Microsoft Defends Its Practices

Microsoft Corp. Tuesday came out swinging in the latest round of its antitrust battle with the U.S. Department of Justice and 19 states, arguing in a legal brief that it did not violate the law while attempting to preserve its Windows operating system's market share.

The filing was Microsoft's first legal response to U.S. District Judge Thomas Penfield Jackson's Nov. 5 finding that the company is a monopolist that ruthlessly crushed real and perceived threats to the dominance of Windows.

"There is remarkably little law in the plaintiffs' proposed conclusions of law," sniffed the company's lawyers at the beginning of its main brief.

"Plaintiffs still have not satisfied their burden under the governing law on any of their claims."

Jackson's finding has been widely regarded as a death knell for Microsoft's case, leading to open speculation that he might eventually order a breakup of the company. The Department of Justice has reportedly starting pushing for a breakup in settlement talks being held in Chicago. Steve Ballmer, installed as Microsoft's new CEO by company cofounder Bill Gates last week, angrily called the idea of breaking up the software giant "reckless and irresponsible."

Nevertheless, Microsoft filed its "proposed conclusions of law" in federal court here, in an attempt to persuade Jackson to conclude the company is innocent of the charges against it. In 70 pages of dense legal argument, accompanied by several pages which listed relevant case law and federal antitrust guidelines, Microsoft dismissed the claims made last month by the government that it is guilty of multiple violations of the Sherman Antitrust Act.

In a separate filing, Microsoft rebutted a brief filed last month by the states' attorneys general. In that brief, Microsoft says the states' charges constitute an "impermissible burden on interstate commerce." The company says the states' claims should be dismissed, either because they don't involve interstate commerce, or because they are superseded by federal laws.

Attacking the heart of the government's original case, Microsoft argued that it did not illegally bind its Internet Explorer Web browser to Windows to forestall Web-based platform threats from Netscape, Sun Microsystems and elsewhere. Leaning heavily on a relevant 1998 appeals court ruling, the company said the government has failed to show that Internet Explorer and Windows are separate products, or that tying them together resulted in "substantial" foreclosure of the Web browser market.

To prove its point in that regard, Microsoft twice touched on America Online's bid to acquire Time Warner as evidence that it's now "even less likely" that Microsoft could monopolize the Web browser market. The glancing reference to last week's announcement stood in marked contrast to Microsoft's fervent embrace of last year's AOL-Netscape merger as proof that software industry competition is alive and well. The earlier merger formed the bulk of Microsoft's rebuttal case last year. The company couldn't trumpet the latest merger news, however, because it's not part of the now-closed factual record of the case.

Throughout the brief, Microsoft argued that it did not engage in anticompetitive conduct with computer makers, Internet service providers and other companies to illegally forestall threats to Windows.

Legal experts faulted several aspects of the brief, including Microsoft's decision to lead off by arguing about technological product tying. In his earlier findings, Jackson said the company has harmed consumers and "unjustifiably jeopardized the stability and security of the operating system" by irreversibly binding Internet Explorer to it.

Microsoft's continued reliance on the 1998 appeals court ruling, which overturned an earlier order by Jackson and permitted Microsoft to bind Internet Explorer to Windows, could come back to haunt the company, legal experts warn.

If Jackson's final ruling is as adverse to Microsoft as his findings of fact, the company could find the appeals court less willing to overturn it, experts say, because of the extensive trial record in this case that didn't exist when the earlier appeals court ruling was handed down. Furthermore, the appeals court is expected to defer to Jackson's 207-page initial findings, including his labeling of Microsoft as a monopolist.

"One of the sides isn't reading Jackson's findings, and I think it's Microsoft," says Robert Heller, an antitrust attorney at Kramer, Levin, Naftalis and Frankel in New York. "They're playing to the court of appeals, but they don't really respond to Jackson's major findings."

The company waited until the end of its brief to take on the more damaging allegation of monopoly maintenance made against it by both the government and Jackson. Microsoft's lawyers argued that the relevant market defined by Jackson - Intel-based personal computer operating systems - is "too narrow" because it "excludes many of the most serious competitive threats" to Windows, including Unix operating systems and Sun's Java programming language. Furthermore, according to the brief, Microsoft could not control product pricing or exclude competition in the relevant market.

"Microsoft's argument would give a monopoly virtually unlimited power to use its position to crush competition," says a Justice Department official. "Its brief ignores the court's findings of fact and distorts key legal precedents."

Some legal experts share that opinion.

"There's a saying among lawyers - when you don't have the facts, argue the law," says Richard Donovan, an antitrust attorney at Kelley, Drye and Warren in New York. "Microsoft is relegated now to arguing these fine legal points because they're stuck with these bad facts."

The government is scheduled to file a rebuttal on Jan. 25. Microsoft will respond with another brief on Feb. 1. Also by Feb. 1, Jackson will receive four "friend of the court" briefs in the case. Microsoft, the Justice Department and the states will each designate a friend of the court to file on their behalf.

Jackson has asked Harvard law professor Lawrence Lessig (a regular contributor to The Industry Standard) to file a brief; Lessig will write on the subject of technological tying.

Settlement talks are ongoing in Chicago, mediated by Richard Posner, chief judge of the 7th Circuit U.S. Court of Appeals, at Jackson's request. The sides are largely silent about the talks, but are said to remain far apart on settlement terms.

Another round of oral arguments is scheduled on Feb. 22. Barring a settlement in the case, Jackson is expected to issue his final ruling by May. Should that ruling go against Microsoft, Jackson may schedule another round of arguments, and perhaps even witness testimony, before ordering a final "remedy" in the case.

On Tuesday, Microsoft said its profits from the second quarter jumped 22 percent to 44 cents per share ($2.44 billion) from 36 cents per share a year ago. The company took a one-time charge of about 3 cents per share related to the settlement of an antitrust lawsuit by Caldera. Microsoft's new CFO, John Conners, said analysts should not raise third quarter per-share estimates of 41 cents per share.

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