Appeals court: Don't break up Microsoft

Microsoft and the government claimed victory Thursday after a federal appeals court vacated an order calling for the breakup of the software giant but also determined that it illegally maintained its monopoly in operating systems.

In a 125-page decision, the U.S. Court of Appeals for the District of Columbia Circuit upheld a previous ruling that Microsoft used illegal conduct to retain its OS monopoly and asked a trial court to determine an appropriate remedy. The appeals court also asked the trial court to revisit the controversial issue of tying products such as the browser to Microsoft's ubiquitous PC operating system.

"I am pleased to say that the court unanimously found that Microsoft engaged in unlawful conduct to maintain its dominant position in computer operating systems," said U.S. Attorney General John Ashcroft. "This is a significant victory."

However, in a crucial win for Microsoft, the appeals court said the trial judge, Thomas Penfield Jackson, "seriously tainted the proceedings." It removed him from the case and tossed out his order calling for the breakup of the software titan.

In addition, the court threw out a claim that Microsoft attempted to extend its monopoly to the browser market.

Gates praises court decision Bill Gates, chairman, Microsoft

Microsoft Chairman Bill Gates described the ruling as positive and said it could lead to a settlement with the government.

"With this ruling there is a new framework, and so it would be a good time for all parties involved to sit down together," he said at a press conference at the company's Redmond, Wash., headquarters.

Sorting out the real winner depends on what the expectations were for the appeals court. In that regard, Microsoft is likely to be more disappointed in the split decision.

Mixed results
For the past several weeks, many analysts and some Microsoft executives had anticipated a fairly sweeping victory. As a result, being labeled an abusive monopolist and having the tying issue remain unresolved is considered a loss.

On the other hand, the elimination of the breakup order and judge Jackson are important wins.

"I don't think this was a very good ruling for Microsoft," said Andy Gavil, an antitrust professor with Howard University School of Law. "I've heard Microsoft is trying to claim some victory out of it, but I don't see a lot of victory for them."

Thursday's decision came almost exactly a year after Jackson ruled that Microsoft violated antitrust laws by exploiting its monopoly in the market for operating systems to capture the market for Web browsers.

As a remedy, Jackson said the company should be split into two pieces: One would focus on operating systems, and the other would develop applications and other products.

The decision: A breakdown These were the four key issues before the appeals court and how it ruled: Issue: Microsoft used illegal and anti-competitive means to maintain its monopoly in Intel-based operating systems. Ruling: The court largely ruled in favor of the government, agreeing that Microsoft indeed maintained a monopoly in this area. Issue: Microsoft attempted to extend that monopoly into the browser market. Ruling: The court disagreed, reversing the previous ruling on attempted monopolization. Issue: Microsoft's act of tying, or "bolting," its Internet Explorer Web browser to Windows 95 and 98 was an anti-competitive act. Ruling: The court sent the tying section back to the trial court for review. Issue: U.S. District Judge Thomas Penfield Jackson failed to give Microsoft due process in determining his remedy, which resulted in an order breaking Microsoft into two companies. Ruling: The court threw out the breakup order and removed Jackson from the case.

In Thursday's decision, the federal appeals court unanimously vacated that order and sent parts of the case back to a lower court. In addition, the court determined that the case should be heard by a new judge.

"We are...constrained to vacate the final judgment on remedies, remand the case for reconsideration of the remedial order, and require that the case be assigned to a different trial judge on remand," the appeals court wrote.

In explaining the reasons, the appellate court said: "First, the District Court failed to hold an evidentiary hearing despite the presence of remedies-specific factual disputes. Second, the court did not provide adequate reasons for its decreed remedies."

In addition, the appeals court said it "drastically altered the scope of Microsoft's liability," arguing that a breakup order was not warranted by the software giant's actions.

"While we do not undertake to dictate to the District Court the precise form that relief should take on remand, we note again that it should be tailored to fit the wrong."

The court also was sharply critical of Jackson, writing that he "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 the courtroom, giving rise to an appearance of partiality."

The decision is the latest step in a process that has gone on for years and is not likely to end anytime soon. The Department of Justice and 19 state attorneys general sued Microsoft in 1998, charging it with abusing its monopoly in the OS market to crush rival Netscape Communications in the emerging browser market.

Gartner analysts David Smith, Thomas Bittman and Neil MacDonald say that although Microsoft claimed victory, the U.S. Appeals Court condemned some of its past business practices, and the case isn't over yet. see commentary

In April 2000, Jackson ruled that Microsoft violated two sections of the 1890 Sherman Act. He concluded that Microsoft was a monopoly that used anti-competitive means to maintain its dominance in Intel-based operating systems. The judge also determined that Microsoft illegally tied its Internet Explorer Web browser to Windows 95 and 98 and that the company attempted to extend its operating system monopoly to the browser market.

Two months later, Jackson ordered that Microsoft be broken into separate operating system and software application companies. He stayed that order and restrictions on Microsoft's business practices pending appeal.

Microsoft appealed the decision, and the case traveled to the current court. In an unprecedented move, the full panel of eligible judges was appointed to hear the case, rather than just a three-judge panel.

Unexpected twist
Thursday's decision was not entirely surprising, although most court watchers did not expect a unanimous decision.

During oral arguments Feb. 26 and 27, the panel of seven appeals judges pounded both Microsoft and government attorneys with questions, revealing shaky 4-3 majorities on many claims. Some judges also lambasted Jackson's handling of the case, particularly statements published in the media after his breakup order.

Four of the seven jurists were appointed by Republican Presidents Ronald Reagan or George Bush: Douglas Ginsburg, Raymond Randolph, David Sentelle and Stephen Williams. Democrats Jimmy Carter and Bill Clinton appointed the remaining judges: Harry Edwards, Judith Rogers and David Tatel.

The Justice Department and 19 states must decide how they will handle the ruling. One choice is to appeal the case to the Supreme Court, but University of Baltimore Law School professor Bob Lande and Andy Gavil, an antitrust professor at Howard University School of Law, are not convinced that the DOJ under the leadership of Ashcroft will appeal.

DOJ claims victory in Microsoft case John Ashcroft, U.S. attorney general

"There's no question the political climate in Washington is much better for Microsoft than it was six months ago," Lande said. "There's a good chance there will be a negotiated settlement on easier terms favorable to Microsoft."

But legal analysts also say the Bush administration is unlikely to expend political capital by getting actively involved in the case and may be reluctant to pursue additional matters.

"The new administration might be less inclined to be perceived as doing battle for competitors that are perfectly able to defend themselves," Gavil said.

The states have indicated that they will appeal the decision, even if the DOJ seeks and reaches a settlement with Microsoft. But Lande thinks they will have a tough time going to the Supreme Court alone.

"If you have the government and Microsoft on one side and the states on another, it's much more difficult for the case to go on--not impossible, but extremely difficult," he said.

One other scenario is that either the DOJ or the states could drop the case altogether, but that is unlikely. The government has never dropped a case on appeal after getting a victory at the trial court, Gavil said.

Trading in Microsoft shares was halted for about three hours after the court's ruling. When trading resumed around 11:50 a.m. PDT, the shares climbed $2 to $73, but they slid back to close at $72.74.