Overdrive, page 6
Gates said of his disgruntled competitors in a Time magazine interview in June: “Lotus lost ground because it was very late in catching the two biggest technology waves: the Macintosh and Windows. Borland International is too distracted with its had merger with Ashton-Tate. Philippe Kahn is good at playing the saxophone and sailing, but he’s not good at making money. WordPerfect is truly a one-product company. Our most successful software is for the Macintosh. We have a much higher market share on the Mac than anywhere else. How does Apple help us? Well, they sue us in court. In the future, maybe our competitors will decide to become more competent.”
About the same time Gates was telling Time what he thought of some of his rivals, Novell was filing an official complaint against Microsoft in Europe with the Commission of the European Communities’ Directorate General on Competition, the executive arm based in Brussels. “We find it disappointing that Novell chooses to compete with us in this manner instead of the marketplace,” said Microsoft’s Neukom.
By now, both Novell and Microsoft had assembled formidable lobbying teams, including some big-name legal guns, in anticipation of the second FTC meeting on the antitrust investigation, since scheduled for July 21, by which time Microsoft was prepared to match Novell lobbyist for lobbyist, lawyer for lawyer. Microsoft’s legal phalanx included two attorneys from the New York firm of Sullivan & Cromwell and two from the Seattle firm of Preston Thorgrimson Shidler Gates & Ellis, where Gates’s father was a partner. The Preston Thorgrimson firm also had an office in Washington, D.C., where Microsoft had tapped the talents of a couple of attorneys who had previously worked at the Justice Department. Microsoft had also hired the public relations firm of Edelman Worldwide to promote its Washington, D.C., interests. But perhaps the most important member of the Microsoft team was Patricia Bailey, a lawyer and lobbyist with Squires, Sanders & Dempsey, a prominent law firm in Cleveland that also had an office in the nation’s capital. As a former FTC commissioner, Bailey knew her way around not only the hallways of the FTC building but also the corridors of power around Washington. And not to be overlooked on the Microsoft team was Lloyd Meeds, a former congressman from Washington State and partner in the D.C. office of Preston Thorgrimson. Meeds also knew his way around Congress and the White House.
The Novell team included lawyers with the Washington firm of Ablondi, Foster & Sobin. In May, Novell had hired its big gun, Michael N. Sohn, a partner in the Washington firm of Arnold and Porter. Sohn was FTC general counsel during the Jimmy Carter administration. The newsletter FTC: Watch had ranked Sohn as perhaps the most effective lawyer to have argued before the FTC, based on a poll of the FTC staff. After Novell hired Sohn, it also hired the well-connected Washington public relations firm of Fleishman Hillard Inc.
As the July commission meeting neared, Novell retained the services of another heavyweight attorney, Robert Pitofsky, a partner in the same firm as Sohn. Pitofsky, a professor at Georgetown University, was highly regarded in Washington legal circles, and was considered one of the country’s foremost antitrust scholars. He had been a key Clinton antitrust adviser who served on the president’s transition team. Previously, Pitofsky was director of the Bureau of Consumer Protection, from 1970 to 1973, and had served as an FTC commissioner, from 1978 to 1981.
Novell also had a powerful ally in its home-state senator, Orrin Hatch of Utah, the ranking Republican on the U.S. Senate’s antitrust subcommittee.
In the weeks leading up to the July vote, Novell launched an intense and aggressive lobbying campaign, as did the rest of the anti-Microsoft crowd, including Lotus, Borland, and Sun, some of which had also bulked up their legal and lobbying teams. Lotus, for example, hired Andrew Barg, a senior adviser to former FTC commissioner Terry Calvani. Much of the lobbying was directed at Commissioner Azcuenaga, who was seen as the possible swing vote to break the February deadlock. Although appointed by Reagan and reappointed by Bush, Azcue- naga had since developed close ties within the Clinton administration.
Not to be outdone in the lobbying game, Gates made personal visits to each of the four commissioners in the week before July 21. Gates, however, was anything but the diplomat. During his meeting with Commissioner Yao, the easy-going economics professor told Gates that perhaps Microsoft could give advance copies of its software to Novell to prevent incompatibility problems. “Sure,” an angry and incredulous Gates replied, “if you want to be a communist, we could do that!”
Of his meeting with Gates that day and the communist remark, Yao later recalled: “In my view, I didn’t think that much about it. It was just a reaction to some of the lines of conversation and I didn’t think anything of it.”
Similarly, in the office of Mary Lou Steptoe, the director of the Bureau of Competition, Gates exploded when it was suggested that Microsoft had deliberately designed code in Windows so that it would not work with Novell’s operating system, DR DOS. “You don’t know what the hell you are talking about!” an upset Gates said before attorney Neukom stepped in to steer the conversation back to other issues.
As expected, the meeting between Gates and Commissioner Owen went well. One FTC official described it as a “love fest.” Owen liked and respected Gates. “He struck me as a man who knew his business and was passionate about his business,” she later recalled. “That is in marked contrast to a lot of corporate people whom I have seen while I have been here at the commission, and in marked contrast to some of the corporate people I spoke with on this matter who didn’t seem to know their business at all. I was stunned at some of the representations that people came in here and made to me.” She declined to be specific.
Even as Microsoft, Novell, and the other companies lobbied the commissioners, there was growing speculation whether the ease would be handed off to the Justice Department should the FTC again deadlock on whether to take action against Microsoft. The division’s newly appointed leader, Anne Binga- man, had been making a lot of noise about how the days of antitrust inaction were over.
On July 13, Senator Howard Metzenbaum, an Ohio Democrat, wrote to FTC chair Steiger, urging that the Microsoft case be turned over to the Justice Department should the commission not be able to reach a decision for the second time. Metzenbaum, an old-style trustbuster who headed the Senate’s antitrust subcommittee, sent a copy of his letter to Bingaman. His office had called Bingaman beforehand to ask if she had a problem with the letter being sent to Steiger. Bingaman gave her consent.
In part, the Metzenbaum letter read:
As you may recall, I contacted you almost two years ago to inquire about the investigation and, subsequently, my staff was briefed on it by FTC attorneys.
I am concerned about possible anti-competitive conduct by Microsoft because I believe that robust domestic competition is vital to the strength of our economy. This is especially true in a high technology industry, such as personal computers and software, which has so much to contribute to our nations economic prosperity....
I understand that the Commission has spent the past 36 months investigating allegations that Microsoft—the industry’s leader in personal computer operating systems—may have engaged in anticompetitive conduct. However, last February, when the Commission considered bringing an antitrust action against Microsoft, it was unable to reach a decision. It deadlocked in a 2 to 2 vote because one of the Commissioners recused himself from participating. Consequently, a final resolution of the case was delayed, pending further review.
I have been informed that the Commission intends to review the Microsoft case again later in July. I hope that the Commission will be able to decide what action to take at that time. However, if the Commission remains deadlocked, I would strongly urge you to refer the case to the Department of Justice’s Antitrust Division for an independent review.
As you know, the Commission has spent a great deal of time and taxpayer money in a legitimate effort to determine whether anticompetitive behavior is stifling growth and innovation in this important high technology sector. Therefore, I believe that the Commission should not abandon the case simply because it is deadlocked due to a recusal. Under such circumstances, it seems to me that referring the investigation to the Antitrust Division would be an appropriate way to bring the matter to a conclusion. ... It would be regrettable if the Commission closed out the file on this investigation due to a deadlock.
It was not unusual in FTC investigations for political pressure to be applied by congressional lawmakers. Well- positioned members of Congress are often asked to do someone else’s dirty work. But the Metzenbaum letter raised troubling questions about its authorship. Rumors, which were never reported by the press, said the letter was written by none other than Robert Pitofsky, the noted antitrust scholar who just happened to be representing Novell in the Microsoft case.
However, Mindy Hatton, an attorney on Metzenbaum’s staff who advised the senator on antitrust issues, claimed she wrote the letter, and said the senator had been following the Microsoft case since its beginning with the IBM agreement at Comdex.
“When I first got to the staff, he [Metzenbaum] was very interested in allegations that there was price-fixing going on in the computer industry; that there might be some funny deals between IBM and Microsoft, and that Microsoft was leveraging its monopoly power,” Hatton said. “We followed the Microsoft investigation closely. It seemed to us this was a young, dynamic industry, and we were concerned that someone that had an incredible lead like Microsoft might be tempted to abuse its power. We had the FTC in a couple of times to brief us on the progress of its investigation. When the commission first deadlocked, we were concerned. Hut when it got to the point [that] they were going to vote again, and finally there was this Justice Department that we had some confidence in, it seemed like a big fat waste of taxpayer money to let an investigation in an industry as important as this to go down the tubes because of a deadlock.”
Before the July vote, the Novell reps came calling on the senator, as did Pitofsky. “But frankly, by that time, we had already decided to write the letter,” said Hatton, who also met with Microsoft’s representatives—twice. “It would have been unfair not to hear their side,” she said.
Hatton strongly denied that the Metzenbaum letter was written by Pitofsky. “That’s absolutely false,” she said. “I wrote the letter. Would I ever let Bob Pitofsky draft a letter I gave to the senator? No. That would never happen. Bob Pitofsky did not dictate it to me, I assure you.”
But two sources with independent knowledge of the letter insist it was crafted by Pitofsky. In an interview, Pitofsky, who would subsequently be picked by Clinton to replace Steiger as chairman of the FTC, first said he didn’t remember whether he helped draft the Metzenbaum letter. Pressed on the matter, though, he eventually acknowledged that he and his law firm had indeed been involved. “I dealt with the senator and his staff,” Pitofsky recalled. “I don’t think I drafted the letter, but I’m not sure....” Later in the same interview he said, “I don’t want to mislead you. I’m sure we [his law firm] had something, to do with drafting the letter. I’m not going to deny it. Our conversation has reminded me. We did have a good deal to do with the first drafts of the letter; the firm did.”
On July 20, one day before the scheduled vote on Microsoft, the commission received another letter, this one from Susan Braden, a nationally recognized antitrust lawyer with the Washington law firm of Ingersoll and Bloch. She had worked for the Justice Department’s Antitrust Division from 1973 to 1980 and later was a stall' lawyer for the FTC during the Reagan administration.
A Republican, Braden believed that Microsoft needed “behavior modification” but not restructuring. Her letter to the FTC, copies of which she sent to Senators Metzenbaum and Hatch, urged the commission not to vote on the Microsoft complaint, but simply to refer the matter to the Justice Department:
[I]t is doubtful that injunctive relief in this case could be obtained and sustained on appeal. Moreover, as a practical matter, the Commission has a responsibility to recognize that an administrative trial unlikely would [sic] be completed by an administrative law judge and reviewed by the Commission any sooner than the end of the decade. Such a delay is unfair to the participants and too long for the software industry to wait to receive definitive guidance as to important competitive issues raised by this investigation.
Under the informal liaison between the antitrust enforcement agencies, matters concerning the computer industry traditionally have been handled by the Antitrust Division since the initiation of the IBM case. There are, however... other important reasons why the public interest is best served by the Antitrust Division’s review of this matter, which I believe have not been considered by the Commission. First, the Office of Science and Technology Policy in the White House now has a task force of industry and interagency experts working under the direction of the Vice President to promote interoperability throughout the industry. Since certain aspects of the Microsoft investigation concern that issue, any enforcement decision and proposed remedy should consider and reflect the overall goals of the task force effort....
Because of its unique status as an independent agency, the Commission does not have a role in these executive branch policy initiatives, even though they essentially are of a nonpartisan nature. Any proposed enforcement action and remedy in this critical industry to our economic health, however, surely must fully consider these efforts. The procedural route suggested by Senator Metzenbaum is unsound as it would establish the precedent that deadlock commission votes ... should be resolved by the Antitrust Division, rendering the Commission’s independent authority subservient to the executive branch....
Because Braden had worked at the FTC, she had been following the Microsoft case closely and knew all the commissioners. She had never understood why the FTC rather than Justice had taken the case in the first place. “I could not understand the rationale of companies like Novell wanting this to be investigated by the FTC,” she said. “It was insane. The corporate guys didn’t understand the difference between the two agencies—Justice and the FTC. I personally spoke to Novell’s counsel, Bradford, kind of late in the game. My impression was that he just didn’t understand why it would have been better to have had this case before Justice from the start.”
Braden had a point. The FTC has only the authority to go to court to seek injunctive action, which is an extraordinary legal remedy. In order to get an injunction against Microsoft, the FTC would have to prove Microsoft would do irreparable harm, which is a very high legal standard, especially for the government.
“You are not going to get a judge to grant an injunction that will be sustained by any court of appeals of the type of conduct the FTC was looking at for Gates,” Braden said. “The case did not lend itself to an injunction. The only other thing the commission could do was bring an administrative complaint. Well, they have not been able to get through an administrative complaint process in short of a decade So what did Novell think they were going to get? Even if they got the FTC to issue an injunction, the commission could never have sustained its burden of proof in court. Basically, the only time the government can get an injunction is if you have a merger going through and you are only going to court to block the merger because if the companies merge you can’t unscramble the assets, so it’s either now or never.”
The FTC is an independent agency, a creation of Congress, essentially off on its own. It is not hooked into the rest of the government, whereas the Justice Department is. If the case were under the jurisdiction of Justice, its lawyers could have called the White House Office of Science and Technology or the Commerce Department and exchanged relevant information. FTC lawyers could not do that; they were out of the loop.
At one point, Braden called Novell’s counsel to her office because she thought the company was handling the Microsoft case badly. “Frankly, I thought they should hire me. I knew more about what was going on than he did.” Braden also thought Novell should have filed its own suit against Microsoft and not waited for the government to act. “File your own case,” she said. “Be a master of your own destiny. They had the money to bankroll a plaintiffs case. It would have given the government a boost to do something. The government could have also stepped in in a case like that with little effort.”
On July 21, the day of the long-awaited FTC meeting, the commissioners received yet another letter, this one from Utah’s Senator Hatch. Even though the Hatch letter read like a shorter version of the Metzenbaum letter, it was significant. By writing his own letter first, Hatch had effectively blocked other Republicans, who might have sided with Microsoft, from turning the matter into a partisan political debate.
The Hatch letter, in part, read:
I have written you earlier on the economic and anti-trust implications that flow from behavior that stifles competition in the computer hardware and software industry. I am therefore disappointed that the apparent barriers to market entry that lie at the heart of the earlier allegations continue to exist.
In light of the continuing impediment to trade and commerce in this important sector, I am therefore requesting that the case be referred to the Justice Department's Antitrust Division Idr an independent review, if the Commission is unable to break the current deadlock during this month’s review.... The Commission’s 2-2 vote in February suggests that Justice Department referral is a highly appropriate route for satisfying many lingering questions as to Microsoft’s conduct.
According to aides of the senator, Novell’s Ray Noorda phoned Hatch to thank him personally for writing the letter to the FTC. Noorda had contributed $1,000 to Hatch’s 1988 re- election campaign, Federal Election Commission records showed. He also gave $5,000 to the Utah Republican Party in July 1992.
