Rumors of Microsoft breakup proposal not surprising

Legal experts say they are not surprised by reports that government lawyers are proposing a breakup of the software giant and that news of the plan was most likely leaked to accelerate settlement discussions.

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Legal experts today said they are not surprised by reports that government lawyers are proposing a breakup of software giant Microsoft and that news of the plan yesterday was most likely leaked to accelerate settlement discussions.

Reports yesterday indicated that the Justice Department and 19 states have proposed to break Microsoft up into two or three smaller companies. Under a breakup, one company would likely take over operating systems, while a second company would be in charge of applications. A third would own Microsoft's Web properties. A breakup on lines like this have been suggested earlier by antitrust experts and others.

That the government--or for that matter, Microsoft--would make such a proposal is no revelation, said legal experts. However, until now, both sides have kept secret ongoing negotiations with Judge Richard Posner, who heads the U.S. Court of Appeals for the Seventh Circuit. Both the government and Microsoft have repeatedly refused to comment on settlement talks.

Legal experts speculate that if there was an intentional leak, it may have come from the states.

Justice Department spokeswoman Gina Talamona reaffirmed federal trustbusters are respecting the secrecy of settlement talks.

"We have been refraining from talking about the mediation process, and we're not going to start now," she said.

"The government posturing about somehow breaking up Microsoft is misguided, but it isn't new," said Microsoft spokesman Mark Murray. "They've been floating these kinds of ideas for a year without saying how they would ever help consumers or address the issues in their case. The only thing new this week is that government sources are talking about the confidential mediation process in violation of the mediation ground rules."

Murray staked out the moral high ground in keeping settlement negotiations confidential. "We're committed to trying to make the mediation work, so we're not going to comment on anything related to mediation, even if the government is playing that game," he said.

University of Baltimore School of Law professor Bob Lande speculated the government may have leaked the information to let Microsoft know, again, that it is serious about divestiture.

"The government has been so closed-mouth up until now, and (it) seems odd that someone has got loose lips all of a sudden," said Lande.

The government's hardball breakup plan should come as no surprise, said George Washington University law professor Bill Kovacic. "That this comes as a shock or that this in some way unsettles the equilibrium of negotiations or introduces a new, crucial variable to the situation is an unwarranted assumption," he said.

Kovacic and other legal experts point to ongoing signs the government would seek to break up Microsoft. One recent instance: the Justice Department's retaining Greenhill & Co., a New York-based investment firm specializing in divestitures.

The proposal Microsoft's day in court may be important for another reason: to show government lawyers are finally in concert about what to do with Microsoft, Lande said. One reason U.S. Judge Thomas Penfield Jackson asked for mediation was because of "divergent views" in the government camp.

A divided government would mean little chance for settlement or consensus about remedies should Jackson rule against Microsoft, as many legal experts expect. His ruling is expected as early as March.

If both sides fail to settle the case before Jackson's ruling, the government would then propose remedies--or penalties against Microsoft--in an effort to restore competition.

Consensus among government lawyers actually could move settlement talks forward, Lande said. "It?s a united front now," he said. "There had been some speculation that the Justice Department might settle for something wimpy. Things are now clear and there is no way to play one side off of the other."

Kovacic voiced similar opinions, pointing out it is a negotiation process. "For the mediation process to succeed, each side has to stake out its basic preferences," he said.

The government also may be trying to strengthen its hand given the announced AOL-Time Warner merger this week.

"It's conceivable that this is some kind of leak by the government telling Microsoft that they're not going to be swayed by this merger," Lande said.

Microsoft has long argued the changing competitive landscape negates the need for a harsh remedy, such as divestiture.

Whether the breakup proposal helps or hurts settlement talks may be immaterial in one sense, Kovacic said.

"The Justice Department and the states have precious little time to formulate their remedial proposals," Kovacic said. "If this was an academic calendar, their paper on this is very late."

Ideally, the proposal should have been outlined at the lawsuit's outset and should have been solidly developed before the parties started taking evidence, Kovacic said.

The government will likely be called on to present its proposal on remedies in April.

Microsoft and the government will file three briefs over the coming weeks. On Tuesday, Microsoft will deliver to the court its proposed conclusions of law. The government filed a similar document on Dec. 6. On Jan. 25 and Feb. 1, the government and Microsoft each will file rebuttal documents to the other's suggested conclusions. Oral arguments are scheduled for Feb. 22.