A federal appeals court yesterday upheld the three-year-old antitrust settlement between Microsoft Corp. and the Justice Department, ending efforts by the state of Massachusetts and two computer trade groups to win tougher sanctions against the software giant for its monopolistic behavior.
In a unanimous decision, a panel of the U.S. Court of Appeals for the D.C. Circuit said the 2001 deal satisfied legal requirements for addressing Microsoft's violation of antitrust laws in the design and marketing of its dominant Windows operating system.
The ruling, along with Microsoft's continuing settlement of a series of civil and class-action antitrust lawsuits, effectively puts to rest the major legal challenges to the company's business practices in the United States. However, the company still faces serious legal action in the European Union, where regulators have ordered Microsoft to provide two versions of Windows -- one without its software for playing digital music and videos. The company is appealing the ruling.
Yesterday's decision, which is unlikely to be appealed to the Supreme Court, effectively closes the antitrust case brought in 1998 by the Justice Department, more than 20 states and the District. Ten states signed on to the 2001 settlement while nine plus the District pushed for stiffer sanctions in new hearings. When U.S. District Judge Colleen Kollar-Kotelly ruled against them in November 2002, only Massachusetts appealed, continuing to argue that the sanctions included in the settlement were a slap on the wrist and that the judge had erred in approving them.
But yesterday the six appeals court judges who heard the challenge endorsed Kollar-Kotelly's ruling for not imposing more invasive requirements on the company, one of which would have forced it to sell a "modular" version of Windows that would have allowed programs for Web browsing, playing digital music and other functions to be removable.
The theory was that such a move would blunt the ability of Microsoft to leverage the dominance of Windows by continuously bundling programs into it, at the potential expense of competitors.
"Far from abusing its discretion," wrote Chief Judge Douglas H. Ginsburg, "the district court . . . went to the heart of the problem Microsoft had created, and it did so without intruding itself into the design and engineering of the Windows operating system. We say, Well done!"
In an interview after the ruling yesterday, a disappointed Massachusetts Attorney General Thomas F. Reilly said Microsoft "not only has been ruled a monopolist, they are now a protected monopolist. That's a very dangerous thing." Reilly said the case demonstrates that "our antitrust laws are not effective in protecting consumers," especially in the realm of high technology.
The head of the Justice Department's antitrust division, R. Hewitt Pate, called the ruling "a resounding victory for the Justice Department and American consumer."
Microsoft General Counsel Bradford L. Smith hailed the decision, saying the company was particularly gratified that the appeals court took such a strong stand against antitrust remedies that involve removing code from Windows.
The appeals court decision comes three years and two days after the same court upheld rulings by a lower court that Microsoft had abused its monopoly in the market for personal computer operating systems.
District Judge Thomas Penfield Jackson had judged Microsoft to have crushed competition from Netscape Communications Corp., which made the leading Web browser until it was overtaken by Microsoft's Internet Explorer. Jackson also ruled that Microsoft hobbled rival Sun Microsystems Inc.'s Java programming language by degrading its performance on Windows.
But the appeals court rejected Jackson's order to break up the company, and sent the case back to a different judge to determine appropriate sanctions against the software giant.
The original case had been brought by the Clinton administration's Justice Department, which had skirmished with the company for several years over antitrust issues. The resulting trial produced some of the most embarrassing and damaging moments in Microsoft's history.
Well-known litigator David Boies, hired by the Justice Department to try the case, pounded Microsoft officials with internal e-mails showing a corporate culture bent on beating competitors at any cost.
Microsoft Chairman Bill Gates, in a taped deposition, appeared sullen and combative. Judge Jackson became so appalled at the company's behavior that he could barely contain his contempt in open court. That, and his decision to give interviews to a reporter in his chambers, led the appeals court to toss him off the case.
By the time the appeals court upheld most of Jackson's core findings in the summer of 2001, the world had changed. President Bush was in office and a new antitrust division in place. Microsoft, stung by its rivals pushing for the government to pursue the case, lobbied the new administration to settle the case.
Then, in the wake of the Sept. 11 terrorist attacks, Kollar-Kotelly signaled that she preferred the case be settled, and ultimately pushed the parties into mediation.
The deal, which lasts until 2007, requires Microsoft to allow computer makers and users to hide access to Microsoft programs. It also forces the company to disclose more technical information to rivals to allow their programs to work properly with Windows. And it prohibits the company from cutting special deals with computer makers to keep rival programs off new machines.
The company and the Justice Department appear before Kollar-Kotelly at regular intervals to discuss compliance with the settlement.
Rival trade groups did receive support from the appeals court in one area that could affect future antitrust settlements: Kollar-Kotelly had refused to give the Computer & Communications Industry Association and the Software Information & Industry Association the right to challenge her ruling as part of a congressionally mandated process for reviewing antitrust deals between the government and companies.
The court ruled that she was wrong.
But that did little to dampen their disappointment.
The ruling "signals a systemic weakness in the antitrust laws and their vulnerability to political power," said CCIA President Edward J. Black.
Mitchell Pettit, head of ProComp, another trade group, said the decision "comes close to blessing Microsoft as a natural monopoly."
Former federal judge Robert H. Bork, who represented the industry group ProComp, said, "It appears on first reading that Microsoft has been cleared to continue its campaign of predation, including the use of tactics such as the co-mingling of code."
Staff writer Mike Musgrove contributed to this report.