Aftermath: Will Microsoft fight or fold?

"The only card they have now is delay, and it's a real card"

Legally speaking, the sky looks like it has fallen on Microsoft in the watershed anti-trust case brought by the Department of Justice. District Judge Thomas Penfield Jackson's findings of fact read to many antitrust lawyers as if it had been written by the government's plaintiffs. What now?

The company has two realistic alternatives -- Settle with Justice or appeal the decision all the way to the Supreme Court, if necessary.

"I don't really see an alternative to fight or fold,'' said William Kovacic, an antitrust expert at George Washington University. "The question is just how big the dose of medicine is,'' if Microsoft seeks an out-of-court settlement with an ebullient and emboldened set of federal antitrust prosecutors and state attorneys general.

The consensus of antitrust attorneys and economists is that Microsoft has more to gain by grinding on to the bitter end -- the Supreme Court -- where a combination of lower court reversals, new facts and industry evolution could change the dynamic more in the company's favor.

"The only card they have now is delay, and it's a real card," says Rich Gray, principal attorney with the firm Outside General Counsel of Silicon Valley.

The company can essentially ignore any ruling by Jackson and appeal the decision to the District of Columbia Circuit of Appeals, which has already shown that it does not view Microsoft's behavior in as sinister a light as does Jackson. That court reversed a unsolicited injunction by Jackson against Microsoft regarding violation of the 1995 consent decree over the integration of Internet Explorer into Windows. The court said Jackson had exceeded reasonable authority.

"They might just try to stall," said Robert Lande, law professor at the University of Maryland.

Land says that the time you go through the proposed conclusions of law, the remedy phase, the appeal and take it to Supreme Court; it will take at least two years. And even then, if supreme court makes ruling, Microsoft could ask to "open the record,'' so that the original findings -- while not altered -- are updated to reflect current market conditions in late 2001 or 2002.

"Microsoft could get lucky. Jackson could die or retire. Linux could succeed and Java could succeed," says Lande. The likelihood of the higher court throwing out Jackson's entire ruling as biased is highly unlikely, say legal experts. Jackson would have to be found to have ruled in an "arbitrary and capricious" way.

"He was very thorough. I didn't see any gaping holes," says Gray. Others disagree. Stan Liebowitz, Professor of Managerial Economics at the University of Texas at Dallas, and co-author of "Winners, Losers and Microsoft," says Jackson erred in his definition of the relevant market. Consumers do still consider the Apple Macintosh operating system as an alternative to the Microsoft operating system. Also, the Netscape browser still had a 40 percent or greater share of the market when the findings of fact were drawn up -- hardly an insignificant market share.

Jackson "showed a certain zeal" in sweeping aside such considerations, he said. And even if Jackson's findings of fact stand, they could be interpreted quite differently at the appellate level. Of the 9 judges that could sit on a three-judge panel to review Jackson's ruling, five are Reagan and Bush appointees, likely to lean toward's the Microsoft view, for instance, that distributing a browser for free does the consumer good, not harm. A sixth, James Buckley, also is likely to lean in Microsoft's direction, Kovacic said.

They can say Jackson "attached the wrong legal significance'' to the facts. They could say to Jackson, "you looked at the circumstances and said, 'how bad.' We looked at the same circumstances and said, "how delightful.''

As a result, some attorneys and economists say the time is clearly ripe for Microsoft to dance with the DoJ and get the best deal possible. Most predict the DoJ will demand highly dramatic remedies, given its strong victory in the findings of fact.

Richard J. Pierce, Jr., the Lyle P. Alverson Professor of Law at George Washington University and an expert in anti-trust law, said that the remedy component of the case is sure to be the most complicated, regardless of whether Microsoft tries to settle the case or decides to slug it out in the courts.

The findings of fact, he said, undoubtedly emboldened the US Department of Justice to seek "drastic" remedies, such as the forced dismantling of Microsoft or the licensing of their software code to rivals. The company would probably be willing to settle for something that would impose behavioral restrictions on how they do business. Steven Salop, a professor of economics and law at Georgetown University Law Center, said Microsoft's best bet may be to settle with the Department of Justice--even if that means the company must break up into separate companies.

In fact, Salop, who has written law articles about the case and who has followed it closely, says that a Microsoft break-up may be preferable to a written code of conduct by which Microsoft will have to abide.

"That eliminates the need for regulation," he said. "It might get the government out of Microsoft's day-to-day behavior and let them get back to what they say they want to do, which is to innovate and make good software."

Otherwise, an internal breakup of Microsoft or the licensing of its software to rivals could mean that a judge, a special "master" or an advisory panel of some sort would constantly be monitoring what constituted appropriate parts of an operating system -- and what parts of Microsoft intellectual property had to be given to rivals, to keep them competitive, and what could be considered proprietary.

Salop says the company could be broken up in one of three ways: a horizontal divestiture, in which Microsoft would be forced to divest itself of Windows and keep its applications. The so-called vertical-divestiture, could create several vertically-integrated companies, so there would be a company that produced Office and Windows and other applications, and then another company with the same sets of products that would compete with the Microsoft company.

Salop prefers a third, hybrid remedy: You divest Windows from Microsoft and they are left with applications. But you also create several competing Windows companies with the divestiture.

"This one is better because it leaves applications alone," he said. "Applications were not part of the case." But coming to an agreement with Justice and the state attorneys won't be easy. They can't afford to be seen as giving away the store and only lightly slapping Microsoft on the wrists, as happenned with the 1995 consent decree. If that happenned, they'd be fending off "torches and pitchforks" from constitutents and computer companies for "giving away a great case," says Kovacic.

From the government standpoint, "it only makes sense to settle if the settlement is spectacular," said Kovacic. And given that Microsoft is not likely to acquiesce easily to either the licensing of its software to rivals in any way that would create true competitors; and not likely to agree to a breakup, an immediate resolution is not likely.

"I don't see Microsoft buying the potent stuff," said Kovacic. "It's going to be a long ride."

Randy Barrett, Tom Steinert-Threlkeld, Doug Brown and Connie Guglielmo contributed to this report.

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