Tech Industry

Court upholds Microsoft-Justice Dept. settlement

Appellate ruling rejects Massachusetts' call for stiffer penalties in antitrust case. "Well done!" the court says of the deal.

A U.S. Appeals Court on Wednesday upheld Microsoft's landmark antitrust settlement with the Department of Justice and several state attorneys general, rejecting Massachusetts' appeal for stiffer penalties.

"The order approving the consent decree in the public interest is affirmed," the appeals court wrote in an 83-page ruling that preserves the settlement and dismisses the objections of Massachusetts--the lone holdout state--and two industry trade groups.

The decision by the U.S. Court of Appeals for the District of Columbia Circuit is another step for Microsoft toward putting to rest a case that once threatened extraordinary penalties. Judge Thomas Penfield Jackson originally ordered, in June 2000, that the software giant be split in two as a penalty for violating federal antitrust law.

An appeals court a year later upheld some findings that the software maker had abused its monopoly position but threw out the breakup order. Microsoft and the federal government reached a settlement in November 2001, with the states divided on whether to accept the deal or fight for stiffer penalties.

The settlement has a number of provisions, including requirements that Microsoft disclose server protocols to rivals, offer uniform licensing of Windows to computer makers and not engage in exclusive contracts that would prohibit software developers or PC makers from using competing products.

July 15, 1994
After a four-year antitrust probe, Microsoft signs a consent decree with the Justice Department, agreeing that its OS licenses will not contain conditions that apply to its other software. A similar agreement is also struck with the European Commission, giving it the right to monitor Microsoft's compliance for six-and-a-half years.

Oct. 20, 1997
The DOJ files a petition, alleging the software maker violated the 1994 agreement by bundling Internet Explorer in Windows 95 and preventing computer makers from removing IE's functionality from the operating system. Microsoft confirms that the European Commission has also begun a probe into a complaint about its licensing practices.

The European Commission expands its investigation of Microsoft, after Sun Microsystems complains that its rival would not disclose technical interfaces to Windows NT. In 2002, the commission further widens its Microsoft investigation to look at how streaming media technology has been integrated into Windows.

May 18, 1998
A group of state attorneys general and the DOJ file their historic antitrust cases against Microsoft. Both seek permanent injunctions against Microsoft's inclusion of its browser software in Windows. A federal judge later consolidates the cases.

Oct. 19, 1998
The DOJ and 19 states square off in court with Microsoft, as the landmark antitrust trial begins. The DOJ alleges Microsoft squashed Netscape's market-leading browser, in part through its Windows monopoly and exclusive contracts that forced computer makers to favor IE.

April 3, 2000
U.S. District Court Judge Thomas Penfield Jackson issues a ruling. He determines that "Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market."

June 7, 2000
Jackson orders Microsoft broken into two separate companies--one for OSes, the other for applications. That judgment is suspended, pending an appeal.

June 28, 2001
A U.S. Court of Appeals throws out the order to break up Microsoft. But it also rules Microsoft used its monopoly powers to retain its OS monopoly and asks the lower court to revisit the issue of Microsoft tying its products, such as the browser, to its OS.

Sept. 6, 2001
The DOJ, now under the Bush administration, says it will drop its efforts to break Microsoft in two and halt its pursuit of the claim that Microsoft illegally integrated its browser with Windows 95 and 98.

Nov. 2, 2001
Microsoft, the DOJ and nine states reach a settlement under which Microsoft must share information on its OS to let rivals better develop interoperable software. Nine other states and the District of Columbia consider pursuing their lawsuits separately.

Nov. 1, 2002
A U.S. District Court judge approves the proposed settlement. Court sanctions are set to last five years.

Nov. 29, 2002
Massachusetts says it will contest the federal settlement.

Aug. 6, 2003
European antitrust regulators announce a preliminary decision to require Microsoft to provide greater technical information to its server competitors and to reduce the ties between its OS and Media Player.

March 18, 2004
Settlement talks between the European Commission and Microsoft collapse.

March 24, 2004
The European Commission requires Microsoft to unbundle Media Player from Windows and pay a fine of more than $600 million.

June 27, 2004
European ruling against Microsoft is suspended while the company's appeal goes forward.

Source: CNET research by Dawn Kawamoto

Those appealing the ruling had argued that the court should have taken more direct action to prevent Microsoft from tying its products together--an action known as "commingling"--but the court said the settlement aided competition without taking such a drastic step.

"Far from abusing its discretion, therefore, the district court, by remedying the anticompetitive effect of commingling, went to the heart of the problem Microsoft had created, and it did so without intruding itself into the design and engineering of the Windows operating system. We say, 'Well done!'" the court said in the ruling.

Microsoft was quick to praise the decision.

"Of all the steps we've taken over the past two years, this is the most important step in resolving our legal issues and moving forward," Brad Smith, senior vice president and general counsel at Microsoft, said in a statement. "Today's unanimous decision sends a clear and emphatic message that the settlement reached two years ago is a fair and appropriate resolution of these issues."

"A fight worth fighting"
Massachusetts could appeal to the U.S. Supreme Court, but the high court would have to agree to hear the case. So far, the state has not indicated that it will appeal.

"This was a fight worth fighting, because it was about the future of our economy. This decision is bad news for consumers, bad news for competition and ultimately will be bad news for our economy," Massachusetts Attorney General Tom Reilly said in a statement Wednesday. "This clearly shows that our antitrust laws are not effective in protecting consumers. Our high-tech economy will not reach its full potential unless regulators and the courts are willing to deal with Microsoft and its predatory practices."

The Justice Department said it was pleased with Wednesday's ruling.

"This is a resounding victory for the Justice Department and American consumers," Assistant Attorney General R. Hewitt Pate said in a statement. "The Court's forceful decision confirms what the department has been saying all along: Our settlement protects the public by providing a full and effective remedy for Microsoft's anticompetitive conduct."

This has been a momentous week for Microsoft on the legal front. On Tuesday, the company agreed to pay $34 million to settle a separate class action lawsuit in Massachusetts, in which the company was charged with breaking laws on unfair competition and consumer protection. A day earlier, it won preliminary approval of a $105 million deal in Arizona to settle similar charges.

And over the weekend, the European Commission suspended an order that would have required Microsoft this week to begin offering a version of Windows without its Media Player. In that case--the biggest hurdle remaining among the company's many legal battles over its business practices--Microsoft has asked a key European court to annul the Commission's $604 million fine (497 million euros) and other judgments against it.

Microsoft has also been working to settle other outstanding legal matters in recent months, reaching multimillion-dollar accords with Sun Microsystems, Time Warner and others. A $1 billion lawsuit by RealNetworks remains active.

RealNetworks on Wednesday lashed out at the court's ruling.

"The U.S. courts and the European Commission have each concluded that Microsoft's unlawful abuse of its operating-system monopoly has restricted competition, stifled innovation and limited consumer choice," the company said in a statement. "Unfortunately, the settlement approved today by the court has done little to restore competition in the browser and operating-system markets."

The argument
Massachusetts had argued in its appeal that the district court abused its discretion in adopting several provisions Microsoft proposed while rejecting others put forth by Massachusetts and other litigating states. The appeals court threw out that contention and left intact the remedies set forth in the settlement.

Two industry groups--the Computer and Communications Industry Association (CCIA) and the Software and Information Industry Association (SIIA)--had separately asked the appeals court to allow them to bring their own appeal of the settlement. The appeals court on Wednesday agreed with the groups that they should be able to argue their case but found their appeal without merit and denied it, along with the one brought by Massachusetts.

"CCIA and SIIA make various arguments--some overlapping those raised by Massachusetts--that the consent decree between the United States and Microsoft is not in the public interest," the court said in its ruling. "We find no merit in any of CCIA's and SIIA's objections, substantive or procedural. We therefore uphold the district court's approval of the consent decree as being in the public interest."

But the ruling was not a shock, said Richard Donovan, an antitrust attorney with Kelley Drye & Warren in New York. He added that he thinks a further appeal from Massachusetts is unlikely.

"It's not a surprising result, given the way the D.C. circuit court had looked at the previous appeals involving Microsoft," Donovan said. "I gather that they gave a fair amount of deference to the lower court."

Donovan also pointed out that the Appeals Court can only consider the facts as they were at the time the court approved the deal.

"They can't consider some of the evidence that came out after the argument that suggest some of the settlement provisions aren't working out as well, as at least the Justice Department would have wanted," he said. "That may be an issue for another day."

In an interview, CCIA President Ed Black said he was disappointed but not surprised by the ruling.

"The trial court traditionally gives great discretion to the Department of Justice, and the appeals court traditionally gives discretion to the trial court," Black said. "We had a double hurdle to overcome. They even tried to block us from joining the case."

Black said Wednesday's ruling doesn't change the fact that the settlement has been a failure. "There has been no increase in competition, no change in Microsoft's behavior and no returning of the ill-gotten gains."

Microsoft's Smith rejected that notion during a press conference, pointing to the media player and music markets in particular.

"Look at the success of Apple and iTunes," Smith said. "(Apple Computer) is doing so with media formats that are not ours. It's doing so with its own media player, not ours."

The pro-Microsoft Association for Competitive Technology issued a statement supporting the ruling.

"Today the Court of Appeals rejected the attempts of competitors to gain special favors from the American courts at the expense of the industry and consumers," ACT President Jonathan Zuck said in a statement. "Rather than begin innovating, however, these competitors have unfortunately moved their crusade against Microsoft to Europe."