Update: Appeals Court tosses out Microsoft break-up order

A federal appeals court today reversed Microsoft's breakup and sent the case to a new judge.

The U.S. Court of Appeals for the District of Columbia ruled that Judge Thomas Penfield Jackson conducted himself improperly, creating the appearance that he was biased against the company. The court's order sends the case back to the district court - and a different judge - for further proceedings.

"We vacate the judgment on remedies, because the trial judge engaged in impermissible ex parte contacts by holding secret interviews with members of the media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom, giving rise to an appearance of partiality," the court said.

The court vacated Jackson's remedy of breaking up the company, but it upheld the finding that Microsoft illegally tried to maintain a monopoly in operating systems.

After the decision was released, the Department of Justice issued a statement, saying, "We are pleased that the Court of Appeals found that Microsoft had engaged in illegal conduct to maintain its operating system monopoly. We are reviewing the court's opinion and considering our options."

A Microsoft spokesman declined to comment, explaining that company lawyers are still reading the decision. A Justice Department spokeswoman couldn't immediately be reached for comment.

Dan Kusnetzky, an operating systems analyst with IDC in Framingham, Mass., said the only surprise in the decision is "how we've gotten to this point, not that we got here."

Instead of Microsoft winning an appeal based on flaws in the government's case, Kusnetzky said, the ruling was based on opinionated comments about the case by Jackson outside the courtroom.

"If you look at Microsoft's behavior since this went to the Appeals court, they have acted like it was going to go this way," he said. "They have not changed their behavior."

Bill Claybrook, an analyst with Aberdeen Group Inc. in Boston, said that while he agreed with Jackson's original ruling in the case, it was clear the judge's related conduct would cause problems. "He was pretty flamboyant, I think," Claybrook said of Jackson.

The bottom line, Claybrook said, is that the appeals court found that Microsoft illegally tried to maintain an operating system monopoly. "Microsoft, I'm sure, loves this because they think they can probably get it thrown out in a lower court."

In June of last year, Jackson ordered the breakup of Microsoft into two separate companies, one to be focused on operating systems and the other on software applications. The DOJ and 17 of 19 state attorneys general who are plaintiffs in the case had recommended that ruling. Jackson further ordered a variety of behavioral remedies meant to curb what the plaintiffs had alleged to be Microsoft's illegal use of its operating system monopoly to further its dominance in IT. The breakup and remedies were "stayed" while the appeals process continues.

Jackson ruled before he issued the breakup order that the company is in fact a monopoly and has used that power in violation of the Sherman Antitrust Act. It's not illegal under U.S. law for a company to be a monopoly. What is illegal is using that status to, among other things, squelch the competition.

The judge's harshest sentiments were not, however, conveyed in his written court rulings. In public speeches and interviews with reporters, Jackson expressed his views on the case and on DOJ and Microsoft attorneys and personnel. He likened Microsoft Chairman Bill Gates to Napoleon.

Such comments didn't sit well with officials in Redmond. Microsoft urged the appeals court to consider the judge's remarks and that panel did, rebuking Jackson for offering his thoughts on the case. Chief Judge Harry Edwards said that though judges certainly form opinions, if all of them spoke publicly "the system would be a sham." Edwards made his comments during two days of oral arguments before the appeals court, which included time to consider the "conduct of trial and extra-judicial statements."

During the arguments, Edwards also had a sharp exchange with Jeffrey Minear, an attorney from the Office of the Solicitor General, defending the breakup order, casting doubt on the government's contention that Microsoft exhibited monopolistic, anti-competitive behavior against Web browser developer Netscape Communications by attacking its business.

Though legal observers say that appeals courts typically defer to a judge's findings - debating primarily the merits of the law being applied to those facts - Edwards appeared to call into question some of Jackson's findings, commenting, "I don't think my obligation is to defer to them."

Jackson had sought to bypass the appeals court, sending Microsoft's appeal directly to the U.S. Supreme Court, arguing that resolving the case has "general public importance" and so it should be put on the appellate fast track. Microsoft fought that move, contending that there was no justification to send such a complex case directly to the Supreme Court without allowing the high court the benefit of an appeals review of the matter.

Just in case, though, the company hired lawyers with experience arguing before the Supreme Court. When Jackson issued his verdict and his remedies in the case, much was made of the time it could take for the case to wend its way through the appeals process. The case already had already been in the works for a long time.

Microsoft is actually stronger in the marketplace now than when the antitrust case began, according to Kusnetzky, with a 91% market share in desktop operating systems for systems shipped in 2000. That's up from 88% in 1999, based on IDC figures. The company's server operating system market share also increased, from 38% in 1999 to 41% in 2000.

"I think it tells us that people who were committed to Microsoft would continue with Microsoft because they were committed to it," he said. It would have been too expensive for companies to change applications and operating systems and retrain workers to move to other options in the marketplace, he said.

"People have been continuing to purchase Microsoft software as though this weren't happening," he said.

The genesis of the antitrust case can be traced to a 1991 U.S. Federal Trade Commission investigation, opened after competitors complained that Microsoft has an unfair advantage because it makes both applications and the operating systems on which those applications run. The DOJ picked up the investigation a couple of years later, after FTC commissioners deadlocked on whether to pursue the probe.

That eventually led to a consent decree, including an agreement that Microsoft stop charging OEMs, or original equipment manufacturers, a blanket royalty on all PCs sold, even if the machines weren't bundled with Windows. The consent decree was meant to settle the case but sparked even more legal wrangling. In August 1995, a federal judge approved the consent decree. But in September 1996 the DOJ opened another investigation into whether Microsoft violates antitrust laws, eventually asking Judge Jackson to find the company in contempt of the consent decree.

The judge issued a preliminary injunction ordering the company to stop requiring PC makers to pre-install the Internet Explorer browser as a licensing condition for Windows 95. That issue was settled in January 1998 when Microsoft agreed to create an unbundled version of Windows 95. But the following month, reports surfaced that the DOJ investigation was expanding. In May of that year, the DOJ and state attorneys general filed the antitrust suits against the company.

The appeals court decision on its Web site could not be reached because of heavy traffic. However, the decision was available (in PDF format) on Microsoft's Web site.

Computerworld staff writer Todd R. Weiss and Marc Ferranti of the IDG News Service contributed to this report.

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Copyright © 2001 IDG Communications, Inc.

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