UPDATE 3: Microsoft Counters U.S. Remedy Proposal

BOSTON (05/10/2000) - Microsoft Corp. today has proposed alternative behavioral remedies that it says will lead to greater competition in the operating system market. The software giant has asked a federal judge to toss out the U.S. government's "draconian" recommendation in the ongoing antitrust trial that the company be split in two.

Microsoft filed a motion for summary judgment regarding the breakup proposal, arguing that the findings in the case "do not justify the government's radical request to split Microsoft into two separate companies -- what the government euphemistically refers to as a simple 'reorganization,'" according to one of five documents filed in the case today. Such a breakup is without precedent in the history of U.S. antitrust law, would harm consumers who have benefitted from Microsoft's products, stymie innovation and potentially lead to Microsoft's demise, the company contends.

If U.S. District Court Judge Thomas Penfield Jackson rejects the government breakup plan, Microsoft said it is willing to accept restrictions on its behavior immediately, including disclosure of APIs (application programming interfaces), changes in the way Microsoft deals with business partners, and a version of the vendor's Windows operating system with the Internet Explorer browser hidden from consumers. Microsoft proposes having the restrictions in place for four years rather than the three suggested by the government, and argues that the behavioral remedies are sufficient to stop the company's anticompetitive behavior, so "there is no basis to split Microsoft into separate companies with all the attendant risks, costs and complexities."

The U.S. Department of Justice (DOJ) and 17 U.S. state attorneys general, all plaintiffs in the historic antitrust lawsuit against Microsoft, have recommended that Jackson order behavioral remedies aimed at stopping the company's anticompetitive business practices, and also want him to split the company in two, with one entity focused on operating systems and the other on applications. Two U.S. state attorneys general of Ohio and Illinois respectively, also plaintiffs, filed a separate remedy proposal seeking only behavioral remedies.

Jackson has ruled in favor of the U.S. government that Microsoft has a monopoly on operating systems in the desktop PC market and has used that power in an attempt to make inroads into other markets, most notably Internet browser software, and to squelch competition. Before making a final ruling on remedies in the case, Jackson will also hold a hearing, during which the sides will have an opportunity to present their proposals orally.

In today's court filings, Microsoft argues that the U.S. government's proposed remedies go beyond the scope of the case, affecting products such as the vendors Windows 2000 operating system that were not included in the trial.

Microsoft officially launched Windows 2000 earlier this year on Feb. 17.

"Microsoft also should not be forced to suffer the disruption to its business that will inevitably result from having the threat of a breakup hang over its head like the sword of Damocles while this Court conducts proceedings on remedies," the company contends in today's filings. "Not only may Microsoft lose irreplaceable employees, but third parties may be unwilling to enter into routine business agreements with Microsoft while its continued corporate existence remains in doubt."

Although the court-ordered breakups of AT&T Corp. and Standard Oil have been often cited in the Microsoft antitrust case, both AT&T and Standard Oil had separate operating units that were split "without massive disruption," the software vendor said. "In contrast, Microsoft does not have free-standing operating units devoted to particular regions or types of products -- it has one headquarters, one set of sales and marketing subsidiaries around the world, one sales and marketing force, one product support organization, one basic research unit, one finance department," according to today's filings.

No U.S. court has ever broken up a "unitary company that was not formed by mergers and acquisitions," Microsoft argued. "Microsoft did not become a leading supplier of 'Intel-compatible PC operating systems' by acquiring or merging with its rivals. Instead, Microsoft built its current market position from scratch by developing a succession of operating systems, each one markedly better than its predecessors, broadly licensing those products to computer manufacturers at attractive prices, and evangelizing the benefits of those products to software developers."

Microsoft also proposed that the remedy phase of the antitrust trial be extended, and offered three options for postponement of oral arguments, depending on which proposal Jackson accepts. The judge originally wanted the remedy phase to end within two months of his conclusions of law which were released last month.

The software giant today proposed, if Jackson decides to consider the U.S. government's breakup proposal, that oral arguments be postponed until Dec. 4.

If Jackson agrees to Microsoft's summary rejection of the breakup proposal, the vendor proposes that the hearing be held Oct. 2. Finally, Microsoft proposes that the hearing be on Aug. 7 if Jackson decides to throw out the government's breakup proposal as well as the government's proposal on "disclosure" remedies which, for example, would require Microsoft to reveal aspects of its Windows OS code under the monitoring of a third party -- a remedy the software company seems to find particularly offensive.

"In addition to its attempt to rip apart Microsoft's integrated operations, the government seeks to impose other relief that, although characterized as a 'disclosure remedy,' would constitute a wholesale confiscation of Microsoft's intellectual property -- the company's crown jewels," the company argued today.

Allowing competitors such as IBM Corp, America Online Inc. (AOL), Novell Inc., Oracle Corp. and Sun Microsystems Inc. "to appropriate Microsoft's inventions and innovations free of charge" is not a proper remedy, Microsoft said.

Microsoft's filings today contends that U.S. courts "are not authorized in civil enforcement proceedings to punish antitrust defendants."

Microsoft, in Redmond, Washington, can be reached at +1-425-882-8080 or http://www.microsoft.com/.

(Marc Ferranti of IDG News Service contributed to this report.)

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