UPDATE2: Judge Orders Microsoft Breakup

BOSTON (06/07/2000) - U.S. District Court Judge Thomas Penfield Jackson today ordered the breakup of Microsoft Corp. into two separate companies, splitting the operating system business from applications, essentially granting everything the government plaintiffs asked for.

Microsoft has four months to submit a plan for "divestiture," as the breakup is being called. The government then has 60 days to submit objections to that plan, after which Microsoft has a month to respond to the objections.

The divestiture will be "stayed," or put on hold, until the appeals process is complete, and would take effect within 12 months after expiration of the stay.

Judge Jackson further ordered a variety of behavioral remedies aimed at stopping Microsoft's business practices that he has deemed illegal under the Sherman Antitrust Act. Unless an appeals court grants Microsoft a stay on those remedies, they will take effect in 90 days and last for three years after implementation of the breakup.

Jackson previously ruled that Microsoft has a monopoly in the operating systems market and that it has illegally used that status in an attempt to dominate other markets, most notably Internet browser software, as well as to squelch competition. The U.S. Department of Justice (DOJ) and 17 of 19 state attorneys general that filed suit against Microsoft called for the breakup. The lawsuit is viewed by legal experts as historic and is likely to establish antitrust case law for decades to come.

"Plaintiffs won the case, and for that reason alone have some entitlement to a remedy of their choice," Jackson said today in his "memorandum and order."

Besides that court filing, he also issued his "final judgment," a 13-page document that establishes the particulars of the remedies, including the breakup.

As part of the breakup plan, the judge ordered that the operating systems business may not "develop, license, or distribute, modified or derivative versions of the Internet browser."

Jackson further chided Microsoft officials for their ongoing public contention that the company has not behaved improperly.

"Microsoft officials have recently been quoted publicly to the effect that the company has 'done nothing wrong' and that it will be vindicated on appeal," he wrote. "The Court is well aware that there is a substantial body of public opinion, and some of it rational, that holds to a similar view. It is time to put that assertion to the test. If true, then an appellate tribunal should be given early opportunity to confirm it as promptly as possible, and to abort any remedial measures before they have become irreversible as a practical matter."

While the antitrust case has gone on for nearly two years, Microsoft has continued its past business practices "and may yet do to other markets what it has already done in the PC operating system and browser markets," Jackson said.

"Microsoft has shown no disposition to voluntarily alter its business protocol in any significant respect. Indeed, it has announced its intention to appeal even the imposition of the modest conduct remedies it has itself proposed as an alternative to the non-structural remedies sought by the plaintiffs."

Moreover, he wrote, "Microsoft has proved untrustworthy in the past," continuing its anticompetitive practices even while under a preliminary injunction aimed at stopping such behavior.

Because courts have not often ordered company breakups -- Standard Oil and AT&T Corp. being the most notable exceptions -- the divestiture plan, which will be in place for a decade, has garnered the most attention for its potentially long-term effects. However, analysts and industry observers noted after the ruling that the behavioral remedies will have a more immediate effect.

The behavioral remedies include:

-- Microsoft is banned from taking action or threatening action that adversely affects any OEM (original equipment manufacturer), ISV (independent software vendor) or IHV (independent hardware vendor) that supports competing products through use, distribution, promotion or support of those products.

-- The company must license Windows products to OEMs in a uniform way, with licensing fees established in a schedule set by Microsoft and published on a Web site accessible to plaintiffs in the case and OEMs.

-- Microsoft cannot restrict OEMs from modifying the boot sequence, startup folder, Internet connection wizard, desktop, preferences, favorites, start page, first screen or other Windows OS aspects.

-- APIs (application programming interfaces), communications interfaces and technical information must be disclosed to ISVs, IHVs and OEMs. The company further must create a "secure facility" where vendor representatives "shall be permitted to study, interrogate and interact with relevant and necessary portions of the source code and any related documentation of Microsoft Platform Software for the sole purpose of enabling their products to interoperate effectively with Microsoft Platform Software."

-- Microsoft cannot do anything to knowingly interfere with or degrade performance of any non-Microsoft middleware when it comes to operating with any Windows OS product without notifying the supplier in writing with reasons for taking the action.

-- Exclusive deals with third parties are banned.

-- Contractual tying of products is banned. Microsoft cannot make it a condition of granting a Windows license that third parties must also agree to license, promote or distribute any other of the company's software that is separately distributed.

As part of that remedy, Microsoft cannot bind middleware products to Windows OS products unless it offers an otherwise identical version of the OS that allows OEMs and end users to remove the middleware. When OEMs remove end-user access to middleware, the royalty paid to Microsoft will be reduced.

-- Microsoft must establish a Compliance Committee on its corporate board of directors within 90 days of the final judgment taking effect. The committee is to continue its work for the duration of the divestiture plan, which is in effect for 10 years.

The committee has to hire a chief compliance officer whose job it will be to report to the committee and directly to the chief executive officer of Microsoft. The officer will oversee development and supervision of the company's internal programs aimed at making sure it is complying with antitrust laws and the final judgment.

The company also must submit to inspections by plaintiff representatives to make certain that it is abiding by antitrust laws and the final judgment.

The ruling set off a flurry of dueling public statements from both sides -- as also has been the case in the past when important court documents have been filed in the lawsuit.

"We will be appealing this decision, and we believe we have a very strong case on appeal," said Microsoft Chairman and Chief Software Architect Bill Gates.

"We believe this ruling is inconsistent with the past decisions by the Appeals Court, with fundamental fairness, and with the reality of the marketplace.

Consumers every day see more competition, lower prices and an economy full of innovation."

The DOJ's Joel Klein, who heads the antitrust division, had this to say: "The court's order is the right remedy for Microsoft's serious and repeated violations of the antitrust laws."

Though the ruling was issued after the stock market closed, investors today had advance word that it was coming, and reacted calmly to the widely expected breakup order. Trading brought Microsoft shares up by 88 cents, to US$70.50, at the close of the market.

Microsoft, in Redmond, Washington, can be reached at +1-425-882-8080 or http://www.microsoft.com/ The DOJ, in Washington, D.C., can be reached on the Internet at http://www.usdoj.gov/.

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