Judge signals split of Microsoft

THE BALTIMORE SUN

WASHINGTON - Showing a keen interest in dividing Microsoft Corp. into three new companies, a federal judge signaled yesterday that he will bring the antitrust case to a swift close with an order to break up the software giant.

U.S. District Judge Thomas Penfield Jackson, at a hearing lasting nearly three hours, gave his first reactions to competing proposals for ways to remedy Microsoft's violations of antitrust law that he had found earlier.

Jackson seemed inclined to embrace a breakup proposal, rather than just limit remedies to required changes in the company's behavior.

He hinted that he would be ready in a matter of days to impose a final remedy on Microsoft.

Investors did not appear disturbed by the developments in court. The judge's actions came before the stock markets closed, and Microsoft shares closed at $65.5625, up $2.375.

The remedy ruling by the judge would set the stage for Microsoft's planned appeal of not only the remedy but also Jackson's finding that the company violated antitrust law by misusing its monopoly over the Windows operating system, or command center, for personal computers.

John L. Warden, a Microsoft lawyer, told the judge bluntly: "We expect to prevail, wherever the appeal goes."

Jackson implied that he would try to arrange for any appeal to go directly to the Supreme Court -- a process that would likely take months.

Such a move would bypass a federal appeals court here that Microsoft expects to be more sympathetic to its position.

A breakup order for Microsoft would be put on hold during the appeal.

During the hearing, Jackson spoke favorably of a proposal by Microsoft's competitors that their dominant rival be broken into three companies, instead of the two suggested by the Justice Department and 17 states, including Maryland.

Three-company plan

Under the competitors' suggestion, Microsoft would be spun off into one company that would have the Windows operating system, a second with the Internet Explorer Web browser, and a third that would include all its other programs, such as Office, the package of software that includes Word and the Excel spreadsheet program.

Under the Justice Department-states plan, Microsoft would be divided into two: a Windows company and a company with everything else, including the browser.

As the hearing ended, Jackson delivered a double setback to Microsoft. He brushed aside its pleas for up to six more months to challenge any breakup proposal. And he told the Justice Department and the states to give to him by tomorrow a final version of their breakup plan and other suggested remedies.

Up to that point, the judge had given no clear signal of how he would respond to Microsoft's argument that the breakup proposal and some of the other parts of the proposed remedy were so "radical" that the company had a right to introduce extensive evidence to defeat such measures.

But when Warden, the Microsoft attorney, asked when the judge might act on the request for more time and what process would now unfold, Jackson replied: "I'm not contemplating any further process."

A murmur swept across the crowded courtroom, as the audience absorbed the meaning: The remedy phase of the case was about to be wrapped up quickly, after a trial that has run for two years.

Jackson confirmed that prospect, asking for a "clean copy" by tomorrow of the sweeping remedy proposal by the Justice Department and the states - one that would include the proposal for a breakup, plus restrictions lasting 10 years on how the newly divided companies could deal with each other and with competitors.

The judge also asked that the final version include several minor changes he had discussed during the day, including some limits on ownership of shares in the newly divided company.

Modification suggested

And, more significantly, Jackson appeared to be signaling to the department and the states that he would welcome a modification of their breakup proposal, perhaps along the lines of carving three companies out of Microsoft.

Jackson said the final version should "reflect our proceedings today."

A two-company split, the judge said, might not ensure more competition in the software industry, because those two companies might simply emerge as new monopolies that "would be dominant and very profitable."

Jackson gave Microsoft two days after it receives the final proposal to respond to it. He did not set a date for issuing the final remedy, nor did he provide any details of how he would respond to the final proposal.

But his comments indicated that Jackson had begun sorting out the details of a breakup and appeared to be leaning in favor of it, rather than Microsoft's far narrower suggestion that the judge preserve the single company but impose some curbs for four years on its behavior toward its rivals.

Jackson's demeanor suggested that he was ready to move rapidly. As the hearing opened, and a Microsoft lawyer asked the judge to focus on the procedures to be followed as the case continued, the judge shot back: "I intend to proceed to the merits of the remedy."

Though he listened calmly to the lawyers' arguments, Jackson raised his voice once. When a Microsoft lawyer, Steven L. Holley, began outlining the kinds of new evidence that the company wanted to introduce to challenge the suggested remedies, the judge blurted out: "This case has been pending for two years!"

Final proposals uncertain

After the hearing, lawyers for the Justice Department and the states said they were not sure what they would include in their final proposal to take account of the judge's suggestions. They did not say whether they would propose a three-company split, instead of the two-company idea they had suggested.

Along with the Justice Department, 19 states sued Microsoft for antitrust violations. All but two of the states -- Illinois and Ohio -- support the breakup plan.

During the hearing, David Boies, a Justice Department lawyer, was asked about a three-company split - a proposal the judge said had been made in "an excellent brief" by those competitors.

Boies said the challengers to Microsoft had considered that approach and had found it to have "a lot of advantages." But, Boies added, the department and the states settled on a two-company split because it would be "simpler to implement."

The judge suggested, though, that no breakup plan would be simple to implement, because "Microsoft is not a willing participant" in working out the details.

Microsoft's lawyers spent the hearing lambasting the breakup proposal, as well as the other recommendations for changing its business behavior.

Warden told the judge that the remedy proposals, taken together, "will go a very long way to make Microsoft the one company in the world that can't win the next round of competition for the market" in personal computers and Web innovations.

The company, Warden added, up to now "has played a leading role in the computer revolution that has helped to fuel unprecedented economic growth."

Stacked up against all the benefits the company has already provided to consumers and the economy, the Microsoft lawyer said, "the government solution offers only speculation as to how the software industry might be improved" by breaking up the company.

He heavily stressed the word "might."

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