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Judge: Microsoft monopolized Web browser market

No panic at Microsoft, just faith in appeals

Logo - Seattle Post-IntelligencerApril 3, 2000 | Seattle Post-Intelligencer

By Seattle P-I Staff and News Services

A federal judge today found that Microsoft Corp. violated the Sherman Antitrust Act, maintaining “monopoly power by anticompetitive means” and trying to take over the Web browser market.

U.S. District Judge Thomas Penfield Jackson also ruled that Microsoft violated another section of the law by “unlawfully tying its Web browser to its operating system” and could be sued under state anti-competition laws.

The judge said Microsoft kept “an oppressive thumb” on competitors during the race to link Americans to the Internet.

Attorney General Janet Reno applauded the ruling, saying “Microsoft has been held accountable for its illegal conduct by a court of law.” Assistant Attorney General Joel I. Klein added that the decision will benefit consumers and stimulate innovation.

“This is indeed a landmark opinion,” he said. “It demonstrates once again that no company, no matter how powerful or how successful, can refuse to play by the rules.”

Microsoft has pledged to appeal, which could delay any impact of the ruling for years. Chairman Bill Gates said he’s confident his company will prevail, but “it’s too bad we have to spend the resources” to do that.

“We did everything we could to settle this case and will continue to look for new opportunities to solve it,” he said. “(But we) believe we have a strong case on appeal.”

Gates said the country’s high tech companies should be able to innovate without being “second-guessed” by the courts.

The verdict affirms Jackson’s previous ruling in November that the software giant is a monopoly, one that illegally used its power to bully competitors and stifle innovation, hurting consumers in the process.

The judgment sets up a new round of hearings to determine what punishment to impose on Microsoft, including the question of whether the huge company founded by Gates should be broken up.

Jackson was to have ruled last week, but intense negotiations were under way, and he agreed to let both sides try a little longer to reach a settlement. The renewed talks, however, collapsed Saturday.

Industry analysts say Microsoft now finds itself facing a harsh legal road ahead that threatens to embolden private litigants, depress the company’s stock price and erode its dominant influence in computing.

News of the collapse in talks forced Microsoft’s stock down when the markets opened Monday, and it never recovered. The Nasdaq composite index also plunged nearly 350 points in its biggest point drop ever.

In November, Jackson found that Microsoft repeatedly engaged in anti-competitive behavior by taking advantage of its monopoly power.

The next step in the case is for the judge to begin designing a remedy that could range from breaking up Microsoft to restricting its conduct in the marketplace.

“Microsoft is now back in the legal quagmire, and nothing good is going to happen to the company any time soon,” David Readerman, a managing director at Thomas Weisel Partners, a technology investment firm in San Francisco, said before the ruling was announced.

Yet at Microsoft’s corporate campus in Redmond before the ruling, there was no evidence of panic. Its executive team, led by Chairman Bill Gates, was taking the long view by planning to battle the antitrust case in the courts through appeals for years, if necessary.

“We absolutely believe that the judicial system will ultimately rule in our favor,” Gates said in an interview yesterday.

And for Microsoft, the risks of that course clearly seemed preferable to offering further concessions in the mediation efforts abandoned Saturday.

Microsoft’s plight could also possibly be altered by this year’s presidential election. A Republican administration and a new set of political appointees heading the Justice Department could take a different view of the case, and George W. Bush has said he believes antitrust enforcement should be confined mainly to combat price fixing.

Microsoft has had its corporate reputation tarnished repeatedly during the long-running antitrust suit, filed in May 1998, which alleges that the big software maker is a bullying monopolist that has stifled competition. In his findings of fact in November, Jackson largely agreed with the case presented by the Justice Department and 19 states.

If the sides had reached an out-of-court settlement, Jackson’s strongly worded findings of fact could have been pulled off the table. But a legal verdict cannot — and it and the findings of fact become a permanent part of the legal record of the case.

And that legal record — a finding of monopoly power and abuse of that power — will make it easier for companies and class-action lawyers to bring cases against Microsoft. Already, dozens of class-action suits have been filed against the company.

“Microsoft is in for a bumpy ride over the next several months, as it will face an energized group of private litigants,” said William Kovacic, a professor at the George Washington University Law School.

After Jackson rules, he will then move to consider what sanctions, or remedial steps, should be ordered. The suggested remedies range from forcing Microsoft to alter its business practices to breaking up the company.

The judge can ask for papers from experts and call witnesses. The court-ordered remedies and Jackson’s final order may not be filed until the end of the summer. Until then, in theory, the two sides can still settle, a possibility that seems remote. Microsoft will almost certainly appeal the ruling to the federal appeals court and possibly to the Supreme Court. Those appeals could take a year or two.

The uncertainty surrounding the outcome of the case, industry experts say, could well slow down Microsoft, as the center of gravity in computing is increasingly moving beyond the personal computer, Microsoft’s stronghold, and toward the Internet, where the company faces far more competition.

In the Internet arena, they note, Microsoft is forging partnerships with companies in many industries, from cable television to telecommunications, to ensure that its software is used on a widening array of Internet-connected devices. But those efforts could be hampered if potential partners have questions about Microsoft’s future.

“As long as this case hangs over Microsoft, it will affect its influence in the marketplace,” said David Yoffie, a professor at the Harvard business school. “It just reduces Microsoft’s credibility, its ability to set technology standards as it has in the past.”

Microsoft has no illusions about its near-term prospects in the courts. In an e-mail Saturday to Microsoft employees informing them of the breakdown in the settlement talks, which he blamed on “divisions and extreme views on the other side,” Gates wrote that Jackson would announce his legal judgment as soon as today, and “we don’t expect the ruling to be favorable to Microsoft.”

In an interview yesterday, William Neukom, Microsoft’s general counsel, said: “We’re not giving up in this court, but we think this is toward the high-water mark for the government. We’d rather be in the appeals court, and we’re confident about our prospects.”

On appeal, legal experts do not think there is any chance that Jackson’s judgment, which they believe will find Microsoft repeatedly violated the law, can be reversed entirely.

“Microsoft’s bet seems to be that through a process of attrition on appeal, Judge Jackson’s decision is narrowed in scope considerably,” noted Kovacic, the law school professor. “The result would still be a government victory but one that supports a remedy that is not very drastic.”

Microsoft also faces a wave of private litigation, including dozens of class-action suits. A strong ruling by Jackson will simplify the task of winning such cases, said Terry Gross, an attorney in San Francisco involved in a class-action suit against Microsoft. Most of the class-action suits are on behalf of individuals and companies who claim Microsoft charged too much for its industry-standard Windows operating system.

In the legal opinion, Gross said attorneys involved in the class-action litigation would be looking most closely at what Jackson says, if anything, on Microsoft as a monopolist overcharging consumers for Windows.

Microsoft recognizes that the class-action suits could be costly and time-consuming, but it is confident it can win them.

As it has throughout the federal suit, Microsoft says the price it charges for Windows is a small percentage of the price of a PC and is far below what a garden-variety monopolist could charge.

“These class-action cases are just piling on,” Gates said. “There is no economic theory to show that ours was not the most aggressive price for Windows. We’ve taken the high-volume, low-cost approach.”

Because the government antitrust case focuses mainly on allegations that Microsoft bullied industry partners and rivals to favor its software, some legal experts said that Jackson’s legal verdict might be most useful to rival software companies in private antitrust suits.

In Silicon Valley, home to many Microsoft rivals, the ruling will likely be read closely in many corporate legal departments.

“Any private company that thinks it has a beef ought to test it in court,” said Scott McNealy, the chairman of Sun Microsystems, a Microsoft rival. “Now, you will just need to prove that they did something to you and then figure out what the cost was.”