MS/DOJ: Microsoft to face 'deep trouble'

With weeks, if not months, to go before a US federal judge rules on whether Microsoft used its monopoly status to violate antitrust law, legal scholars believe that the company faces severe repercussions, including the possibility of a court-ordered break-up into separate entities.

It's not against the law to be a monopolist in the US. However, it is against the law to use monopoly status in ways that harm consumers. Although US District Court Judge Thomas Penfield Jackson must still determine if Microsoft is guilty of such misuse of its monopoly power, his harshly worded 207-page "findings of fact" on Friday leaves little doubt where he is headed in the minds of some who have followed the US Government's antitrust case against the software maker.

After looking over the findings of fact document released on Friday, private attorney Dana Hayter, of San Francisco law firm Fenwick & West LLP, and Herbert Hovenkamp, a law professor at the University of Iowa, both suggested yesterday that the future looks somewhat bleak for Microsoft. At least, in terms of the software giant continuing in its current incarnation.

"The remedy that the judge would craft is likely to be more extensive rather than less," said Hayter, who previously worked for the US Department of Justice (DOJ) in San Francisco. "The Government has been clear that they're not seeking money [from Microsoft]. They're not seeking a fine. A money penalty would be viewed by some as the cost of doing business."

The US DOJ and 19 US state attorneys general -- the plaintiffs in the antitrust case -- have put the most difficult work behind them by persuading Jackson that Microsoft is indeed a monopoly when it comes to operating systems that run on Intel-based computers.

"Now, all the Government has to do is connect the dots," Hayter said.

Both the plaintiffs and defendant Microsoft will present legal briefs arguing their respective cases to Jackson before he issues his conclusions of law and any remedies to correct alleged wrongs on the part of the Redmond, Washington-based company. Yet, the conclusions of law, tantamount to the verdict, seem foregone given the strength of Jackson's ruling last week.

What remains more questionable in the minds of antitrust experts like Hayter and Hovenkamp, who advised the DOJ in this case, are the remedies, which could be anything from a simple wrist slap to a break-up of the software maker.

Assuming that Jackson rules that Microsoft violated antitrust law, the only true remedy would be to break up the monopoly, in Hovenkamp's view. There are various ways to do that. One would be a literal physical break-up of Microsoft into multiple corporations. Given that Microsoft stands accused of using its OS monopoly to gain unfair competitive advantage in the Internet browser market, those products might be broken into separate entities.

Another less aggressive method, which Hovenkamp supports, would be ordering compulsory licensing of the Windows source code and the Windows name so that a half a dozen or so of the "highest bidders" purchase access to the code and the name through a set date. This solution would lead to competing versions of Windows.

So, for instance, there might be an IBM version or a Compaq version (or both) of Windows. Those versions would then be licensed to OEMs (original equipment manufacturers) or sold on the retail market, somewhat like software for preparing US federal income tax returns, Hovenkamp said. In other words, the software might be different, but it all helps users file tax returns based on the same income tax regulations. The versions of Windows, therefore, would all be basically compatible with one another.

In fact, such a remedy would force compatibility because companies, even while technically competing in the Windows marketplace, would have an incentive to make their products work together. If they didn't, consumers would have the option to simply buy a different version of Windows.

Another likely result would be that "more streamlined, faster, more specialised versions" of Windows would emerge. For example, a civil engineer might need a version of the OS that works fast and handles graphics well, but isn't very sophisticated when it comes to handling text.

"There are a whole lot of possibilities that a competitive market would produce," Hovenkamp said. "The ways Windows could be sliced and diced and configured are limited only by creativity."

Hayter, on the other hand, cites past case law to support his sense that "there's just a very strong value in US intellectual property law against compulsory licensing". Though not entirely without precedent, he nonetheless sees that possible remedy as much less likely than other options.

Were Judge Jackson to order the break-up of Microsoft -- in any manner -- his ruling would establish a legal precedent.

"There's plenty of precedent for divesting hardware," Hovenkamp said. "There's no precedent here, but that's not really a legal problem. That's a function of the fact that this is the first time we've had to break up a monopoly whose major asset is intellectual property."

Less aggressive in terms of remedies would be the imposition of price uniformity so that Microsoft would be forced to charge the same amount for licences regardless of whether a vendor, say, encouraged use of Microsoft's Internet Explorer browser. Such an imposition would ostensibly eliminate the sort of heavy-handed behaviour Jackson found Microsoft engaged in when it came to licensing deals.

However, such a remedy on its own "has all of the important criteria that makes it unattractive", Hovenkamp said. "It doesn't break up the monopoly." Rather, it would "basically be imposing restrictions on how the monopoly is used".

This is essentially what happened with the failed 1995 consent decree Microsoft agreed to after the DOJ went after the software maker, Hovenkamp noted. The software maker was effectively able to sidestep the consent decree because the legal language used wasn't strong enough, in the view of Hovenkamp and other critics.

In terms of appeals, a higher court isn't likely to reverse Jackson on the findings of fact. An appeal is much more likely to work when it comes to the conclusions of law -- whether or not Microsoft is guilty of misusing monopoly power. Even then, an appellate case might be shaky.

If an appellate court agrees with Jackson that Microsoft has market dominance, in order to throw out Jackson's ruling, the higher court would have to toss out every example cited by the judge regarding "bad conduct" on the software maker's part, Hovenkamp said.

"They would have to reverse the trial court all the way down the line," he said. "On the other hand, because the conduct here is generally illegal only if you have monopoly power, Microsoft could arguably win the whole case by getting the judge [Jackson] reversed."

That's not likely in his view.

"Microsoft, I think, is in deep trouble on that score because I don't see the monopoly power charges being reversed," he said.

If Jackson orders that Microsoft be broken into separate corporations, that remedy is unlikely to take effect until after all appeals have been exhausted. The courts typically will impose remedies that can be easily reversed if an appeal is successful. Putting Microsoft back together again wouldn't be an easy matter.

A more interesting issue could be what happens to the findings of fact in the event a settlement is reached before the conclusions of law are issued.

In Hayter's view, the facts established by Jackson in his ruling on Friday would remain. But Hovenkamp said that would depend on the settlement. It's likely that as part of any settlement agreement, Microsoft would push to have the findings of fact set aside. Jackson would have to decide that it is in the public's best interest to do that.

Under a legal precept called "offensive collateral estoppel", if Microsoft is found to be a monopoly, then the same issues do not have to be litigated again. In other words, once a monopoly, always a monopoly, and so any future plaintiffs would file lawsuits with that precedent established.

What happens if the findings of fact are thrown out, or vacated, is debatable. If there isn't a judgment in the end, if Jackson doesn't rule on conclusions of law because a settlement is reached before then, some courts have ruled that the offensive collateral estoppel would not apply. The Washington DC circuit court that would hear any appeal has a case on the books to that effect, Hovenkamp said. However, at least one other circuit court has ruled that once established, facts cannot be litigated again even if there is not a final judgment.

While some legal scholars have said they expect a flurry of lawsuits will be filed now that Jackson has ruled Microsoft is a monopoly, Hayter doesn't expect that will happen. He sees no more than 10 such suits in the future, with perhaps only half of those having enough legal toehold to proceed.

He also thinks that a break-up of Microsoft, contrary to what company officials argue, could wind up being good for shareholders in the long run. When the government broke up Standard Oil earlier this century, the value to shareholders improved, he noted.

"A bad monopolist, when they violate antitrust law, that means they are probably spending an inefficient amount of time protecting the monopoly," he said.

As for how Microsoft shares fared yesterday, the first day of trading since Jackson issued his ruling on Friday evening, the company rebounded after opening at a low of $US84.37 per share. Microsoft ended the regular trading day at $89.93 per share, down just slightly from $91.56 at the close of Friday. More than 121 million shares were traded.

Microsoft chairman Bill Gates wouldn't be drawn on Friday on the possible impact of the judge's findings of fact on his company's stock price.

"Microsoft is not a prognosticator in the stock market -- not up, not down, not sideways," Gates said in a teleconference to give the Microsoft response to the judge's findings. "We're in the business of creating software. I'm not going to speculate on the market one way or the other."