Trial and Error

Appeals court's critical review of findings, Jackson gives Microsoft edge

Microsoft Corp. fared so well last week in its first round of hearings before the U.S. Court of Appeals here that many believe the likelihood of splitting the company in two, as ruled by the U.S. District Court last year, is extremely slim.

The U.S. Court of Appeals for the D.C. Circuit last week heard two days of arguments from attorneys from the Department of Justice and Microsoft over District Judge Thomas Penfield Jacksons ruling to break up the company for antitrust violations.

But while the appellate judges seriously questioned the findings that Microsofts acts against rivals were meant to protect its monopoly in the operating systems market and that it illegally tied its Internet Explorer browser to Windows, legal experts still expect the government to prevail on the appeal.

Any victory at this point, however, is likely to be a hollow one, as the final remedy is expected to be dramatically watered down from the current breakup order—to perhaps nothing more than the equivalent of a rap over the knuckles for Microsoft. In addition, observers inside the Beltway expect the Bush administration to be more willing to settle the case than the previous administration. The appellate courts decision is expected in May or June.

"While I do not think the whole case has gone down the tubes, its certainly nowhere near as strong from the governments perspective as it was the day Jackson issued his ruling," said Herb Hovenkamp, an antitrust expert and law professor at the University of Iowa, in Iowa City. "This Court of Appeals is also one of the most conservative on antitrust issues and has one of the highest rates of reversal in this regard, which further favors Microsoft."

Mark Ostrau, who chairs the antitrust group of law firm Fenwick & West LLP, in Palo Alto, Calif., agreed, saying it was "extremely unlikely" there would be a complete reversal as "this would have an adverse reaction on all antitrust cases."

The most likely scenario is for the court to reverse some of Jacksons conclusions of law and findings of fact, with the remedy being sent back to another District Court for review, Ostrau said.

If the court does not find sufficient evidence of monopoly maintenance, it can reverse Jacksons order to break Microsoft into separate operating system and software application companies and either set aside the entire remedy or send it back to the District Court for review.

In last weeks hearings here, Chief Judge Harry Edwards and Judge David Sentelle aggressively questioned Jeffrey Minear of the U.S. Solicitor Generals office about the link between Microsofts behavior and the effects it had on consumers and the operating system market.

Edwards also peppered Minear with questions about whether a Microsoft monopoly could be replaced by a Sun Microsystems Inc. and Java middleware monopoly. "I cannot find anything that says Netscape [Communications Corp.] has an interest in, or the capacity to serve in, the middleware market," Judge Edwards said. "If it is not intending to enter this market and compete with Microsoft as an operating system, I dont see how it is a threat."

Minear maintained the governments stance that Microsoft used its monopoly power to restrict competition and took extraordinary steps and spent a great deal of money to prevent consumers from access to Netscape Navigator and Java technologies.

It would be a huge victory for Microsoft if the Court of Appeals decides Netscape posed no competitive threat to Microsoft or that Microsofts actions did not prevent Netscape from effectively distributing its Web browser, experts said.

Bill Kovacic, a professor of law at George Washington University, in Washington, said it was clear that Judges Edwards, Stephen Williams, Raymond Randolph and Douglas Ginsburg doubted some of the key aspects of the governments case, which would give a majority for a reversal. It was also apparent that Jackson will be removed from the case and his findings of fact reviewed.

"Its clear that several of the judges would like to start the case all over again, but I dont think thats going to happen as it would reduce two long years of hard work in the trial to nothing," Kovacic said. "What I expect to emerge is a set of results that are not broad-based enough to support the magnitude of Judge Jacksons remedy package."

While District Court findings of fact are generally deferred to in an appeal, the appellate court judges last week criticized some of the findings as not being supported by fact. Chief Judge Edwards bluntly stated that some of Jacksons findings of fact were "conclusory" and that he could find no evidence to support them. "As such, I do not feel compelled to defer to these findings," he said.

Jacksons behavior and public comments during and after the trial give the court further ammunition to set his findings of fact aside or examine them closely and skeptically.

"What reason could Jackson have had to hold secret meetings and bad-mouth one of the litigants?" Judge Sentelle asked John Roberts, who was arguing for the 18 states and the District of Columbia. Judge Edwards asked,"This is beyond the pale, extraordinary; how can we assume anything other than the worst?"

Hovenkamp said this was all good news for Microsoft, which might also get the chance to reargue much of its case before a new judge. But Fenwick & Wests Ostrau said the government would also then be able to introduce new evidence.

While Microsoft declined to comment on the hearings, there is rising speculation that Microsoft is trying to clean up some of its other government messes. The company may sell the 25 percent equity stake it took in Canadian software maker Corel Corp. last year. The Justice Department is investigating whether that deal reduces competition in the market for business productivity software.

Microsoft spokesman Jim Desler said Microsoft has not sold that stake. "Corel filed an S3 form with the SEC [Securities and Exchange Commission] in late February, which gives us the flexibility to easily sell our Corel stake in the future," Desler said. "It was purely a procedural move and formed part of the original agreement. The filing is not an indication of our intent to sell and was not at all motivated by the current government investigation into the deal."

The University of Iowas Hovenkamp said if Microsoft sold its Corel stake, the government would most likely drop its investigation. But Ostrau said the ongoing business relationship between the two companies could still be subject to scrutiny.

"But that is less of an issue, and I agree that the investigation will probably be terminated if Microsoft offloads its stake," Ostrau said. "This is positive for the government as they can take the credit for this, whether or not they were responsible."