In a victory for Microsoft Corp., a federal appeals court reinstated yesterday the July 1994 antitrust settlement between the company and the Department of Justice, ruling that a lower-court judge had overstepped his authority in rejecting it.
The three-judge panel disqualified Judge Stanley Sporkin, who had rejected the settlement in February and ordered the case reassigned to a different judge, to be picked at random. It also ordered that the antitrust settlement be accepted in its current form.
Because the settlement was widely seen as a mere slap on the wrist for Microsoft after a four-year government investigation, many in the industry had suggested that a tougher set of sanctions might be imposed.
Yesterday's action removes that cloud from the company. Yet it does nothing to change the status of other antitrust disputes between the government and the software giant.
In May, the company backed out of its proposed acquisition of the personal-finance software maker, Intuit Inc., rather than fight the Justice Department on the matter.
Meanwhile, the Justice Department is continuing to look for antitrust problems involving the company's new on-line service and its new personal computer operating software, Windows 95, which the company plans to introduce in August.
Still, in the case at hand, yesterday's ruling was the most favorable of all possible outcomes for Microsoft, which said it was "gratified" by the decision.
The consent decree it reached with the Justice Department in July required only that Microsoft end certain kinds of software-licensing contracts with computer makers; the government said the contracts gave Microsoft an unfair advantage over its software rivals.
"The court gave us exactly what we wanted," William Neukom, Microsoft's senior vice president for law and corporate affairs, said in a telephone interview. "This is a wonderful result for us."
Microsoft shares gained $2.125 on the news, to close at $87, in Nasdaq trading.
The Justice Department was also pleased. "The Court of Appeals' decision clarifies an important area of law both for the Department of Justice and for private parties who enter into consent decrees with the department," said Anne Bingaman, assistant attorney general in charge of the antitrust division.
"The opinion handed down today will serve as a precedent and guide for many years in many other situations."
Lawyers for Microsoft's rivals said yesterday they were disappointed. But some said that they believed Judge Sporkin's refusal to approve the decree had helped Microsoft's rivals by prodding the Justice Department to pursue the company more actively in other matters.
Although Judge Sporkin's ruling did not stand, "it was essentially a wake-up call to the antitrust division, and all of a sudden they have become much more aggressive in investigating Microsoft," said Jeffrey Jacobovitz, a Washington lawyer who represented IDE Corp. in the case.
IDE, a hardware manufacturer based in Billerica, Mass., claimed it was harmed by Microsoft's licensing practices.
The ruling by the appeals court primarily addresses Judge Sporkin's role, rather than the merits of the consent decree itself.
The appeals court objected specifically to Judge Sporkin's reliance on the book "Hard Drive," by James Wallace and Jim Erickson, reporters for the Seattle Post-Intelligencer, for examples of Microsoft's alleged unfair business practices and to his admission of briefs filed by Gary Reback, a Silicon Valley lawyer, on behalf of three anonymous clients.
The court also said Judge Sporkin had overstepped his bounds in attempting to play the role of prosecutor.
"We are not aware of any case in which a plaintiff was allowed to sue a defendant and still remain anonymous to that defendant," the appeals court wrote. "Such proceedings would, as Microsoft argues, seriously implicate due process."
Mr. Reback argued that the clients had to remain anonymous for fear of retaliation by Microsoft. His law firm, Wilson Sonsini Goodrich & Rosetti, represents many Microsoft competitors, including Novell Inc., Sun Microsystems Inc. and Borland International Inc.
"What really matters is what happens next," Mr. Reback said. "If they take action on Microsoft Network and other bundling issues, then this decision is of no great import."
Although the court's decision to remove Judge Sporkin was unusual, legal experts said it was not surprising given the facts in this case.
Because the judge who approves a consent decree must monitor compliance, Judge Sporkin's antipathy to the decree could have made it difficult for him to put his feelings aside, the court wrote.
"As one reflects upon it, what Judge Sporkin did, really, was to go way overboard," said Charles Rule, the head of the antitrust division from 1986 to 1989 who is now with the Washington law firm Covington & Burling.
"It probably makes sense, given the circumstances, to give it to another judge," he said.
The primary effect of the consent decree is to end Microsoft's practice of "per processor" license agreements, in which hardware manufacturers agreed to pay a licensee fee for each computer shipped with a particular model of microprocessor, regardless of whether it contains a copy of Microsoft's operating system software.
Companies with competing operating system software, like Novell, said this practice chilled the market for their products.
Now Microsoft will grant licenses either on a per copy basis, for installed software or on a per system basis, where companies will pay for a given model of computer, rather than for the microprocessor inside.
In practice, the different licensing procedures are not expected to harm