NewsMax.com Wires
Friday, June 29, 2001

In an opinion highly critical of U.S. District Court Judge Thomas Penfield Jackson, the U.S. Circuit Court of Appeals sent the case back down to be reheard by a different judge.

At the same time, the appeals court made it tough for any new judge to break up the company. It said the government would have to prove a direct causal relationship between the company's anti-competitive conduct and its dominance of the marketplace - something the appeals court said the government had so far failed to do.

The appeals court upheld part of Jackson's ruling that Microsoft violated the Sherman Act by "employing anticompetitive means to maintain a monopoly in the operating system market," but it reversed his determination that the company violated the act by illegally attempting to monopolize the Internet browser market.

The unsigned, or "per curiam," appeals court opinion sent the case back down for retrial on whether Microsoft violated section 1 or the Sherman Act "by unlawfully tying its browser to its operating system."

Gates 'Incredibly Optimistic'

Microsoft cheered the ruling. "I'm incredibly optimistic about the future," said founder Bill Gates. The decision "removes the breakup cloud from the company" and "significantly narrows this case," said spokesman Jim Cullinan.

After the news broke, Microsoft shares, which had been down 89 cents to $70.25, suddenly surged $3.82 to $74.96 before they were halted in late-morning trading on the Nasdaq. The ruling helped propel the Nasdaq up 50.91 to 2,125.65, the Dow Jones industrial average up 131.37 to 10,566.21, and the broader Standard & Poor's 500 index up 15.16 to 1,226.23.

"This is a significant victory," said Attorney General John Ashcroft, who said he would be open to settlement talks with Microsoft.

Although it was highly critical of the trial judge and threw out his division of Microsoft, Thursday's appeals court opinion contained many sections upholding Jackson's judgment, a sure sign of trouble for Microsoft in any second trial in the massive antitrust suit.

Last June, Jackson ordered Microsoft to spin off its universal Windows operating system from the rest of the company, and to curb its aggressive business tactics. The judge had stayed the effects of his ruling until it could be appealed.

The full appeals court said it was "vacating," or throwing out, Jackson's orders "because the trial judge engaged in impermissible ex parte [one-sided] contacts by holding secret interviews with members of the media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom, giving rise to an appearance of partiality."

In a rare rebuke of a colleague, the judges ruled Jackson made inappropriate comments to the news media that gave the appearance he was biased against Microsoft. Among his comments, Jackson compared Gates to Napoleon.

The appeals court said though it found "no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process. We are therefore constrained to vacate," or throw out, "the final judgment on remedies, remand the case for reconsideration of the remedial order, and require that the case be assigned to a different trial judge on remand."

In other words, the appeals court said a judge besides Jackson would have to eventually determine what punishment should be meted out to Microsoft, and whether that punishment would include a split of the company.

Microsoft Still Accused of Monopoly

However, Thursday's appeals court decision did not go entirely Microsoft's way.

The appeals court said it rejected Microsoft's claim that it did not exercise monopoly power.

"Microsoft argues that [Jackson] incorrectly defined the relevant market. It also claims that there is no barrier to entry in that market. Alternatively, Microsoft argues that because the software industry is uniquely dynamic, direct proof, rather than circumstantial evidence, more appropriately indicates whether it possesses monopoly power. Rejecting each argument, we uphold [Jackson's] finding of monopoly power in its entirety."

The appeals court also upheld Jackson's finding that Microsoft Windows dominated its market, and engaged in anti-competitive conduct in violation of the Sherman Act.

With one exception, the appeals court held that all the licensing restrictions that Microsoft placed on contractors "represent uses of Microsoft's market power to protect its monopoly, unredeemed by any legitimate justification. The restrictions therefore violate section 2 of the Sherman Act."

As for tying in its own Internet browser, Internet Explorer, to the Windows system, the appeals court said Microsoft's failure to include IE in an add/remove program "and its commingling of browser and operating system code constitute exclusionary conduct, in violation of section 2" of the Sherman Act.

The Microsoft Web site did not say whether the company would ask for Supreme Court review of parts of the ruling, saying, "Please check back for updates."

Last year, the Supreme Court declined to hear a direct appeal of the case, though such an appeal was allowed by federal law, and said the appeals court would have to rule first.

In the complaint leading up to Jackson's ruling, the Clinton Justice Department and 19 states alleged that Microsoft illegally tried to quash competition. The plaintiffs' options include settlement talks, appealing to the Supreme Court or seeking penalties against Microsoft from the new judge.

The Justice Department issued a statement saying: "We are pleased that the Court of Appeals found that Microsoft had engaged in illegal conduct to maintain its operating system monopoly. We are reviewing the court's opinion and considering our options."

Connecticut Attorney General Richard Blumenthal, one of the leaders of the states' antitrust effort, called the ruling "a very powerfully positive outcome because it sustains our core claim that Microsoft has acted illegally by maintaining its stranglehold on the market," Fox News reported.

Among the government complaints against Microsoft: that it had used its Windows operating system as leverage to enforce its will in other software markets.

Microsoft integrated its Web browser, Internet Explorer, into Windows. The company called it simply an "improvement" to a product. But the Justice Department said it was an attempt to force the users of one Microsoft product, Windows, to use another company product, Internet Explorer, to the detriment of rivals such as Netscape.

Windows is installed on nine out of 10 personal computers before they reach the consumer. The department argued that Microsoft was trying to extend its dominance in operating systems to Web browsers.

Copyright 2001 by United Press International.

All rights reserved.

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