Microsoft Case Enters Crucial Penalty Phase
Nine states waging a landmark antitrust battle against Microsoft Corp. are preparing to venture into territory that has been barely visible during the past years of legal slogging: the future.
Since the case began four years ago under the leadership of the Justice Department, it has been focused on the past--whether Microsoft broke the law as it bullied customers to ensure it kept a stranglehold on hundreds of millions of desktop computers.
But with the Justice Department’s surprise decision in November to settle its dispute with Microsoft, the nine states that refused to go along are pushing forward with a far more aggressive strategy in a new trial that begins Monday.
In this punishment phase of the case, they are seeking to prevent Microsoft from quashing its competitors not only in the old world of personal computers but also in the emerging markets of advanced cell phones, hand-held computers, television set-top boxes and countless devices yet to be invented.
“We’re trying to protect nascent technologies--the next Netscape--whatever that might look like,” said California Senior Assistant Atty. Gen. Tom Greene, one of a team of lawyers lent to the mammoth task by the nine states and the District of Columbia.
The states are facing a difficult assignment, taking on not just Microsoft but its new ally, the Justice Department. The rules of engagement, laid down in a mixed ruling by a federal appeals court, are not entirely in their favor.
U.S. District Judge Colleen Kollar-Kotelly, who stepped into the long-running saga last fall, said at a recent hearing that expanding the case to include technologies outside of personal computers might be beyond the scope of the trial.
The states, however, are undaunted. They have enlisted the help of one of Washington’s most intimidating litigators, Brendan V. Sullivan Jr., who defended Oliver L. North in the congressional Iran-Contra hearings.
And they have corralled some witnesses the Justice Department couldn’t get at the first trial, including one representing Microsoft’s primary victims, the computer makers, who refused to testify earlier for fear of reprisals.
In short, the states intend to use their six weeks in the spotlight to raise a ruckus.
After years of dense technological debates and circular legal maneuvers, they hope above all to restore a sense of urgency to a case that will shape the dynamics of the world’s high-tech industries for years.
The groundwork for the trial was laid last year in a unanimous ruling by the appeals court, which upheld the verdict that Microsoft had broken federal antitrust laws to keep its operating system monopoly.
But the court sided with Microsoft in throwing out allegations that it tried to expand that monopoly into new areas. Most important for Microsoft, the higher court threw out an order that the company be broken in two.
The appeals court called for a new trial to determine how to take away Microsoft’s ill-gotten gains, foster new competition and ensure the company does not repeat its misbehavior.
Microsoft’s enemies, including AOL Time Warner Inc., buyer of the improperly bludgeoned Netscape, and Sun Microsystems Inc., home of the victimized Java programming language, welcomed the appeals court’s conclusions.
But the government case veered in an unforeseen direction when the Justice Department, run by new Bush appointees, suddenly agreed to settle its part of the fray. The company’s rivals were outraged and the 18 states that had been tagging along in the proceedings reeled in shock.
Widely criticized as a slap on the wrist, the proposed Justice Department deal would require standard pricing for Windows, forbid Microsoft to discriminate against computer companies that include other firms’ software, and mandate more disclosure from Microsoft about how Windows works.
The 18 states split down the middle, with half grudgingly joining the proposed resolution and half vowing to pursue the case on their own in the remedies trial.
The nine holdout states, led by California and Iowa, now have a chance to prove the timidity of the Justice Department’s settlement.
The states have called on Kollar-Kotelly to require Microsoft to disclose far more about the inner workings of its software, including details about the company’s major Internet commerce initiative, known as .Net. That’s designed to make sure that the company doesn’t have too much of an edge as it competes in the emerging market for Web services.
More dramatically, the states want Microsoft to release the source code for the Internet Explorer Web browser, essentially making it a free part of the technological landscape. They want Microsoft to auction the rights to develop versions of the Office productivity suite for Linux and other operating systems.
And they want Microsoft to produce a “modular” version of Windows, so that computer makers can strip out Microsoft’s browser, video player or other pieces, known as middleware, if they choose to. Such unbundling would be a “loathsome” prospect for Microsoft, which conquered market after market by wrapping in goodies to use its dominance in one area as a springboard for the next, California’s Greene said.
The two sides agree on little except what subjects will provoke the biggest battles during the trial.
The first key debate will be over what exactly the court of appeals meant when it said Microsoft must be prevented from repeating its wrongdoing.
The court found that Microsoft had broken the law 12 times, such as when it threatened not to give Apple a Macintosh version of Office if it shipped Netscape as the default browser on its machine.
Microsoft is only too happy to promise never to do any of those 12 things again.
“The problem is, those items took place five or six years ago. The market is completely different now,” said University of Baltimore antitrust professor Robert Lande. “If Microsoft can limit it to those 12 specific items, it’s a huge, huge victory.”
That’s why the states are pulling in the other direction, trying to show that the appeals court’s ruling must be taken broadly to prevent Microsoft from using its heft to preserve its current monopoly--even if the threats come from barely foreseeable directions, such as cellular phones.
The other big fight will be over whether the states’ demands are even possible to implement.
Microsoft Chief Executive Steve Ballmer has said it’s unrealistic to think that Microsoft could come up with multiple Windows versions that work equally well. And Microsoft attorneys said that breaking Windows into pieces will just force PC makers to stitch the units back together or force software writers to make hundreds of versions of their programs--moves that will ultimately cost consumers.
Microsoft argues that the states’ remedies will force the company to stop selling Windows, which sits on more than 90% of the world’s personal computers. The company warned in a pretrial brief that the remedies would cause “grievous harm . . . to the entire PC industry and to the tens of millions of consumers around the world.”
“They’re going to bring in [Microsoft founder Bill] Gates and have him tell Kollar-Kotelly it will mean the end of Microsoft and the world as we know it,” said Stephen Houck, an attorney for the states. “It’s sort of like nuclear warfare, daring her to do something.”
Gates is on Microsoft’s witness list, as is Ballmer. The states expect to see Gates alone, and his testimony could be pivotal.
Gates’ evasive, videotaped deposition in the last trial was a disaster. If he testifies this time, he will face Sullivan’s withering interrogation.
“Brendan Sullivan is an absolute marvel. The issue is whether he will be able to crack Gates and show some of the less-believable aspects,” Lande said.
The states are preparing to present an executive from beleaguered Gateway Inc. and the computer maker’s former chief technical officer, Peter Ashkin.
Ashkin will testify that Microsoft coercion controlled Gateway so thoroughly that the company couldn’t offer consumers real choices about what came with their machines, according to a pretrial statement.
Kollar-Kotelly’s views remain unclear. In tactical matters, she has leaned in one direction and then the other. If she rules at least partially against Microsoft, as analysts believe is likely, Microsoft will appeal.
But it may be unable to delay the remedies again while higher courts conduct their review. That means that as soon as this summer, the world may finally change.
And that possibility is what keeps Greene and the others in the states’ coalition going.
“Some claims were dismissed, but this is still pretty much the antitrust case of our generation,” Greene said. “It needs to be borne out in the enforcement.”
