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Microsoft Prevails in Antitrust Appeal

The U.S. Court of Appeals in Washington today denied Massachusetts' appeal of the Department of Justice's (DoJ) landmark antitrust settlement with Microsoft . The decision represents a major victory for Microsoft and comes just days after the company won a reprieve from the European Union over similar monopoly abuse charges.

In a unanimous ruling, the court upheld U.S. District Court Judge Colleen Kollar-Kotelly's decision to approve the settlement negotiated between Microsoft and the DoJ in 2002. Following that decision, 19 states decided to sue Microsoft for better terms.

Massachusetts, the only state to not reach an agreement with Microsoft, claimed Kollar-Kotelly erred in her decision in not barring Microsoft from tying software like its Web browser, e-mail client and media player with its operating system.

"Far from abusing its discretion . . . the district court, by remedying the anticompetitive effect of commingling, went to the heart of the problem Microsoft had created, and it did so without intruding itself into the design and engineering of the Windows operating system," the appeals court ruled. "We say, Well done!"

The decision virtually ends the long-running case over whether Microsoft would have to significantly alter its Windows operating system that runs on more than 90 percent of the world's computers.

Massachusetts Attorney General Tom Reilly issued a statement saying the case was "a fight worth fighting" because it involved the future of the economy, adding that the ruling is "bad news" for the economy and consumers.

"This clearly shows that our antitrust laws are not effective in protecting consumers," he said. "Our high-tech economy will not reach its full potential unless regulators and the courts are willing to deal with Microsoft and its predatory practices."

Reilly did not say if he would pursue the case. One lawyer said it's unlikely.

"The state has the right to ask the Supreme Court to take the case, but the court does not have to take it -- and I doubt they would take the appeal," said Robert Badal, a partner in the law firm of Heller Ehrman White & McAuliffe.

Brad Smith, senior vice president and general counsel at Microsoft, hailed the decision as the "most important step in resolving our legal issues and moving forward. Today's unanimous decision sends a clear and emphatic message that the settlement reached two years ago is a fair and appropriate resolution of these issues."

Smith also said he hoped the decision would have an impact on the software giant's legal problems with the EU, which has temporarily stayed its decision forcing Microsoft to remove its media player from European versions of its Windows operating system.

"I do hope the people in Europe and around the world will take the time to pause and read the decision," he said. "At the heart of this case was the question of whether Microsoft should be required to remove software code from our products, or provide multiple versions of our products with certain features removed. This unanimous decision clearly states that removing code would be a huge step backwards for consumers and for the industry as a whole."

Joe Wilcox, senior analyst with Jupiter Research, agreed that the timing of today's ruling is very good for Microsoft.

"Microsoft just got its stay with the European Union's case," he said of the EU ruling that found Microsoft abused its monopoly power by bundling its Windows media player with the Windows operating system.

In appealing the remedies of the U.S. case, Reilly said the DoJ settlement with Microsoft did little to change the software giant's practices, wouldn't spark competition and "ignored Microsoft's ill-gotten gains." The original settlement proposed to pay Massachusetts $28.6 million for legal costs and future enforcement and compliance efforts.

"When Microsoft illegally crushes a new idea, because it threatens Microsoft's monopoly, it is consumers who pay the price," Reilly said in a statement when he filed the suit in December of 2002. "Competition is also key to what we are doing. Without competition, our economy has no future. It is what provides choices, spurs on new technology, and creates jobs."

For Massachusetts, which started its investigation of Microsoft anti-competitive practices in 1996, it's been a long fight. In 1998, Massachusetts sued Microsoft for monopolistic practices related to its Windows operating system and claimed victories (along with its co-plaintiff states and the DoJ) in trial and appeals courts.

The remedies settlement, which followed Kollar-Kotelly's ruling that Microsoft was in violation of U.S. anti-trust laws, does not prevent Microsoft from tying software like its Web browser, e-mail client and media player with its operating system -- initially a cornerstone issue in the government's case.

It does, however, require the company to provide software developers with the APIs for its middleware, allowing them to create competing products that can utilize the integrated functions Microsoft includes in its own products.

It also gives computer manufacturers and consumers the freedom to substitute competing middleware software on Microsoft's operating systems -- without fear of retaliation from the industry giant.

Additionally, the settlement requires Microsoft to license its operating systems to PC manufacturers on uniform terms for five years. It also bans Microsoft from entering into exclusive agreements.

Finally, the settlement includes a provision for a panel of three independent monitors, which will work from Microsoft campuses and have full access to the company's books, systems (including source code), and personnel for five years.

The court will have the option to extend that period for another two years if it finds that Microsoft violates the settlement.

Erin Joyce, Susan Kuchinskas and Colin C. Haley contributed to this report.