Microsoft will remain as one entity: US appeals court

Peter Kaplan/Scott Hillis

WASHINGTON/SEATTLE: A US appeals court on Thursday unanimously overturned an

order to split Microsoft Corp. in two, but left intact a lower court ruling that

the software giant broke antitrust laws. The seven-judge panel agreed with a

lower court that Microsoft holds a monopoly in personal computer operating

systems with its Windows software and that some of its competitive practices

amounted to illegal use of that monopoly.

But the appeals panel also severely rebuked trial judge Thomas Penfield

Jackson, saying he had given the appearance of partiality in the case. They

ordered him off the case and said a new judge should be appointed to decide

vital issues.

Though both sides claimed victory, the stock market was clearly on

Microsoft's side. Its stock ended Thursday higher while shares of key rivals

fell. After being halted most of the day, Microsoft shares ended up $1.60, or

2.3 per cent, at $72.74 in a burst of trading that briefly overwhelmed Nasdaq's

systems.

The US Court of Appeals for the District of Columbia ordered that a new lower

court judge look at whether Microsoft illegally tied its Internet browser to

Windows to maintain its monopoly, a question that could have implications for

Windows XP, the upcoming version of the operating system.

Gates now takes it cool



Microsoft chairman and co-founder Bill Gates said the ruling was largely
"positive." Looking pleased and relaxed - in contrast to his demeanor

just over one year ago when he railed angrily against the breakup order - Gates

told a news conference the ruling would allow Microsoft to add features to new

products.

"We are moving ahead with Windows XP as a product that has the features

that consumers want. There's nothing in today's ruling that changes our plan for

future products, including Windows XP," Gates said. Shares of Microsoft

rivals like Internet and media giant AOL Time Warner Inc.; Red Hat Inc., which

makes an alternative platform to Windows; and media software maker RealNetworks

Inc., all fell on the news.

The landmark antitrust case, filed in May 1998 under the Clinton

administration, is the biggest since the government took AT&T Corp to court,

resulting in the 1984 breakup of that company into regional telephone companies.

‘Tainted proceedings’



The court overturned a ruling by Judge Jackson that Microsoft had tried to
monopolize the Web browser market. The panel also rebuked Jackson for an

"appearance of partiality" through media interviews. "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," the court said.

"We are therefore constrained to vacate the (breakup order) on remedies,

remand the case for reconsideration of the remedial order, and require that the

case be assigned to a different trial judge on remand." Gates said the

ruling opened a door to possible settlement of the case, which has dogged the

company for three years.

"With this ruling there is a new framework and so it would be a good

time for all parties involved to sit down and see what kind of resolution can be

worked out," Gates said. "I won't rate the chances of that in advance,

but I'd say that the fact that this narrows the case quite a bit, and some of

the key principles laid out in the decision, make me think that it's absolutely

worth making an effort there," he said.

The US Justice Department welcomed the finding that Microsoft engaged in

illegal conduct to maintain its monopoly over PC operating systems. "This

is a significant victory," Attorney General John Ashcroft told a news

conference. Charles James, the department's top antitrust enforcer, said the

decision vindicated the department on its core claim that Microsoft engaged in

anti-competitive conduct to preserve its operating system monopoly.

The White House said it was too early to say if the Justice Department would

pursue the case less vigorously during President George W Bush than under former

President Bill Clinton. "I think it's too soon to make any

conclusions," White House spokesman Ari Fleischer said.

Far from victory



But some antitrust experts said though the appeals court had thrown out the
breakup ruling, it was far from a total victory for Microsoft. "The main

features we see in the ruling is the affirmation of the monopolization. Hence

it's going to become very difficult for Microsoft to continue in its central

position that it is not a monopolist and that it did not abuse its monopoly

power," Andy Gavil, a law professor at Howard University in Washington D.C.

"That much the court of appeals has agreed with."

The appeals court agreed with Judge Jackson that Microsoft had used its

monopoly power to stay dominant. Specifically, the judges cited the company for

co-mingling the computer code of Internet Explorer browser with the Windows code

and excluding the browser from the Windows add/remove utility.

That could give competitors fodder for new lawsuits against the company as it

rolls out Windows XP, which ties in messaging and multimedia features, and as it

makes headway on its .NET strategy to deliver software as a Web-based service.

But Bill Neukom, Microsoft's lead legal counsel, said in a conference call

that any such issues would have to be addressed in a new trial employing tougher

standards. "The court remanded that issue for consideration under a

different judge under a 'rule of reason' analysis, which is generally more

sympathetic to a defendant such as Microsoft," Neukom said.

‘Dramatic changes’



Calling into question the wisdom of Jackson's breakup plan, which would have

created one company making operating systems and another selling software like

word processors, the court said it was difficult to devise acceptable antitrust

remedies for high-tech industries.

"By the time a court can assess liability, firms, products, and the

marketplace are likely to have changed dramatically," the court said,

echoing arguments Microsoft itself has made. Much of the original case revolved

around Microsoft's motives and tactics in competing with Netscape

Communications, a once-dominant browser maker now owned by AOL Time Warner.

After 78 days of trial, Jackson found Microsoft held monopoly power in the PC

operating systems market and illegally used that power, including integrating

its browser into Windows and refusing to offer Windows without it. On June 7

last year, Jackson ordered the company broken up to prevent future antitrust

violations, and set various changes in the company's business practices, but he

suspended those changes pending appeal.

The appeals court ruling parallels some misgivings about the government's

case and Jackson's decision that the judges expressed during oral arguments

heard in February. In those hearings, the judges questioned whether a breakup

was warranted and why there was not a full hearing on the remedy.

(C) Reuters Limited 2001.

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