A federal judge yesterday found Microsoft Corp. guilty of violating antitrust law by waging a campaign to crush threats to its Windows monopoly, a severe verdict that opens the door for the government to seek a breakup of one of the most successful companies in history.
Saying that Microsoft put an "oppressive thumb on the scale of competitive fortune," U.S. District Judge Thomas Penfield Jackson gave the Justice Department and 19 states near-total victory in their lawsuit. His ruling puts a black mark on the reputation of a software giant that has been the starter engine of the "new economy."
"Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems," Jackson said.
The judge is now set to convene a penalty phase, to start as soon as next month, to determine how to fix the damage done to the marketplace by Microsoft's anti-competitive conduct. Appeals might delay any action against the company for years.
The sweeping guilty verdict--coming two days after out-of-court settlement talks collapsed--harkens back to the monumental monopolization cases against Standard Oil and AT&T and validates the government's power to enforce antitrust law in the information age. It comes at a time when Microsoft faces substantial business obstacles to expanding its software dominance from the desktop to the Internet.
While Attorney General Janet Reno proclaimed the verdict a landmark victory for consumers, competition and innovation, Microsoft Chairman Bill Gates disagreed: "This ruling turns on its head the reality that consumers know--that our software has helped make PCs affordable to millions."
In blunt language, Jackson depicted a powerful and predatory company that employed a wide array of tactics to destroy any innovation that posed a danger to the dominance of Windows. Among the victims were corporate stars of the multibillion-dollar computer industry: Intel Corp., Apple Computer Inc., International Business Machines Corp. and RealNetworks Inc.
To crush the competitive threat posed by the Internet browser, Jackson ruled, Microsoft integrated its own Internet browser into its Windows operating system "to quell incipient competition," bullied computer makers into carrying Microsoft's browser by threatening to withhold price discounts and demanded that computer makers not feature rival Netscape's browser in the PC desktop as a condition of licensing the Windows operating system.
"Only when the separate categories of conduct are viewed, as they should be, as a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself," Jackson wrote in the 43-page ruling.
The tone of the ruling struck Steve Ballmer, Microsoft's chief executive, as harsh. He said Jackson's verdict "implies a sort of veiled reference to our values and that to me is sort of disturbing. We are a company of integrity. . . . I know the personal honesty we demand from our people internally and in their dealings."
Government officials, meeting at the Justice Department last night, hailed the decision. Justice Department antitrust chief Joel I. Klein said the ruling "demonstrates once again that no company, no matter how powerful or how successful, can refuse to play by the rules and thwart competition for America's consumers."
Jackson's decision came five months after his preliminary ruling--his finding of facts in the case. He determined at that time that Microsoft held a monopoly and harmed consumers, competitors and innovation. Yesterday's verdict determined those actions broke the law.
Microsoft vowed a vigorous appeal. But by separating the findings of fact from the conclusions of law, Jackson inoculated a good portion of his verdict from being overturned. "Microsoft has its work cut out for them if they are going to try to get this thrown out," said University of Iowa law professor Herb Hovenkamp, who has advised the government in the case.
The judge's opinion leaves Microsoft vulnerable to private multimillion-dollar antitrust suits, perhaps including an action by America Online Inc., which now owns Netscape Communications Corp. Jackson's separate ruling that Microsoft tried to monopolize the browser market can be used by AOL as evidence on its face that Netscape was harmed by Microsoft under antitrust laws.
Jackson sided with the government on three of the four charges of monopolistic behavior. On one lesser allegation, he gave Microsoft a minor victory by ruling that Microsoft's deals with various Internet companies did not violate the Sherman Antitrust Act because they were not so exclusive as to shut out Netscape. However, Jackson was quick to add that the deals were restrictive enough to support the ruling that Microsoft illegally fought to perpetuate its monopoly.
The government said it has not decided what penalty to seek, but at least one of the plaintiffs was talking tough. "We must act on this ruling by advocating that the court adopt remedies that are as far-reaching and fundamental as Microsoft's abuses of its monopoly power," Connecticut Attorney General Richard Blumenthal said.
Ideas that have surfaced during the case include dividing Microsoft into three companies by separating the people and resources needed to make its three primary products--its software applications and its consumer and corporate operating systems--or forcing the company to change its business practices.
Some backers of the government's case are urging on the hard-liners. "Now all he [Jackson] has to do is decide if he is going to go through a behavioral set of orders, which would require a law enforcement army to monitor," said consumer activist Ralph Nader, "or whether he goes through a breakup, where natural market forces do the job."
However, Microsoft's friends, including some members of Congress, urged the government to ease up on the breakup talk. "A reasonable settlement can now be reached without destroying a great American corporation and a tremendous national asset," Sen. Robert G. Toricelli (D-N.J.) said.
A vigorous public debate, including the likelihood of congressional hearings, is expected to coincide with Jackson's remedy hearings. Yesterday, Senate Judiciary Committee Chairman Orrin G. Hatch (R-Utah) jump-started the dialogue and set up a Web site to solicit public comments on remedies to impose on Microsoft.
In turn, Microsoft has been boosting its public relations and lobbying force in Washington and nationwide. The company has filmed and is considering airing national television commercials featuring Gates, and is marshaling public support among stockholders and independent software vendors.
In some spots, Jackson's opinion navigates difficult waters. At one point it challenges the U.S. Court of Appeals on an earlier ruling that has become controversial in the case. In that ruling, Microsoft won an appeal in which it argued that it should be allowed to bundle its Internet Explorer browser with Windows without breaking antitrust laws.
But Jackson sided with legal commentators who have argued that the earlier appeals panel's ruling did not carry weight because it addressed a preliminary injunction rather than a full trial in which exhaustive evidence was heard. The appeals court test in the matter, Jackson said, "appears to be inconsistent with Supreme Court precedents."
That finding heartened Microsoft general counsel Bill Neukom: "The trial court is quarreling with the court of appeals."
However, the so-called tying issue is minor compared to the charge of maintenance of monopoly, the heart of the case and the most serious civil antitrust law a corporation could be found guilty of violating. On that matter, Jackson ruled that Microsoft "trammeled on the competitive process" in its attack on potential competitors, such as Netscape and Sun Microsystems Inc., the maker of the Java programming language.
"While the evidence does not prove that they would have succeeded absent Microsoft's actions, it does reveal that Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market," Jackson said.
But Gates thinks the law is on his side. "The law here in this country is very clear that the kind of improvements we've made, the kind of products we've made since creating this company 25 years ago, that's what's encouraged," Gates said.
But Jackson's ruling cheered rivals who had been named as victims of Microsoft's actions. "It's a pretty damning indictment--although we believe fully justified--of Microsoft's behavior and business practices," said Michael Morris, Sun's general counsel.
Jim Barksdale, the former chief executive of Netscape and a star government witness in the trial, said he is pleased at the verdict and thinks a breakup is the right solution. Barksdale added that the trial has already had an impact: "I think Microsoft is already acting differently. They're trying to be a better citizen."
Jackson's ruling comes two days after a mediator recruited by the judge surrendered all hope that he could bridge the differences among the parties--Microsoft, the Justice Department and the 19 state attorneys general who brought the suit.
Expecting the worst for Microsoft, Wall Street turned on the software giant. Shares dropped by more than $15 a share to close at $90.87 1/2 yesterday, though they rose a bit in after-hours trading. The paper loss for Gates at the closing bell was about $12 billion.
In his preliminary ruling last fall, Jackson said that Microsoft had cornered the market for personal-computer operating systems, the software that makes computers function. He further ruled that Microsoft had used that monopoly to harm consumers, crush competitors and stifle innovation the company saw as a threat.
Yesterday, Jackson explained that those activities were a violation of the 110-year-old Sherman Antitrust Act, a law passed to prevent monopolies from conduct that is unreasonably harmful to rivals as part of a scheme to create or perpetuate a monopoly.
Through more than 70 days of trial, Microsoft had argued that it did not have a monopoly--though nine out of 10 personal computers run on the Windows operating system--and it did not break the law. Instead, company officials said, they merely competed vigorously in a dynamic, fast-changing marketplace. Microsoft also argued that the case was moot because the swift changes in the industry had already diminished the importance of the PC operating system market.
Jackson's two-part ruling had been intended to encourage the two sides to settle the case. After delivering the preliminary decision, Jackson recruited Richard Posner, the widely respected chief appellate judge for the 7th Circuit in Chicago, to mediate a deal.
Over four months of rigorous and intense discussions, settlement talks collapsed on Saturday. Microsoft said the talks faltered over sharp differences in the government's own ranks--between the Justice Department and the 19 state attorneys general; some states advocated tougher sanctions than the federal prosecutors. The government, however, suggested that the differences among the plaintiffs were far smaller than those between the government and Microsoft and that the company had simply refused to make further concessions.
Settlement talks still are not out of the question, even at this late stage, and Gates said he is open to restarting the talks. "We'll continue to look for new opportunities to resolve it," he said.
Short of an out-of-court resolution, Jackson would impose a remedy by summer. Following that, Microsoft is expected to appeal to the U.S. Court of Appeals for the District of Columbia.
Aside from working to overturn the verdict on appeal, Ballmer conceded that the company had to work on its image.
"We have spent the past 25 years thinking of ourselves as a small, aggressive company playing catch-up to industry giants, even though at some point, we became a large company," Ballmer said.
"Our intense focus on moving forward has at times been seen as threatening, and our passion for being the best has sometimes been misinterpreted. We can do better."
Staff writers Bill Brubaker, Ariana Eunjung Cha, Peter S. Goodman, Greg Schneider, John Schwartz and David Streitfeld contributed to this report.
Then and Now
Since the Justice Department and 20 states sued Microsoft on May 18, 1998, the company has fared well despite the distraction.
As of May 18, 1998 $3.8
As of yesterday $6.1
Adjusted for splits
As of May 18, 1998 $43.03 1/3
As of yesterday $90.87 1/2
As of May 18, 1998 $1.3
As of yesterday $2.4
As of May 18, 1998 $208
As of yesterday $473
*As of 3/31/98 and 12/31/99 respectively
SOURCE: Company reports, CNN, Bloomberg News
Questions and answers about the Microsoft antitrust case.
Q: What's this lawsuit about?
A: The Justice Department and a group of states took Microsoft to court over charges that the software giant abused its dominant position in the marketplace and violated the 110-year-old Sherman Antitrust Act.
Wait a minute. I thought the judge already said Microsoft was a monopoly.
Last fall, after a trial that lasted 70 days, U.S. District Court Judge Thomas Penfield Jackson issued "findings of fact" in which he declared that the government had proved half of its case: Microsoft was a monopolist and had abused its market position to harm competitors and consumers as well. The company's actions, he said, stifled the creative energies that other companies might have brought to the market.
Those findings of fact, however, had to be followed up with findings of law--specifically, whether Microsoft violated the provisions of the Sherman Antitrust Act.
What happens now?
Jackson is expected to issue one more ruling: the "remedy" for Microsoft's anti-competitive conduct. That could range from ordering the company to change the way it does business all the way up to a forced breakup of Microsoft.
If the judge orders serious penalties, how quickly would they take effect?
Don't hold your breath. Computers might measure time by the nanosecond, but courts don't. Any ruling by Jackson is certain to be appealed, and the case will take years to work its way through that process.
The Long Battle
Key dates in Microsoft Corp.'s antitrust fight:
The Federal Trade Commission begins to investigate claims that Microsoft monopolizes the market for PC operating systems.
The FTC closes its investigation, but Justice Department and European Commission antitrust investigators begin independent probes.
Microsoft, in a consent decree, agrees to change some business practices, notably the terms for licensing its operating system to PC makers.
U.S. District Judge Thomas Penfield Jackson approves the consent decree reached between Microsoft and the government the previous year.
Microsoft launches Windows 95.
Microsoft releases Internet Explorer 2.0 for Windows 95, a challenge to Netscape's Navigator, which dominates the browser market.
Microsoft says the Justice Department is probing the bundling of its Internet browser and PC operating system.
Microsoft launches Internet Explorer 4.0 in a stepped-up challenge to Netscape, whose share of the browser market slips to less than two-thirds of Internet users.
The Justice Department sues Microsoft, alleging Microsoft violated the 1995 consent decree by forcing computer makers to feature its Internet browser, which the company says is an integral part of its operating system.
A preliminary injunction forces Microsoft to stop requiring manufacturers to install its Internet Explorer on PCs. Microsoft appeals but agrees to sell a modified version of Windows.
The Justice Department and 20 states sue Microsoft, alleging anti-competitive practices.
Judge Jackson sets a September trial date for Microsoft.
An appeals court rules that Microsoft did not violate its 1995 consent decree with the federal government when it integrated its Internet Explorer browser with its operating system.
Microsoft releases Windows 98.
The Microsoft trial begins. Each side is limited to 12 witnesses.
America Online announces a plan to acquire Netscape Communications for $10 billion.
South Carolina pulls out of the lawsuit.
The government rests its case.
Microsoft rests its case. Both sides begin preparing rebuttal arguments.
Microsoft and the government hold brief settlement talks but cannot reach an agreement.
After a 13-week recess, rebuttal arguments begin. Each side is limited to three witnesses.
Rebuttal arguments conclude.
Both sides deliver closing arguments.
In a preliminary ruling, Jackson finds that Microsoft holds monopoly power with its Windows operating system, and that it used that power to harm consumers, computer makers and other companies. The findings of fact are so extensively weighted against Microsoft that most observers expect the company to be found guilty of antitrust violations.
Jackson appoints Richard Posner, chief judge of the 7th U.S. Circuit Court of Appeals, as mediator in an effort to speed a settlement.
Judge Posner convenes with Microsoft and government representatives to discuss the possibility of a settlement.
The Justice Department hires merger and acquisition firm Greenhill & Co. to advise it on implications of remedies in the case.
In proposed findings of law, the Justice Department and the 19 states file papers arguing Microsoft violated antitrust laws in at least four ways.
Founder Bill Gates steps down as chief executive; Steve Ballmer takes the job.
Both sides deliver closing arguments on conclusions of law.
Jackson says unless he hears from Posner or jointly from both sides, he will issue his ruling, prompting last-minute talks.
Jackson sets a deadline of April 6 for both sides to reach an agreement.
Posner announces mediation talks have collapsed.
Jackson issues his verdict, which includes his conclusions of law.
Jackson has indicated he will hold another set of hearings on remedies. Those proceedings could involve additional witnesses and last several weeks.
A final decision on remedies is expected. The losing side almost certainly will appeal. An appeal to the U.S. Court of Appeals could take six to 12 months. A Supreme Court decision could take another six to 12 months.
SOURCES: Associated Press, Washington Post news reports, Bloomberg News