States to keep heat on in Microsoft case

Two states participating in the Microsoft antitrust case have a message for the Justice Department: If you go soft on the software giant, we're ready to push for stronger sanctions on our own.

Breaking ranks with the government camp: New York Attorney General Elliot Spitzer and California Attorney General Bill Lockyer, who late last week said that they are "committed to pressing the trial court for stringent remedies that will change the conduct by Microsoft that the courts have found to be illegal, and that will provide consumers with the benefits of competition."

Such a move by the two states, which have the resources to pursue separate actions against Microsoft and which have been among the leaders of the coalition of 18 states arrayed against the software company, could add to the challenge of obtaining a fast remedy or eventually settling the case.

California and New York appear to be responding to a surprising turnabout by the Justice Department, which last week said it would not seek a breakup of Microsoft or retry the claim that the software giant illegally tied together Internet Explorer and Windows 95 and 98. Instead, the federal agency plans to seek restrictions on the company's business practices.

Through that action, the government may be signaling terms on which it would be willing to settle and that could be palatable for Microsoft. But Spitzer and Lockyer may be sending another message: They don't want the case settled on too modest terms or to see the Justice Department go easy on the company during forthcoming remedy proceedings, said legal specialists.

The government and Microsoft are supposed to file a joint status report with newly appointed U.S. District Judge Colleen Kollar-Kotelly on Friday.

"They have the right to seek whatever remedy is appropriate for the violations of their own antitrust laws," said Rich Gray, a Silicon Valley-based antitrust attorney closely following the trial. One problem for the government: "Seeking a stiffer remedy could drag out discovery" and other proceedings when the case returns to court, Gray said.

In a worst-case scenario, the trial judge could separate those states' cases from the larger proceeding, he added.

Ernest Gellhorn, law professor at George Mason University, says states aren't in a "power" position to hamper any federal decisions in the Microsoft case. (3:48) Play clip

Although many legal experts were not surprised to see the Bush administration relenting on a position strongly advocated by Clinton trustbusters, the apparent support of the state attorneys general for that move did catch them off guard. Two of the most vocal supporters of hard-line action against Microsoft, Iowa Attorney General Tom Miller and Connecticut Attorney General Richard Blumenthal, publicly spoke out last week in favor of the Justice Department's apparently softened position.

"It's really hard to believe, after pushing so long and hard for breakup, the states would back off that position now," said Bob Lande, an antitrust professor with the University of Baltimore School of Law. "It makes you wonder."

Sources close to the California Attorney General's office indicated that Lockyer and some of his peers were themselves blindsided by the Justice Department's very public removal of breakup as a potential remedy in the case.

But the Justice Department may have had good reason for publicly backing off a breakup when it did, given Friday's deadline.

"It may be that the government was sending a draft to Microsoft which made these things clear, and decided they would rush to make the announcement before Microsoft leaked it," Gray said.

A high-level Justice Department official lent credence to Gray's conjecture. "Certainly if we told Microsoft, it would inevitably have gotten to the public by next Friday," the official said, speaking before Spitzer and Lockyer issued their statement. "So we decided to tell Microsoft and then the public."

A remedy too soft?
Backing off breakup appeared to be a complete turnaround from the position strongly advocated by the Clinton administration.

Based on the language of the June 28 appeals court decision that upheld eight separate antitrust claims against Microsoft, the Justice Department concluded it could not sustain breakup on appeal, even if granted by Kollar-Kotelly, the agency official explained.

But by abandoning breakup and tying, the Justice Department may have opened the door for Microsoft to work toward a settlement it can live with, Gray said.

"Still, taking those two things off the table changes the settlement dynamic dramatically," he added. "Now Microsoft is sitting there without these two huge issues over its head. That's not how cases are settled."

Gray believes that Spitzer and Lockyer are attempting to put "political pressure" on the Justice Department and Microsoft to keep the case from being settled on terms too favorable to Microsoft.

"We look forward to continuing to work with the Department of Justice in the proceedings that are about to begin before the trial court, but will, if necessary to protect the public, press for remedies that go beyond those requested by the Department of Justice," the two attorneys general said in their statement at the end of last week.

Another issue could be the Justice Department's using conduct restrictions imposed earlier by U.S. District Judge Thomas Penfield Jackson as a starting point for a new remedy. When Jackson, who was removed by the Court of Appeals, issued his original remedy, he did it in two parts. The first would have put restrictions on Microsoft's business practices, while the other would have broken the company into separate operating systems and software applications businesses. Jackson stayed both remedies pending appeal.

The Court of Appeals later threw out both remedies and ordered a new one to be crafted in its place. If Kollar-Kotelly eventually accepts Jackson's original conduct restrictions or some derivation of them, it would put her in the position of overseeing--"in some ways regulating"--Microsoft for years to come, said Glenn Manishin, an antitrust attorney with Patton Boggs in McLean, Va.

"A structural remedy"--that is, breakup--"is a cleaner, more sure approach," he said. Manishin also noted that in some ways Jackson's restrictions do not go as far as those hammered out during failed settlement discussions last year.

Although Jackson's original remedy would have placed many restrictions on how Microsoft conducts its business, those restrictions were designed to work in conjunction with a breakup of the company and not necessarily to stand on their own.

Spitzer and Lockyer made it clear they want more. Their target: Windows XP.

"The states of New York and California will insist that Windows XP--Microsoft's latest version of its personal computer operating system scheduled for marketplace release in the next few weeks--receive close scrutiny in arriving at a judicially ordered remedy," the two attorneys general said. "It is imperative that Microsoft not have...(the) opportunity to use Windows XP to suppress competition in emerging Internet areas."

Although the government will be looking at Windows XP during remedy proceedings, there will be no attempt to stop the operating system's scheduled Oct. 25 launch.

"We have no present intention to move for a preliminary injunction to ask the court not to let XP ship," the Justice Department official said.

Moving quickly to an additional "limited period of discovery" to address changes since the trial's conclusion also contributed to the Justice Department's decision to put aside breakup and tying, the agency official said. "The remedy here has to be effective for where Microsoft is today."

Pushing for breakup could have added another year or more to the proceeding.

But Gray didn't see the Justice Department's logic for backing off breakup while pushing for new discovery.

"How can they know for sure they aren't going to be able to sustain the breakup at the appellate level until they do those further investigations?" he asked. "You can't have it both ways."