U.S. appeals court rejects Microsoft breakup

A federal appeals court delivered a ruling Thursday in the landmark antitrust case between Microsoft Corp. and the U.S. government, sending the case back to a lower court to be reviewed by a new judge, while upholding a lower court verdict that Microsoft acted illegally to maintain its monopoly in the market for desktop operating systems.

The ruling was heralded as a partial victory by both sides in the case. Microsoft’s chairman and chief software architect Bill Gates and its CEO Steve Ballmer – who was vacationing in Shasta, Calif. when the appeals court verdict came down – remarked that the proverbial clouds over Redmond, Washington had cleared. Top company officials cheered that it had avoided a possible breakup.

The DOJ’s topmost officials, along with the 19 state attorneys general who are plaintiffs in the case, voiced similar optimism. “I feel the court in stating very clearly that the monopoly position of Microsoft was maintained in an unlawful manner, is a major victory,” U.S. Attorney General John Ashcroft said at a press conference in Washington, D.C.

But the blue skies in Redmond, and the sense of victory in Washington, D.C., will likely not hang around for long – some legal experts forecast more clouds; competitors and industry analysts call for a thunderstorm. As Microsoft steams full ahead with its most advanced operating system, Windows XP, and its lofty .Net Internet initiative, the courtroom drama over Microsoft’s desktop strategy will rage on.

“It’s clear that Microsoft’s not going to be broken up,” said Rob Enderle, an analyst at the Giga Information Group Inc. “But it does look like Microsoft has been found to be a monopoly, and a monopoly that mis-acted.”

The U.S. Appeals Court for the District of Columbia ruled in a long-awaited court order that upheld U.S. District Court Judge Thomas Penfield Jackson’s finding that Microsoft illegally tried to maintain a monopoly in operating systems. It is not illegal for a company to be a monopoly, but it is against the law for a monopolist to engage in anticompetitive behavior. In a 125-page document, the appeals court ordered that the case be sent back to the lower court, and ruled that a judge other than Jackson should reconsider the issue of remedies [See story – U.S. court upholds Microsoft monopoly ruling].

While Microsoft seems certain to have avoided a breakup, other observers said the company is far from out of the woods. With the case headed back to the district court for review, Microsoft will likely still face stinging behavioral restrictions along the lines of those proposed by the U.S. government in the first place, said Mark Schecter, partner at the Washington, D.C., law firm of Howrey & Simon and a former official in the U.S. Department of Justice’s antitrust division.

“I don’t think this is anything close to a major victory for Microsoft,” Schecter said.

The DOJ and state attorneys general filed the federal lawsuit three years ago, arguing that Microsoft illegally used the power it has garnered with its Windows operating system 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 browser or from pre-installing rival browser software. It further cut anticompetitive deals with ISPs (Internet service 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.

While these licensing issues will resurface back in the district court, Microsoft lead counsel Bill Neukom said many of the original concerns raised in the case have long since been removed from the company’s licensing agreements. “Most of those are provisions that we have discontinued using months or even years ago,” Neukom said during a Microsoft press conference. “As for the remainder of the licensing provisions, we will review those and respond accordingly.”

Microsoft’s ability to maintain its current licensing agreements with OEMs and ISPs could affect its planned release of Windows XP on factory-installed computers. It is too early to tell if Microsoft will have to amend any of those agreements, the company said.

It is also too early to tell how the case will proceed in and out of the courts. Both the Justice Department and Microsoft said they were still reviewing the court document and could not make preliminary comments on how they will respond to Thursday’s decision. Either side could opt to appeal part or the entire ruling to the Supreme Court. Both sides also hinted that they would consider settling out of court. “We will … continue to work hard to resolve the remaining issues without continued need for litigation,” Gates said.

Officials from the Department of Justice agreed. “We would be willing to entertain a settlement if we thought it would prevent such violations … in the future,” said one official who declined to be named, adding that these are conditions placed on any proposed settlement. “The government says it is amenable to settlement if (the defendant) can give us the confidence to believe that the illegal conduct that is giving rise to the suit will cease and won’t be renewed,” the official said.

(Additional reporting by Nancy Weil and George A. Chidi Jr. in Boston, James Niccolai in San Francisco, Stacy Cowley and Marc Ferranti in New York, and Cara Garretson in Washington D.C.)

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