Despite ruling, Microsoft still faces unresolved issues

WASHINGTON -- To the relief of Microsoft Corp. Chairman Bill Gates, the U.S. Court of Appeals may have freed his company from the thing it has feared most: a breakup. But the company still faces some unpleasant choices: a settlement that could curb its business practices or continued litigation with an uncertain outcome.

And Microsoft also has a new worry: There's a possibility that the government and the states could bring new action, based on yesterday's decision (see story), against its emerging products, especially the Windows XP operating system 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" (see story). The appeals court decision 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 today. "We are still reviewing the decision."

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.

Regardless of whether the states go to court immediately, Microsoft's emerging business strategies will be the key issue in the next step of this case, said Blumenthal. "Forward business practices are definitely relevant to the remedy," he said. 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."

But some legal experts questioned whether the government could take immediate legal action, and even one supporter of the government's case, Ken Wasch, president of the Software & Information Industry Association, a Washington-based trade group, said he 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," said Wasch. "You would probably hear screams from computer manufacturers."

Gates, who saw the decision as lifting a cloud over the future of his company, 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 appeals court 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 as well as Microsoft's. Thus, the government also has reasons to settle.

If settlement efforts don't succeed, protracted litigation is possible. Either sides could take this decision directly to the U.S. Supreme Court. But Blumenthal questioned 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 trial was held, but under a different judge. Trial Judge Thomas Penfield Jackson, who wanted Microsoft's operating system division split into a separate company, won't be allowed to touch it. The appeals court disqualified him 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, according to 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. It's a process that should take place within 45 days of yesterday's decision, he said.

With this ruling, both sides have a better sense of where they stand on the legal issues. But they still don't have a remedy, which has been long regarded as the most difficult part of this case.

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 appeals court wants the lower court to examine the benefits of bundling. 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 Gordon & Glickson LLC in Chicago.

"I think a breakup was always pretty unlikely, and this decision certainly makes it more unlikely, but that doesn't mean the states will not seek a breakup," said Steven Newborn, the Federal Trade Commission's litigation chief until 1994 and now an attorney at the Washington law firm of Clifford Chance Rogers & Wells LLP.

But any remedy imposed by the court will have to be significant, said Newborn, and will likely include "substantial fencing-in provisions" that penalize the company if it doesn't follow the remedy order closely.

The decision not to break up Microsoft was widely expected, according to Stephen D. Houck, one of the attorneys who argued strongly for that action during the trial. Houck was the lead trial counsel for the 19 states involved in the case against Microsoft and is now an attorney at Reboul, MacMurray, Hewitt, Maynard & Kristol in New York.

Houck said Jackson didn't hold remedy hearings because he first wanted to get feedback from the appeals court on his decision and then decide what remedy was appropriate.

Houck believes a breakup is still possible. "It's just a handful of American companies that have been declared an illegal monopoly. The remedy has to be a significant one," he said.

Justice Department officials would discuss a settlement only in the broadest of terms. "The government has routinely indicated that when we bring cases, we're amenable to possible settlement of the cases if the settlement is of a sort ... that the illegal conduct giving rise to the suit will cease," said one official, speaking anonymously.

Microsoft critic Ed Black, who heads the Computer & Communications Industry Association (CCIA), a Washington trade group whose members include Sun Microsystems Inc. and Oracle Corp., said the court's finding that Microsoft illegally maintained its monopoly is very serious. "This is the provision of the law that has been historically used for the grounds for breakup. That is the capital crime of antitrust law."

Remedy options other than a breakup that were raised in prior settlement talks, included requirements for Microsoft to 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. But some end users said they wonder whether the decision will bring any change at all.

Tony Scott, chief technology officer at General Motors Corp., said the ruling may prompt Microsoft to "take a pause" in how it engages in future practices.

"But on the other hand, when I recently talked to Microsoft, they made it clear that they feel passionately about their point of view and about this case," said Scott. "I don't expect a 180-degree turnaround in the way they do business. That's highly unlikely."

Still others hold out hope that alternative technologies or market forces will loosen Microsoft's grip. "People like me, who've been entrenched with Microsoft, are looking at other solutions based on Linux," said Jack Nork, CTO at Mason & Madison Advertising in Bethany, Conn.

"I came to a smaller organization from Mercedes-Benz," said Nork. "Here, I have to do a lot more dollar-cost analysis. If I can get something for $60 [that uses Linux] instead of for $5,000 [for Microsoft licenses], then it's not difficult to see where the ROI is," he said. "Microsoft is fueling the development of Linux."

Computerworld staff members Mitch Betts, James Cope, Pimm Fox and Lee Copeland Gladwin contributed to this article.

Copyright © 2001 IDG Communications, Inc.

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