Second Chance for Microsoft


To the relief of Microsoft Chairman Bill Gates, a federal appeals court may have freed his company from the thing it has feared the most, a breakup. But the company still faces an unpleasant choice: a settlement that could curb its business practices, or continued litigation with an uncertain outcome.

And Microsoft Corp. has a new worry: the possibility that the government and the states could bring new action, based on last week's decision, against its emerging products. That in particular could affect the Windows XP operating system, which is due for release in October.

The state attorneys general earlier this month called Microsoft's linking of its .Net Internet services and the XP operating system "troubling." The decision of the U.S. Circuit Court of Appeals of the District of Columbia doesn't prevent the government from seeking court intervention if it feels that Microsoft is repeating behavior that was faulted by the court.

"There is nothing to preclude seeking some immediate relief, but there are no current plans" to do so, Connecticut Attorney General Richard Blumenthal, who represents one of the 19 states involved in the lawsuit, said Friday.

But Microsoft said the decision supports its linking strategy. "We remain confident that we will ship Windows XP on Oct. 25. The court's decision supported our right to innovate and sent back a framework on the tying issue that is very high for the government to meet," said Jim Cullinan, a company spokesman.

Microsoft's emerging business strategies will be the key issue in the next step of this case, said Blumenthal. The court, during the remedy phase, "can hear evidence about XP and Hailstorm and any other products or practices that involve the same violation of law," he said.

But some legal experts question whether the government could take immediate legal action. Even one supporter of the government's case, Ken Wasch, president of the Software & Information Industry Association, a trade group in Washington, doubts that the court, after some six years, will move swiftly now.

Perhaps more important, any effort to block Windows XP will likely be opposed by PC makers. "A significant portion of the computing industry depends upon new operating systems as an incentive to upgrade computers. You would probably hear screams from computer manufacturers," Wasch said.

Gates must now decide whether to try, for a third time, to settle the case and live with the problems that may bring. His motivation? Seven appellate judges unanimously ruled that Microsoft is a monopoly that has broken the law. It's not a trivial finding.

U.S. Attorney General John Ashcroft called the decision a "significant victory." But the court found clear problems with the government's case, too. Thus, the government also has reasons to settle.

Both sides can take this decision directly to the U.S. Supreme Court. But Blumenthal wondered why either side would do that. "Both sides are declaring the results a victory; litigants don't normally appeal victories," he said.

If an appeal to the highest court is ruled out, the case will return to the U.S. District Court where the original trial was held, but under a different judge. The appeals court disqualified Judge Thomas Penfield Jackson because of his post-trial comments critical of Microsoft and Gates.

The new judge will be selected at random by a computer program that's used for assigning judges, said Joseph Alexander, a spokesman for the U.S. District Court for the District of Columbia. The selection, out of a pool of about 10 judges, will be made after the case is officially sent back to the lower court by the appeals court. That process should take place within 45 days of yesterday's decision, he said.

The new trial judge, the appeals court wrote, must reconsider whether a breakup is still appropriate in light of the weaker case. The appeals court was also critical of Jackson for not holding hearings on the remedy issue.

The appeals court changed this case in significant ways. Of the three major antitrust violations originally cited, one is no longer viable: that Microsoft attempted to monopolize the browser market. The appeals court didn't accept the government's argument that competitors, such as Netscape Navigator, were denied access to the market.

The second major claim, that Microsoft had illegally tied or bundled its browser to its operating system, was sent back to the lower court. The court, however, upheld the third claim, that Microsoft had used anticompetitive tactics, through its licensing contracts with PC makers, to maintain its operating system monopoly.

"The court's clear signal is that a breakup is a punishment that doesn't fit the crime," said Hillard Sterling, an antitrust expert at the law firm Gordon & Glickson LLC in Chicago.

Remedy options other than a breakup have included requirements that Microsoft end exclusive contracts with PC makers, set single prices for its operating systems and guarantee access to its application programming interfaces, which the company contends it already does.

Copyright © 2001 IDG Communications, Inc.

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