Microsoft Learned to Play Along
A federal appeals court last year unanimously declared Microsoft Corp. a monopolist that abused its market power to hobble competitors. Yet when it came time last week to punish the world’s most valuable company, Microsoft escaped devastating sanctions.
The reasons are many. The Redmond, Wash.-based software maker got smarter about how to play Washington, D.C., politics. Its opponents dwindled and misplayed some of the few cards they had left. And Microsoft just plain got lucky.
U.S. District Judge Colleen Kollar-Kotelly on Friday approved a settlement to end the four-year antitrust lawsuit against Microsoft without imposing many of the tough restrictions sought by California and eight other states. The Justice Department and Microsoft hailed the ruling as good for technology and good for consumers, but critics disagreed on both counts.
The most important factor in avoiding stiff sanctions may have been Microsoft’s adaptable corporate culture, cultivated by its co-founder, Bill Gates. Gates’ company dramatically improves weak initial versions of its software until it gets them right. In much the same way, Microsoft eventually learned how to grease the right Washington wheels and come across more reasonably in court. Then it benefited from mistakes by the states and from events beyond the control of either side -- especially the 2000 election of George W. Bush as president.
“The conventional wisdom is that regime change in Washington is what caused all this, and certainly a regime change was a substantial proximate cause. But it was not the only cause,” said Silicon Valley lawyer Gary Reback, who helped design the government’s initial legal assault at the behest of such Microsoft rivals as Sun Microsystems Inc. and Oracle Corp.
The Justice Department and 19 states sued Microsoft in 1998, but that effort “lost its start-up quality” over time, Reback said Saturday. The states’ agendas fractured and money and enthusiasm ran short.
Still, Friday’s opinion by Kollar-Kotelly offers insight into how, even in its late stages, the campaign against Microsoft could have ended differently.
At the beginning of the case, Microsoft hewed to the same sort of scorched-earth approach in the courtroom its rivals accused it of taking in business. Gates personally oversaw the strategy that exploited inherent weaknesses in the legal system.
Any judicial proceeding of such magnitude takes years to prosecute, especially against such a well-heeled opponent. Antitrust law in particular is complex, turning on arcane economic theories and statistics. And technology advanced even as the case proceeded. For instance, by the time the case reached the appeals court, Microsoft already had taken the lead in the Internet browser market from onetime leader Netscape Communications Corp., which has since been acquired by AOL Time Warner Inc.
“If you’re always seeking a remedy after the fact, you’re never going to fix these markets,” said Reback, explaining that a punishment can fit an old crime without preventing a new one. “If you come in and say ‘don’t do it again,’ he says ‘fine’ -- he has the benefit of the illegal conduct.”
In 1995, Microsoft began bundling its browser, Internet Explorer, free with every copy of Windows, which powers more than 90% of the world’s PCs. Its competitors cried foul.
After months of lobbying, the competitors forced a reluctant U.S. Justice Department to argue that Microsoft was violating a 1994 consent decree. But the company prevailed on appeal.
Then in 1998, a separate suit by the Clinton administration and 19 states revisited the issues. The Justice Department hired star litigator David Boies and spent more than $7 million accusing Microsoft of illegally maintaining its desktop monopoly by quashing a combined threat by Netscape and Sun’s Java programming language. Java and Netscape enabled programmers to write software less dependent on Windows.
A key second accusation was that Microsoft was breaking the law by trying to extend its monopoly into the browser market.
Microsoft fought every point in court. But it also made changes to the way it approached Washington. Like many technology companies, it had all but ignored the political process.
A Big Corporate Donor
But it began funneling millions to a range of candidates, favoring Republicans as they grew in strength. By the time of the 2000 Republican national convention, as the litigation was entering a crucial phase, Microsoft was the second-largest corporate donor, giving $4.3 million to the two parties -- a far cry from the $256,000 it gave in 1996. Just over half went to Republicans.
On the campaign trail, then-candidate Bush said he was worried the company would be broken up, which he said was the “great fear” in the case. In June 2000, about four months before the election, U.S. District Judge Thomas Penfield Jackson ordered Microsoft broken apart. Microsoft appealed.
After the election, the Bush administration’s new antitrust enforcer, Charles James, showed less enthusiasm for the Microsoft lawsuit.
When the federal appeals court overturned Jackson’s breakup order in 2001, James got a chance to change course. The judges said Jackson had not done enough to consider the effect of a split. And the appeals court removed Jackson from the case for speaking with reporters while the case was pending, another unpredictable event in Microsoft’s favor.
On Jackson’s findings, the appeals court said the government had proved that Microsoft acted improperly in protecting its monopoly, but not that it improperly went after the browser market by tying Internet Explorer to Windows. James announced that the U.S. wouldn’t seek a breakup or a retrial on the issue of tying.
The states, which had taken a back seat to the Justice Department, had almost no notice that federal officials were backing off. Eventually they decided to follow -- a step some lawyers on both sides now see as a mistake because it limited the states’ options and surrendered the momentum.
As soon as Kollar-Kotelly took control, meeting the two sides just weeks after the Sept. 11 terrorist attacks, any remaining enthusiasm among the states took another hit. Citing the terrorist attacks, she said the country had more important things to worry about.
“That changed the emotional feeling around the case,” said Jim Tierney, a onetime Maine attorney general with ties to Oracle who lobbied the attorneys general to stand firm.
As the states’ lawyers looked at each other in amazement, Kollar-Kotelly urged Microsoft and the government to settle their differences. “I expect [both sides] to make all efforts, seven days a week, around the clock,” she said.
James did just that, emerging with a mediated settlement and telling the states they could take it or leave it. The 18 remaining states split down the middle, and the dissidents lost a major voice when New York Atty. Gen. Eliot Spitzer joined in the deal.
The nine holdout states, now financed largely by California, had depleted resources and a judge that proved to be more inscrutable, meticulous and conservative than her predecessor.
Above all, the settlement was a tough hurdle for the states to overcome, said former Justice Department lawyer Daniel M. Wall. But he said the team “had great witnesses; they had help from outside lawyers representing Sun and other Microsoft rivals.”
From the start, the states angered Kollar-Kotelly by causing a one-week delay in the court proceedings. Days later, they compounded their woes by modifying some of the antitrust sanctions they sought and by trying to introduce testimony from more than a dozen Microsoft employees after the deadline for witnesses had passed.
The case put on by the states fell short in several ways, Kollar-Kotelly wrote. They produced only one economic expert, and he disagreed with some of their proposed remedies. And they tried to introduce evidence of wrongdoing that the appeals court hadn’t found to be illegal -- or had told the government to try to prove again, in new proceedings the states had opted to skip.
“Plaintiffs sought to gather all existing complaints regarding Microsoft’s business practices and bring them before the court at this late stage,” Kollar-Kotelly wrote Friday. “Plaintiffs have shown little respect for the parameters of liability that were so precisely delineated by the appellate court.”
Learning From Missteps
Microsoft meanwhile was applying the lessons from its earlier courtroom failures.
One of the company’s darkest hours had come before Judge Jackson, in February 1999, when it played a videotape that was supposed to prove a key defense point but instead undermined Microsoft’s credibility.
The video was supposed to reenact a demonstration showing that removing components of Internet Explorer impaired the Windows 98 operating system. In a moment out of “Perry Mason,” Boies replayed the tape, isolating frames that showed the video was a composite.
Equally damaging was Gates’ videotaped deposition, in which he seemed unwilling to answer questions as basic as whether he had marked an e-mail as high-priority.
But Microsoft changed everything during the second trial. To project a less combative image, the company hired former Iran-Contra prosecutor Dan K. Webb, a Chicago trial lawyer known for his unflappable demeanor.
And when Gates appeared in the flesh, he came across as cooperative and truthful.
Although Kollar-Kotelly chastised both sides during the 32-day trial, Microsoft benefited from her keeping the trial focused on narrow antitrust issues. And with scant experience in technology and antitrust cases, she seemed reluctant to stake out territory in fields with which she was unfamiliar.
“It would take a judge with a lot of self-confidence to go against the Justice Department, which has great expertise in antitrust matters,” said Robert Lande, a law professor at the University of Baltimore. “But here you have a judge with no antitrust experience and no technology experience.... It’s asking a lot to have her stick her neck out.”
