Microsoft Gains Some Ground in Rebuttal Phase

With the final witness in the Microsoft Corp. antitrust trial expected to conclude his testimony today, the case appears to have taken a turn in favor of the software giant--though probably not enough to avoid legal sanctions against the company’s lucrative software franchise.

Since the rebuttal phase of the landmark trial began June 1, Microsoft lawyers have proven more adept--and the government’s rebuttal witnesses more vulnerable--than in the trial’s first phase. Back then, discrepancies in a crucial Microsoft video demonstration and other courtroom gaffes prompted Washington antitrust expert James R. Loftis to pronounce Microsoft’s legal fate “doomed.”

But in this round, Microsoft lawyers have fought back hard, casting doubt on the testimony of some of the government’s most recent witnesses--IBM Corp. executive Garry Norris and economics expert Franklin Fisher.

“The rebuttal phase went better for Microsoft,” said antitrust specialist Ernest Gellhorn, a law professor at George Mason University in Fairfax, Va. “But it really didn’t change the dynamics of the case--the odds still favor the government.”

In testimony Wednesday, the government’s lead lawyer, David Boies, appeared poised to regain some ground as he continued his attacks on the credibility and scholarship of economist Richard Schmalensee, Microsoft’s final witness.

And U.S. District Judge Thomas Penfield Jackson, who is overseeing the nonjury trial, has shown signs that he remains critical of some of the company’s business practices and the courtroom performance of its lawyers.

In court this week, Jackson likened Microsoft to retail giant Wal-Mart and theorized aloud that if a company such as Wal-Mart or Microsoft were to constantly add product features to protect its huge market shares, it would be “a benevolent despot--a monopoly.”

And after Microsoft lawyer Richard Pepperman became exasperated while questioning Norris two weeks ago, Jackson remarked to him in a private sidebar conference, “I’m not sure how much progress you are making so far.”

The Justice Department, 19 states and the District of Columbia maintain that Microsoft has used its dominant Windows PC software to compete unfairly with rivals, such as Internet Web browser developer Netscape Communications Corp.

Microsoft has countered that its business practices aren’t illegal and that it faces stiffer competition from rivals, including Netscape, which last year was purchased by America Online Inc.

Over the next three months, both Microsoft and the government will assess how those arguments fared. The two sides will have to determine whether to settle their differences out of court or take their chances with a judge who will decide what many experts consider to be the most important business case since the breakup of the AT&T; telephone monopoly.

The end game could be affected by Microsoft’s charismatic but volatile chairman, Bill Gates. Gates’ utterances have confounded his legal team throughout the trial--most recently in an upbeat article about the personal computer industry that he wrote for Newsweek magazine last month. His comments appeared to undermine Microsoft’s claims that the PC industry is on the wane and is being challenged by other technologies.

Resolution of the case will be complicated by an unusual three-step process Jackson has imposed aimed at foreshadowing his final decision and--more important--encouraging the parties to settle.

After Schmalensee, dean of the Massachusetts Institute of Technology’s business school, finishes his testimony, the government and Microsoft will have 30 days to submit proposed findings of facts in the case. The sides will reconvene for oral arguments, then Jackson will issues his findings of key facts of the case--presumably on such topics as whether Microsoft faces significant competition.

The parties will then have 30 days to submit findings of law. Jackson will mull those submissions before fashioning his own thoughts about whether Microsoft exercises monopoly power.

“I think the most likely window of settlement comes after the judge issues his findings of facts,” said Kevin Arquit, a New York antitrust lawyer who has advised some of Microsoft’s rivals.

Only after these steps will Jackson rule on the case.

If Microsoft is found guilty of any antitrust violations, that will probably trigger a court proceeding to determine any punishment. As a result, most experts expect the case to last until next spring.

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