Right Verdict, Wrong Remedy

Court vacates breakup remedy, upholds anticompetitive ruling

The unanimous decision by the U.S. Court of Appeals last week that Microsoft Corp. engaged in anticompetitive 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 Jacksons remedy of a company breakup back to U.S. District Court for review—many legal experts viewed it as a serious blow to the Redmond, Wash., companys case.

Thats because the core of the Department of Justices case, that Microsoft is a monopoly and has used anticompetitive means to shut out rivals, 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 Jacksons.

Underlining that point is that once the case makes it back to the District Court, new evidence of alleged anticompetitive 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 Courts original ruling, any settlement will probably place far more stringent conditions on Microsoft than those previously proposed.

"Todays decision represents a very significant victory for the Antitrust Division on the core claim in the Microsoft case: that Microsoft engaged in anticompetitive 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.

Most legal experts contacted last week agreed and said that despite Microsofts 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 LLP, in San Francisco, and a former attorney in the Justice Departments Antitrust Division.

While the appeals court vacated, or kicked back, the remedy order, that in no way prohibits another District Court judge or the Supreme Court from reimposing such a measure.

"The possibility exists that the courts may believe a structural remedy is the only way to effectively deal with [Microsofts] behavior," Hayter said.

If the case is not settled and not appealed, the DOJ will be able to introduce new evidence of alleged anticompetitive behavior by Microsoft at the full evidentiary and remedy hearings. "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 such as music playback and instant messaging into the core operating system.

Iowa Attorney General Tom Miller maintains that Microsofts 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 Microsofts 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 last week.

In addition to vacating the remedy to the lower court, the appeals court in its 125-page decision kicked back Jacksons ruling that said Microsoft illegally tied, or bundled, products together.

But Miller was upbeat about that part of the ruling. "With a unanimous liability decision as the basis for a strong remedy, todays decision will offer us a powerful foundation for addressing that issue again before the District Court," Miller said.

Most in the legal community and the computer industry agreed that, due to the severity of the appeals court ruling, 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. Any delay would put off full evidentiary and remedy hearings and give Microsoft more time to work on a negotiated settlement with the government and the state attorneys general.

Microsoft Chairman and Chief Software Architect Bill Gates 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 during a media conference following the appeals court ruling last Thursday.

In addition to upholding anticompetitive law, the appeals court found that a number of Microsofts licensing policies were restrictive, anticompetitive and "violated Section 2 of the Sherman Act." Bill Neukom, executive president of law and corporate affairs at Microsoft, downplayed this finding, saying many of those policies had ended long ago.