Justice Dept. downshifts in Microsoft case

In a bid to "streamline" the next phase in the Microsoft antitrust case, the government on Thursday said that it would not seek to break up the software giant.

The Justice Department also will not seek a rehearing on the tying claim--that Microsoft illegally integrated its Internet Explorer Web browser with Windows 95 and 98. The agency said in a statement Thursday that it is "taking these steps in an effort to obtain prompt, effective and certain relief for consumers."

Even as the agency removed those issues from consideration, however, it opened the door for others, saying it wants the court "to investigate developments in the industry since the trial concluded"--which could include the forthcoming Windows XP operating system.

The announcement also could be part of settlement discussions or an effort to bring Microsoft to the negotiating table as a new judge gets set to resume hearings in the case.

The government might have agreed to publicly take a breakup off the table, "if Microsoft was willing to (accept) restrictions on XP and other operating systems," said Andy Gavil, an antitrust professor at the Howard University School of Law. But, he cautioned, "this could easily mean there are no serious discussions going on."

Microsoft, the Justice Department and 18 states are scheduled to meet over the next two weeks with U.S. District Judge Colleen Kollar-Kotelly. The U.S. Court of Appeals for the District of Columbia Circuit last month ordered the case returned to the district level, upholding an earlier ruling that Microsoft had engaged in anti-competitive business practices but requesting reconsideration of the remedies imposed, which included breaking the company into separate operating systems and applications businesses.

"I'm not really surprised the new administration (of President George W. Bush) would drop the breakup," Gavil said. "Philosophically, it was not their bag, and the Court of Appeals made it clear it would be difficult if they would continue to press for it."

The abandonment of the tying claim is more of a surprise, but probably stems from the government's quest for speed.

"What I think is they thought the new judge was going to have protracted proceedings before any further trial on remedy on the tying," said Emmett Stanton, an antitrust attorney with Fenwick & West in Palo Alto, Calif. "They probably calculated the remedy they could get in two years would be no more severe than the remedy they could get quickly."

By removing breakup and tying, Stanton said, "the government has made it more unlikely for Microsoft to turn this into a protracted process."

Thursday's announcement marks a turning away from the government's saber rattling after the appeals court's June 28 ruling that upheld eight separate antitrust claims against Microsoft.

State attorneys general for Connecticut, Iowa and New York, among others, earlier made it clear that a breakup was still an option. They also raised concerns about new technologies integrated into Windows XP. At one point, the government appeared ready to seek an injunction against the operating system, which is expected to appear on new PCs on Sept. 24 and at retail on Oct. 25.

Support from the states
On Thursday, Iowa Attorney General Tom Miller said the 18 states were in agreement with the Justice Department "and the decision not to seek a breakup of Microsoft. Since the Court of Appeals decision, the states and DOJ have directed their efforts to one objective--the quickest and most effective remedy possible. This decision is consistent with that objective."

CNET Radio Bob Lande, senior research scholar at the American Antitrust Institute, explains why the DOJ has backed off its plans to split Microsoft. (2:43)   • Play clip

That turnabout caught the attention of Bob Lande, an antitrust professor with University of Baltimore School of Law. "The states no longer asking for breakup after all this time of being so stiff is really surprising."

Microsoft, meanwhile, voiced its hopes for a resolution to the long-running case.

"I'm not a legal person, but we have said for some time we look forward to a fair and expeditious solution, and that's what we continue to strive for," said John Conners, chief financial officer at the software company, who was just informed of the ruling before a presentation at Salomon Smith Barney's Tech 2001 Industry conference in New York on Thursday.

Investors apparently saw no great meaning in the Justice Department's decision, as Microsoft's stock shifted slightly downward for the day, keeping pace with the Nasdaq as a whole. At the close of the market, shares were off $1.72, or 3 percent, to $56.02.

"I don't expect a near-term impact on the business," said Salomon Smith Barney analyst Richard Gardner, who called the move "a positive, since they're not going after a tie-in and they're not going after a breakup."

Gartner analysts David Smith and French Caldwell say that the Justice Department doesn't want to be perceived by the public and influencers as erecting roadblocks to any potential for economic recovery. see commentary

In its statement on Thursday, the Justice Department said that rather than seek a breakup of Microsoft, it would ask the district court for an order modeled after "the interim conduct-related provisions" issued at the time of the antitrust ruling. It also said it would ask for "a period of expedited discovery" to consider what has happened in the PC industry since the end of the trial "to evaluate whether additional conduct-related provisions are necessary."

In the June ruling, Judge Thomas Penfield Jackson imposed a number of restrictions on Microsoft's behavior. For example, the company would have to offer equal licensing terms to all PC makers; would not be able to force Windows licensees to buy other Microsoft software; could not threaten or take action against companies making competing products by withholding license terms, technical support or sales support; and could not lock PC makers into agreements requiring them to promote, distribute or use Microsoft products.

The timing of the announcement--and the fact that one had been made at all--struck many legal specialists as unusual. The government could have made its intentions known in a scheduled Sept. 14 court filing.

Observers said that the government could be jockeying for position, perhaps in advance of a settlement. The backing of the states for the Justice Department's call for a lesser remedy increases the chances of settlement, some said.

"The announcement makes sense if they now want to start getting serious about negotiating with Microsoft," Lande said.

"If the states are onboard, it surely means settlement is likely," Gavil said. Microsoft's muted response to the announcement "really does suggest they're at the table. You would expect them, to the contrary, to be jumping up and down," he said.

CNET Radio Charmaine Gravning, product manager for Microsoft Windows, talks about pre-orders for XP. (3:33)   • Play clip

"I am sure there are settlement talks going on, probably at multiple levels and at secret back channels," Stanton said. "But I wouldn't read much into the prospects of settlement from this announcement."

Rich Gray, a Silicon Valley antitrust attorney closely watching the trial, also was skeptical. "The only way I would do this as part of the settlement scenario is if the damn thing is already signed," Gray said. "But even that doesn't make sense to me as part of a settlement scenario."

No one just takes their two biggest bargaining chips off the table, he said.

"The government carries a special burden when it goes into court to avoid game-playing with the court," Gray added. "If these government attorneys had already made the determination it's not in the public's best interest to pursue these remedies, then it makes sense not to pretend they're going for something that they're not."

Staff writer Larry Dignan contributed to this report from New York.