Microsoft loses federal ruling; Software company called 'oppressive,' antitrust law violator; Gates to seek settlement; Judge to consider how to end monopoly; breakup possible

THE BALTIMORE SUN

WASHINGTON -- Lambasting Microsoft Corp. for putting "an oppressive thumb on the scale" of competition, a federal judge ruled yesterday that the software giant repeatedly violated federal and state antitrust laws.

Two days after the collapse of private negotiations over an out-of-court settlement, U.S. District Judge Thomas Penfield Jackson issued a 43-page ruling that on almost every page sharply disparages Microsoft's conduct.

Jackson's ruling could lead to a ruling this year to dismantle Microsoft or at least to alter drastically the way it does business, such as requiring it to share some of its secret technology with rival companies.

Anticipating the withering verdict that emerged at 5 p.m., after the financial markets had closed for regular trading, investors abandoned Microsoft shares in droves yesterday. The company's overall market value fell $80 billion as Microsoft shares closed at $90.875, down $15.875. Microsoft Chairman Bill Gates suffered about $12.1 billion in paper losses.

The company's stock dragged technology stocks downward on the Nasdaq, which lost 349.15 points, or 7.6 percent, to close at 4,223.68. It was the Nasdaq's biggest point decline and its fifth-largest percentage drop.

In his verdict, the judge said the company had "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" dominated by Microsoft's Windows operating system.

Attorney General Janet Reno praised the ruling, saying that "Microsoft has been held accountable for its illegal conduct by a court of law."

Joel Klein, the assistant attorney general who has pursued Microsoft in the 22-month-old case, said the ruling would "set the ground rules for the information age."

Gates said, "This ruling turns on its head the reality that consumers know, that our software has helped make PCs more accessible and more affordable to millions.

"While we did everything we could to settle this case, and will continue to look for new opportunities to resolve it without further litigation, we believe we have a strong case on appeal."

The judge found Microsoft to be a "market predator" with a monopoly over the command systems that run personal computers. He concluded that the company poses a danger of gaining a second monopoly, over Internet browsers.

'Trojan horse' threat

Jackson said that, faced with the arrival in the digital world of browsers, and seeing them as a "Trojan horse" that could muscle its way into Microsoft's monopoly over computer operating systems, Microsoft mounted a four-year campaign to make itself the dominant supplier of browsers.

Internet Explorer, the browser that the judge said Microsoft pushed onto the industry, sometimes against the wishes of corporate customers, did not fare well in the decision.

The judge called it a lower-quality browser not likely to become the "best of breed" soon. He also said that Microsoft did not envision Explorer as a money-maker, but rather as a wedge to force rival Netscape Communications' Navigator browser out of the market.

Exclusive sales upheld

Microsoft emerged with one victory in the ruling. Rejecting one of four antitrust complaints by the Justice Department and 19 states, including Maryland, Jackson found that the company did not act illegally in trying to lock personal computer manufacturers and Internet service providers into exclusive deals favoring Microsoft.

That conclusion fell far short of vindicating the company's style of aggressive competition. Although Jackson found that those tactics did not violate one section of the Sherman Antitrust Act, he ruled that they violated another as part of Microsoft's effort to maintain its operating system monopoly.

Moreover, the other violations the judge found set the stage for an even more devastating ruling, a decision to impose what the judge called "appropriate relief." That was a reference to potentially harsh remedies to counter the violations he found.

Unless the two sides unexpectedly resume negotiating a settlement, Jackson's decision is expected to set off this sequence of events: This spring or early summer: The Justice Department, the 19 states and the District of Columbia will suggest remedies for the antitrust violations. The judge wants those governments to agree on the remedies they propose. He will hold a hearing on the issue.

Late summer or fall: The judge will issue orders to break up Microsoft or force it to change its business practices as it deals with others in the computer industry.

This winter: Microsoft is expected to file with the U.S. Circuit Court of Appeals in Washington an appeal that could take a year or longer.

Next year or 2002: The case could reach the Supreme Court.

The verdict, with its blistering tone, was expected as a sequel to the judge's ruling in November. In that decision, issued at the close of the antitrust trial, Jackson drew factual conclusions that Microsoft had gained a monopoly in the operating systems market and had used strong-arm tactics -- especially to head off the rivalry of Netscape -- in the browser market.

Yesterday, the judge translated those findings into legal judgments, a verdict that Microsoft's monopoly with Windows, and its attempted monopoly in the browser market with its Explorer entry, violated the Sherman Act. That law was passed in 1890 to enable the government to break up the huge monopolies of the Gilded Age, such as in the oil industry.

1998 ruling not binding

The judge said he was not applying exactly a ruling two years ago by the appeals court in Washington, which will be reviewing his decision. That decision cautioned against applying antitrust laws too tightly to the creative designs of computers and other high-technology systems.

That ruling was narrow in scope, Jackson said, adding that the appeals court's remarks about protecting innovative design among computer companies were not binding on him.

Jackson found specific actions by Microsoft illegal but said that only by looking at the company's "single, well-coordinated course of action" against its competitors could one see "the full extent of the violence that Microsoft has done to the competitive process."

The company, he said, "paid vast sums of money, and renounced many millions more in lost revenue every year, in order to induce firms to take actions that would help enhance Internet Explorer's share of browser usage at Navigator's expense."

Microsoft did so, he said, as "a rational investment" with the aim of prolonging its monopoly in the operating systems market.

Turning from that market to what he considered to be the separate market for Internet browsers, Jackson ruled that the company had used tactics with the "dangerous probability" that it would gain a monopoly in that field, too.

The judge acted cautiously when he turned to one of the principal challenges to Microsoft's conduct in the browser market, the claim that it forced people who wanted Windows to take the Explorer browser, whether they wanted it or not, as part of its plan to shove the Navigator browser aside.

His caution, Jackson said, resulted from the appeals court's 1998 decision -- in a different government case against Microsoft -- that concluded that operating systems and browsers are the same product, integrated and inseparable.

Counting on appeal success

Microsoft has been counting on that appeals court ruling as its best hope of avoiding the possible dire consequences of Jackson's ruling. Expecting ultimate victory in the appeals court, it is understood, was one of Microsoft's main reasons for driving a hard bargain in the now-ended settlement talks.

Jackson said the appeals court's remarks on the supposedly necessary linkage between operating systems and browsers contradicts two Supreme Court rulings. He ruled that the operating system and the browser were separate items and that it was illegal for Microsoft to force customers to accept both to get the Windows operating system.

In his opinion, Jackson concluded repeatedly that Microsoft had no legitimate business reasons that would justify its "predatory" conduct toward companies that threatened its dominance in the industry.

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