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Microsoft Break-Up Overturned

NEW YORK -- In an apparent victory for Microsoft Corp., the U.S. Court of Appeals for The District of Columbia Thursday overturned U.S. District Judge Thomas Penfield Jackson's decision to break up the software giant as a remedy to its antitrust violations.

In a unanimous 7-0 decision the court issued a stinging rebuke that Jackson's conduct had been improper and found that Microsoft was not acting unlawfully when it tied its Internet Explorer browser to its Windows OS.

However, the ruling affected only the remedy that Jackson laid out - not his finding that Microsoft had engaged in anti-competitive practices.

"We vacate the judgment on remedies, because the trial judge engaged in impermissible ex parte contacts by holding secret interviews with members of the media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom, giving rise to an appearance of partiality," the appellate court said.

"Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process," the court said.

Later it added, "We affirm in part and reverse in part the District Court's judgment that Microsoft violated '2 of the Sherman Act by employing anti-competitive means to maintain a monopoly in the operating system market; we reverse the District Court's determination that Microsoft violated '2 of the Sherman Act by illegally attempting to monopolize the Internet browser market; and we remand the District Court's finding that Microsoft violated '1 of the Sherman Act by unlawfully tying its browser to its operating system."

The court sent the case back to a lower court for a new remedy hearing, but stipulated the case be heard by a judge other than Jackson.

The court also considerably raised the bar should the government choose to pursue the tying aspect of the case under the new judge. The court said that under remand, the government must:

  • Show that Microsoft's conduct unreasonably restrained competition, but meeting that burden necessitates an "inquiry into the actual effect" of Microsoft's conduct on competition in the tied good market
  • Show that the benefits Microsoft's refusal to allow OEMs to uninstall IE or remove it from the Windows desktop are outweighed by the harms in the tied product market
  • Show that Microsoft charged a higher price for the bundled Windows and IE package than it would have charged for Windows alone.

    An obviously pleased Bill Gates, Microsoft chairman and chief software architect, said the ruling was a metaphor for something only a true Seattle native could appreciate: the sun coming out from behind the clouds.

    According to Gates, the next logical step is to move forward and get the entire issue settled. Thursday's ruling, he said, puts any future legal proceedings in the right context.

    "Today's developments we view positively, but this is not the end of the case," Gates said. "One of the avenues that we'll pursue is discussion with the other parties to see what kind of additional litigation is necessary. If litigation moves forward, at least it's a very narrowed case and under a set of principles that we think are very appropriate, particularly relative to the issue of innovation."

    Industry analysts at Zona Research said the appeals court decision was a return to sanity, given the bias held by the judge and the prosecution, which made the proceedings last year little more than a political witch-hunt.

    "We maintain that this case was not brought forward because consumers would be hurt by the company's product strategy but by Microsoft's competitors who sought to beat the company in court where they could not win in the marketplace," a Zona release stated. "Anti-trust law is not about protecting competitors; it is about protecting consumers from price fixing and the like. Where were the outraged consumers during the trial? The prime evidence against Microsoft came from competitors such as Netscape, America Online and Sun, who all took their shots."

    It's a sentiment shared by House Majority Leader Rep. Dick Armey (R-TX), who thinks that government needs to take a step back from penalizing successful high-tech companies.

    "I applaud today's ruling because it's good for American competitiveness," Armey said in a statement Thursday. "Our antitrust laws should not be used to hold our most successful companies back to give the competition a chance to catch up. That kind of tired economic thinking is exactly what our new economy does not need."

    On the industry side, Steve DelBianco, a technology executive and vice-president of Corporate Affairs for the Association for Competitive Technology (ACT), characterized the decision as a victory for the software industry. ACT, a technology industry trade organization, submitted Amicus briefs to the court on Microsoft's behalf.

    "Seven to zero," DelBianco said. "These judges have pitched a shut-out here and put to rest a notion that it is illegal to integrate features into your software to make things more convenient for consumers. They remanded what the industry considered the most pernicious part of Judge Jackson's ruling: tying. This sets the industry free to continue to add features and value to their software. If we don't add features and value, why would anyone ever upgrade their software?"

    The Justice Department may appeal the Appeals Court decision to the U.S. Supreme Court, though DelBianco said, "With a 7-0 strong ruling, one has to wonder if the Supreme Court would bother to take the case."

    That aside DelBianco said he and the software industry would simply like to see the case settled.

    "Speaking for the industry, we would be much happier to see this case settled rather than retried," he said. "Those of us who are programmers and businessmen would rather just get back to work."

    Goldman Sachs & Co. analyst Rick Sherlund said that might be a good possibility. "We are hopeful that the surviving issues in the case can be negotiated and resolved without negatively impacting the company as the extreme break-up order had threatened," Sherlund wrote in research issued Thursday afternoon.

    "We believe all parties may attempt to now resolve remaining issues although it remains uncertain whether mediation will be any more successful given the hard-line posture demonstrated previously by several of the states, notably Iowa and Connecticut. In any event, the worst case scenario of a Government mandated break-up of the company has been thrown out by the Appeals Court which on balance should be a benefit to the stock."

    Microsoft stock rose modestly on the decision, from an open of $71.55 to $72.50 at mid-day.

    -- Jim Wagner contributed to this article.



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