Microsoft wins a reversal of breakup

06/29/01

BY KEVIN COUGHLIN

It looks like Microsoft will not be a house divided.

Reversing an order to split the software giant in two, an appeals court yesterday kicked the historic antitrust case back to a new judge to ponder lesser penalties for Microsoft while rapping the knuckles of the man who ordered the breakup one year ago.

The panel agreed with U.S. District Judge Thomas Penfield Jackson that Microsoft "behaved anticompetitively" to preserve a monopoly for its Windows operating system, but accused the judge of "serious judicial misconduct" in bad-mouthing Microsoft to the press.

Jackson compared Microsoft co-founder Bill Gates to Napoleon, and likened the company to Japan at the end of World War II, in embargoed interviews published after a 78-day trial.

"Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process," asserted a seven-member panel of the U.S. Court of Appeals for the District of Columbia, in a unanimous 125-page decision.

While the government hailed the panel's affirmation of Microsoft's monopoly, many analysts scored the mixed decision a win for the titan from Redmond, Wash.

Most significant was the appellate court's reluctance to bar the company from tying products together, which Microsoft has defended as its "right to innovate."

"I am incredibly optimistic about the future," said Gates, suggesting the time was right to renew settlement talks with the government. He said the company still plans an autumn release of Windows XP, a new operating system that will include many Internet-related features.

Gates said the four-year legal battle has been challenging for the company and himself. "But," he said, "despite the many twists and turns of the case, I have always had faith in our company, in our employees and in the magic of the software we are creating."

Microsoft stock closed up $1.60, to $72.74.

Foes of Microsoft fear further legal proceedings will buy time for the wealthy corporation to dominate Internet services and computer gaming.

"What Microsoft has done in the intervening year is an unbelievable record of continued violations of the law of the standard laid out by the court of appeals," said Ed Black, president of the Computer and Communications Industry Association.

Proclaiming the appeals court affirmation of the monopoly finding a "very significant victory," U.S. Assistant Attorney General Charles James quickly added it will take time to digest the "long and very complex" decision. President Bush withheld comment while that review is ongoing.

The breakup was urged by the Department of Justice under President Bill Clinton and by 17 of 19 states that sued Microsoft under antitrust laws.

They argued that Microsoft crushed rival Netscape by bundling its own Internet browser with Windows, and cowed computer makers into handing over control of the computer desktop, ensuring Windows' advantage.

Jackson concurred, ruling in April 2000 that Microsoft violated two sections of the 1890 Sherman Act. A few weeks later, he ordered Microsoft's operating system split off from the company's other software ventures.

It was the most momentous antitrust decision since the breakup of AT&T's telephone monopoly in the early 1980s. But Jackson erred by refusing a special hearing on his order, a glaring error in the panel's opinion.

The judges also ruled that the monopoly question for browsers is moot, and said another District Court judge should decide if Microsoft's acted illegally by tying its browser with Windows. As things stand now, the only potential penalties facing Microsoft stem from its "anticompetitive" efforts to maintain the Windows monopoly.

Meanwhile, the panel expressed concerns that any attempt to prohibit Microsoft from packaging software products together "may impede operating system innovation."

"It can put anything it wants in the operating system. That is a big victory," said Nicholas Economides, a New York University economics professor who has followed the case closely.

Odds of pinning any damages on Microsoft may be slim, too. The government must prove somebody actually was harmed, said Jim DeLong, an antitrust lawyer for the pro-business Competitive Enterprise Institute. Microsoft could have charged much more for its software, he said.

"My bet is it will go into settlement talks," said DeLong, who declined to disclose whether the nonprofit institute gets funding from Microsoft.

Yesterday's decision brought joy to Berkeley Heights, where Microsoft has its New Jersey headquarters.

"This is a much, much smaller case today than it was yesterday. . . . The cloud is removed, by and large," said Joseph Pagano, Microsoft's regional manager.

"It's a win for us, but also for the industry," added Michael Allen, a Microsoft marketing manager. "It says that Microsoft, our competitors or partners can continue to innovate and develop products that meet customers' demands."

Kevin Coughlin covers technology. He can be reached at kcoughlin@starledger.com or (973) 392-1763. Star-Ledger wire services contributed to this report.