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  Microsoft Scores a Court Victory in Fight With Justice

By Elizabeth Corcoran
Washington Post Staff Writer
Wednesday, June 24 1998; Page C09

Microsoft Corp. won an important victory in its antitrust battle with the Justice Department yesterday when a federal appeals court ruled that the company did not violate a previous agreement with the government when it combined its Windows 95 software with an Internet browser.

The opinion struck down an order from U.S. District Judge Thomas Penfield Jackson that would have required Microsoft to let computer makers sell its Windows 95 operating system separately from its Internet Explorer browser software.

The ruling by the U.S. Court of Appeals in Washington technically applied only to the Justice Department's limited case, filed last year, that Microsoft violated a 1995 consent decree when it bundled Windows 95 with the Internet software.

But legal experts said the ruling would force Justice to rework the strategy in its broader antitrust case against Microsoft's next version, Windows 98, which bundles the operating system even more tightly with the browser.

Windows 98 goes on sale tomorrow. Justice's broader antitrust case is due to be heard in court in September before Jackson, the same judge who was overruled yesterday in the more limited Windows 95 case.

Windows software is used in about 90 percent of personal computers. A key contention in the department's Windows 98 case is that by requiring computer users to include the Internet product with it, Microsoft is illegally trying to expand a monopoly in Windows into another field.

Investors were buoyed by the news. Microsoft's stock rose $4.93 1/2 yesterday on the Nasdaq Stock Market to close at $100.75.

Yesterday's ruling "is a slam dunk for Microsoft and big trouble for Justice," said Robert Litan, a scholar with the Brookings Institution and formerly with the Justice Department's antitrust division. "The most contentious, highest-stakes part of the [government's] case will certainly be affected by this ruling."

"I don't think it's a fatal obstacle," said William Kovacic, a professor at George Mason University School of Law. "But it took a case that the Justice Department had less than a 50-50 chance of winning on the day it was filed and made it more like 1 in 4 or 1 in 5," he said.

Microsoft executives were upbeat. The decision "reaffirms [our] central principle that Microsoft should be able to integrate its products and include new features on behalf of consumers," said Robert Herbold, the company's chief operating officer.

Justice Department officials said in a statement that they were "disappointed" with the ruling but determined to push ahead with the broader antitrust case against the software giant. "We remain confident that the evidence and our legal arguments . . . will demonstrate that Microsoft's conduct has violated federal antitrust laws," the statement said.

Yesterday's 40-page ruling overturned a preliminary injunction issued by Jackson in December. Jackson had required that Microsoft give computer makers the option of hiding its Internet Explorer software when installing the Windows 95 operating system.

The government had argued that Microsoft violated a 1995 consent decree by tying together two previously separate products. That meant Microsoft was unfairly using the popularity of Windows 95 to boost the success of its browsing software, according to the government.

A trial court hearing on the case is still set for September. Judge Jackson had issued the injunction to prevent undue harm to competitors in the months before the court date.

The three-judge panel yesterday lifted the injunction on a technicality, saying Jackson hadn't given Microsoft adequate opportunity to fight the order. The court also said it wasn't necessary for Jackson to appoint a "special master" to advise the court on the technical issues in the case.

The opinion was written by Judge Stephen F. Williams on behalf of himself and Judge A. Raymond Randolph. Judge Patricia M. Wald concured with part of their ruling but disagreed with other parts.

The heart of the ruling was the majority's support for Microsoft's integration of the browser into the operating system. "We think that an 'integrated product' is most reasonably understood as a product that combines functionalities (which may also be marketed separately and operated together) in a way that offers advantages unavailable if the functionalities are bought separately and combined by the purchaser," the court said.

That language, while cloaked in legalisms, is similar to arguments that Microsoft has made in defending the value to consumers of an integrated electronic desktop that combines browser and operating system in a seamless package.

But Wald argued in her dissent that the decision set too low the bar for showing that a company inappropriately tied together two products. "In effect, the majority has fashioned a broad exemption from the antitrust laws for operating system design," she wrote.

Microsoft's critics took solace in the fact that the court's ruling centers on interpreting the consent decree, rather than the broader antitrust issues raised in the Windows 98 case. The government can still argue that the Sherman Act restricts how a firm like Microsoft with dominant market share can bundle its products.

In addition, antitrust enforcers can still argue that they have much evidence – in the form of electronic-mail messages, contracts and so on – that Microsoft executives deliberately tried to inhibit competition. Microsoft has since relaxed some of the terms Justice had criticized in the software giant's contracts with Internet service and content providers.

Gary Reback, an attorney who represents some Silicon Valley competitors of Microsoft, said the industry continues to look for a more sweeping result. It "strongly believes that the only remedy is divestiture," Reback said.

Rather than trying to create artificial constraints on Microsoft, the government should try to split the company into say, five clones, and let them all compete against each other in every part of the software market, he said. "The free-market solution is divestiture," he declared.

Staff writers Rajiv Chandrasekaran and David Segal contributed to this report.

© Copyright 1998 The Washington Post Company

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