Appeals court reverses Microsoft breakup order

A federal appeals court today reversed a lower court ruling that called for splitting Microsoft Corp. into two companies, sending the case to a new judge for a decision on what remedies to impose on the software giant.

Although the U.S. Court of Appeals for the District of Columbia found that Microsoft engaged in illegal conduct in order to maintain its operating system monopoly, it ruled that Judge Thomas Penfield Jackson created an impression in out-of-court comments that he was biased against the company. At one point, for example, he called Microsoft Chairman Bill Gates a "Napoleon."

The court's 125-page unanimous opinion, released just before noon, means the case now goes back to a different District Court judge for further proceedings.

Both sides found comfort in the decision, with U.S. Department of Justice (DOJ) lawyers portraying it as a victory and Microsoft officials saying they are pleased with the outcome.

"It's clear that it reverses and significantly narrows" Jackson's original decision, Gates said at a news conference this afternoon. The ruling "sets a much higher standard" on the browser and operating system monopoly questions than that applied by the lower court, he said.

"We're pleased with the reversal. We're pleased with what the appeals court laid out here," Gates said. "We've always said that we felt a breakup was not going to take place at the end of the legal process. We do not believe a breakup will take place."

Attorney General John Ashcroft called the ruling a major victory for the government and 19 states because it upheld the government's key claim: that Microsoft used illegal conduct to maintain its operating system monopoly.

The opinion wasn't a complete win for the government, however, and both sides can appeal it to the Supreme Court. The decision could also open the door for a new round of settlement talks.

Asked about that possibility at a late-afternoon news conference, Ashcroft said he didn't know what the next step would be. But he made it clear that the decision doesn't compel the government to settle.

"The [Justice] Department is not in a weakened position," Ashcroft said. "The court did find that Microsoft had engaged in unlawful conduct.

"We will pursue the best interest of the American people, [and] we will explore all kinds of avenues to do that," said Ashcroft, who until today has said little about the merits of the government's case. "I'm not prepared at this time to indicate what the final outcome to be pursued on the part of the Justice Department is."

The appeals court, in its decision, specifically rejected Jackson's order that Microsoft be split. "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 decision said in part.

The court did uphold Jackson's finding that Microsoft illegally tried to maintain a monopoly in operating systems, a point noted by the DOJ in a statement.

Reaction to the decision was mixed.

"Microsoft was hoping for a home run, and they didn't quite get that," said Michael Silver, an analyst at Gartner Inc., in Stamford, Conn. "This is a stand-up double. This is really good for Microsoft."

Even so, "the decision means that Microsoft will have to pay the piper," said Mark Levitt, a collaborative computing analyst at Framingham, Mass.-based IDC who is also a lawyer. "It'll just be up to a different judge, one who at least does not give the public appearance of bias."

Bill Claybrook, an analyst at Aberdeen Group Inc. in Boston, said the appeals court decision was as much about Jackson's comments as about Microsoft's business practices. While he agreed with Jackson's original ruling, it was clear that the judge's related conduct would cause problems. "He was pretty flamboyant, I think," Claybrook said.

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

Lorne Cooper, president of Bedford, Mass.-based NuSphere Corp., the developers of an open-source Web development platform that supports Windows, Linux and Unix environments, said the appeals court decision will test the mettle of government prosecutors.

Since the case was reversed not on its merits but because of Jackson's behavior, Cooper said, he hopes the government will use the ruling as a "galvanizing event for the Justice Department to take the facts from the first case and aggressively pursue Microsoft."

Jack Nork, chief technology officer at Mason & Madison Advertising Inc. in Bethany, Conn., said Microsoft's actions are fueling the rise of competitors such as Linux vendors. The marketplace, more than the government, may rein in Microsoft, he said.

"The government may not have to intervene," Nork said. "People like me who've been entrenched with Microsoft are looking at other solutions based on Linux. I came to a smaller organization from Mercedes-Benz. 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.

"Microsoft is fueling the development of Linux," Nork said.

House Majority Leader Rep. Richard Armey (R-Texas) hailed the decision. "I applaud today's ruling because ... it sends the message that innovation in America will be rewarded, not punished. Our antitrust laws should not be used to hold our most successful companies back to give the competition a chance to catch up."

"The Court of Appeals has now joined the U.S. Department of Justice, the District Court and most of the information technology industry in recognizing that Microsoft's business practices are not just business as usual, but rather a clear and demonstrated violation of red-letter law," said Ken Wasch, president of the Washington-based Software & Information Industry Association (SIIA).

An official at the Computing Technology Industry Association saw it the other way, calling the decision "welcome news" for competition and consumers.

"The appeals court found that the federal government, the states and the lower court failed in that duty. Consequently, the lower court's order to break up Microsoft was out of proportion to the alleged antitrust violation in the case," said Lars Liebeler, attorney for the group, in a statement.

It's been just over a year since Jackson ordered the breakup of Microsoft into two separate companies, one focusing on operating systems, the other on software applications. The Justice Department and 17 of 19 state attorneys general who are plaintiffs in the case had recommended that remedy. Jackson also ordered a variety of behavioral remedies to curb Microsoft's alleged illegal use of its operating system monopoly to extend its dominance in IT.

Those orders were quickly put on hold so Microsoft could appeal the decision.

Although Jackson ruled that Microsoft is a monopoly and had violated 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 try to squelch competition.

The judge's harshest comments came in public speeches and interviews with reporters, when Jackson expressed his views on the case and on the Justice Department and Microsoft attorneys and personnel. The company later urged the appeals court to consider those remarks, which it did, rebuking Jackson for his public thoughts on the case.

During arguments before the appeals court, Chief Judge Harry Edwards also had a sharp exchange with Jeffrey Minear, an attorney from the Office of the Solicitor General, defending the breakup order and casting doubt on the government's contention that Microsoft exhibited monopolistic, anticompetitive behavior against Web browser developer Netscape Communications Corp.

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, saying, "I don't think my obligation is to defer to them."

Jackson sought to bypass the appeals court, sending Microsoft's appeal directly to the U.S. Supreme Court and arguing that the case has "general public importance" and 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.

Today's opinion marks the latest turn in an antitrust case that began with a 1991 U.S. Federal Trade Commission investigation that was 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 matter.

That eventually led to a consent decree, including an agreement that Microsoft stop charging PC makers 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 Justice Department opened another investigation into whether Microsoft had violated antitrust laws, eventually asking 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 preinstall 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 in May that year, the DOJ and state attorneys general filed the antitrust suits against the company.

Gates himself may have best summed up what today's ruling means.

"This is not the end of the case," he said. "But if the litigation moves forward, at least it's a very narrowed case."

Computerworld staff writers Patrick Thibodeau, Todd R. Weiss, James Cope, Jennifer DiSabatino and Brian Sullivan, Marc Ferranti of the IDG News Service and Keith Perine of The Industry Standard contributed to this report.

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Copyright © 2001 IDG Communications, Inc.

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