WASHINGTON In striking down key portions of the landmark decision to break up Microsoft Corp., a federal appeals court may have opened the door to settlement talks that could end the four-year-old antitrust case.
Microsoft said this week it would seek talks with the Justice Department to settle the case, saying now was a "good time for all parties to sit down." Antitrust experts said the decision could prompt the government and the Redmond, Wash., software giant to settle by the end of the summer.
Meanwhile, industry observers said the unanimous decision could restore calm to U.S. high-technology markets wracked by months of economic turmoil and uncertainty over the outcome of the antitrust case.
The U.S. Court of Appeals here cited "ethical violations" by the lower-court judge and his failure to provide the company with a fair hearing on the evidence as key reasons for reversing the breakup order. In a 125-page ruling issued Thursday (June 28), the seven-member appeals panel reversed the breakup ruling and sent the case back to be heard by a different trial judge.
The browser angle
U.S. District Judge Thomas Penfield Jackson earlier ruled that Microsoft maintained a monopoly in the market for Intel-compatible PC operating systems in violation of U.S. antitrust laws. Jackson also ruled that Microsoft was attempting to use its monopoly power to gain control of the browser market by tying its Internet Explorer to Windows.
Jackson ordered Microsoft to submit a divestiture plan that would split the company into separate operating-systems and applications businesses.
Microsoft immediately appealed. The U.S. appeals court here took only six months to reverse Jackson's ruling and order a new trial judge to decide the case.
The reversal stemmed in large measure from Jackson's conduct during the trial. "Although we find no evidence of actual bias," the appeals court said, "we hold that the actions of [Jackson] seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process." The court also chastised Jackson for holding "secret interviews" with reporters and making "numerous offensive comments" about Microsoft executives during the trial.
The appeals court also said Jackson failed to hold an evidentiary hearing sought by Microsoft that the company said would have addressed legitimate issues surrounding Jackson's remedy of breaking up the company.
The appeals panel did uphold portions of Jackson's ruling, however namely that Microsoft violated antitrust laws by acting illegally as a monopoly and attempted to use its monopoly in operating systems as leverage in the browser market.
Microsoft chairman Bill Gates said the company is reviewing the opinion, but added during a conference call that "it reverses and significantly narrows the [lower-court] decision [and] sets a much higher standard for these issues." He said the company would review what actions it needs to take, including "reviewing licensing provisions in light of today's decision."
Industry observers expressed relief over the decision. The case "is one of those black clouds hanging over the market that has now been lifted," said Brian Halla, chief executive of National Semiconductor Corp. (Sunnyvale, Calif.). While the continuing jury trial on the antitrust allegations could go on another two to three years, Halla said Jackson's decision and its aftermath could prompt Microsoft to drop its aggressive legal tactics. "I expect them to be more polite in the future," he said.
If so, observers said Microsoft would take a page from Intel Corp.'s legal playbook. Intel settled a 1999 antitrust case brought by the Federal Trade Commission the day before a hearing was to begin.
Since both sides in the Microsoft case could still appeal to the U.S. Supreme Court, the legal focus has now turned to a possible settlement. "This is not the end of the case," Gates acknowledged, though he said that this week's ruling "narrows the case quite a bit." He said it would be "worth making an effort" at reaching a settlement.
Antitrust experts said settlement talks could be imminent since the appeals court upheld Judge Jackson's central ruling that Microsoft was a monopolist. "This was a pretty decent victory for the government," said a former U.S. antitrust attorney. "The core of the government's case was really upheld and sets the stage for a quick move to settlement talks." The ex-government lawyer predicted a settlement in as little as two months.
Lobbying groups here also hailed the decision, calling it everything from a victory for consumers to a boost for technology innovation. "Today's decision should put an end to the specter of government regulation of the high-tech industry," said Jim Prendergast, executive director of Americans for Technology Leadership, a group that claims to represent technology professionals. "The real issue is that this court has upheld industry's right to integrate its own products the way its sees fit."
But Microsoft's competitors in the embedded space saw the decision as an unfortunate one for the computing industry. "Wall Street is viewing this as a victory for Microsoft," said Curt Schacker, vice president of corporate marketing and development for Wind River Systems (Alameda, Calif.). "But the question is whether this is a victory for the computing industry. The consensus is that it probably isn't."
Schacker said that Microsoft often ends up competing with its own customers for the service dollars resulting from customer products, and said that makers of embedded devices will now need to be cognizant of that.
"Microsoft will be confident in proceeding with business practices that are aggressive and sometimes predatory," Schacker said. "They'll feel less concerned with getting on the wrong side of the government as a result of this ruling."
Clinton vs. Bush
Industry analysts said the reversal of the Microsoft breakup will have more effect on the business climate in general than on the embedded space in particular.
"If you track the demise of the technology sector, you'll find it began with the Microsoft case," said Jerry Krasner, executive director of CMP's Electronics Market Forecasters (Waltham, Mass.), a unit of EE Times' parent company, CMP Media. "The feeling of venture capitalists was that if the government could take on Microsoft, they could take on anybody. If you're a venture capitalist and someone comes to you with a really good idea, but you know that the government is pernicious in its efforts against innovation, then you're going to be hesitant to put up money."
Krasner sees the Microsoft case as an indicator of the differences between the Clinton and Bush administrations. "The people who have been appointed by the Bush administration understand business and understand what is legitimate control and what is not," he said. "I doubt the Bush Justice Department would have brought these cases, and if they had, they certainly wouldn't have taken it to the excess that was done here."
Krasner, however, does not see Microsoft as an innocent victim of an overzealous Justice Department. "When you take networking protocols that are open-source and attach specific code to them so that you can't exchange files under Unix, but you can under Windows NT, that's anti-competitive," he said.
Analysts believe that the breakup could have imposed some restrictions on Microsoft's embedded effort. "If the company had been broken up, it would have been somewhat harder for the embedded group to integrate all the pieces it needed," said Laurie Balch, senior analyst for Gartner Dataquest (San Jose, Calif.). "But it wouldn't have been a huge stumbling block. Microsoft would have found ways around it."
The effect would have varied depending on how the breakup was accomplished, some said this week. "The question is: How do you divide this baby?" Krasner said. "How do you divide up the critical organs? If the RTOS people can't talk to the Internet people, that's a severe restriction. But now it looks like they won't have to worry about that."
With settlement talks now likely, the competitive spotlight shifts to Microsoft's dealings with chief rival AOL Time Warner and partner Real Networks. The appeals court sent back to a lower court for further review Judge Jackson's ruling that Microsoft had engaged in monopolistic practices by "tying" its browser to the Windows operating system (OS). That issue arose this week during a conference call with state attorneys general who have filed a collective lawsuit against Microsoft. The question of tying is a continuing issue as Microsoft prepares to bring two new functions into its OS, the attorneys general noted.
In its Windows XP OS, Microsoft includes its own instant-messaging software and a media player for streaming audio and video. Those applications have competed in the standalone market against the proprietary messaging software from AOL Time Warner and the RealPlayer application from Real Networks. Gates said during a news conference that there are no plans to change the functions intended for Windows XP.
David Lammers contributed to this story.