U.S. court upholds Microsoft monopoly ruling

U.S. District Court Judge Thomas Penfield Jackson erred when he wouldn’t allow an evidentiary hearing on remedies in the federal antitrust case against Microsoft Corp., “seriously tainted the proceedings” in his courtroom by conducting “secret interviews” with journalists and by publicly making “numerous offensive comments” about company officials, a federal Appeals Court said in a ruling that harshly criticizes Jackson.

The 125-page court document, released Thursday, rebukes the district court judge and orders the case be sent back to a lower court – “remanded” in legal parlance – so that the issue of how Microsoft should be made to remedy its anticompetitive behavior can be reconsidered. A different judge will be assigned the case, the U.S. Court of Appeals ruled in a unanimous 7-0 decision.

The court upheld Jackson’s ruling that Microsoft engaged in illegal monopoly behavior, but it set aside his order that the company be broken into two separate entities, one for operating systems and the other for applications [See story –

U.S. appeals court rejects Microsoft breakup

]. Under U.S. antitrust law, it is not illegal for a company to be a monopoly. It is illegal for a monopolist to engage in anticompetitive behavior. The appeals court upheld Jackson’s “finding of monopoly power in its entirety.”

The U.S. Department of Justice (DOJ) and state attorneys general filed the federal lawsuit three years ago, arguing that Microsoft illegally used the power it has garnered because its Windows operating system (OS) is used in the vast majority of computers globally in order to make inroads into other markets, including Internet browsers, and to squelch competitors.

Among other things, Microsoft established restrictive licensing practices in dealing with OEMs (original equipment manufacturers), including preventing them from removing visible means of access to its Internet Explorer (IE) browser or from pre-installing rival browser software, the appeals court affirmed. Microsoft further cut anticompetitive deals with Internet access providers so they would offer IE for free and gave them “a bounty for each customer” signed up for service using IE, the court affirmed.

It further agreed with the district court that Microsoft did “commingle” IE and Windows code in an anticompetitive way. However, citing a lack of information, the appeals judges sent the issue of “tying” Windows to IE back to the lower court for reconsideration and offered guidance to the trial judge as to what should be considered and what each side must prove. The court also ruled that the government did not prove its claim that Microsoft attempted to create a monopoly in Web browsers.

In its appeal of issues related to the district court ruling that it is an illegal monopoly, Microsoft failed to challenge factual findings from the district court and also failed to argue that Jackson’s findings in the case did not support his conclusions, the appeals decision said. That failure “infects many of the company’s monopoly power claims” in its appeal, the ruling found, covering examples point by point, paying particular attention to the issue of middleware.

The company argued that Jackson erred when he excluded Netscape Communication Corp.’s Navigator and Java in considering the software market relevant to the case. The company contends that “because middleware could usurp the operating system’s platform function and might eventually take over other operating system functions” such as controlling peripherals, Jackson should have allowed Navigator and Java to be considered in the operating system market issue. Jackson ruled that there is no middleware product available that “could now, or would soon, expose enough APIs (application programming interfaces) to serve as a platform for popular applications, much less take over all operating system functions.”

Rather than challenge that finding and present contrary evidence, Microsoft “simply asserted middleware’s ‘potential’ as a competitor,” the appeals court found. Such assertions don’t hold sway in the appellate process.

The appeals court affirmed that after properly defining the relevant software market in the case, the district court then established that Windows has a greater than 95 percent share in operating systems, and that even if Apple Computer Inc.’s Mac OS is considered, Microsoft still has more than 80 percent of the market cornered. “Microsoft challenges neither finding, nor does it argue that such a market share is not predominant,” the appeals ruling said.

The court did agree with Microsoft that because new competitors could emerge, considering only current market share could be misleading, but concludes that in this case “the District Court was not misled. Considering the possibility of new rivals, the court focused not only on Microsoft’s present market share, but also on the structural barrier that protects the company’s future position.”

That structural barrier has two aspects noted by the appeals court: Most consumers will use operating systems that already have a lot of applications written for them and most developers prefer to write for OSes that already are in widespread use by consumers.

Microsoft “misses the point” in arguing that developers do write for other operating systems, the appeals court ruled, pointing to testimony that the success of IBM Corp.’s OS/2 was impeded because the company couldn’t get more software developers to write for that platform.

IBM was far from the only competitor hurt by Microsoft, the appeals court agreed. It cited an exclusive deal with Apple related to IE and Microsoft’s behavior related to the “potential threat” it perceived from Java technologies developed by Sun Microsystems Inc., as well as the threat it made to Intel Corp. officials, pressuring them to not support Java.

As for Microsoft’s appeals argument that its behavior regarding licensing restrictions is justified because it is merely exercising its copyright, the court said those claims are “bold and incorrect” when it comes to copyright law, which cannot be used to violate antitrust law.

While the appeals court agreed that Microsoft has illegally used its monopoly power, it tossed out Jackson’s breakup order because “it is a cardinal principle of our system of justice that factual disputes must be heard in open court and resolved through trial-like evidentiary proceedings,” the appeals court said.

“Despite plaintiffs’ protestations, there can be no serious doubt that the parties disputed a number of facts during the remedies phase. In two separate offers of proof, Microsoft identified 23 witnesses who, had they been permitted to testify, would have challenged a wide range of plaintiffs factual representations, including the feasibility of dividing Microsoft, the likely impact on consumers, and the effect of divestiture on shareholders,” the court said.

Furthermore, the court ruled that Jackson did not explain how his remedies decree would fit with the requirements established by the U.S. Supreme Court that antitrust remedies must end anticompetitive conduct in the affected market, end the illegal monopoly and ensure that no practices remain in effect that could lead to future monopolization. “Indeed, the court devoted a mere four paragraphs of its order to explaining its reasons for the remedy,” the appeals court said.

The remedies also must be remanded back to the lower court because the appeals court has “drastically altered” the district court’s conclusions regarding Microsoft’s liability, particularly in the area of “tying” Windows to IE.

The district court also must reconsider whether a breakup of Microsoft is appropriate based on the company’s argument that it operates as a single business. Cases that have been cited by plaintiffs and the district court to justify the breakup have mostly involved companies that were formed through mergers and acquisitions, the appeals court said.

To order a breakup, the lower court must first establish a link between Microsoft’s anticompetitive behavior and its dominant position in the OS market. Judge Jackson “expressly did not adopt the position that Microsoft would have lost its position in the OS market but for its anticompetitive behavior,” the appeals court said. If that causal connection is not established by the next judge who hears the case at the district level “it may well conclude that divestiture is not an appropriate remedy.”

Specifically regarding Jackson’s behavior, the appeals court offered the caution that it has only published accounts “and what the reporters say the Judge said. Those accounts were not admitted in evidence. They may be hearsay. … We are of course concerned about granting a request to disqualify a federal judge when the material supporting it has not been admitted in evidence. Disqualification is never taken lightly. In the wrong hands, a disqualification motion is a procedural weapon to harass opponents and delay proceedings. If supported only by rumor, speculation, or innuendo, it is also a means to tarnish the reputation of a federal judge.”

That said, the court went on to note that this case is “most unusual.” Jackson imposed an embargo on the interviews he granted and that “ensured that the full extent of his actions would not be revealed until this case was on appeal.” The embargo demand makes the situation worse because “concealment of the interviews suggests knowledge of their impropriety. Concealment also prevented the parties from nipping his improprieties in the bud,” the appeals court found.

In addition, the court said, the plaintiffs in the case “all but conceded that the Judge violated ethical restrictions by discussing the case in public.”

All things considered, the appeals court decided to “assume the truth of the press accounts and not send the case back for an evidentiary hearing on this subject.”

The appeals decision quotes from a number of press accounts, including quotes attributed to Jackson in which he likens Microsoft Chairman and Chief Software Architect Bill Gates to Napoleon, questions Gates’ business acumen and likens the company’s writing of incriminating documents to drug traffickers who “never figure out they shouldn’t be saying certain things on the phone.” The drug trafficker analogy was used in interviews published in both the New York Times and The New Yorker magazine.

The antitrust case was pending each time Jackson was interviewed, the appeals judges said. Indeed, the case is pending now “and even after our decision issues, it will remain pending for some time.” Therefore, Jackson violated his ethical duties established under the Code of Conduct for United States Judges every time he was interviewed, the judges found, contending that “although the reporters interviewed him in private, his comments were public. Court was not in session and his discussion of the case took place outside the presence of the parties” to the case. Jackson knew that his comments would eventually be widely published, the appeals court said.

Jackson’s comments did not fall under any of three narrow exceptions allowed under the code. He wasn’t discussing “purely procedural matters,” but “disclosed his views on the factual and legal matters at the heart of the case.” Jackson’s claims in published reports that he wanted to educate the public and refute public misperceptions failed to sway the higher court judges.

If that’s what he meant to do, he should have addressed those matters in his court rulings “or he could have held his tongue until all appeals were concluded.”