Both sides claim antitrust win; now what?

Both sides are claiming victory in the Microsoft Corp. antitrust case, after a federal appeals court ruled against the breakup of the software giant but left open the question of other punishment for its anticompetitive practices.

Several things are clear: the breakup threat to Microsoft is virtually eliminated; the trial judge, whose derogatory out-of-court comments put him in hot water, won't be on the bench in a new trial; and PC users probably won't see any immediate changes. The U.S. Court of Appeals for the District of Columbia's entire ruling is available online.

The Windows XP first-launch desktop will probably remain unchanged, although Microsoft officials say it's too early to comment. It's possible that the government and Microsoft may reach a compromise allowing PC vendors to place icons of their choosing on the desktop alongside Microsoft's icons for MSN and Internet Explorer.

And most critically for Microsoft, the ruling has no impact on the company's newest business model: online application subscription services, commonly referred to as HailStorm, that are part of the Microsoft .Net strategy to enable developers to build user-centric XML Web services offering enhanced personalization.

Microsoft claims business as usual

"Nothing in the ruling comments on HailStorm," says Steve Ballmer, Microsoft chief executive officer. "We will continue our plans in the online services area."

Ballmer adds that "it's premature to comment" on the question of whether PC vendors will be permitted to place new icons on the Windows XP desktop.

"We have licensing terms in a draft form for Windows XP, and we'll be re-reviewing those terms and will decide what changes need to be made to comply with the court," Ballmer says.

Bill Neukom, Microsoft executive vice president for law and corporate affairs, sees the legal wheels turning in Microsoft's favor.

"From a lawyer's standpoint, the decisions by the Court of Appeals filed today moves this controversy toward a resolution in a very direct way and a very positive way for Microsoft," Neukom says.

Rivals also pleased

Critics don't buy that argument.

"We don't understand why Microsoft is calling this decision a victory," says Ken Wasch, president of the Software & Information Industry Association. It represents more than 1000 high-tech companies that develop and market software and electronic content for business, education, consumers, and the Internet. The organization has been critical of many Microsoft practices, and Microsoft withdrew from membership years ago.

Wasch says the appeals court affirmed the lower court's ruling on important issues.

"If Microsoft's claiming a victory, then presumably they won't appeal to the Supreme Court," Wasch says. "Victors don't appeal."

The appeals court ruled Thursday that a new trial judge must take over the case in which U.S. District Court Judge Penfield Jackson had ordered the breakup of the nation's biggest software company.

The appellate court set aside Jackson's breakup recommendation, but the seven-judge panel upheld his finding that the software giant illegally tried to maintain a monopoly with its Windows operating systems.

Professor Luke Froeb, a leading scholar on antitrust policy at Vanderbilt University, calls the lower court's decision "the worst case of hubris to think that a court could restructure an American industry to make it work better." He says the remedy should have been the focus of the trial from day one.

"One thing I teach my students is to look ahead and reason back," Froeb says. "That's the one thing the Justice Department and the [trial] court didn't do."

Back to settlement talks?

The appellate court singled out and rebuked the trial judge for derogatory comments about Microsoft, Gates, and other company officials. "Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process," according to a summary of the 125-page appeals court ruling. "We are therefore constrained to vacate the Final Judgment on remedies, remand the case for reconsideration of the remedial order, and require that the case be assigned to a different trial judge on remand."

The federal government's top lawyer calls the appellate decision a "significant victory."

"We believe this is a significant victory in terms of the determination made by a unanimous court that Microsoft had engaged in unlawful conduct," says U.S. Attorney General John Ashcroft. "But, I'm not prepared at this time to indicate what the final outcome to be pursued on the part of the Justice Department is."

For his part, Microsoft founder and Chairman Bill Gates seems hopeful a settlement can end the seven-year-old case. Despite the judge's urging, the DOJ and Microsoft were unable to negotiate a settlement before the original rulings.

"I think with this ruling there is a new framework, and [it's] a good time for the parties involved to see what kind of resolution can be worked out," Gates says. "I am not going to make any prediction about what might come out of it.... We did our best at every stage of the process, and now there is an opportunity to do that again."

The case is far from over. It could be taken back to trial. The charges still in contention could be settled out of court, and/or certain parts of the appeals court decision could be appealed by either side to the U.S. Supreme Court.

"My judgment is that we still have a lot of analysis to do in this very complex opinion," Ashcroft says. "It's pretty clear from the complexity of the opinion that the court made every effort to address a very wide variety of serious and difficult issues, and we have to digest that opinion very carefully."

Mixed reaction in tech industry

The case predictably picked up some buzz among attendees at the closing day of TechXNY/PC Expo in New York City. But the tech industry itself is divided in its assessment of the case.

"Microsoft has done a lot of good," says Eric Lomori, a conference-goer and sales representative for tech firm FFWD in Provo, Utah. "Smaller firms are more unethical than Microsoft. It just happened to be the most visible and easiest to pick on," Lamori says.

James Smith, IS for Adelphi University in Garden City, New York, counters, "In my estimation Microsoft clearly stepped outside the bounds of proper business practices. And I'm disappointed in the government because I believe it is their duty to keep a leash on companies that cross that legal line."

Sun Microsystems, whose president and CEO, Scott McNealy, has been critical of Microsoft's business practices, says the ruling clearly brands Microsoft as a guilty transgressor.

"With today's Court of Appeals ruling, two levels of the federal court system have now found that Microsoft is a monopolist and has abused its monopoly power in very significant ways. Moreover, the courts have agreed that Microsoft's acts broke United States antitrust law," Sun says in a statement. The company urges the district court to find another remedy to curtail "Microsoft's illegal activity."

The Computing Technology Industry Association, a not-for-profit trade association of more than 10,000 technology companies and professional members, cheers the ruling as a step forward for competition and consumer access to new technology.

"This ruling strengthens the technology industry as a whole and empowers CompTIA's membership to continue innovating and operating in a market free from unnecessary government constraints," says Lars Liebeler, an attorney for the association, which filed an amicus brief in the case.

The Communications & Computer Industry Association has been a critic of Microsoft's business practices and doesn't see the big company changing its activities, no matter which way the case ends up.

"Despite the efforts of legal authorities, Microsoft has been undeterred and continues its unlawful behavior as it seeks to expand its entrenched monopoly from the desktop to the Internet," says Ed Black, president and CEO of the trade organization composed of industry, technology, and Internet interests whose motto is: "Open Markets, Open Systems, Open Networks, and Full, Fair and Open Competition."

(Andrew Brandt, Anne B. McDonald, and Tom Spring of; Lauren Dunn of Medill News Service; and IDG News Service contributed to this report.)

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