Microsoft may still face break-up

The core of the case against Microsoft - that the company is a monopoly and has used anti-competitive means to shut out competition remains intact; and that may pose a problem for the company in the long run.

The unanimous decision by the U.S. Court of Appeals on Thursday that Microsoft Corp. engaged in anti-competitive activity to maintain its monopoly in the operating system market had both Microsoft and the Department of Justice claiming victory.

However, as Microsoft rolled out its top brass to laud the ruling--which also vacated Judge Thomas Penfield Jackson's remedy of a company break-up back to U.S. District Court for review--many legal experts viewed it as a serious blow to the company's case.

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That's because the core of Department of Justice's case, that Microsoft is a monopoly and has used anti-competitive means to shut out competition, was upheld by the Appeals Court for the District of Columbia Circuit, in Washington. As a result, if the case makes it back to District Court, there is nothing to prevent the new judge from ordering the same remedy, or for that matter, an even stronger remedy than Jackson's.

Underlining that point is the fact that once the case makes it back to the District Court, new evidence of alleged anti-competitive behavior will be able to be introduced--evidence that seems to be mounting.

All this, experts say, is enhancing the likelihood of an out of court settlement. However, because this ruling favors the core of the District Court's original ruling, any settlement will probably place far more stringent conditions on Microsoft than previously proposed.

"Today's decision represents a very significant victory for the Antitrust Division on the core claim in the Microsoft case: That Microsoft engaged in anti-competitive conduct to preserve its monopoly position in computer operating systems," said Charles James, assistant to U.S. Attorney General John Ashcroft for the antitrust division in Washington, following the announcement of the ruling. "The unanimous court has concluded now that Microsoft has monopoly power and has acted unlawfully to preserve it."

Most legal experts contacted last week agreed and said that despite Microsoft's claims that the ruling "narrowed the scope of the case," the threat of a possible breakup of the company is far from over. "This ruling is really bad for Microsoft in the sense that they lost on the legal merits of the monopolization claim--by far the most important part of the case," said Dana Hayter, a lawyer with Fenwick & West in San Francisco, Calif., and a former attorney in the Justice Department's Antitrust Division.

"This is a double blow. Not only did Judge Thomas Penfield Jackson, the conservative District Court judge who handled the case, brand them a monopolist, but even the more conservative Appeals Court has now unanimously mostly affirmed that view," he said.

Donald Falk, an antitrust expert at legal firm Mayer Brown & Platt in San Francisco, agreed that the most significant finding was that Microsoft had an entrenched monopoly and repeatedly violated antitrust laws in trying to maintain that monopoly. "The core of the government's case was affirmed. Microsoft has been roundly and unanimously condemned for the most central aspects of its conduct," he said.

While the Appeals Court had vacated, or kicked back, the remedy order, it in no way prohibits another District Court judge or the Supreme Court from re-imposing such a measure.

"The possibility exists that the courts may believe a structural remedy is the only way to effectively deal with his behavior," Hayter said. "I don't think Microsoft is likely to take that chance and it will move to settle."

But if the case is not settled and not appealed, the DOJ will be able to introduce new evidence at the full evidentiary and remedy hearings about the current market structure, as well as any alleged anti-competitive behavior Microsoft may have engaged in since Jackson's ruling last summer.

"When this record comes to light and gets in front of a District judge, we could find ourselves where we were last June: with another breakup order," Hayter said.

Legal experts and critics say Microsoft continues to use the type of monopolistic business tactics that caused the original antitrust case, most notably integrating additional functions like music playback and instant messaging into the core operating system.

Iowa Attorney General Tom Miller maintains Microsoft's upcoming HailStorm Web services, to be built on top of its .Net software and requiring its Passport service for log-in and storage of personal information, clearly violates antitrust law.

The inclusion of Smart Tag technology in Internet Explorer 6, the Web browser bundled with Windows XP, has also been heavily criticized as a means of controlling the way consumers use the Internet. However, Microsoft has dropped this feature "for the time being" because of partner and tester feedback and not due to concerns about legal issues, spokesman Jim Cullinan told eWEEK.

In addition to vacating the remedy to the lower court, the Appeals Court in its 125 page decision, also kicked back Jackson's ruling that said Microsoft illegally tied, or bundled products together.

But Iowa Attorney General Tom Miller was upbeat about that part of the ruling. "[We'll be] very comfortable before the District Court in reviewing both our tying claims and the remedy necessary to address the findings of wrongdoing by Microsoft in maintaining its monopoly," he said. "We will have the opportunity to present again our claim that Microsoft illegally linked together its products to further protect its monopoly. With a unanimous liability decision as the basis for a strong remedy, today's decision will offer us a powerful foundation for addressing that issue again before the District Court."

Most in the legal community and computer industry agreed that it was likely Microsoft would appeal the ruling to the Supreme Court, if for no other reason than to delay the matter as long as possible. And delay would put off the full evidentiary and remedy hearings and give Microsoft more time to work on a negotiated settlement with the government and State Attorneys General.

Bill Neukom, Microsoft's executive president of law and corporate affairs, upheld the possibility that the company would appeal all or part of the ruling to the Supreme Court. But Microsoft Chairman and Chief Software Architect Bill Gates, while downplayed the monopoly maintenance aspect of the ruling, and said the company was eager to avoid continuing litigation.

"We will be reviewing our licensing structure and will also be looking to resolve any issues with the other parties without the need for continuing litigation," Gates said at a media conference following the Appeals Court ruling last Thursday.

Violating Sherman

In addition to monopolistic law, the Appeals Court also found that a number of Microsoft's licensing restrictions were restrictive, anti-competitive and "violated Section 2 of the Sherman Act." Neukom downplayed this, saying many of them had ended long ago.

But Microsoft CEO Steve Ballmer said all its current licenses would be reviewed. "I am confident that these can be adjusted if necessary without affecting our business." He also said he was "disappointed" that Microsoft had been found to be a monopoly, but added that "this is not illegal in itself."

Surprisingly, some Microsoft partners welcomed the fact that the court upheld the monopoly and anti-competitive aspects of the case. Gregg Morris, president of FarPoint Technologies Inc., said he was glad the court ruling upheld the antitrust claims and only sent back the remedy.

"Will another judge decide to break them up? Probably. That would be my guess," said Morris, whose company is a longtime Microsoft partner and ISV, in Morrisville, N.C. "Everything in the last couple of weeks has been Microsoft strutting their stuff again."

Others in the Microsoft camp also admitted the legal battle was far from won. James L. Gattuso, the vice president for policy at the Competitive Enterprise Institute in Washington D.C., welcomed the Appeal Court judgement as a clear, but qualified, victory for consumers.

"[But] the lawyers are not going home yet," he said. "Many issues were remanded to trial court for more proceedings. The litigation will go on."

He added, that instead of pursuing this further action, the government should settle the case as soon as possible - and let the future of the Internet be determined by consumers, not by litigation. Those in the anti-Microsoft camp also lauded the ruling. Ed Black, the president of the Computer & Communications Industry Association said the appellate ruling confirmed that Microsoft was guilty of serious and massive violations of antitrust law.

Microsoft had further entrenched its monopoly position in the operating system, browser and desktop productivity software markets. "We look forward to the next phase of this matter and the ultimate imposition of a structural remedy against the company," he said.

Jim Barksdale, the former chief executive officer for Netscape Communications who testified for the government at the trial, welcomed the ruling and its support for Judge Jackson's Findings of Fact and Conclusions of Law.

"I hope that the government and the judge to which this case is remanded will keep these facts foremost in their minds when deciding how Microsoft's pattern of anti-competitive behavior and abuse of monopoly power will effect the future of technology and innovation," he said in a statement.

Additional reporting by Roberta Holland, Evan Koblentz, and Michael R. Zimmerman.