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Breaking Up Is Hard to Do

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In a substantial victory for Microsoft Corporation, last week the Court of Appeals for the District of Columbia unanimously reversed Judge Thomas Penfield Jackson's ordered breakup of Microsoft under U.S. antitrust laws. The 125-page ruling comes more than a year after Judge Jackson's initial order to break up the company, and more than eighteen months after his finding of fact that Microsoft constituted a monopoly.

<http://pacer.cadc.uscourts.gov/common/opinions/ 200106/00-5212a.txt>

Although the Appeals Court upheld that Microsoft is indeed a monopoly and engaged in anti-competitive practices, it also concluded that Judge Jackson engaged in "serious judicial misconduct" in his statements outside of court and to the media during the penalty phase of the trial. The Appeals Court then remanded a portion of the case back to district court, but under terms which gut substantial portions of the government's case against Microsoft. The bottom line is that Microsoft was found to have violated the law, but is unlikely to face serious consequences for those actions, and almost certainly will not be broken into two or more companies.

We've repeatedly examined the Microsoft antitrust case in TidBITS, but in essence two central points of the government's case were reviewed by the Appeals court:

  • That Microsoft maintained a market monopoly in operating systems through anti-competitive actions; and

  • That Microsoft tried to monopolize the browser market by tying its browser to its existing operating system monopoly.

<http://db.tidbits.com/series/1152>

The Government's Victory -- The first point above is largely established through Judge Jackson's findings of fact from late 1999, and an Appeals Court can't just toss out those findings unless they're plainly erroneous or it can be proven the trial court was substantially biased. The Appeals Court overturned a handful of Judge Jackson's findings of fact, but for the most part, those findings were upheld and the Appeals Court was not able to find instances of actual bias in Judge Jackson's findings.

This is the part of the Appeals Court decision the government can tout as their victory: unless Microsoft appeals to the Supreme Court (and wins), Microsoft now has a monopoly in the eyes of the law. Contrary to popular opinion, under U.S. law it's not illegal to have a monopoly in a particular market. However, it is illegal to create or protect a monopoly by stifling competition in that market. This means that in the future, anyone who wants to come after Microsoft has half their case made for them: they won't have to prove Microsoft has a monopoly, they'll only have to prove that Microsoft has deliberately stifled or eliminated competition in that market. This potentially exposes Microsoft to heaps of litigation from other companies, particularly as Microsoft continues to integrate more and more previously separate functionality into what it considers to be its core operating system. Microsoft's never-subtle CEO Steve Ballmer has repeatedly said he doesn't feel there's any limit to what Microsoft can unilaterally declare part of its operating system; now he may find that stance is more frequently challenged in court.

Incidentally, this is the part of the case where Apple figured most prominently: the Appeals Court upheld that Microsoft illegally engaged in anti-competitive practices when it used threats of cancelling Microsoft Office for the Mac "as a club" to force Apple to adopt Internet Explorer as the default Web browser installed with the Mac OS.

Microsoft's Victory -- It's on the second point - that Microsoft illegally tried to leverage its Windows monopoly to create a monopoly in the browser market - that Microsoft can declare its victory. First, the Appeals Court found that the government failed either to define the browser market or to establish that Microsoft set up barriers to protect that market for itself. Furthermore, it reversed this finding without remand, which means the government can't even try to make the point again in a retrial. Unless the government appeals to the Supreme Court (and wins), it's now a matter of law that Microsoft did not attempt to monopolize the browser market.

Further, the Appeals Court disagreed with Judge Jackson's finding that Microsoft committed a "per se" violation of the Sherman Antitrust Act by integrating its browser with the operating system. As a legal standard, "per se" basically means Microsoft's integration of the two products was "in itself" a violation of law, simply because they did it. However, the Appeals Court found that since the software industry is unlike other industries to which antitrust laws have been applied, a "per se" analysis of the law wasn't valid. Instead, Microsoft would have to be found in violation of the Sherman Antitrust Act by "rule of reason," a different legal standard which basically grants leeway to the first company to integrate what had previously been perceived as two disparate markets. The Appeals Court tossed this issue back to the district court for resolution (also stipulating that it be heard by someone other than Judge Jackson). However, since the Appeals Court found that the government failed to define a browser market, the government would have to prove integrating Internet Explorer with Windows harmed competition in the browser market without "arguing any theory of harm that depends on a precise definition of browsers or barriers to entry." That's going to be hard to do, so the government faces a heavy burden to prove this part of its case at a retrial.

Jackson's Packin' -- The harshest words of the Appeals Court ruling were reserved for Thomas Penfield Jackson, the trial judge for the Microsoft case. Judge Jackson and the Appeals Court have previously disagreed in regard to Microsoft: in 1998, a three judge panel on the Appeals Court overturned Jackson's preliminary injunction barring Microsoft from requiring computers pre-install Internet Explorer with Windows. Although the Appeals Court did not find any instance where Jackson demonstrated actual bias in his handling of the case, they held that Jackson violated ethical rules by holding "secret sessions" with journalists during the penalty phase of the trial, which "seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process." In reversing Jackson's ruling, the Appeals Court also requires that any new penalty consideration or retrial take place before a different judge. So, this case is over for the man who made history presiding over the Microsoft antitrust trial.

You Get What You Settle For -- Since Judge Jackson's original ruling, the U.S. presidency has changed hands. During his campaign, President Bush repeatedly stated he wasn't in favor of breaking up Microsoft, and his Republican administration is generally not in favor of regulating markets or business activity. Although Attorney General John Ashcroft has said very little about the Microsoft case since assuming his post, in the wake of the Appeals Court decision, it would seem the odds that Microsoft and the government will settle out of court have increased.

However, the federal government isn't the only plaintiff: nineteen states are also party to the antitrust case, and so far haven't shown much interest in backing down. During settlement talks in mid-2000, the states were said to have resisted settlement proposals, and so far the states seem to feel the Appeals Court ruling upholds the core of the case. It's conceivable the Justice Department and Microsoft might agree to terms of a settlement, but the states could refuse to go along with it. Under a statute known as the Tunney Act, any proposed settlement would have to be reviewed by a federal judge in a hearing, and the states could urge the judge to stop any proposed deal on the basis it wasn't in the public interest. After all, Microsoft's failure to adhere to the terms of a 1995 court settlement are how the current antitrust case got underway in the first place.

For now, the next move is in the hands of the Justice Department, which must decide whether to pursue the case or a settlement, and the whole process will undoubtedly take several more years to unravel.

 

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