Microsoft's Legal Gambit

SAN MATEO (04/10/2000) - SO, HOW DO YOU feel about doing business with an illegal monopoly?

That is the question Microsoft's partners and customers are mulling over in the wake of U.S. District Judge Thomas Penfield Jackson's historic ruling that found the software giant unlawfully used the dominance of its Windows operating system to take over the Web browser market.

Microsoft must convince the rest of the world that it is still a sunny day, despite the big black cloud hanging over it. That may be tough to do because the company's strategy has its risks. The case will likely distract Microsoft's top strategic executives, and customers and partners could look elsewhere for technology -- or at least feel more assertive in dealing with the notoriously hard-as-nails company -- as the case wends its way through the legal process.

"Many of Microsoft's principal business customers have testified against them in this case, and so have many of their partners. One thing that is apparent is that [customers and partners] are going to be more comfortable in the future dealing with Microsoft's rivals," said Bill Kovacic, an antitrust expert at George Washington University Law School, in Washington.

Although many other companies and customers are, in the words of one user, "looking at [Microsoft] with a real hate in the eyeball," in many ways it will be business as usual. Conventional wisdom has dictated for years that the case would not go in Microsoft's favor, at least initially, so Jackson didn't surprise many people.

"[Customers'] decisions about whether to do business with Microsoft will always come down to dollars and sense," said Warren Wilson, a Bellevue, Wash.-based analyst at Summit Strategies. "Microsoft may lose a few [customers] who can't handle the legal uncertainty, but the company's got a strong base and a strong product lineup."

Once Jackson makes a decision on punishment -- proposed remedies range from regulating business practices to forcing Microsoft to share Windows code to breaking up the company -- Microsoft will appeal the case. Even if the case goes directly to the U.S. Supreme Court, it still could take at least a year.

Meanwhile, U.S. Assistant General Joel Klein is expected to testify this week before the House Judiciary Committee about his antitrust division's prosecution of Microsoft.

Arriving at remedies that appease the plaintiffs -- the Department of Justice, 19 state attorneys general, and the District of Columbia -- has already proved problematic. Many states were pushing for a breakup of the company, which the Justice Department reportedly has shied away from. But with Jackson's harsh ruling, the government likely will revisit that punishment, which still enjoys widespread support.

"If [the government] wants to have an impact on Microsoft and its increasing propensity to become a monopoly, they are going to have to break off part of the company," said Barry Wheeler, senior network systems engineer at Wells Fargo Auto Finance Group in San Francisco.

Recently, Microsoft reorganized itself into three distinct groups, which could make a potential breakup relatively easy -- the platforms and developers group, consisting of the Windows platforms and the SQL Server database; the business productivity group, which includes the Office and Back Office packages; and a consumer group, including all Internet-related businesses.

"If Microsoft will be forced to break up the company, it will do it in these three groups, and this won't hurt them at all," said Tom Bittman, an analyst at Gartner Group, in Stamford, Conn. But a cloning -- building up three new Microsofts, each competing with similar intellectual property -- would take a long time and hurt companies dependent on Microsoft's products, Bittman said.

Consumer advocate Ralph Nader urged the Justice Department and states to break up the company and force it to "divest itself of the browser, the software product that led to the antitrust case." Other remedies Nader suggested include ensuring that Microsoft's Office desktop applications suite is compatible with at least two non-Windows platforms, requiring that Windows source code be opened up to competitors, and preventing Microsoft from "penalizing" OEMs who carry non-Microsoft software.

Jackson put the case on a fast track, and legal sources said Microsoft would rather not see its case catapulted directly to the Supreme Court. Microsoft has had prior luck in the District Court of Appeals, which disagreed with Jackson's 1998 decree that Microsoft had illegally bundled its operating systems products.

Other legal experts said that Microsoft may want to take the slower appeals route because any remedies imposed by the government now may make little sense in two years given the changes in the market.

"It is a very difficult business decision. They must weigh the business disadvantages of having this tied up for two years with the possible advantages of waiting to see how much the market changes," said Emmett Stanton, an antitrust attorney at Fenwick & West, a law firm in Palo Alto, Calif.

Jackson issued his verdict last Monday, after last-ditch settlement negotiations broke down that weekend. Jackson ruled in his 25-page conclusions of law that Microsoft violated two sections of the Sherman Antitrust Act: It unlawfully tied Internet Explorer to Windows, and it "maintained its monopoly power by anti-competitive means and attempted to monopolize the Web browser market." However, Jackson found that the government did not prove that Microsoft broke antitrust laws via its marketing arrangements with other companies.

Additional reporting by Pia Landergren, London correspondent for the IDG News Service, an InfoWorld affiliate.

The case in quotes

"Microsoft's campaign succeeded in preventing -- for several years, and perhaps permanently -- Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits."

-- U.S. Judge Thomas Penfield Jackson

"The court concluded that Microsoft violated the antitrust laws by abusing its monopoly power and attempting to monopolize the Internet browser market. The decision will benefit consumers and stimulate competition and innovation in the high-tech industry."

--Joel Klein, U.S. assistant attorney general for the Antitrust Division"For the past 25 years we've been thinking of ourselves as a small, aggressive company playing catch-up with industry giants, even though somewhere along the way we became a large company. Our intense focus in moving forward has at times been seen as threatening and our passion for being the best has been misinterpreted."

-- Microsoft President and CEO Steve Ballmer"We hope the court will act decisively to ensure that Microsoft's illegal activity -- and the harm that it has done to the industry and to consumers -- is brought to an end forcefully and permanently."

-- Sun Microsystems CEO Scott McNealy

"We believe we will have a strong case on appeal."

-- Microsoft Chairman and Chief Software Architect Bill GatesRuling could open civil lawsuit floodgatesAs Microsoft appeals U.S. District Judge Thomas Penfield Jackson's illegal monopoly verdict, the company may well land in a tangle of private litigation, wrestling legal battles from arch-competitors and class-action suits lodged by businesses or consumers.

"That is going to be a real challenge for Microsoft. It could be a total deluge of lawsuits, some legitimate suits and some of them nuisance suits," said Dwight Davis, a Kirkland, Wash.-based analyst at Summit Strategies.

Sun Microsystems' General Counsel Mike Morris just days after the ruling said his company had an obligation to check out its legal options. But a Sun representative said the company is still some steps away from filing a private suit, which would likely build on Jackson's findings.

Other parties might not be so far off. "Even in the interim period, other plaintiffs can refer to this ruling and use it as ammunition," Davis said.

Emmett Stanton, an antitrust attorney at Fenwick & West, a law firm in Palo Alto, Calif., agreed. "They are now terribly vulnerable," he said. "Private plaintiffs have to prove three things: that Microsoft has a monopoly, that it has exercised monopolistic acts, and that those acts have caused damages to the defendants. The recent judgment takes care of [Nos.] 1 and 2," said Stanton.

The easiest lawsuits to lodge against Microsoft would be class-action suits that involve consumers who believe Microsoft's monopoly led them to pay too much for products such as Windows, Stanton said.

Business customers could also band together to collect damages, although corporate customers may be less inclined to enter class-action suits.

Still, some corporations may find that they owe it to shareholders to at least look into the issue of collecting damages, Stanton said.

Microsoft President and CEO Steve Ballmer last week vowed that the private litigation would not get in the way of a Microsoft appeal.

"The class-action lawsuits will not distract at all from our appeal," Ballmer said. "We think they're misguided."

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