversal of them in the past. That may cause Microsoft to be over confident that it can do it again.
Kichaven: It's not a situation in which Posner came in, flailed around for a short period of time and then walked away. He was effective, at least in so far as Microsoft and the Justice Department tentatively did reach some agreement. So the timing and the mandatoriness did not prejudice Posner's efforts.
If you were advising Microsoft about the whole question of structural vs. conduct relief in the context of this very complicated negotiation, what would you be telling your client?
Chu: I think Microsoft would want something other than a structural remedy. The other remedy its agreed to in the past has served it well in business. Its goal would be to have almost anything but a break up of the company. Its success has been from its large market position in operating systems. Breaking up the company leaves it without the ability to use that large market position as it has in the past.
Romero: What would you recommend to the assistant attorney general of antitrust?
Chu: I would recommend structural remedies. The prior consent decree was not effective. Microsoft is smart and aggressive in how it interprets agreements. One of the reasons the attempted mediation failed had to do with the history. The plaintiffs did not feel that the consent decree entered into several years ago was effective because Microsoft took an aggressive interpretation on what was prohibited and what was permissible. In the more recent past, Microsoft was successful on appeal before the D.C. Circuit. So each side looked at those two points and dug in.
Romero: Some cases have to be tried. The system benefits by the fact that not every case settles. Maybe it is impossible to settle the case because the department would never agree to anything short of a structural remedy.
Shults: If you look at Microsoft's objections to the proposed judgment, it's taking the same aggressive position it did with respect to the consent decree. It's serving notice that it's going to hold the department and the court to the narrow market definition they've used and will not allow anything to overstep the scope of relief that's sought.
Microsoft forgets, given the findings of fact, that it's a monopolist with a rising market share that has engaged in exclusionary and predatory conduct that is, at least in part, responsible for the monopoly. That has historically justified more than simply conduct remedies. It has justified structural remedies when you're dealing with this defined level of market power and market share.
Microsoft has a serious problem now saying, "Oh gee, look at the poor shareholders, look at our employees, look at everybody who loves our operating system and our software. Just basically do the same conduct remedies you did to us in the consent decree. We promise we'll be good boys now and we won't say the aggressive things we've said in the marketplace. We won't punish people who go up against our core businesses anymore."
It doesn't wash. It didn't wash with the judge and I think Microsoft has low credibility with the department. So if I were advising Microsoft, I might say, "Given where we are and what we've done, tough it out and do the best we can do in the marketplace and with the appellate process because we're pretty much in trouble with this judge, this department and, God forbid, the states attorneys general on the structural relief issue."
Madigan-Herman: From a societal perspective, a structural remedy is also highly risky. When you're dealing with antitrust economic issues, such as those raised in this case, your predictions about the future are highly speculative on both sides. So you've got one shot to craft the best possible response in a structural remedy. You could err in many different ways.
One of the big barriers to settlement in this case is that, aside from ideology and beliefs about what is and is not appropriate competitive conduct, each side has genuine but different views about how this will affect consumers, innovation and rival behavior. Nobody's going to be able to really predict what's going to happen when you've got brilliant economic minds on both sides going head to head and not reaching agreement.
Shults: Another obstacle to settlement may have been that in recent years, state antitrust enforcement authorities have been more aggressive than federal. State governments expect to see dramatic relief. They may have felt that they had a legitimate, sovereign place at the table and they didn't have a chance to air that dialogue adequately in the process.
Kichaven: The challenge was to give the states a feeling of greater empowerment while not diminishing the sense of empowerment on the part of the department and Microsoft. Perhaps the first substantive discussions ought to be with the states to find out which of their concerns and interests were not properly addressed.
Romero: Is it possible for Microsoft to settle with the federal government and take its chances with the states? Would you advise that?
Shults: I don't think so. The reality is that the states can nibble you to death and do more than nibble. Ideally, if you're Microsoft, you're looking to restore a degree of predictability and stability to your marketplace, to your customers and to your own ways of doing business. Settling with the federal government only to buy 19 separate lawsuits with the states is not going to help that. It's not going to help you with investors either.
Chu: I certainly agree. The ideal for all concerned would be to have a global settlement. But there are two barriers that existed to the settlement that still exist. One is a fundamental difference in position between the United States and Microsoft in the prior litigation. It includes how the parties see their chances on appeal and how the parties view the possible impact a change in administrations during the upcoming election will have on the overall litigation. There is also the fact that there are over 100 private antitrust suits filed against Microsoft, which creates a disincentive for Microsoft to settle. It will still have other battles to wage on the antitrust front and the potential liability for Microsoft is enormous.
Kichaven: Isn't Microsoft then somehow better off with the government actions settled?
Chu: Yes, but it still creates a disincentive. The pending private suits should also affect Microsoft's thinking about how aggressive it should be in settlement. In other words, if it were to get a sweetheart deal from the governments, that might encourage additional private actions. Many private corporations that have a beef with Microsoft might hold back because of the public enforcement efforts. That has an impact on how the governments may be looking at a settlement of the current litigation.
Madigan-Herman: The flip side of that is, if in fact a settlement is achieved, it would lead to a significant change in how Microsoft functions or does business. It alters the cost-benefit analysis of litigation in those private suits for the companies that would like to see structural change. And you might see some of those disappear. Some folks can't piggyback off the work that's being done by the department attorneys and experts. But you still have the problem of those who are still in it primarily for damages for past conduct. Anyone mediating this dispute would have to distinguish among those suits that are driven primarily by requests for damages vs. those that might be driven by desire for structural change, and figure out how that all works into the calculations.
Shults: There's an advantage, then, for Microsoft to take predictable relief as part of the settlement now, with the department and the states on its side in the private cases, than to go for what Morgan called "the sweetheart deal." You get the federal and state governments to come in as friends of the court in the various private lawsuits and essentially say, "Don't do any more to Microsoft because this settlement we've created is what we, the governments, think is optimum for competition in this industry and for the public interest. If you go further than that, you're going to screw up all the good work we've done and work contrary to the best interest of antitrust law and the economy."
Romero: Would you agree with me that the judge's remedy would be less likely to be upheld on appeal if it is structural, rather than an attempt to change Microsoft's conduct?
Chu: I don't see a dividing line between remedies that are conduct-based as opposed to structural. I think the battle on appeal will have to do with whether the asserted wrongdoing by Microsoft fit with the remedy or remedies the judge ordered. That's one set of issues. Microsoft's argument will be that if its major wrong, as the government alleged, was tying the Internet Explorer browser with its operating system, why should any remedy, whether it's structural or conduct based, go far beyond that? The government will argue that the remedies it suggested are tailored, in fact, to cure the wrongs, and that the lesser remedies proposed by Microsoft would be a mere slap on the wrist, that would ignore the real wrongdoing.
Shults: The findings of fact, of course, go far beyond the tying of the browser to the operating system. The judge repeatedly said that Microsoft was trying to create barriers to application-software advances. Microsoft is teeing this thing up for appeal on another issue, though. That issue is that there is substantial jurisprudence holding that when you get to structuring a remedy in a complex case - where things like the vestiture or other structural relief is contemplated - the court has an obligation to make an appropriate due-process analysis of the remedy, not just the liability.
Microsoft is trying to structure this by submitting the supplemental evidence it would put on if the judge would allow it. Microsoft is trying to suggest that if there is liability, then before the judge can determine whether the remedy is appropriate, he has to understand what the impact of the remedies will be. Therefore, according to Microsoft, since you've not given us an opportunity to put on evidence about that, the appellate court could easily remand the case for further proceedings on the remedy aspect of it.
Chu: That could be a never-ending process because if Jackson allowed a lengthy proceeding based on what Microsoft wants to put forward now, a year later, the company will say, "There is new evidence because the market has changed and now we have another 58 witnesses and 2,000 documents to introduce based on the changes in the marketplace."
Shults: That's what Jackson essentially said by refusing to give Microsoft the additional time. I don't think there's any doubt he is going to enter some kind of structural relief. His framing of the debate, when the government proposed its plan, was, "Why two companies? Why not three?"
Chu: Most observers have said that part of Microsoft's strategy is to draw out the proceedings as long as possible. And if it is successful in drawing out the proceedings, it wins no matter what happens at the end of the road. I find some attractiveness to that point of view.
But I wonder if Microsoft is actually hurt by having a lengthy process. It has some fundamental differences from IBM, Standard Oil and other strong industrial companies of the past. It has the danger of having its greatest asset - the people who work at Microsoft - leave it tomorrow. Microsoft has done a great job of assembling some of the best and brightest in the software industry.
We all like to work at our place of employment because we feel it gives us a lot of self-respect. Maybe we get a lot of respect from those outside our own organization. Well, what's happened to Microsoft? The outside world, instead of having tremendous universal respect for Microsoft, is now viewed, at least by some people inside Microsoft, as being critical of the company and of the people inside. There's been a diminution in perceived respect.
Of course, the stock has gone down a material amount, and that has a significant impact on people's compensation. If Microsoft loses some of its best developers, sales people, marketers and executives, it will be very difficult for the company to reconstruct that organization. That's a real danger as this proceeding is stretched out over a long period of time. I think that wise people see that cutting risk and coming to a resolution at an early stage always has a value in and of itself.
Madigan-Herman: The additional incentive is that Bill Gates is at a point in his life at which he can leave a much greater legacy than simply responding to government suits against Microsoft. He's already left one mark, but he's in a position to leave an additional legacy. Gates is an unusual party, not one we typically see in mediation, because he and his company have so much money and can bear risks nobody else can. He can afford to be motivated by more personal interests. My sense is that Gates has a bigger vision for his place in the world than simply being a litigant in an antitrust suit.
Wallin: That's very profound, but I think what he sees in the government's position to break up Microsoft is so hard and disastrous for his company that he has no choice but to fight. A break up is not something he would ever agree to, and I think he may be confident, maybe unreasonably so, that he can achieve reversal in a higher court as the years go by.
Madigan-Herman: Well, he was on track with the department at some point in the mediations with Posner, but something happened with the states. I think the path to resolution exists. We just need to get them back on it. I think that appealing to Gates' broader vision of his role in the marketplace may be a critical aspect of this.
Romero: You cannot settle when what they're asking you to do is the worst case scenario. All Microsoft can do is try to convince the states' attorneys general who want the break-up that it will never happen and that it's in the best interest of the consumers of those particular states to have a conduct type of remedy rather than a structural remedy.
Shults: The kind of conduct remedies currently in the proposed judgment are relatively extensive. Many of the things identified are highly technical and require a tremendous amount of monitoring to make sure they function the way they're supposed to. Do the two judges here have a sense about how they would want to be in the saddle, monitoring that kind of relief?
Romero: I'd say, "You go do it yourself."
Wallin: I agree. It would be at least a full time job for a master and a master staff. In general, I dislike the idea of court supervision of a corporation because I think it'd go on for at least a decade. I don't ever think it's as satisfactory as some other resolution and I question it, especially in the dynamic situation with Microsoft, a technology business.
Chu: One way to view the divestiture is that it is a simple remedy, not a bad thing or dramatic in a bad way. It doesn't require monitoring; therefore, it is a good remedy. There's always a high value for simplicity. After all, large, medium and small corporations frequently split themselves up. Take AT&T, of recent years, that had its own trivestiture, or Hewlett Packard, which recently split itself.
Shults: The judgment was a reflection of the fact that you couldn't trust Microsoft to obey the law. If the court adopted the structural approach, it could rely on the marketplace a lot more effectively. The marketplace would be setting up new competitors against one another. I think that's the beauty of it and why, in cases dealing with a monopolist that has engaged in predatory conduct, structural relief is not an uncommon remedy.
Wallin: The difference between Microsoft and AT&T is that the telephone company is capital-intensive. You could break it up geographically and quite successfully. But Microsoft is knowledge-intensive. It's a hundred times more difficult to break it up and be certain that you have two or three competitive entities.
Shults: That's Microsoft's big pitch in opposing the structural relief. The company claims that it is too difficult to decide which people go where, that the state governments and the judge don't really understand the technology and how it operates together, that they've defined it wrong and that they don't realize that pieces of the browser technology are necessary for the operating system to work and vice versa. Microsoft also add further layers to it by saying it has subsidiaries in dozens of countries around the world and they operate with different pieces. Therefore, it's a nightmare to try and split them up. You have a lot of laws to take into account, you have tax issues, you have labor issues, and so forth.
All those things are true, but as already observed, it hasn't stopped divestitures or structural relief in the past. Is it going to work to create perfectly competitive companies? No. Is that the job of the law in this area? Probably not. The job is to do the best it can. If it can't do the optimal job, the general answer to that is, "It's the monopolist's fault that we're here and we can't be blamed for the situation that you, monopolist, have created."
Looking Ahead
Madigan-Herman: If I were asked to provide a blueprint for a successful mediation or resolution of this case, I would reconvene the parties and hold private conversations, initially with the lead negotiators for Microsoft and the government, to determine the most critical obstacles to settlement. It appears that progress was made and that Microsoft and the Justice Department were converging on something but the states seemed unhappy with both the process and the blueprint for settlement that the federal government and Microsoft had created. So one of the first orders of business would be to restructure a process to be more inclusive of the states rather than excluding them.
That process would include having the mediator or part of the mediation team work privately with all the government agencies to help them formulate a more unified response to Microsoft's proposals and try to help them with their own differences before re-engaging with Microsoft in negotiations. I would try to bring the outliers closer to center. I would identify the most critical state participants and enlist them to bring the other states along in crafting a coherent and consistent negotiation strategy.
Romero: The timing of the reconvening of the mediation is key. If I were Microsoft, I would hope that Jackson devises the most drastic remedy he could come up with to give me a chance at convincing the Court of Appeals. I would weigh which three-judge panel is going to get the case on appeal since the likelihood of getting a reversal may be dependent on how the panel is constituted. I would go ahead and focus on the key attorneys general who may be an obstacle to settlement. I would advise people that early is better than later, but that it's never too late to settle the case.
Chu: The question is, why have these wise parties with smart principles not been able to resolve their differences when each has had a strong incentive to settle? I do not think that they are misjudging the probability of each of the possible outcomes through litigation. They're probably judging what those probabilities are in a similar fashion.
I think that the easy answer is the right answer. They have a fundamental difference about how the case ought to be resolved. Microsoft will not agree to break up the company. And from the collective view of the plaintiffs, having some kind of meaningful structural remedy is important. I think that situation could change over time. Therefore, my solution is only a partial solution. Revisit the possibility of settlement again and again and again. And sometimes it works and sometimes it doesn't. After all, that's why we have a judicial system to resolve disputes that cannot be resolved privately.
Kichaven: I think that people generally come to a point where they act in their legitimate self-interest by achieving finality, eliminating risk, reaping the media benefits and putting the situation behind them. Figuring out a process that allows the states to feel included, so they feel more respected in the process, may very well work to allow the states' self-interests to come to the forefront. They'll feel a sense of ownership of the solution that finally emerges so that they do not have, what I am inferring they perceived as, an interest in exerting control over the situation in the only way left open to them, by vetoing it.
As mediators, we're taught that persistence is a virtue. Eventually, these self-interests will come to the forefront and the parties themselves will design a solution that reasonably accommodates everyone's interests and allows that premiere goal of finality to be vindicated.
Shults: I don't think the judge is interested in initiating mediation at this stage in the case. It seems that it's up to the parties after the judge issues the relief order. For that reason, who does the initiating is very important. I'd be advising Microsoft to demonstrate to the governments that although it's taken an aggressive position because it thinks it's right on the law, Microsoft should approach the state attorneys general who were out of the process and begin a dialogue, as a showing of good faith. Perhaps it could try to identify who are the states' spokespeople and who among them have the strongest interests, and use that as a vehicle for getting the process going again.
Being pragmatic in the process as well, I would approach the legislatures in those states. I would have my lobbyists in Washington going real fast on the process to get further talks going. I would actually work in the competitive marketplace to demonstrate to the people who have been identified in the findings of fact as having been injured that I'm really interested in partnering.
As a litigator, I always tell clients there are many ways to resolve a dispute. I don't leave any lever unpulled. The mere fact that you're still litigating doesn't mean that you can't find other solutions. But you've got to take the first step. Maintain a maximum legal position, but work on the other scenes as well. That's why I think it really ought to be an initiative from Microsoft at this point because the company has a lot to say and a lot to sell.
Wallin: I would want to talk with Posner to get a sense of where the negotiations broke down. If it was because the states disagreed, I would focus on them. I would also want a team of mediators involved. I would want those with expertise in the industry, in antitrust law, and enough different people involved so that we could really bring a lot to the table. It's too much to expect a single person to have all the knowledge that's required, especially since all the parties are using teams of lawyers.
It would be imperative to try to bring the states together in some unified fashion. It doesn't strike me that there's any reason for any one state to have, in the end, a different position from the other states, just a disagreement about how to proceed.
I think there will be mediation after Jackson issues his final order and before there is an appellate decision. Whether it's going to be a success, I'm not sure. I think Microsoft is betting that it can prevail on appeal against any claim for a breakup. I can't think of any arguments right now to get Microsoft to come to the table if they feel that way, which is what I suspect. But once the order is in place and everyone has thoroughly studied it, there'll be parts of it that nobody will like and there'll be opportunities for mediation that may lead to a resolution of the entire dispute.
#276425
Kelly Lee
Daily Journal Staff Writer
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