Microsoft faces old threats in new remedy phase

When management at Jim Havens' company, Illinois Tool Works Inc. subsidiary Tacc, discusses its Microsoft migration strategy, the software company's antitrust case is like a ghost in the room. Without ever being mentioned, the legal case silently influences decisions. "The instability is always back there," he said.

Havens, IT manager at the Rockland, Mass.-based manufacturing company, said Microsoft Corp.'s continuing legal problems are keeping him from considering migrating to Windows XP. "I don't know what the right answer is," he said.

The answer may come in the case's next phase: deciding what remedy to impose on Microsoft. That is, unless the Supreme Court accepts Microsoft's appeal of the U.S. Court of Appeals decision not to throw out the trial judge's rulings following his out-of-court comments about the company.

Microsoft wanted to delay remedy hearings until the Supreme Court decided, but the appeals court today rejected any stay -- clearing the way for new hearings to decide this company's fate.

The government hasn't revealed its proposed remedy, but it's talking tough.

"Any remedy has to change fundamentally Microsoft's use of monopoly power in the market," said Richard Blumenthal, Connecticut's attorney general and one of the leaders of the 18-state coalition involved in the case, in an interview. "The test set forward by the Supreme Court indicates that there has to be fundamental changes," he said.

That test was outlined by the appeals court in its June 28 decision. Citing three separate Supreme Court cases, the appeals court said a test for a remedy should include its ability to "terminate the illegal monopoly."

The court also said a remedy must "unfetter" the market from anticompetitive conduct, deny the defendant "the fruits of its" violation and ensure "that there remain no practices likely to result in the monopolization in the future."

These four requirements are "basically a road map" for the new trial court judge, said Herb Hovenkamp, an antitrust expert and a law professor at the University of Iowa in Iowa City, who argues that criteria means the court has to look at XP. "That means, in my way of thinking, that Windows can no longer be a monopoly once this decree has been executed."

But other legal experts disagree. Indeed, both sides can find language in voluminous decisions to support their arguments. The court voiced reservations about a breakup, particularly in light of its revised ruling. "Divestiture is a remedy that is imposed only with great caution, in part because its long-term efficacy is rarely certain," the court said at one point. Microsoft has said that this decision removed the "breakup cloud" from the company.

Trial Judge Thomas Penfield Jackson ordered the company to be split in two, separating the operating system unit from other lines of business, but he never held hearings on his solution and didn't explain how a breakup would restore competition. For those reasons and others, his remedy was rejected by the appeals court.

The court, however, upheld findings that Microsoft had illegally maintained a monopoly in operating systems, while rejecting the claim that the company had sought to monopolize the browser market. The court also sent the finding of illegal tying back to the trial court for a new hearing using a different standard.

Bruce Sokler, an antitrust attorney at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in Washington, said that without finding fault on the tying issue, which concerns the integration of different products, the justification for a breakup isn't strong.

Where the appeals court did fault the company, particularly on its exclusive contracts, "the first remedy usually thought of ... would be fencing-in-conduct remedies," said Sokler.

A remedy that makes sense to Wesley Howland, a programmer/analyst at Cessna Aircraft Co. in Wichita, Kan., is to force Microsoft to release its Windows source code for other companies to develop competing Windows versions. With pending changes to Microsoft's enterprise operating system licensing, "now they're taking advantage of their monopoly," Howland said.

But Mark Hawkins, IT manager at the Augusta Newsprint Co., in Augusta, Ga., said Microsoft should be left alone. "Microsoft is a strong company and they earned it, and the government has no reason or means to go interfere with that," he said.

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