Microsoft, Justice Defend Antitrust Pact : Software: They tell appeals panel that judge exceeded his authority in rejecting deal. Some original players are absent.

Microsoft Corp. and a revamped team of Justice Department lawyers defended their controversial antitrust settlement before a federal appeals court panel Monday, arguing that a lower-court judge exceeded his authority when he rejected the pact in February.

They faced off against three industry attorneys, who asked the three-judge appellate panel to uphold a February decision by U.S. District Judge Stanley Sporkin to reject the decree, which would force Microsoft to change the way it licenses its MS-DOS and Windows personal computer operating system software.

The short hearing, during which all sides were sharply questioned by the appeals panel, gave no indication how the judges might rule.

But the courtroom was marked by the absence of the Justice Department antitrust chief, Anne K. Bingaman, who had argued the case in lower court. Also absent from the Justice team were Deputy Assistant Attys. Gen. Diane P. Wood and Robert E. Litan, both of whom played key roles in preparing the Microsoft case.

Joel I. Klein, a former deputy White House counsel who joined the Justice Department in February, handled oral arguments Monday.

The appeals court has several options. It could overrule Sporkin and direct him to sign the agreement; uphold Sporkin and thus force the Justice Department to either reopen the case, drop it or reach a new settlement, or it could uphold certain elements of Sporkin’s ruling and request modifications to the agreement.

Under questioning, Klein said the department will accept a judge’s modification of the consent decree. But, he added: “ . . . the fact that we would . . . doesn’t mean this decree is not in the public interest. Our position is that this decree, without modification, should be entered.”

Microsoft and the Justice Department contend that Sporkin overstepped his authority by considering issues that were not part of the agreement. But Gary L. Reback, who represents several anonymous opponents of the decree, said the proposed settlement “does not undo the damage” allegedly caused by the near-monopoly position of MS-DOS and Windows, and that Justice should have pursued other allegations about Microsoft’s business practices.

The panel sharply question Microsoft and Justice lawyers about judicial and prosecutorial discretion to shape consent decrees, and also concentrated on the absence from the agreement of a relatively obscure Microsoft software product called Windows NT.

Currently, Windows NT holds a scant 1% share of the computer market, compared to 60% for Windows 3.0 and its successors, according to research firm Dataquest Inc. But its installed base of 585,000 units is expected to grow to 3 million this year and 10.3 million by 1996, Dataquest says.

Windows NT’s growing popularity has fueled concerns that Microsoft could circumvent the proposed consent decree by migrating computer users to NT. Critics say falling prices for the relatively advanced PCs needed to run NT mean it will soon be marketed much more broadly.

“Overall, I see the operating systems (Windows and Windows NT) collapsing into one,” said Tom Kucharvy, president of Boston-based software market research firm Summit Strategies.

In a brief interview with The Times before Monday’s court hearing, Bingaman acknowledged that Windows NT’s “market share is growing,” but she said her decision to exclude the product from antitrust constraints is sound. “The complaint was alleged monopoly, and they did not have a monopoly in Windows NT at the time,” Bingaman said.

Requiring the inclusion of Windows NT as a condition for the approval of the consent decree is one of the types of remedies the appeals panel could order.

A Justice Department spokeswoman said no significance could be attached to Bingaman’s absence from Monday’s hearing.

Wood, who helped draft the appeals brief, has been nominated to the federal bench. Litan, who was Bingaman’s chief deputy, has moved on to the Office of Management and Budget.