Government expected to stick with two-way split

During a remedy hearing yesterday, U.S. District Judge Thomas Penfield Jackson grilled the government about a third-party proposal that would split Microsoft into three rather than two companies, as the government had proposed last month.

Whether it's split into two or three companies, Jackson yesterday clearly "indicated he is strongly leaning toward breaking up Microsoft," said University of Baltimore Law School professor Bob Lande. That indication and his refusal to allow more time to review the government's remedy proposal were unexpected blows to the Redmond, Wash.-based software giant's case.

Jackson appeared concerned a two-way split would create two monopolies--one in operating systems and another in software applications--that would not spur enough competition.

But sources familiar with the government's case said such a proposal is unlikely. "If Jackson was really serious about the three-way proposal, he would have given more time. You can expect tweaking (with the government's proposal) and not much more," said a source.

In the hearing yesterday, things looked good for Microsoft initially, when Jackson probed Wisconsin assistant attorney general Kevin O'Connor, lead attorney for the states joining the Justice Department in the case, about the viability of a two-way split. The judge questioned whether "a bisection will create two separate monopolies that might have no incentive" to affect the behavior or profitability of the other. "Tell me why they would effectively inspire competition," Jackson said.

O'Connor left the answer to Justice Department lead attorney David Boies, who laid out several arguments supporting the two-way breakup. Boies compared the plan to the AT&T breakup, which, among other actions, separated the company's long-distance and local calling operations. The effect would be similar to separating Windows from Microsoft's other software applications, he said.

The government has long contended that Microsoft's operating system monopoly and dominance in productivity applications, such as Word and Excel, create barriers to entry in the applications market. Microsoft has more incentive to use its applications as a way of preserving its Windows monopoly rather than to develop versions to compete on other operating systems such as Linux, Boies argued.

To support this and the contention that conduct restrictions would not go far enough to change Microsoft's behavior, Boies introduced damaging emails from Microsoft chairman Bill Gates. In one email, Gates expressed a willingness to forgo some of Outlook's functionality if that would help gain ground in the handheld market.

Boies also explained the two-way split represented a compromise approach that served the government's larger goal of restoring competition quickly with the least long-term impact and oversight of Microsoft.

"We thought a two-part divestiture would be simpler to implement," Boies said.

This failed to satisfy Jackson, who responded: "This is anything but simple to implement."

But rather than explore a less stringent conduct remedy restricting Microsoft's business practices, Jackson brought up a trade association proposal advocating a more radical breakup of the company.

The Computer & Communications Industry Association (CCIA) and Software Information Industry Association (SIIA) late Friday filed a "friend of court" brief advocating a three-way split: operating systems, software applications and Internet products.

SIIA president Ken Wasch said, "There is no way the judge saw the brief before about noon on Monday."

That was enough time for Jackson. He clearly was pleased with the 65-page filing, calling it an "excellent brief" and referring to it in both morning and afternoon court sessions.

Possibly sensing the government's reluctance to propose a three-way split, Jackson later referred Boies to another possibility put forth in the brief: dividing Microsoft into operating systems and applications companies and essentially opening the source code to Internet Explorer.

The government is expected tomorrow to file its revised remedy proposal, which Jackson said he hoped would "reflect the proceedings here."

The revised remedy proposal is likely to be similar to the original, addressing some definitions and other issues raised in court yesterday. Microsoft, for example, argued that ambiguity in the original filing could open the Windows source code to competitors. The government will likely address that and other issues.

"It will be the same document with more details and definitions," University of Baltimore's Lande said. "They will make it more of a concrete document, so that if Jackson wants to he can sign it and be done with it."

Microsoft is expected to respond Tuesday in what will be its last scheduled filing before Jackson rules.

When Jackson will issue his final judgment is uncertain. Legal experts are predicting anywhere from next week to a month. But given that Jackson earlier had said he wanted to fast-track the case, wrapping up within 60 days of his initial ruling, his final judgment could conceivably come around June 1.

A source in the Microsoft camp said he "wouldn't be at all surprised if Jackson rules next week."

While Jackson is expected to order some breakup of Microsoft, he will likely stay--or put aside--this order until after the case is appealed. Both the government and Microsoft expressed willingness to expedite the appeal process by petitioning the Supreme Court to take the case directly.

If Jackson does rule quickly, "it could conceivably put the case before the Supreme Court in its next session," said George Washington University School of Law professor Bill Kovacic.

That could put the case before the high court this year, although it is under no obligation to accept it yet.

Lande said he wouldn't be surprised the high court did accept the case directly.