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Microsoft ruling may be symbolic

Despite the celebratory claims from headquarters in Redmond, today's appellate court victory could end up largely symbolic.

Despite the celebratory claims from corporate headquarters in Redmond, Washington, today's appellate court victory could end up largely symbolic for Microsoft in the long run.

The decision by the U.S. Court of Appeals for the District of Columbia applies to an earlier case brought by the Justice Department last October, an action based narrowly on a consent decree Microsoft signed with the federal government in 1995. For practical purposes, that case already had been made moot by the pending release of the Windows 98 operating system, the successor to Windows 95, and the filing of a new case by the Justice Department and 20 state attorneys general.

Legal analysts acknowledged that today's ruling could have a significant effect on the overall case, but not all agreed that Microsoft would be the sole beneficiary.

The decision reverses a preliminary injunction U.S. District Judge Thomas Penfield Jackson issued in See special coverage: 
Big win for Windows December. After finding that the government stood a good chance of proving that Microsoft was violating a key provision in the consent decree, he ordered the company to offer Windows 95 separately from its Internet Explorer browser while the case was pending. Microsoft has been accused of unfairly leveraging its dominance in the operating system market by bundling its browser with Windows.

In essence, the appellate bench today ruled that Jackson failed to follow established court procedure and that he misinterpreted the meaning of the consent decree, which Microsoft had signed to settle an earlier antitrust case.

But the three-judge panel went well beyond the immediate issues presented by the consent decree, offering detailed comments that provided illuminating clues to the future of the Justice Department's case.

Although the rejection of the lower court's injunction was an obvious win for Microsoft, government lawyers will probably be encouraged by several side remarks contained in the decision. Chief among these nuggets is an indication that the judges are inclined to agree that the software giant is a monopoly, a contention Microsoft vigorously denies.

In setting out the historical facts of the case, the court recited how in the early 1980s IBM tapped fledgling Microsoft to provide an operating system for a new line of personal computers, allowing it to acquire an "installed base" on literally millions of machines.

"That base constituted an exceptional advantage and created exceptional risks of monopoly," the decision stated. The appeals court also observed that "widespread use of multiplatform browsers as user interfaces has some potential to reduce any monopoly-increasing effects" surrounding Microsoft operating systems.

"These are two purely pro-government observations that are extraordinarily significant for the government," said Rich Gray, an antitrust attorney at Bergeson, Eliopoulos, Grady & Gray. The government's newer case, he explained, is built on the dual premise that, first, Microsoft is a monopoly and that, second, it violated federal law by trying to extend and preserve its monopoly in the market for personal computer operating systems.

As a result, "the government's case now is heavily dependent on the argument that what Microsoft is doing is attacking Netscape's browser to prevent it from becoming an alternative to the Windows operating system," he said, adding that the government attorneys may similarly argue that Microsoft attempted to thwart Sun Microsystems' Java programming language.

Microsoft associate general counsel Brad Smith disagreed that the remarks regarding the potential monopoly would in any way hurt the company's case. "We don't believe that Microsoft is in any type of monopoly position today, and we don't believe there is any probability that the company is likely to be a monopoly in the future," Smith said.

For the most part, the company viewed the ruling as an important new weapon to their arsenal of legal defenses.

"This is a very powerful, very informing decision from the Court of Appeals, and it does bear on the issues in the Windows 98 litigation," said Bill Neukom, Microsoft's senior vice president for law and corporate affairs. "We intend to use this clarifying opinion as we go forward in either of these cases."

Specifically, Microsoft attorneys were heartened by the appellate court's detailed legal analysis of what it means for products to be "integrated"--an issue that lies at the heart of questions involving the relationship between the Windows operating system and the Internet Explorer browser.

"An 'integrated product' is most reasonably understood as a product that combines functionalities (which may also be marketed separately and operated together) in a way that offers advantages unavailable if the functionalities are bought separately and combined by the purchaser," Judge Stephen Williams wrote for the majority, which included Judge Raymond Randolph.

They differentiated legal integration from "sham" integration by saying the combination must be justified by technical efficiencies. "If there is no suggestion that the product is superior to the purchaser's combination in some respect, it cannot be deemed integrated," the majority opinion stated. "Integration may be considered genuine if it is beneficial when compared to a purchaser combination."

Judge Patricia Wald disagreed with that analysis, writing in a dissenting opinion that it was out of step with the facts of the case and established antitrust law. While the dissent is an official part of the court record, it is not legally binding.

William Kovacic, a professor specializing in antitrust law at George Mason University, said the decision gives Microsoft powerful ammunition in its Windows 98 case.

"Microsoft's case hinges substantially on demonstrating the benefits of bundling, and the majority opinion here should be encouraging to them," he said. "It tends to adopt a more expansive definition of what constitutes integration and a somewhat narrower view of what constitutes illegal tying."

He added that the decision "also signals to Microsoft that when it comes to appeals, they will have a significant number of sympathetic ears when they lay out the basic elements of their case." While any appeal in the Windows 98 case would be assigned at random to a new panel, he estimated that a majority of the other judges on the court share similar views on product integration.

Regardless of interpretation, Kovacic said the ruling indicates the case is likely to take years to resolve and could result in a historic ruling.

"It creates the expectation that this case will go all the way to the Supreme Court," he said, "and that this is going to be the vehicle that the Supreme Court uses to define the boundaries of conduct for monopoly firms, including high-tech firms."