Microsoft faces uncertain penalties in case

The judge in the Microsoft antitrust trial issues stinging findings of fact against the software giant, but the outcome is still far from certain.

Tech Industry
The judge in the Microsoft antitrust trial today issued stinging findings of fact against the software giant, but the outcome is still far from certain.

Legal analysts have long handicapped the trial in favor of the government, predicting that the true battle will come in settlement negotiations over remedies, or in appellate court--a forum that has favored Microsoft in the past.

Microsoft's day in court Regardless of how the case turns, however, Judge Thomas Penfield Jackson today handed prosecutors a big stick for those future skirmishes, declaring that Microsoft holds a monopoly in computer operating systems.

While the ruling does not touch on the legality of Microsoft's behavior, it could set the stage for a settlement, attorneys outside the case said. Others said today's findings could lay the groundwork for severe penalties against the company, including a possible breakup.

"This part of the decision is almost unappealable," said Michael Full text of Judge Jackson's findings of
fact Froomkin, a professor at the University of Miami Law School. "A trial judge's finding on facts are almost impossible to overturn. Microsoft can't make this go away, except for settling the case."

Significantly, outside attorneys say the judge's document also leaves the door open for a full range of potential penalties. If Microsoft sees a drastic outcome in its future, such as a corporate split, that may encourage the company to settle.

"I went in today really doubting a severe remedy was likely," said Rich Gray, an intellectual property attorney with the Outside General Council for Silicon Valley. "After reading these findings of fact, I think it's back on the table."

Further feeding the

What comes next  
• Either side could choose to file a motion for reconsideration if it disputes any portion of the judge's findings, no matter how small. Such motions could be filed as early as next week.  
• Both sides are to present their conclusions of law, tentatively scheduled to take place in about 30 days. Jackson may put that off until after the holidays.  
• Typically the briefings are staggered rather than presented simultaneously, which is likely to stretch out the next stage until late February.  
• Unless the two sides settle, Jackson's ruling will likely spark a string of appeals that many antitrust experts expect will reach the Supreme Court.
perception that a settlement might be the next step, Microsoft watchers say, are signs the company is striking a more conciliatory note in its public statements. In the press conference following the release of the findings, the company backed away from several opportunities to criticize the government's actions.

Attorneys also note that it is a rarity in antitrust cases of this scale to drag on in litigation to the bitter end. The two previous high-profile cases in recent antitrust history have both closed before a final verdict. AT&T settled its antitrust case, agreeing to the split-up that created the Baby Bell local phone companies in 1984, while the government ultimately gave up in its decade-long pursuit of IBM.

But others said it is still too early for Microsoft opponents to celebrate victory.

"Microsoft will be going to the appellate court, rather than seeking settlement," predicted Hillard Sterling, an antitrust attorney with Gordon & Glickson. "Both sides are too entrenched in their respective positions, and middle ground is too hard to find given the disparity of each side's factual and legal claims."

A question of remedies
Microsoft general counsel Bill Neukom downplayed the significance of today's findings, saying any discussion of remedies is premature at this point.

"Rhetoric about relief is putting the cart way before the horse," Neukom said, although he downplayed the possibility of a drastic restructuring of the company, as some have proposed. "Relief has to be commensurate with the activity found to be in violation of the law…It's hard to imagine where any alleged wrong doing would require structural relief."

But others agreed with Gray that today's findings of fact could lead to a tougher resolution for Microsoft.

"The judge has crafted the finding so that it could support virtually any remedy, from breaking Microsoft up into several pieces to simply enjoining them from a particular kind of action," said Joe Sims, an antitrust attorney with Jones, Day, Reavis & Pogue.

"What Microsoft was probably looking for here was a finding of fact that could not support drastic remedies," Sims added. "They did not get that."

Microsoft competitors also were quick to join the party.

Emboldened by Jackson's rulings, Sun Microsystems today released its own sweeping wish-list of remedies, including prohibiting Microsoft from buying cable and wireless companies; from buying rather than inventing technologies; and requiring the company to make its pricing policies public.

A long way to go
Of course, the ongoing antitrust trial has a long way to go before the software giant comes under any kind of irrevocable penalty.

Both sides will have 30 days to respond to today's document with proposed "findings of law"--the part of the trial in which the judge determines whether the facts detailed today mean Microsoft has actually acted illegally.

Judge Jackson will then respond with his own finding of law, which will essentially be the "guilty or not guilty" moment of the trial.

Only at that point will the court decide what penalty it should impose. The government has suggested that another hearing process be convened to discuss possible outcomes--a process that could take months to conclude. Jackson has consistently been outspoken about trying to bring the trial to a speedy conclusion, however.

Observers say prosecutors can seek a one-time structural change, or take a regulatory approach. Justice Department antitrust division chief Joel Klein has in the past expressed a preference for one-time solutions that avoid continuing oversight.

One structural approach would break the company into several identical "Baby Bills," similar to the way in which AT&T was broken up, each with complete copies of Microsoft's intellectual property. That approach has been endorsed by former Judge Robert Bork, an antitrust expert who advocates breaking the company into three pieces.

"Microsoft has shown enormous agility in getting around the law and prior consent decrees, and they seem to have no respect" for the law, Bork said earlier this year. "I don't think trying to control their conduct by a decree is likely to be enough."

Another structural approach would effectively divide the company into two separate businesses, putting one in control of the operating system and another to create applications, such as Microsoft Word. Microsoft argues there is no clear line defining where the operating system stops and other functions start. A key issue to be resolved at the trial is whether Microsoft went too far in building its Internet Explorer Web browser into its Windows 98 operating system.

Microsoft has steadfastly defended its right to integrate new features into its operating system. In outlining settlement conditions earlier this year, chief Bill Gates said the integrity of the Windows operating system and the freedom to innovate are two key principles that he would not give up.

The government could take a more regulatory approach by requiring Microsoft to license its secret "source code" to competitors. That solution was less than fully successful when the Federal Trade Commission forced Xerox to license its copier patents in 1975, and opens the door to contentious arguments over the conditions and costs of licensing.

The weakest regulatory approach would be for the judge to order the company to cease business practices the government contends are illegal. The government reached an agreement with Microsoft in 1995 to prohibit certain business practices, but lost an important round in the appellate court when it tried to enforce that agreement in 1997.

News.com's Aimee Male and Courtney Macavinta contributed to this report.

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