Microsoft’s Gamble Leaves It Vulnerable
Gambling he could prevail in the federal courts, Microsoft Corp. Chairman Bill Gates rejected a settlement with the Justice Department last year that would have put strict antitrust limits on his company.
Now he must be wondering if he should have accepted the offer.
Microsoft publicly touted last week’s ruling by the federal appeals court for the District of Columbia as a victory, contending that it spared the company from a lower court’s order that it be split in two.
But the proposal Gates was offered 14 months ago also would have left Microsoft intact. And, more important, it would have spared the company from being legally judged a monopoly--a situation that could have grave consequences for the software giant.
For one thing, the company now could be forced to accept tough antitrust restrictions that could constrain its ability to compete in the fast-moving software marketplace. The roll-out of its new Windows XP in October is already threatened. In addition, it is now vulnerable to more than 100 private antitrust lawsuits.
“All of the dynamics have now changed and the government’s negotiating position is stronger and Microsoft’s is weaker,” said Robert Lande, a law professor at the University of Baltimore. “A few days ago, Microsoft thought, ‘There’s a really good chance we will win everything.’ . . . Now they have to go back to square one. Both Microsoft and the government will have to examine the changes that have taken place in the marketplace” and determine their best course of action.
Three possible courses lie open.
Either side could take the appeals court ruling to the Supreme Court. But experts say the court would be unlikely to take the case both because it declined to hear an earlier appeal and because the appeals court decision was unanimous.
The government and the company could take the case back before the new district court judge who is expected to be selected by mid-August to replace trial Judge Thomas Penfield Jackson, whose conduct of the case was the object of blistering criticism by the appeals court.
Finally, the two sides could hold settlement talks before or during any court proceeding.
Microsoft says it is open to settlement talks with the Justice Department, the District of Columbia and 18 states that have joined the antitrust action against the company. Legal experts say the appeals court’s decision lays out a road map for the warring parties to resolve the dispute. At a minimum, these experts say, the decision provides support for a settlement or new court order that would:
* Require Microsoft to adopt uniform pricing of its flagship Windows software.
* Bar exclusive or discriminatory contracts between Microsoft and Internet content and service providers.
* Restrict Microsoft’s ability to prevent PC makers from modifying the appearance of the Windows “desktop” and substituting other software applications such as Web browsers.
“I think the court has backed the government on these issues,” said Herbert Hovenkamp, a University of Iowa law professor.
During settlement talks 14 months ago, Microsoft rejected a proposal crafted by Richard A. Posner, a federal judge in Chicago who was acting as a mediator, that also would have included these elements.
Since then, Microsoft says, it already has modified many of these practices. It says it no longer makes exclusive contracts or offers discounts on Windows to get computer makers to do its bidding.
Two other, more contentious matters might also be part of a new settlement. These are requirements that Microsoft allow others to develop and sell Windows in competition with Microsoft and that the company divulge Windows’ underlying software code to outside software developers. Posner’s package included the second of these requirements but not the first.
Microsoft argues that these requirements would interfere with its freedom to innovate.
In immediate jeopardy for the software giant is its plan to launch a new Internet service initiative called .Net and bundle enhanced multimedia applications in a new version of Windows, called Windows XP, scheduled to go on sale Oct. 25.
Legal experts and attorneys for the 18 states that are co-plaintiffs with the Justice Department say the appeals court decision paves the way for the government to seek an injunction against the release of Windows XP. Some antitrust officials have already indicated they plan to examine Windows XP more closely in the coming weeks and bring its alleged anti-competitive features to the attention of the new district court judge assigned to the case.
“Windows XP reportedly evidences some of the very same tactics ruled exclusionary by the court of appeals, especially manipulation of the Windows desktop and commingling of source code in a way that unnecessarily excludes rival software without providing any significant benefits to consumers or technical benefits to Windows,’ said Andrew I. Gavil, an antitrust expert and professor of law at Howard University. If true, this will provide a reasonable basis for the government to seek to enjoin release of all or part of Windows XP, he said.
Government lawyers said over the weekend they have not yet formally met as a group to discuss the case. But they said they were pleased with the appeals court decision, remained committed to tough sanctions and would approach any new litigation or settlement talks with an open mind.
“This decision very emphatically opens a new chapter in the case,” said Richard Blumenthal, who leads the coalition of states pursuing Microsoft. “We need to reevaluate promptly what our specific position is going to be. The overarching goal is to change fundamentally the way this company conducts itself.”
“I’m encouraged by the court ruling,” added Wayne Klein, an assistant attorney general who has represented Utah in the litigation against Microsoft. “I’m not putting any limitation on what we may or may not be willing to consider at any settlement talks. . . . We are proceeding under the assumption that this case is going to be decided by a judge.”
Joining the states will be a host of new faces in the Bush administration, including Atty. Gen. John Ashcroft and Justice Department antitrust division chief Charles A. James. Another key player could be Michael Katz, a former Federal Communications Commission official who is said to be the leading candidate for chief economist of the antitrust division.
The UC Berkeley economist said by e-mail that he had no comment on the Microsoft matter. A colleague and former Justice Department economist said Katz could play a key role by providing support for the government’s contention that Microsoft is an illegal monopoly.
“I expect he will be working very closely with the lawyers to craft the type of remedy that will go to the heart of the matter,” said Janusz Ordover, a professor at New York University.
If the case proceeds to settlement talks, a software executive who negotiated a financial settlement with the company said the government would face the same problem that he did: “You can’t trust Microsoft.”
Added Jeff Blattner, a Washington lawyer who negotiated with the software giant as a deputy assistant attorney general in the Clinton administration’s Justice Department: “Microsoft needs to think long and hard about whether a clean structural solution and a return to the marketplace in short order is better than intense legal scrutiny for a long period of time.”
