DOJ learns from previous MS scrapes

That's what legal watchers say after the Justice Department went on the offensive yesterday in asking a federal judge to hold Microsoft (MSFT) in contempt of court.

Taking a lesson from its past, the DOJ has developed into a bolder, more decisive agency when dealing with the software giant. Meanwhile, Microsoft stands a lot to gain from a protracted battle.

As reported yesterday, Justice Department attorneys alleged in court papers that Microsoft's plans to offer two separate versions of Windows 95 violate a preliminary order issued last week. The injunction prevents the company from requiring computer makers to bundle Web browsing code with its operating system software.

In filing yesterday's motion with U.S. District Judge Thomas Penfield Jackson, the government appears determined not to repeat mistakes it made when it took the company to task starting in the early 1990s.

At that time, it took years of investigations and negotiations to put a consent decree in place that attempted to open up competition in the operating system market. By the time the settlement was approved in August 1995, critics charged the decree was worthless because Microsoft's Windows was the only viable game in town.

Some court observers say the criticism has not been lost on Joel Klein, who heads the Justice Department's antitrust division and was the No. 2 attorney there when the consent decree was approved.

"They've clearly learned from that mistake and are now moving aggressively to police Microsoft in a timely way," said Rich Gray, an antitrust attorney at Bergeson, Eliopoulos, Grady, & Gray in San Jose, California. "Justice now understands that because the high technology marketplace is so fast-moving, they have to move fast as well if they're going to have any impact."

Added Bob Lande, a professor specializing in antitrust issues at the University of Baltimore School of Law: "Microsoft wants to delay things until they can rub Netscape out. The DOJ is aware of this and that's why they've gone back to insist that Microsoft comply with the order in a meaningful way."

The federal government's tiff with Microsoft began in the early '90s when the Federal Trade Commission began looking into a number of Microsoft licensing practices, including a requirement that PC vendors pay a royalty for each unit sold whether or not it carried an operating system made by the Redmond, Washington, company.

When commissioners ultimately deadlocked on whether to bring charges, Anne Bingaman, then the chief of the Justice Department's antitrust division, launched an investigation of her own in 1993. Although the government and Microsoft reached a settlement in 1994, a number of administrative procedures prevented it from being approved and put into place until the summer of 1995, effectively giving Microsoft time to cement its dominance of the operating system market and make significant gains in eliminating competition for desktop applications.

"By the time the [consent decree] was filed, there really wasn't anything more that could be done," says Simon Lazarus, a Washington antitrust attorney at Powell, Goldstein, Frazer, & Murphy. "This time around, [Justice] may have been motivated to move before that happened."

In the last year, Microsoft has seen a sharp increase in market share for its Internet Explorer browser. In September 1996, IE had just 8 percent of the market, while Navigator from rival Netscape enjoyed 83 percent, according to Zona Research of Redwood City, California. Some 12 months later, IE had shot up to 36 percent, while Navigator was at 62 percent.

None of this suggests that Microsoft doesn't want a quick resolution to a case that diverts attention away from its business and has the potential to hurt its image, noted Zona analyst Ron Rappaport. But the company also has something to gain from a lengthy court process. Microsoft has proposed giving computer makers two options: a dated version of Windows without the browser or an upgraded version of the operating system that can be licensed only if IE is left intact. Industry watchers say that given those two options, computer makers likely will choose to keep the browser.

"Microsoft understands there is gong to be a period of time to settle this matter, and there may be a grin or two knowing that IE has the opportunity to grab more market share," added Rappaport.

Lawyers are quick to point out that in seeking to maintain the status quo and draw out litigation, Microsoft is no different than the vast majority of defendants locked in commercial disputes. Still, according to Jeffrey Kingston, an antitrust attorney at Brobeck, Phleger, & Harrison in San Francisco, Microsoft may have more to gain than most defendants.

"You're talking about a business practice that is perceived to preclude competition," said Kingston, who recently took on Microsoft in an unrelated case in Europe. "Microsoft is trying to wring every second out of that business practice because this is how it can win this [browser] battle."

Despite the government's gutsy allegations yesterday, it remains unclear whether they will resonate with Jackson. Microsoft attorneys insist their plan complies with the judge's order because it lets licensees choose whether to carry IE. They further argue that prying the browser from Windows will render the OS inoperable. Government attorneys counter that removing IE from Windows is a simple and harmless procedure.

Although considered a conservative, Judge Jackson demonstrated some activist tendencies last week when he issued a preliminary injunction against Microsoft, even though Justice attorneys had not requested one. If Jackson agrees with the DOJ that Microsoft is evading his order, he may not be as reluctant this time around to fine the software maker $1 million per day for being in contempt of court.

Given the intense debate over whether removing the Internet code from Windows is technically feasible, it's possible that Jackson will defer to the recommendations of a software and computer law expert that has been designated a "special master" in the case. (See related story)

In a related matter, Jackson has set a scheduling hearing for tomorrow at 11 a.m. ET. The hearing will be limited to setting a briefing and hearing schedule on the government's motion.

Reuters contributed to this report.