Judge: Microsoft must be broken in two 
By Joe Wilcox and Scott Ard
Staff Writers, CNET News.com
June 7, 2000, 5:05 p.m. PT
URL: http://news.cnet.com/news/0-1003-200-2033666.html 

update A federal judge ruled today that Microsoft should be broken into two
companies, a decision that could radically tilt the
balance of power in the technology industry. 

U.S. District Judge Thomas Penfield Jackson decided that Microsoft could
retain its operating systems for PCs, TV set-top boxes,
handheld computers and other devices. But the company would be forced to
create a separate firm for its other software and Web
products--such as Outlook, Internet Explorer, BackOffice and the Microsoft
Network (MSN)--resulting in sweeping changes from
corporate offices and homes to the entire Internet. 

Jackson's order requires Microsoft to submit a plan for breaking into two
companies within four months. If an expected appeal fails,
Microsoft would have 12 months to complete the breakup under the guidance of
a chief compliance officer. 

The breakup and accompanying restrictions would remain in effect for 10
years, when the two companies could merge again into one
firm. 

In addition to the breakup, Jackson imposed restrictions on Microsoft's
business practices that go into effect in 90 days unless an
appeals court blocks the action. Microsoft said it will immediately appeal
the ruling.

Microsoft "broke the law"
As part of a strongly worded decision, Jackson said the court "has
reluctantly come to the conclusion...that a structural remedy has
become imperative: Microsoft as it is presently organized and led is
unwilling to accept the notion that it broke the law or accede to
an order amending its conduct." 

He added that Microsoft "continues to do business as it has in the past and
may yet do to other markets what it has already done to
the PC operating system and browser markets." 

Jackson also said Microsoft has "proved untrustworthy in the past."
According to Jackson, Microsoft had sought "months of
additional time" in further hearings regarding a breakup. 

The decision effectively marks the end of a bitter two-year trial that
exposed Microsoft's hardball
business tactics. But the case is far from over: Microsoft immediately said
it will seek a stay,
which would prevent the restrictions from taking effect while an appeal is
decided. An appeal could
tie up the case for two or more years. 

Microsoft general counsel William Neukom said an appeal would be filed
within "a very few days,"
although the process will take "a number of months, maybe a year or longer,"
to conclude. 

"This is the beginning of a new chapter in this case," Microsoft chairman
Bill Gates said in a
videotaped response. "We will be appealing this decision, and we have a very
strong case on
appeal.

Next stop: Supreme Court?
The government, meanwhile, said it seeks to move the appeal directly to the
Supreme Court, taking
advantage of a little-used provision of antitrust law. 

"I suspect we'll be filing our papers very soon to move the case to the
Supreme Court," said Joel
Klein, head of the Justice Department's antitrust division. "It's not so
much which forum (which is
important), but the need to get the case resolved so everyone can go
forward." 

That request would have to be granted by the Supreme Court justices,
however. Microsoft said it
would oppose that notion, preferring to go the traditional route through the
Court of Appeals. 

"Today's ruling represents an unwarranted and unjustified intrusion into the
software marketplace,"
Gates said later in a televised press conference. "The ruling says to
creators of intellectual property
that the government can take away what you've created if it proves too
popular." 

Speaking on behalf of the 19 states, Iowa Attorney General Tom Miller
defended the ruling as
sending "a strong message that no company is above the law." He added that
"this remedy will
prevent recurrence of Microsoft's anticompetitive conduct and restore to the
marketplace the vital
competition that Microsoft itself destroyed." 

Industry condemns, defends decision
Industry reaction was swift. RealNames, which recently signed an alliance
with Microsoft, criticized
the ruling. 

"Has anybody considered what this means for Microsoft's partners and the
future of technology?" said Keith Teare, founder and CEO
of RealNames. 

On the other hand, Carl Yankowski, CEO of Palm, supported a split. "It seems
to us that the separation of the OS business from the
applications business would create the incentive for each independent
business to compete fiercely and fairly on a level playing
field." 

Microsoft is in a heated battle with Palm, which maintains a commanding lead
in the handheld market. The competition played a role
in the antitrust case and may have influenced Jackson. 

              While urging Jackson last month to break up Microsoft, the
Justice Department revealed two emails by Gates
              that they contended demonstrated Microsoft's continuing
efforts to dominate the software market. 

              In one email, Gates urged his managers to make changes in
Microsoft's Outlook program to better support the
              company's line of handhelds. "We really need to
demonstrate...why our PDA will connect to Office in a better
way than other PDAs, even if that means changing how we do flexible schema
in Outlook and how we tie some of our audio and
video advanced work to only run on our PDAs," Gates wrote. 

Jackson's ruling shocked some legal experts, including University of
Baltimore Law School professor Bob Lande, who noted the
absence of the standard in-depth legal analysis. 

"This makes it more likely the Supreme Court will say, 'Let the Court of
Appeals have a real ruling on it.' There's just no legal
analysis on the legal standards for remedies."

Judge sides with Justice Department
Jackson's ruling was based largely on a proposal from the Justice Department
that said restrictions alone would be ineffective in
keeping Microsoft from abusing its monopoly in operating systems for the
personal computer. The only real deterrent, the judge
agreed, is to separate the Windows operating system from the company's
businesses in other markets. 

Jackson ruled in April that Microsoft abused its monopoly in operating
systems to beat down competition in other markets, notably
Netscape Communications and its Internet browser. 

Today's ruling, while harsh, could have been more radical. In the
government's and Microsoft's final court appearance, the judge
introduced the idea of a three-way split that caught both sides by surprise.


"It's historic for a major American technology company to have been found
guilty of violating the Sherman Act," said Rich Gray, an
intellectual property attorney with Outside General Counsel Silicon Valley
in Menlo Park, Calif. "All of those old-world antitrust cases
are going to be applied in full force today to Microsoft." 

The immediate effect of the ruling on Microsoft is uncertain. As expected,
Jackson stayed the breakup pending appeal--a request
that Microsoft must file within 60 days. 

Microsoft's appeal of the restrictions, which would be separate from an
appeal of the breakup order, could be a litmus test for the
              case's eventual outcome.

              If this preliminary appeal fails, the provisions would have
immediate and far-reaching consequences on the
              company. Among the restrictions, Microsoft: 

              * could not lock PC manufacturers into agreements requiring
them to promote, distribute or use Microsoft
products; 

* could not threaten or take action against companies that make competing
products by withholding license terms, technical support
or sales support; 

* would have to offer equal licensing terms to all PC makers; 

* and could not force Windows licensees to buy other Microsoft software. 

After a breakup, the two separate companies also would face a series of
restrictions and requirements: 

* They could not threaten or withhold licenses or technical support for
companies using competing products; 

*  the OS company would have to equally disclose the programming code
necessary for linking software applications to the OS; 

*  the OS company would have to license the Internet Explorer Web browser
from the applications company; 

*  and the OS company would have to give all hardware and software makers
equal pricing, licensing of products and access to
technical information. The case took a bad turn for Microsoft in November
when Jackson issued his scathing "findings of fact," in
which he concluded that Microsoft harmed consumers by leveraging its OS
monopoly to reduce competition. 

In his April 3 decision, Jackson said Microsoft violated two sections of the
1890 Sherman Act by illegally maintaining its OS
monopoly and unlawfully extending that into the Web browser market. 

The case pitted Microsoft against the Justice Department and attorneys
general from 19 states. From gaffes
with videotape evidence to failed settlement talks, the trial has been an
unusually tense drama that captured
the attention of the tech industry. 

Tech executives, lawmakers and ordinary consumers have taken sides cheering
or condemning the
government's attack on Microsoft, one of the world's largest and most
powerful corporations. 

The company's backers argue that Microsoft has fueled the rapid growth of
the industry by creating a widely
accepted standard OS. Detractors acknowledge that benefit but fault
Microsoft for ruthlessly crushing
competition and ultimately reducing consumer choice.

"It's not shocking to anyone that the court enters a fairly powerful
injunction," said Robert Taylor of Howrey, Simon, Arnold & White
in Menlo Park, Calif. 

"The more difficult question is whether or not the public--the public being
the computer-using public and the American public--in
general is going to be served by the breakup of this company. And that is an
issue over which I suspect reasonable people will be
disagreeing from now until the very end of this case." 

News.com's Jeff Pelline and John Borland contributed to this report.



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