A federal appeals court yesterday threw out a judge's order to break up Microsoft Corp. but declared that the world's largest software company had abused its Windows monopoly, and left it to a lower court to come up with a new remedy.
Both federal and state antitrust enforcers said last night that, because the U.S. Court of Appeals upheld the most serious allegations against Microsoft, the government would not rule out seeking to split the company to restore competition to the marketplace.
The 7 to 0 ruling, immediately considered by legal scholars one of the most important in U.S. antitrust law, upheld the core of the government's case that Microsoft had violated the Sherman Act through business practices designed to maintain a monopoly in the market for personal-computer operating systems.
The appeals court left open the possibility that the company will be ordered to break up, but the judges also narrowed the antitrust violations facing Microsoft -- possibly increasing the chances of an out-of-court settlement. Such talks in the past have foundered.
"This is a significant victory," Attorney General John D. Ashcroft said. "The department is not, I believe, in a weakened position here."
Microsoft Chairman Bill Gates also claimed victory. Gates said the appeals court ruling "lifts the cloud of breakup over the company," and he said settlement talks should be revived. "With this ruling there is a new framework," Gates said. "It is a good time for all parties to sit down and see what kind of resolution can be worked out."
But the company did not rule out an immediate appeal to the U.S. Supreme Court.
The White House said President Bush was waiting to comment until the Justice Department thoroughly reviewed the ruling. Bush spokesman Ari Fleischer said the president "believes people should work hard to enter into agreements and the president believes there's too much litigation in our society, generally speaking."
While leaving open the possibility that a breakup could be ordered, the appeals court also set a high bar for justifying such a far-reaching remedy. The court pointed out that previous breakups have involved companies put together through mergers and acquisitions and that Microsoft has always been a "unitary company." In addition, the court said that to justify a breakup, "the district court also should consider whether plaintiffs have established a sufficient causal connection between Microsoft's anticompetitive conduct and its dominant position in the OS [operating system] market."
The appeals court saved its harshest criticism for U.S. District Judge Thomas Penfield Jackson. The court said it threw out Jackson's breakup order -- issued in June 2000 -- because he failed to hold hearings on the remedy and because the court overturned two lesser antitrust counts against the company. The appeals court also issued a stern repudiation of Jackson's "secret" interviews with reporters during the trial and ordered that he be removed from the case.
But after reviewing thousands of pages of the court record, the appeals court rejected Microsoft's claim that Jackson was biased.
"Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings . . . and called into question the integrity of the judicial process," the court said.
The case will now return to the U.S. District Court, where the new proceedings could take months.
By upholding the most serious of the allegations against Microsoft, the appeals court has left open the possibility that it could face not only breakup but also serious restraints on its business practices, including some that the company considers crucial to its success in the future. Those restraints could include limits on what Microsoft can bundle with its Windows operating system.
If Microsoft chooses to appeal the most damaging part of the ruling, the company would have to persuade the Supreme Court to overturn a unanimous, unsigned ruling from an appeals court famous for its wide ideological breadth.
"This is an important vindication of the core of the government's theory," said Andrew I. Gavil, a professor of antitrust law at Howard University. "Seven judges of varying ideological bent have all concluded that [Microsoft] was a monopolist and abused its monopoly power. That can't be a good day for Microsoft. Sure, it could have been worse, but it is not exactly good news."
The appeals court reversed two lesser claims, including Jackson's determination that Microsoft violated the Sherman Act by illegally attempting to monopolize the Internet browser market. The court also sent back to the lower court the finding that Microsoft unlawfully tied its browser to its operating system.
But Microsoft did not come out unscathed on the allegation of illegally tying Windows and Internet Explorer, which could have implications for Microsoft's business plan and its next version of Windows, due out this fall. That's because the court upheld Jackson's findings that Microsoft's commingling of the code of its operating system with its Internet Explorer browser was part of a series of illegal acts to protect its monopoly; some have alleged that the new operating system, Windows XP, is illegally bundled with many other kinds of products.
Microsoft officials played down that part of the ruling. "The question of commingling is really properly viewed in the context of [the separate] tying [claim] and this is a part of the decision we have to learn more about as we go forward," said Microsoft's chief attorney, William H. Neukom.
The appeals court, while criticizing Jackson's behavior, upheld his rulings that Microsoft took illegal steps to protect its monopoly through its actions and dealings with companies such as Netscape Communications Corp., now a part of AOL Time Warner Inc., Apple Computer Inc., Intel Corp. and Sun Microsystems Inc.
Time and again in the ruling, the court said, "Microsoft offers no procompetitive justification" for various actions.
The specific findings against the company spell potential trouble for Microsoft if other companies file follow-on antitrust lawsuits. Under the law, in those cases, the initial facts do not have to be retried, and damages awarded must amount to three times actual damages.
"Microsoft is facing enormous treble-damage liability in all of the follow-up private suits," said UCLA law professor John Shephard Wiley Jr.
The appeals court also rejected some key Microsoft arguments, such as the idea that the fast pace of the technology world makes antitrust laws essentially moot. The panel, which includes many very conservative legal analysts, said that while legal remedies might be outpaced by technological evolution, government intervention and private lawsuits are important deterrents to anti-competitive behavior.
"Even in those cases where forward-looking remedies appear limited, the government will continue to have an interest in defining the contours of the antitrust laws so that law-abiding firms will have a clear sense of what is permissible and what is not," the court said. "And the threat of private damage actions will remain to deter those firms inclined to test the limits of the law."
The case will return to district court but go to a new judge.
The decision was not signed and was per curiam, meaning "for the court." Per curiam decisions are saved for the most important cases and often carry more weight as a result. The appeal was heard by the full complement of eligible judges, including Douglas H. Ginsburg, who served as antitrust chief under President Ronald Reagan.
While eschewing some of the harsh language used by Jackson, the court did not pull its punches. For example, the court found that Microsoft acted illegally in making its version of the Java programming language incompatible with other companies' when Sun Microsystems had designed Java to be compatible with a wide array of computing platforms.
"Microsoft's conduct related to its Java developer tools served to protect its monopoly of the operating system in a manner not attributable either to the superiority of the operating system or to the acumen on its makers, and therefore was anticompetitive," the court ruled. "Unsurprisingly, Microsoft offers no procompetitive explanation for its campaign to deceive developers."
The court also agreed with Jackson that Microsoft's exclusive contracts with Internet access providers violated the Sherman Act.
The court also found that the licensing restrictions Microsoft placed on computer makers that wanted to include Windows with their PCs amounted to the use of market power to protect Microsoft's monopoly. Gates said that most of those practices have been abandoned. Still, as a result of the ruling, Microsoft announced it was reviewing its business practices to make sure they were in line with the ruling.
The appeals court agreed with Jackson that Microsoft broke the law in its dealings with Apple Computer. The court found that Microsoft had threatened to withhold a version of Microsoft Office from Apple unless it cut an exclusive deal to use Microsoft's browser.
"This exclusive deal between Microsoft and Apple has a substantial effect upon the distribution of rival browsers," the court found. Microsoft had offered a reason for the exclusive dealing, but the appeals court rejected it.
On removing Jackson from the case, the court said, "Disqualification is never taken lightly." But the judges said it was required, given Jackson's interviews with reporters while the case was pending. The court noted that the case is still pending, and did not end after Jackson issued his breakup order.
The court also ruled that Jackson should have held a hearing to listen to evidence about the breakup plan before his ruling, saying there was "no serious doubt that the parties disputed a number of facts during the remedies phase." The appeals court said Microsoft had a "basic procedural right to have disputed facts resolved through an evidentiary hearing."
The ruling produced another chapter in a decade of antitrust trouble for the software giant.
In 1995, Microsoft settled out of court with the U.S. Justice Department, agreeing to limit its conduct. In 1998, the Justice Department again sued Microsoft, alleging that it violated the 1995 agreement when it bundled Internet Explorer with Windows.
On appeal, Microsoft won that case, with two judges on a three-judge panel saying that combining the two products was legal if there was some plausible consumer benefit or efficiency.
Significantly, the appeals court yesterday said that earlier ruling applied only to the earlier consent decree case; Microsoft, throughout the Sherman Act trial, argued that it also applied to the broader case and hence the latest antitrust case should have been dismissed.
"The court really backed away -- even ran away -- from its apparent suggestion in the consent decree case that the hypothetical existence of 'plausible benefits' would immunize a bundle [of browser and operating system] from attack under tying doctrine," said Alan Meese, an antitrust professor at the College of William & Mary.
For the separate allegation regarding tying of two products together, the court essentially rewrote the standard and made it more difficult to prove. The first standard simply required proof that the new product and the monopoly product were separate. The new standard, which could have broad and significant implications for other high-tech companies, requires a balancing test, one that weighs the competitive harm against the benefit to consumers.
Staff writers Dan Eggen, Carrie Johnson and Bill Miller contributed to this report.
Reporter James V. Grimaldi will host a live discussion about the ruling today at 10 a.m. at www.washingtonpost.com.