Microsoft trial: DOJ ahead at halftime

As the Microsoft antitrust trial reaches halftime, the government so far has dominated the high-stakes contest against the sometimes struggling legal team defending the software giant, commentators say, adding that both sides' cases face vulnerabilities.

Three months after the trial started in federal court in Washington, antitrust prosecutors are close to wrapping up presentation of their case, when Massachusetts Institute of Technology economist Franklin Fisher, the government's 12th and final witness, will step out of the witness box. Microsoft tomorrow is expected to call its first witness, Richard Schmalensee, another MIT economist who, in written testimony yesterday provided a blistering rebuttal to allegations that Microsoft is a monopolist.

Legal observers are mixed about the performance of each side, but most appear to agree that the government is heading into the locker room having scored some valuable points.

"Looking at it from a halftime position, I would say that the government is way ahead on the score board," said Stephen Axinn, an antitrust litigator at Axinn, Veltrop & Harkrider in New York City. While Microsoft has yet to present its defense, he said, the first half does not bode well for the Redmond, Washington, software company.

"The funny thing about antitrust trials is that the defendant needs to win during the plaintiff's case," he explained. "There's very little chance to win during [presentation of] its own case."

"The government has probably laid the foundation for prevailing on some of the conduct issues [alleged] and establishing that Microsoft does have monopoly power," added William Kovacic, a visiting George Washington University professor specializing in antitrust law.

The government's most effective testimony, Kovacic and others said, has come from executives at other companies who claim the software giant used its dominance to kill off technologies that threatened Windows and other key Microsoft products. Also useful has been testimony from economists that Microsoft has monopoly power in the market for personal computer operating systems and that from computer experts that consumers are harmed by the inclusion of the Internet Explorer browser in Windows 98.

The Justice Department (DOJ) and 19 states allege that the behavior is part of a pattern that violates antitrust laws. Highlights of the trial, which began October 19, include the following:

• Testimony from a senior Intel executive that Microsoft made "credible and fairly terrifying" threats if the chip giant didn't kill certain software projects. The government bolstered those claims by presenting email Microsoft chief executive Bill Gates sent to his Intel counterpart, Andy Grove, saying it was "inappropriate" for his company to design Java software that might compete with the software giant.

• Testimony from Apple Computer senior executive Avadis Tevanian that Microsoft tried to "sabotage" QuickTime, a popular multimedia program, by causing misleading error messages to appear when it ran on Windows-based machines. Apple's vice president of software engineering, Tevanian also said that Microsoft proposed that it split the multimedia software market with Apple, a charge that echoes claims made by Netscape Communications' chief executive earlier in the trial.

• Repeated showing of videotaped sworn testimony in which claims made by a combative and evasive Bill Gates are contradicted by his own email. In one such instance, Gates said he "had no sense of what Netscape was doing" in June of 1995, only to be presented with an email message he had written three weeks earlier detailing the threat the Mountain View, California, company posed to Microsoft. While of questionable evidentiary value, the videotape has hurt Gates's credibility, prompting U.S. District Judge Thomas Penfield Jackson to say the Microsoft chief "has not been particularly responsive" to prosecutors' questions.

• Testimony from America Online vice president David Colburn and others that Microsoft used its software dominance to forbid partners from promoting Netscape's Navigator browser. In addition to AOL, content providers such as Walt Disney and CNET: The Computer Network (publisher of News.com) were required to "promote [Internet Explorer] and no other browser." Similarly, Internet service providers were required to not promote Netscape's browser and adhere to strict distribution quotas.

The government has presented evidence of other misdeeds as well, including Microsoft's attempt to undermine Java by pressuring Apple and other companies not to embrace the "cross-platform" programming language. In addition, prosecutors have presented evidence that Microsoft has kept prices for Windows artificially high--which, along with other charges, is designed to prove that the software giant holds monopoly power.

Efforts by Microsoft's defense team to cast doubt on these and other claims have sometimes failed or even backfired. One example was Microsoft attorney Ted Edelman's lengthy cross-examination of Tevanian, which prompted the Apple executive to recount a meeting at which Microsoft executive Chris Phillips told a counterpart at Apple he wanted the company to "knife the baby," a reference to Microsoft's wish that Apple kill QuickTime. Tevanian did not include the charge until he was repeatedly challenged on the stand.

Of the six legal observers contacted for this story, all predicted that Judge Jackson will find that Microsoft holds monopoly power. Alone, the finding would not be enough to prove Microsoft violated the law, but it would be a necessary element in the government's case. It would also make it easier for Microsoft adversaries to prevail in future private lawsuits, since the law holds monopolists to a higher standard of conduct.

Most of the commentators said the judge also was likely to find that Microsoft abused its monopoly through exclusive contracts and attempts to kill off competing technologies. Also posing a serious threat to Microsoft are the market division allegations, said Lewis Noonberg, an attorney at Piper & Margery.

"If proved, that's a per se violation of the antitrust laws," Noonberg explained. "If I were Microsoft I would make certain that that charge was fully met."

Still, not everyone is applauding the government for the case it has presented. "The government has fallen short in establishing a strong record evidencing a Sherman Act violation. Hardball tactics do not a Sherman Act violation make," said Hillard Sterling, an attorney who represented Staples and Office Depot in a proposed merger that was ultimately blocked by the Federal Trade Commission.

Sterling explained that the government's case has lacked focus ever since a federal court of appeals in June upheld the integration of Internet Explorer and Windows. The ruling undermined a key legal theory in the government's case and sent prosecutors scrambling for new theories to salvage it.

The government's case also suffered a setback when AOL announced in November that it had agreed to acquire Netscape for $4.2 billion. Judge Jackson has repeatedly referred to the transaction, which also includes Sun Microsystems, saying once it could produce a "very significant change" in the industry Microsoft is accused of monopolizing.

Yet another vulnerability in the government's case is its repeated reliance on third-party, or "hearsay," accounts. For example, Tevanian's claim that Microsoft proposed "knifing the baby"--as well as numerous other allegations in the case--are not purported to be eye-witness accounts. Microsoft has filed motions seeking to exclude much of the testimony from court and could raise hearsay objections if the case goes up on appeal.

Nonetheless, Microsoft's expected motion to dismiss the case, a common maneuver by defendants after a plaintiff rests it case, will almost certainly fail, Sterling said. "Judge Jackson has exhibited a consistent disbelief and even anger at Microsoft," the lawyer, a partner at Gordon & Glickson, noted. "It is likely that he will rule against Microsoft even under this feeble record offered by the government."

That's not likely to keep Microsoft from launching a vigorous defense. Microsoft's first witness, Schmalensee, is expected to provide more than 300 pages of written testimony arguing that the government's monopoly arguments are out of touch with fundamental dynamics in the software industry, in which every competitor tries to be dominant. The company is also expected to call a half-dozen of its top executives to cast doubt on allegations leveled against the company.

"Microsoft has to show that what looks on its face as a purely exclusionary contract actually had a consumer benefit," said Eleanor Fox, a professor of law at New York University. Similarly, she added, "as to every single incident, it will claim that it has a consumer benefit and/or everyone else in the industry was doing the same thing."