Microsoft Violated Federal Antitrust Laws, Judge Rules
In a sweeping repudiation of Microsoft Corp. that sent tremors through Wall Street’s technology sector, a federal judge on Monday ruled that the software giant violated federal antitrust laws by abusing its monopoly in personal computer operating systems.
“Microsoft placed an oppressive thumb on the scale of competitive fortune,” wrote U.S. District Judge Thomas Penfield Jackson in a harshly worded 43-page decision, “thereby effectively guaranteeing its continued dominance” in the market.
Jackson’s ruling was not unexpected, given the sternness of his preliminary ruling against the company in November, and by the collapse of settlement talks this weekend involving Microsoft, the federal government, 19 state attorneys general and the District of Columbia.
But it nevertheless set the stage for renewed contention between the two sides over the scale of remedies to be imposed on the software giant for what Jackson called four years of implacably anti-competitive behavior.
“This opinion will . . . set the ground rules for enforcement in the Information Age,” said Joel Klein, assistant attorney general for antitrust in the U.S. Justice Department, which filed the lawsuit in 1998. “It demonstrates once again that no company, no matter how powerful or how successful, can refuse to play by the rules and thwart competition for America’s consumers.”
Klein hailed Jackson’s ruling as a “landmark opinion” that demonstrated that the nation’s century-old antitrust laws are equipped to deal with competitive concerns in an economy driven by technology.
But Bill Gates, Microsoft’s chairman and co-founder, vowed to continue fighting the legal case.
He said the ruling “turns on its head the reality that consumers know: that our software has helped make PCs more accessible and affordable to millions,” adding, “We believe we have a strong case on appeal.”
Nevertheless, New York Atty. Gen. Eliot Spitzer said Jackson’s almost total finding for the government--he ruled for the plaintiffs on 23 of 26 arguments they had raised--greatly decreased the odds of a successful Microsoft appeal.
“They need a clean sweep to eliminate their liability, and I don’t think anybody would want to bank on that,” he said. “Microsoft, despite all their naysaying, is wishing they had resolved all this last week.”
Sun Microsystems general counsel Michael Morris said the ruling was likely to help foster competition in subtle ways and that the lawsuit has already done some good.
“Companies feel a little freer to act outside of Microsoft’s shadow,” Morris said. “Dell Computer is supporting Linux, and Gateway is doing things with us. None of that would have happened a couple of years ago. One can hope these conclusions of law will further that feeling of freedom.”
Microsoft could face sanctions ranging from its enforced breakup into several smaller companies, to a wide range of constraints on its business practices, to a fine.
A proceeding to determine those sanctions is expected within the next two to three months, with a final verdict in the case issued by Jackson late this summer or fall. Experts say the severity of punishment will likely be telegraphed by whether Jackson chooses to have extensive oral argument on sanctions or just written briefs. They also say punishment could be imposed on Microsoft even before a final ruling.
“If the judge has an abbreviated remedy phase, then we know it’s going to be a mild remedy; if it’s extensive, then we know at least the possibility of a breakup or other structural relief is on the table,” said Robert H. Lande, a law professor at the University of Baltimore.
When asked whether he might seek to enjoin Microsoft’s illegal business practices before a remedy is fashioned, Klein said: “I think it’s appropriate for us to consider all of our options.”
Few antitrust experts expect Jackson to insist on the most draconian measures, such as a breakup or the distribution of Windows source code--its essential blueprint--to rival software companies.
“Historically, there are very few judges that order companies broken up,” said Lande, who called such a measure “a corporate death penalty.”
Jackson’s ruling was issued at 2 p.m. Pacific time, or one hour after the close of the securities markets. However, expectations that the ruling would be dire drove Microsoft shares down $15.38 to $90.88 in Monday’s trading on the Nasdaq Stock Market. More than 130 million shares changed hands, more than twice the volume of the second-most-active issue on U.S. exchanges. At least partially as a result, the Nasdaq composite index lost a record 349 points, or 7.6% of its value.
Internet Explorer Tied to Windows
At the heart of the case was Microsoft’s strategy of tying its Internet Explorer Web browser to its Windows operating system, which runs on more than 90% of the world’s personal computers. The strategy, which was aimed at the heart of Netscape Communications, its chief competitor in the browser market, meant that computer manufacturers were obliged to package Internet Explorer with almost every computer they sold.
That policy has effectively put Netscape Communicator out of business, Jackson ruled. Although Netscape once had 70% of the browser market, Jackson said, “Explorer’s share of browser usage has already risen above 50%, will exceed 60% by January 2001, and the trend continues unabated.” A failing Netscape Communications was acquired by America Online last year.
More important than undermining a rival, Jackson found, the strategy was designed to eliminate the threat to such key software products as Microsoft Word from Netscape-style software. That meant that Microsoft was using its monopoly in one market--operating systems--to foster a monopoly in others.
In pursuit of this goal, Jackson wrote, Microsoft successfully employed “incentives and threats,” “technological shackles,” and even “subterfuge” against some of the most powerful corporations in the land, including Intel Corp. and Compaq Computer Corp.
Jackson rejected Microsoft’s position that it is not as dominant in the software industry as perceived. Rather, he found, the Redmond, Wash.-based company was able to charge prices “substantially above the competitive level and . . . to persist in doing so for a significant period of time.”
But in one salvation for Microsoft, Jackson ruled that the government failed to prove that the company’s exclusive marketing arrangements with other firms “constituted unlawful, exclusive dealing” under federal antitrust law.
Plaintiffs Divided Over Punishment
But now that Jackson has reached his legal conclusions, political and philosophical differences among the plaintiffs could yet hamper the government coalition’s bid for tough sanctions against Microsoft.
The states are split between hard-liners who favor a breakup of Microsoft and those that support less-draconian restrictions on the company’s behavior. The states are also split along party lines: 12 of the 19 states litigating the case are governed by Republicans; a thirteenth, Minnesota, is run by an independent, while the District of Columbia and six states are run by Democrats.
But on Monday leaders of the state coalition said they were united with the Justice Department.
“Whatever difference we’ve seen really have been dwarfed by the commonality of purpose, by all we’ve done together,” said Connecticut Atty. Gen. Richard Blumenthal.
During intense negotiations that lasted more than four months, Microsoft and the government appeared to be making progress settling their dispute. That ended Friday when talks broke down and federal negotiator Richard Posner declared the positions of the two sides “too deep-seated” to resolve.
Microsoft had made several significant concessions to the government in a last-minute attempt to settle its case. It offered, for example, to remove Explorer from some current and future versions of Windows.
Microsoft also offered to give computer manufacturers more control over the Windows programs they included in their products and to end price discrimination in licensing Windows. But the plaintiffs said these offers fell short of the guarantees of improved corporate citizenship they sought.
Times staff writers Robert L. Jackson, Norman Kempster and Jonathan Peterson contributed from Washington, Joseph Menn from San Francisco and Stanley Holmes from Seattle.
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What’s Ahead
Barring a settlement among Microsoft Corp., the Department of Justice and the 19 states and the District of Columbia suing the company, here’s what is expected next in the case:
A ruling in the next phase of the trial, in which remedial action will be considered, may be issued by early fall this year. The penalty could range from a simple fine to the breakup of Microsoft.
Microsoft might then ask that any sanctions against the company be set aside while it appeals the antitrust case in the U.S. Circuit Court of Appeals, which could rule by spring 2001.
If no settlement is reached, the final step in the case would be an appeal to the U.S. Supreme Court. Legal analysts believe that a high court ruling could come by 2002.
Source: Bloomberg News
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Microsoft Antitrust Timeline
June 1990: Federal Trade Commission secretly investigates possible collusion between Microsoft and IBM.
February 1993: FTC takes no action and closes investigation after 2-2 deadlock vote of its commissioners.
August: Justice Department takes over Microsoft investigation.
July 1994: Microsoft and government sign consent decree. Microsoft agrees to eliminate certain Windows operating system licensing restrictions on computer makers that require them to license other software products. Agreement allows Microsoft to develop integrated products.
February 1995: U.S. District Judge Stanley Sporkin throws out consent decree, saying it is too easy on Microsoft and not in public interest.
June: U.S. Court of Appeals overturns Sporkin’s ruling at request of both Microsoft and Justice Department; grants Microsoft’s request to remove Sporkin; transfers case to U.S. District Judge Thomas Penfield Jackson.
August: Jackson approves consent decree.
September 1996: Government investigates possible violation of consent decree by Microsoft.n October 1997: Justice Department asks judge to fine Microsoft $1 million a day for allegedly violating consent decree by bundling Internet Explorer with Windows 95. Microsoft says browser is integrated part of operating system.
December: Jackson issues preliminary injunction against Microsoft requiring unbundling of Web browser from operating system. Microsoft appeals, offers computer makers an older version of Windows 95 without Web browser. Justice Department asks judge to hold Microsoft in contempt.
January 1998: Company agrees to allow computer makers to install Windows 95 without Internet Explorer icon, thus avoiding contempt charge.
May: Appellate court rules injunction against Microsoft should not apply to Windows 98, allowing company to proceed with launch of new product.
May 18: Justice Department, 20 states and District of Columbia file major new antitrust case alleging Microsoft abused its power and illegally thwarted competition to extend its monopoly on software. (One state ultimately drops out of suit.)
June: Three-judge federal appeals panel overturns Windows 95 injunction, ruling that Jackson made procedural and substantive errors.
August: Government lawyers depose Chairman Bill Gates.
September: Justice Department files new allegations that Microsoft used anti-competitive practices to drive out big-name competitors such as Netscape, Intel, Sun Microsystems and Apple Computer; Jackson denies Microsoft request to limit scope of trial.
Oct. 19: Antitrust trial begins before Jackson. Observers expect it to last about six weeks.
January 1999: Government rests its case. Microsoft begins to present its case.
February: Microsoft rests its case. In an embarrassment to Microsoft, lead government trial attorney gets company executive to admit that more than one computer was used in a video software demonstration, casting doubt on tape’s reliability. First phase of trial recesses.
March: Hoping to end case, Microsoft submits settlement offer to end exclusive contracts and permit changes in Windows opening screens.
June: Trial resumes for rebuttal testimony.
June 24: Trial testimony ends.
August: Both sides submit proposed findings of fact. Government alleges that Microsoft engaged in broad pattern of unlawful conduct to squelch competition in personal computer operating systems. Microsoft counters that its actions were legal; consumers benefited from easier software installations; government failed to prove its case.
September: Both sides present closing arguments.
Nov. 5: Jackson releases his findings of fact, labeling Microsoft a monopoly. They side heavily with governments position and deliver serious blow to Microsoft.
Nov. 19: Jackson appoints Richard A. Posner, chief judge for the U.S. 7th Circuit Court of Appeals in Chicago, to act as mediator in voluntary settlement talks.
March 2000: Jackson says he intends to issue ruling March 28.
March 24: Microsoft proposes wide-ranging settlement.
March 27: After eleventh-hour bid falls short, Microsoft attempts to sweeten deal.
April 1: Posner, citing deep-seated disagreements between Microsoft and government, announces settlement talks have ended in failure.
April 3: Jackson rules Microsoft violated the Sherman Antitrust Act, maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market.
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Sources: Times staff and wire reports
Researched by NONA YATES/Los Angeles Times
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LONG BATTLE AHEAD
Even after the long-awaited judgment, the legal battle is expected to drag on for years. C1
More coverage, C1, C8, C9
