Antitrust Woes at Microsoft Grow With Case : Software: An appeals court to begin hearings today on a February settlement. Company faces problems either way.

Grant Wickes, a vice president at the PC software firm Micrografx, had been waiting a long time for a product development meeting with Microsoft Corp. officials, and he was feeling rather anxious as he arrived at the software giant’s Redmond, Wash., campus on Feb. 15.

Just the day before, U.S. District Judge Stanley Sporkin had rejected an antitrust settlement agreed upon by Microsoft and the U.S. Department of Justice, and Wickes feared his meetings might be canceled by Microsoft executives who would want to hunker down and figure out what to do next.

But nothing of the kind happened: “To them, it was just water off a duck’s back,” he recalled. “Their attitude was, ‘This will be reversed; there’s no news here. Now let’s get down to business.’ They’re so single-minded.”

Yet it has become clear in the two months since Sporkin’s decision that this seemingly cavalier attitude was misleading bluster at best--and a dangerous misreading of the legal situation at worst. For today, as a Circuit Court of Appeals panel hears arguments on why Sporkin’s rejection of the settlement should be overturned, Microsoft’s antitrust troubles are serious indeed.

If the appellate court declines to overturn Sporkin’s decision--and legal experts say a reversal is far from certain--Microsoft will face the possible reopening of the investigation, with a hostile judge overseeing the proceedings.

And ironically, a decision in Microsoft’s favor--and the court is expected to rule quickly--could make it more likely that the Justice Department will move to block Microsoft’s proposed acquisition of personal finance software leader Intuit Inc. Although the two issues nominally have nothing to do with one another, many observers say the Justice Department, smarting from criticism that it was too easy on Microsoft, might seek to block the $1.5-billion Intuit deal as a way to look tough.

Critics fear that Microsoft will use Intuit to dominate the emerging world of on-line commerce, and Justice Department lawyers are reportedly looking sympathetically at those arguments. A decision is expected within two weeks.

Despite official claims to the contrary, moreover, it appears that the ongoing antitrust troubles have begun to alter Microsoft’s behavior at a crucial juncture: The company is straining to launch both Windows 95, a major new version of its flagship operating system, and the Microsoft Network, an on-line service.

The company has backed off on at least two initiatives that might have been seen as abuses of market power. And Microsoft executives have been making the rounds to soften Microsoft’s image as the industry’s ogre.

“Damage control?” said Microsoft Senior Vice President Steve Ballmer. “Perhaps we just haven’t done a good job of articulating how we do business.

“Is our industry a healthy one? Yes, there are 70,000 software companies in the world,” Ballmer said as he leafed through the pages of a presentation with titles like “Microsoft’s role in the industry; sense of responsibility.”

Microsoft Chairman Bill Gates is having a difficult time maintaining his equanimity. Recently, he gave an edgy interview to The Times in which he alternately erupted with anger at Judge Sporkin and with contempt for his competitors, who are, in the words of one Microsoft ally, “using the judge’s decision to pile on.”

Sporkin’s decision was only the latest--and most bizarre--twist in a highly unusual antitrust case. Egged on by complaints from Microsoft’s competitors, the Federal Trade Commission started an investigation of the company five years ago. After spending three years, the commission deadlocked on whether or not to take action, and then the Justice Department took over the case.

Justice estimates that staff attorneys spent 14,000 hours and reviewed more than a million pages of documents during its nearly two-year investigation, and finally agreed to a settlement which forced Microsoft to modify the way it licensed the DOS and Windows operating systems and make a few other minor changes in its business practices. That wasn’t good enough for Sporkin, who criticized the decree as too narrow.

“This will go down in the annals of justice,” said a clearly frustrated Gates, referring to Sporkin’s rejection of a settlement that had been expected to receive a rubber-stamp approval. “This is really unique, a judge who goes off and gathers evidence on his own. He reads this book ‘Hard Drive’ to help him make his decision, a book that spelled my mother’s name wrong.”

Gates has long insisted that Microsoft does not--and will not--operate with one eye on possible antitrust problems: “These things don’t affect employees broadly, they involve very few people,” he maintained. “The people who build products at Microsoft are still building products.”

Not far from Gates’ mind, though, is IBM, which many believe ended up being severely damaged by a long-running antitrust investigation. “I sit on a board with (former IBM Chairman) Frank Carey. I asked him about it,” Gates said. “He said in no way does (the consent decree) explain what happened at IBM.”

“But there are people who say it does explain something,” Gates hastily added.

An IBM insider said a consent decree signed in the 1950s did indeed have an impact on the company. “These sorts of things start to take on a life of their own,” he said. “The focus on compliance (with the decree) has been agonizing for IBM. We’ve had to store warehouses full of documents. Every action has had to be analyzed to make sure it was in compliance with the decree.”

Microsoft executives are working hard to keep employees focused. Ballmer said that he “had one of the employees come up to me the other day and say, ‘Steve, I have a great idea for a new feature for Windows. Can we do it? Or can’t we add things to Windows anymore?’ ” Microsoft’s competitors have complained that the company has usurped their markets by bundling features--that previously required the purchase of non-Microsoft software--into Windows.

Ballmer frets about those who may have backed off ideas without asking.

At the same time, there appear to be several cases in which Microsoft has abandoned initiatives because of antitrust concerns. About 18 months ago, Microsoft was negotiating with cable giant Tele-Communications Inc. and media giant Rupert Murdoch to create Cablesoft, a collaboration designed to bring interactive television to American homes.

The talks collapsed. “Everyone backed off,” said a former Microsoft employee involved in the negotiations. “They were all afraid that this thing would be regulated out of existence.”

Recently, Microsoft scrapped a project, known as Ali Baba, that would have packaged Microsoft’s applications software on a CD-ROM disc with the latest version of Windows. Ali Baba was the software industry’s worst fear: Microsoft leveraging its dominance of operating system software to cut them out of the applications side of the business.

Ballmer said it was complaints from Microsoft’s retailers that caused it to drop Ali Baba. “I hate that it looks like we did it for legal reasons,” Ballmer said.

And Microsoft officials steadfastly maintain that it’s sour grapes from competitors--and not its own behavior--that keeps the antitrust issue alive. “There are the fingerprints and the footprints of the Novells, IBMs and Lotuses all over Washington,” said longtime Microsoft legal counsel Bill Neukom.

“They’ve been all over Washington trying to get the government to make trouble for Microsoft.”