Microsoft Loses Landmark Ruling

As expected, the gavel fell on Microsoft Corp. Wednesday afternoon when Judge Thomas Penfield Jackson, of the United States District Court for the District of Columbia, handed down his final judgment in which he sided with the Department of Justice’s plan to split the company in two.

Judge Jackson swept aside the company’s complaints that it needed more time to argue against the government’s plan.

“Microsoft claims, in effect, to have been surprised by the “draconian” and “unprecedented” remedy the plaintiffs recommend,” Judge Jackson wrote in his Memorandum and Order. “Microsoft’s profession of surprise is not credible. From the inception of this case Microsoft knew, from well-established Supreme Court precedents dating from the beginning of the last century, that a mandated divestiture was a possibility, if not a probability, in the event of an adverse result at trial.”

“Its failure to anticipate and to prepare to meet such an eventuality gives no reason to afford it an opportunity to do so now,” he said.

Jackson’s ruling, as anticipated, calls for Microsoft to be divided into an two companies: one which would focus on operating systems and the other applications, such as Microsoft Office. Further, he ruled Microsoft must transfer the assets of one of the companies to a separate entity, including “all personnel, systems, and other tangible and intangible assets, including intellectual property, used to develop, produce, distribute, market, promote, sell, license and support the products and services of the separated business and such other assets as are necessary to operate the separated business as an independent and economically viable entity.”

He also ruled that any intellectual property that is used in products developed, distributed or sold by the applications business and the operating systems business as of April 27, will revert to the applications unit. The operating systems company will be granted a “perpetual, royalty-free license to license and distribute” that intellectual property — excepting intellectual property related to the Internet browser — in its products.

The ruling also bans the two companies from:

  • Merging or entering into joint ventures with each other
  • Entering into an agreement with one another to develop, sell, license or distribute the others products or services
  • Providing APIs, technical information or communications information to each other that is not also simultaneously made available to ISVs, IHVs and OEMs
  • Providing each other with any product or service on terms more favorable than those available to a similarly situated third party.

Room was also made for a compliance committee made up of Microsoft’s board of directors and at least three members who are not and never have been Microsoft employees. The ruling also establishes a chief compliance officer reporting directly to the committee and Microsoft’s chief executive officer.

The judge gave Microsoft four months to submit a proposed plan of divestiture to the Court and the government. He required that the plan provide for completion of the divestiture within 12 months of the plan’s approval and resolution of any appeals Microsoft may file. He gave the government 60 days from the submission of the plan to submit objections. Microsoft would then have 30 days to submit a response to the government’s objections.

Judge Jackson also ordered that until the plan is implemented, Microsoft must preserve both businesses as “ongoing, economically viable businesses, with management, sales, products, and operations of each business held as separate.” He did except accounting, management and information services. The judge also required that Microsoft use “all reasonable efforts” to maintain and increase sales and revenues of both compa

nies’ products; that it take no actions to undermine or interfere with the divestiture; and that it file a report within 90 days after the filing of the judgment describing the steps the company has take to comply with the requirements.

Rich Gray, an intellectual property attorney with Outside General Counsel of Silicon Valley of Menlo Park, Calif., called the decision a landmark in antitrust law, regardless of what happens on appeal.

“Today (Judge Jackson set) a precedent for the high-tech age that moves beyond any earlier monopoly precedents which were all rooted in the old economy. Today also is the equivalent of the pronouncement of a corporate death penalty for Microsoft, which is also, obviously, a very big deal. All of this may change on appeal, but then again it may not. So even though Microsoft is confident in its chances on appeal, and I personally think they have some good arguments on appeal, it’s far from a sure thing that they’re going to prevail.”

Microsoft Corp. Chairman Bill Gates told Reuters the company plans to appeal and still believes it has a strong case.

We will be appealing this decision, and we believe we have a very strong case on appeal. We believe this ruling is inconsistent with the past decisions by the Appeals Court, with fundamental fairness, and with the reality of the marketplace,” Gates said in a statement on Microsoft’s Web site.

“This is clearly the most massive attempt at government regulation of the technology industry ever,” Gates said. “This plan would undermine our high-tech economy, hurt consumers, make computers harder to use, and impact thousands of other companies and employees throughout the high-tech industry.”

While federal laws allow for the case to be appealed directly to the Supreme Court, bypassing federal appeals courts, justices are under no obligation to take the case and legal experts doubted the issue will land on its docket soon.

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