WASHINGTON (04/28/2000) - The Justice Department asked U.S. District Judge Thomas Penfield Jackson today to cleave Microsoft Corp. in half, arguing that the software giant's Windows operating system business should be split from the rest of its product divisions, including its Office suite of software applications and its Internet Explorer Web browser.
The Justice Department was joined in its "proposed final judgment" by the District of Columbia corporation counsel and 17 of the 19 states that are its partners in the nearly 2-year-old antitrust battle.
Under the proposal, the new operating system company, which would include all versions of Windows software, would be prohibited from recombining with the applications company for 10 years. The filing was accompanied by several supporting affidavits, including one submitted by Edward Felten, a Princeton University professor who testified twice for the government as a technical expert during the case.
Microsoft officials immediately rejected the plan as unworkable, unnecessary and unlikely to be upheld by higher courts. Chairman Bill Gates said the proposals would have a "chilling effect" on high-technology innovation.
"Microsoft could never have developed Windows under these rules," he said.
During a later conference call, Gates stepped up his rhetoric, declaring that the plan "was not developed by anyone who knows anything about the software business."
Microsoft general counsel William Neukom said the government proposal greatly exceeded the evidence presented at the trial and Jackson's findings of fact and law. "Their proposed remedies go far beyond the scope of the case they tried to prove." Neukom said during the conference call with reporters and financial analysts.
On April 3, Jackson found Microsoft guilty of multiple violations of federal antitrust law. He accepted most elements of the government's argument that Microsoft was guilty of illegally preserving its operating system monopoly through a variety of anti-competitive actions. Those included tying Internet Explorer to Windows to thwart rivals such as Netscape Communications and Sun Microsystems from mounting technological threats to the market dominance of Windows.
Although the Justice Department labored to get all of its partners to sign on to the remedy proposal, the attorneys general for Illinois and Ohio filed a separate proposal urging Jackson to stop short of a breakup, instead imposing a set of restrictions on Microsoft's business practices. The two states called on Jackson to review the case in three years' time and decide then whether to break up the company.
Justice Department antitrust chief Joel Klein said the breakup proposal, or "structural remedy," would help restore vibrant competition to the software market more effectively than limits on Microsoft's businesses practices, which would have to be overseen by the government and the courts.
"Under our proposal filed today, neither the heavy hand of ongoing government regulation nor the self-interest of an entrenched monopolist will decide what is in the best interests of consumers," Klein told reporters in a news conference at the Justice Department. "Rather, consumers will be able to choose for themselves the products they want in a free and competitive marketplace.
That is our goal, and that is the overriding purpose for America's antitrust laws."
Connecticut Attorney General Richard Blumenthal, one of the leaders of the states' camp, called the plan "a very measured, resolute but responsible remedy." But antitrust experts noted that courts have rarely imposed broad restructuring plans of the type requested by the government.
"I don't believe structural relief will be ordered by the judge or upheld on appeal," said University of Baltimore law Professor Bob Lande.
Under the government's plan, the two new companies would be barred from selling or distributing each other's products. But the operating system company could create and market its own software applications, and the applications company could sell its own operating system. In fact, Klein envisioned the applications company as a potentially major threat to the Windows operating system in its own right. He said the applications company "could become its own successful platform threat. It exposes a great deal of application-programming interfaces; it can obviously run on a variety of different operating systems."
The government said Microsoft should be granted one year to draw up the blueprint for its own divestiture. Gates would have to decide which company to lead and which to start competing with. The government also said Microsoft should establish an antitrust "compliance committee" and hire a "chief compliance officer" to police the company internally for antitrust violations.
Klein rejected criticism that the remedy goes beyond the scope of the legal case, which focused mainly on Microsoft's actions to take control of the market for Web browsing software. "From the beginning of this case through the trial, the critical issues were Microsoft's illegal maintenance of its monopoly and Microsoft's illegal attempt to monopolize the browser market," he said.
In designing the plan, government lawyers consulted with investment bankers who worked on the 1984 breakup of AT&T and the later spin-off of Lucent Technologies, Klein said. The financial experts were confident that the proposed split could be done in a routine manner, he said.
The government also proposed that Jackson immediately impose a set of "conduct remedies" on Microsoft's business practices that wouldn't expire until after the lengthy appeals process was completed, plus another three years after Microsoft was finally split up. The government advised Jackson to prohibit Microsoft from "exclusive dealing" with other companies or degrading the performance of non-Microsoft platform software. The company would have to publish a uniform Windows pricing list for computer makers, among other remedies.
Microsoft has until May 10 to respond to the government's proposal, but the company is likely to ask Jackson for an extension. "The government's unprecedented and extreme remedy proposals will require a significant expansion of the remedy process currently contemplated by Judge Jackson's order," general counsel Neukom said. "Even the government will have to agree that an American company deserves more than 12 days to respond to a government proposal to tear apart a $400 billion company."
The company's rebuttal will seek to push the trial's "remedy phase" several months past the courtroom hearing Jackson has set for May 24, Neukom said.
The rebuttal will include three elements. The company will try to refute today's filing as unwarranted and unnecessarily severe. It also will tender a counter-proposal that is expected to consist of a set of milder conduct restrictions focusing on such issues as standard Windows pricing for computer makers. Most importantly, Microsoft will ask Jackson to grant the company the right to conduct additional "discovery" of evidence, depose government experts such as Felten, and perhaps even cross-examine those experts in open court.
Today's proposal went far beyond widely reported details of the private settlement talks between the two sides. Before collapsing on April 1, the talks were mediated for several months by Chicago Appellate Judge Richard Posner.
Jackson's initial scheduling of a 60-day remedy phase, considered unusually fast for an antitrust case, was widely read as a sign that the judge, whom President Ronald Reagan appointed to the federal bench, is leaning toward simply restricting Microsoft's business practices rather than breaking up the company. Some observers have speculated that the government proposed a harsh structural remedy as a negotiating tactic to induce Jackson to impose strong conduct remedies in the case.