WASHINGTON - In a slashing blow at one of the most successful companies in the computer-driven New Economy, a federal judge ordered yesterday that Microsoft Corp. be carved up into two new companies.
U.S. District Judge Thomas Penfield Jackson, in the most important antitrust decree since the Bell telephone system was broken up in 1982, declared that a split of Microsoft was the only way to compel it to obey antitrust law.
While saying he had "reluctantly" decided on a breakup, the judge said it had become "imperative."
"Microsoft as it is presently organized and led," Jackson asserted, "is unwilling to accept the notion that it broke the law or accede to an order amending its conduct."
The Justice Department announced immediately that it would ask Jackson to send the case directly to the Supreme Court, as soon as Microsoft files its planned appeal of his order. The judge is expected to approve that step, putting the matter before the Supreme Court in a matter of weeks.
Microsoft said it will oppose immediate Supreme Court review. It prefers going to the U.S. Circuit Court of Appeals for the District of Columbia, which ruled in favor of Microsoft in an earlier case.
Bill Gates, Microsoft's chairman and co-founder, denounced the order as "an unwarranted and unjustified intrusion into the software marketplace, a marketplace that has been an engine of economic growth for America."
Microsoft's stock, which had closed at $70.50, up 87.5 cents, on the Nasdaq stock exchange, rose to $71.75 in after-hours trading, after the ruling was released.
Applauding the judge's decision, which adopted word-for-word the remedies suggested by the Justice Department and 17 states, Attorney General Janet Reno said the ruling "will have a profound impact on this important industry." Joel Klein, the assistant attorney general who led the team that prosecuted the case, said the judge had imposed "the right remedy for Microsoft's serious and repeated violations of the antitrust laws."
Though the judge acted boldly against Microsoft - ordering not only a breakup of the company but also sharp restrictions on its corporate behavior - he imposed no immediate change in its structure or its conduct.
Jackson immediately delayed any breakup, giving Microsoft time to pursue the appeal in which it will challenge every aspect of his ruling. The judge did not postpone his curbs on how the company operates as a business, but those limits are not set to take effect for 90 days. Microsoft said it will ask "as soon as possible" for the courts to delay those curbs throughout its appeal.
If Microsoft is granted no delay beyond the one Jackson ordered yesterday, the company will have to start drafting plans for its own breakup. That was a requirement in Jackson's order that he did not postpone.
The company has said that its appeal will not only oppose any breakup or any other remedy, but will also contend that it has violated no law and that no sanctions of any kind should be imposed.
Jackson took note of assertions by Microsoft officials that they will win on appeal. "It is time to put that assertion to the test," the judge said.
A higher court, he added, should have an early opportunity to say whether Microsoft's expectations of winning are justified and thus have a prompt chance to stop "any remedial measures before they have become irreversible as a practical matter."
Klein said his office will ask the judge to declare that the case is a proper one to go straight to the Supreme Court, bypassing the appeals court. Microsoft has said it expects the appeals court to be more sympathetic to it than Jackson has been.
But Gates, at a news conference at company headquarters in Redmond, Wash., expressed confidence, no matter where the Justice Department took the case after the company appeals.
He said: "Whichever higher court looks at this thing, we are confident that we'll succeed on the appeal.
Under a provision of antitrust law, a trial judge can send a case directly to the Supreme Court by ruling that it "is of general public importance." There seems little doubt that Jackson will find that this case - which tests a variety of antitrust issues as they apply to the high-tech industry - fits that description.
Still, the justices might decide not to hear the case. If they do send the case back to an appeals court, the case could run on for years. If they agreed to hear it, a ruling would not be likely until at least late this year.
Jackson, who found repeated violations of the Sherman Antitrust Act by Microsoft in a ruling two months ago, put his signature on the remedy plan in exactly the form filed earlier this week by the Justice Department and 17 states, including Maryland.
They won the case, he noted, "and for that reason have some entitlement to a remedy of their choice."
Jackson said he was not certain that their plan was the "optimum remedy," and he noted that opinion was "sharply divided" about what remedy to impose. He also conceded that the plan "is perhaps more radical than might have resulted" if the two sides had been able to reach an out-of-court settlement. But intensive mediation efforts failed in the early spring.
The judge added that the remedy he adopted was "less radical" than those that had been advocated by others who had joined in the antitrust case on the side of the governments.
The remedy order he signed, Jackson added, will go into force in stages, "so that the effects can be gauged while the appeal progresses and before it has been fully implemented."
The decree, he said, will "terminate the unlawful conduct, prevent its repetition in the future, and revive competition" in the software industry. An alternative order suggested by Microsoft "is plainly inadequate in all three respects," Jackson said.
He spelled out his views on the remedy order in a five-page opinion that accompanied the actual 17-page order. He reacted scathingly to Microsoft's continued insistence that it has broken no law. Accusing the company of being "untrustworthy in the past," he said he had concluded that early "enforcement measures" are necessary now.
Jackson's remedy ends a 2-year trial that began with a broad antitrust complaint by the Justice Department and 20 states. Along the way, one state, South Carolina, dropped out. Two other states, Illinois and Ohio, refused at the end of the case to endorse a breakup.
But all 19 states that are still involved joined the Justice Department in proposing additional remedies - also imposed by Jackson yesterday - that will regulate Microsoft's business behavior before any breakup occurred and for three years afterward.
The order to break up Microsoft would create two new companies: one to develop and sell operating systems such as the company's Windows system, and the other for Internet businesses and remaining software, such as spreadsheets and word processing.
The antitrust case was prompted by Microsoft's decision four years ago to bundle its Internet browser, Explorer, to its Windows system. The tie-in made it difficult for consumers to use competing Internet browsers, sich as Netscape.
If the breakup does occur, the two new companies would be barred from merging, engaging in joint ventures, keeping technological development information to themselves or signing any agreements with each other without telling the government and the states.
Under the conduct controls Jackson included in his order, taking effect within 90 days unless blocked by a higher court, Microsoft would have to share its secret codes and protocols with competitors, allow computer manufacturers to use Windows without other Microsoft products attached, avoid favoritism among its computer industry rivals, not coerce others to take Microsoft products in exchange for access to Windows software, and ensure that other companies' software works well with Windows.
Microsoft especially opposes showing its its software codes to rivals. The company argues that this rule would force it to give away extremely valuable creations and innovations that are private property.