Judge rules on Microsoft case, backs DOJ settlement

WASHINGTON -- U.S. District Court Judge Colleen Kollar-Kotelly came down today in favor of Microsoft Corp. and the U.S.-backed antitrust settlement, rejecting a series of remedies that would have forced the company to unbundle Windows.

The judge ruled in favor of the government, calling the settlement in the public interest -- a finding she had to make under law before accepting it.

Last year's settlement "adopts a clear and consistent philosophy such that the provisions form a tightly woven fabric," the judge said in her decision.

The U.S. Court of Appeals last year upheld a finding that Microsoft illegally maintained its monopoly in operating systems.

Kollar-Kotelly had a range of options before her. The minimum Microsoft faced was the U.S.-brokered settlement reached last fall by the Bush administration and nine of the 18 states. That was the baseline.

The judge did not have the flexibility to change that settlement -- she could only accept or reject it. And that's what she did. But Kollar-Kotelly could have chosen from among the nonsettling states' alternatives and placed additional restrictions and requirements on the company beyond what the settlement envisioned.

The U.S.-backed agreement requires Microsoft to treat PC makers fairly, set uniform terms and share the interfaces and protocols that competing vendors need to develop Windows applications.

In her ruling, the judge rejected a series of tougher sanctions, including remedies that would have forced Microsoft to port its Office suite to rival operating systems and make its Internet Explorer browser open source.

The company said in a statement that it is "pleased."

"The settlement is a tough, but fair, compromise," the statement said. "It imposes significant requirements on Microsoft, but it enables us to continue to innovate.... We recognize that we will be closely scrutinized by the government and our competitors, and we will devote all the time, energy and resources needed to ensure that we meet our responsibilities."

"It appears to be an unqualified, resounding victory for Microsoft," said Hillard Sterling, an antitrust attorney at Much Shelist PC in Chicago. "It seems that she almost rubber-stamped the proposed settlement."

Kollar-Kotelly made relatively minor modifications to the agreement, and that has left the nonsettling states in a difficult spot, said Sterling.

"An appeal is almost a fruitless effort," said Sterling. "Appellate courts almost uniformly affirm these types of remedy decisions. This decision is virtually bulletproof."

Legal experts were still reviewing the judge's multipart decision tonight, but pundits such as Robert Lande, an antitrust professor at the University of Baltimore, said they were having trouble finding any concessions made by the judge to the nonsettling states.

"This looks like an incredible victory for Microsoft," said Lande. "I see some little tweaks here and there, but basically it's a near and complete Microsoft victory."

"There were questions about could this be appealed," said Tom Bittman, an analyst at Gartner Inc. in Stamford, Conn. "It certainly can be appealed to the Supreme Court. But our opinion is the Supreme Court has basically already said they're not interested, so anything that did go to them would be rejected, we believe. And we think the case is essentially closed."

Industry groups representing Microsoft competitors were disappointed with the decision but argued the ruling could be appealed.

"It's a rubber stamp," said Ed Black, who heads the Computer & Communications Industry Association (CCIA). "It's a shame; it's a loss for innovation. It's such a bad decision that it leaves good grounds for appeal."

Ken Wasch, president of the Software Information Industry Association, was similarly upset. The settlement "will prove an ineffective remedy to Microsoft's antitrust violations," he said, adding that the company's anticompetitive behavior now extends far beyond the browser into other technologies and markets.

Eric S. Raymond, a longtime open-source proponent, said the judge's ruling "doesn't look like it's going to have more than a marginal effect" on the world of operating systems and competition. "I see nothing dramatic here.

"I think the market can take care of the Microsoft problem," he said. "The market is taking care of the problem."

The problem with the judge's ruling today, Raymond said, is that it doesn't solve lingering issues. "Unfortunately, I fear that we may have gotten the worst of both worlds, which is that nobody questions that the government should do this kind of intervention and that the intervention wasn't effective."

Michael Mace, chief competitive officer for PalmSource, the Sunnyvale, Calif.-based OS subsidiary of Palm Inc., which is headquartered in Santa Clara, Calif., said he was a "bit disappointed by the ruling" which he characterized as "narrowly drawn."

Mace, who testified at the remedy trial, said the judge did not use her ruling to "set some ground rules" for Microsoft. The decision also did not look at new market areas that Microsoft has entered or plans to enter.

Three years ago Microsoft launched its PocketPC software to compete with Palm in the handheld computer market. Mace said Palm continues to capture about a 60% share of the handheld computer market.

Microsoft has made an aggressive push into development of mobile phone software and operating systems during the past three years. Microsoft executives have repeatedly said they want to extend the company's .Net architecture to the mobile market, and is actively marketing cellular "SmartPhones" based on the PocketPC OS.

"It's clearly a happy day in Redmond right now," said Dwight Davis, an analyst at Boston-based Summit Strategies Inc. "The settlement that Microsoft had negotiated was far less damaging than some of the earlier proposals that Justice and the states had floated, and Microsoft has to be quite happy that it's survived yet another court test largely intact and largely able to continue business as usual.

"It sounds as though the court's ruling threw some cold water on the stance that the dissenting states had been taking," Davis said. "I don't know if legally that throws any barriers in their path of pursuit of a more rigorous settlement."

Dan Kusnetzky, an operating systems analyst at IDC in Framingham, Mass., said the judge's ruling means that any major changes for consumers and business users arising from the case are probably years away -- if they come at all. That depends on whether the matter is appealed further and ultimately settled or rejected by the U.S. Supreme Court.

Since Microsoft made some changes in response to last year's settlement, such as giving users the ability to remove desktop icons for programs such as Internet Explorer and Windows Media Player, some obvious issues have already been addressed, he said.

"My sense is that we won't see a lot of other consumer-visible actions" until any court appeals are completed, Kusnetzky said.

"For most of the IT organizations, this particular settlement should be pretty much transparent to them," said Rob Enderle, an analyst at Cambridge, Mass.-based Giga Information Group Inc. "By no means is this settlement creating an environment that's worse for them. It'll be neutral or better."

Enderle said there could be long-term positive impact for IT, in the form of better access to competitive products -- if the compliance committee called for under the settlement is a strong one.

"If the compliance committee is strongly built and it does its job, it could make a big difference in protecting the next company that's threatened by Microsoft," said Enderle, noting that the decision is too late to help Netscape Communications Corp. "The compliance committee could actually do a decent job on protecting the competitive environment, but it depends an awful lot on the makeup of that committee."

Kollar-Kotelly gave no hint during the remedy hearing this spring about how she might rule, and the first word that a decision was imminent came in a terse statement yesterday (see story).

Her decision was released at 4:30 p.m., after the financial markets had closed, and was expected to be posted on the court's Web site. The site was unreachable late this afternoon after the ruling was handed down.

The ruling was also posted on Microsoft's Web site.

"I'm happy that the company was not broken up into separate entities," said Steve Sommer, CIO at Hughes, Hubbard & Reed LLP, a New York-based law firm with about 1,100 employees. Sommer's firm is a heavy user of Microsoft products.

"I think [Microsoft Chairman Bill] Gates has better control when it's one entity. Breaking it up was not an answer," said Sommer, adding that he thought the case had grown "a little tiresome."

"We all know Microsoft isn't perfect. IBM is not perfect. No one is perfect. I want it to be over," he said.

But Rick Peltz, CIO at Marcus & Millichap Corp., a commercial real estate investment firm in Encino, Calif., lashed out at the decision.

"Obviously, we would like [Microsoft] to open as much code as possible to keep competition alive," Peltz said. "What it sounds like to me is [the judge] chose not to do anything" after delaying the original settlement for a year.

"I thought there was a whole review process that was supposed to go on and that they were supposed to be penalized today," Peltz said. "A lot of entrepreneurial companies out there were probably looking for that [possible Microsoft] breakup today. If Internet Explorer is going to [continue to] be part of the Windows operating system, then Bill Gates won a big victory today. It continues a monopoly for the IBM-compatible PC operating system. There is no competition out there right now. I'm disappointed."

Today's decision represents another milestone in a landmark antitrust case that began four years ago and may not soon end.

Over a four-month period earlier this year, Kollar-Kotelly heard from a long list of witnesses about what should be done to satisfy a U.S. Court of Appeals decision in 2001 that Microsoft illegally maintained its operating system monopoly.

The U.S. and half of the 18 states involved in the case settled soon after the appeals court decision. But nine other states -- California, Connecticut, Florida, Kansas, Iowa, Massachusetts, Minnesota, Utah and West Virginia -- as well as the District of Columbia pressed on, seeking tougher remedies.

Throughout the remedy hearing, which began March 18, Microsoft's lawyers argued that the states' proposed remedies were too broad, exceeding the scope of liabilities that the Court of Appeals outlined last year and potentially creating havoc not only for Microsoft, but for the entire PC industry as well.

Perhaps the most controversial remedy proposed by the states would have forced Microsoft to sell an "unbound" version of Windows -- one free from additional programs such as a browser and media player that are referred to as middleware -- so that PC makers and end users could replace those programs with ones from competitors.

In a dramatic reaction to that proposal, Gates testified in April that the company would be forced to pull Windows from the market if that particular remedy was accepted by Kollar-Kotelly.

Removing such middleware from Windows would cripple other aspects of the operating system, such as the Help program, Gates told the court. Because the proposed remedy said an unbound version of Windows must be a functional equivalent to the full operating system, minus the removed middleware, Gates said there would be no way Microsoft could satisfy the provision -- forcing the company to stop selling Windows to avoid violating the remedy.

Microsoft was required by the federal remedy to disclose its interfaces under the settlement, something that it has already begun to do.

Carol Sliwa, Todd R. Weiss and Bob Brewin of Computerworld contributed to this report.

Weigh in on the Microsoft case and today's decision in our online Computerworld forum.

Read Computerworld's full coverage of Microsoft's antitrust fight.

Copyright © 2002 IDG Communications, Inc.

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