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Microsoft May Face Wave of Civil Suits

Logo - NY TimesApril 5, 2000 | New York Times

By Steve Lohr

In the wake of a federal judge’s harsh antitrust ruling, the Microsoft Corporation now faces the threat of a rising wave of consumer class-action cases and other private lawsuits.

With Judge Thomas Penfield Jackson having ruled on Monday that Microsoft was a “predatory” monopolist that repeatedly violated antitrust laws, private plaintiffs have a far less daunting challenge in suits already filed — and in actions being considered by companies that believe they have suffered from abuse of Microsoft’s market power.

“This is now an awfully big invitation to plaintiffs’ lawyers,” said John C. Coffee Jr., a professor at the Columbia University law school. “We may have reached a point for Microsoft, as there was in the tobacco cases, that basic attitudes have shifted, and a powerful defendant is no longer seen as invulnerable.”

Some of Microsoft’s leading rivals, and even its biggest customers, could bring private suits, according to legal experts. But they will almost surely hold off, at least until they see what sanctions the courts approve against Microsoft — sanctions that could, among other things, limit its ability to retaliate.

Judge Jackson’s judgment was not surprising, after his findings of fact in November sided with the version of the case presented in court by the Justice Department and 19 states. But this week’s ruling was a crucial step because it means that many of his findings — that Microsoft is a monopoly, for example — may be accepted as proof by other courts in private suits.

Several companies that could now step forward as plaintiffs sent witnesses to Judge Jackson’s courthouse to testify on behalf of the government, including Netscape Communications, America Online, Sun Microsystems, Apple Computer and I.B.M. In his ruling, the judge cited those companies as suffering from Microsoft’s “oppressive thumb on the scale of competitive fortune.”

The judge ruled, for example, that the company not only used its market power to defend its monopoly in operating systems but also illegally tried to monopolize the market for Internet browsing software. The principal victim of that tactic was Netscape, the pioneer in the browser market, which was acquired by America Online in late 1998. That judgment makes it far easier for America Online to sue for damages.

Because the judge ruled that Microsoft’s monopoly power allowed it to overcharge for Windows, the big personal computer makers including Dell, Compaq, Gateway and I.B.M. could have cause to file suit. If they won, such judgments could yield hundreds of millions of dollars each for big PC makers that use Windows. The treble damages in private antitrust cases would cover every PC a company sold over four years, the statute of limitations in such cases.

“Microsoft could find itself in a very tight pincer here, since these companies could regard it as being in their fiduciary interest to file private suits,” said Herbert Hovenkamp, a professor at the University of Iowa law school.

Sun Microsystems, lawyers say, is probably the most likely to file a private suit against Microsoft. It is a bitter direct competitor and has little to lose. For all the others, the calculation would be more complicated because they rely in one way or another on Microsoft’s cooperation.

Most of the companies named in Judge Jackson’s ruling declined to comment yesterday on the possibility of private antitrust suits against Microsoft. Still, an executive at one of the companies said, “It is clearly something we will consider, but there has been no substantive internal discussion of that yet.”

And the companies may decide against suing Microsoft for other reasons. First, parts of Judge Jackson’s legal conclusions — though not his findings of fact — could be reversed on appeal. And second, the companies may not see it as in their long-term interest to bring suit against Microsoft, even if they do not fear retaliation from Microsoft.

RealNetworks, which makes software for playing multimedia programming on personal computers, was mentioned by Judge Jackson as among the targets of Microsoft’s tactics. Yet Rob Glaser, chairman of RealNetworks, said yesterday that he had no plans to sue.

“While I think Microsoft has behaved unethically at times and this judge found that it broke the law, my focus is going to be on doing everything I can to make sure RealNetworks remains ahead of Microsoft in our business,” Mr. Glaser said. “The government was absolutely right to prosecute Microsoft. But it doesn’t make sense for us.”

But companies are not the only potential litigants. More than 100 class-action suits have already been filed against Microsoft in two dozen states, nearly all in the aftermath of Judge Jackson’s powerfully worded findings of fact last November. Those suits, legal experts say, were the early starters as plaintiffs’ lawyers maneuvered for leadership positions in what are likely to become a broader class-action assault.

More consumer class-action suits are expected, and lawyers involved in the early cases said Judge Jackson’s rule was a significant victory.

“We’re very pleased with the way the government case came out,” said Leonard B. Simon, a partner at Milberg Weiss Bershad Hynes & Lerach in San Diego, whose firm has brought many prominent class-action cases. “This is very good news for the consumer class-action cases.”

But while the ruling in the government case makes things easier for private antitrust plaintiffs, it by no means ensures that they will win in court. The consumer class-action suits mainly contend that Microsoft, as a monopoly, was able to overcharge for its industry-standard Windows operating system, which runs the basic operations of nearly 90 percent of all PC’s sold today.

Judge Jackson ruled that Microsoft had the ability to “price substantially above the competitive level.” And in his November findings, he noted an internal Microsoft pricing study that said the company could have charged $49 for a retail upgrade from Windows 95 to Windows 98 but that the company chose to charge $89 instead because it was the “revenue-maximizing price.”

Microsoft replies that the numbers cited in the study were arbitrary numbers, and that it could have also charged far more for the Windows upgrade.

In the class-action confrontation, Microsoft says it has the money and the patience to withstand what it regards as an opportunistic assault on a deep-pocketed corporate target. In addition, the company’s executives express confidence in their legal position.

“These class-action cases are just piling on,” William H. Gates, Microsoft’s chairman, said in an interview over the weekend. “There is no economic theory to show that ours was not the aggressive price for Windows.”

Indeed, while Judge Jackson’s ruling places Microsoft’s liability firmly into the legal record, the class-action suits must still prove damages — that is, what impact Microsoft’s abuse of its market power had on consumers. And even the class-action advocates recognize that.

“The ruling in the government case simplifies our job, but it does not make it easy,” said Terry Gross, a lawyer in San Francisco. “We’re up against one of the most powerful defendants in the world.”

The private litigation promises to be a marathon effort. A group of seven federal judges, called the Multi-District Litigation Panel, held a hearing last week in Palm Springs, Calif., on where to combine all the federal class-action suits. That initial decision is expected soon. But it is only a starting point.

California is the leader among the states in class-action cases. The more than two dozen cases filed to date have been consolidated in the San Francisco Superior Court.