Judge rules Microsoft violated antitrust laws

WASHINGTON--A federal judge has concluded that Microsoft violated antitrust laws by leveraging its monopoly position in operating systems to capture the market for Web browsers.

"The court concludes that Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market," U.S. District Judge Thomas Penfield Jackson wrote in a "conclusions of law" ruling released today.

Jackson also determined that Microsoft could be held liable under state anti-competition laws; he accepted 23 of the 26 arguments presented by the 19 states that joined the federal government in the landmark case.

Microsoft shares plunged $15.38 to $90.88 before the release of the ruling, erasing about $70 billion from the company's market value. In after-hours trading, the shares climbed to nearly $93.

Jackson was expected to be hard on Microsoft, and in many respects he exceeded those expectations. But some analysts said that even though the verdict was harsh, it is unlikely the government will be successful if it seeks to break up the company.

Today's verdict is essentially the second step of a three-stage process. In November, Jackson issued what he considered the facts in the case. Today's decision applied those facts to antitrust laws. As early as this summer, Jackson is expected to issue a final ruling that will include the remedies or penalties to be imposed on Microsoft.

Following that ruling, Microsoft today said it would request an expedited appeal process, which could put the case before the U.S. District Court of Appeals for the District of Columbia before the end of the year. The company or the government could also request that Jackson ask the Supreme Court to take the case directly.

"I would give the government only about a 10 percent chance of breaking up Microsoft, even if they prevail at the Supreme Court, which I think they will," said University of Baltimore School of Law professor Bob Lande.

"Breakup is still on the table, but I still think it's unlikely," Lande said. "No judge really wants to break up a company. Their mentality is to not."

Lande predicted the

Key points of ruling

• Microsoft used its operating system monopoly power to dominate the browser market • Microsoft used its clout in the software market to maintain its monopoly in operating systems • Microsoft bundled its browser into its operating system to try to force Netscape out of the browser market

amount of time scheduled for remedy hearings could hint at Jackson's stance. "If there's going to be a strong remedy, it would have to be a careful, deliberate process. If you see a three-month schedule for remedy hearings, you know it's not a breakup or something equally as strong."

Despite today's damaging verdict, Microsoft had some slim victories. For example, Jackson rejected a claim that Microsoft used exclusive arrangements with PC makers and other parties to prevent Netscape Communications, now owned by America Online, from marketing its Web browser.

He stated, "The facts do not support the conclusion, however, that the effect of Microsoft's marketing arrangements with other companies constituted unlawful exclusive dealing under criteria established by leading decisions under (section) 1" of the Sherman Act.

"Today's ruling was not unexpected," said Microsoft chairman Bill Gates. "While we did everything we could to settle this case and continue to look for new opportunities to resolve this, we believe we have a strong case on appeal.

"This ruling turns on the head the reality that consumers know that our software has made software for PCs more accessible and affordable to millions," Gates said. "As we move forward, we feel strongly about everything we've done and how we've behaved."

Microsoft chief executive Steve Ballmer said the company is still open to a possible settlement.

"We really put our heart and soul and time in trying to offer up everything that addressed the concerns the government raised in the trial, and perhaps even more," he said. "We would be glad to engage in conversations (on a potential settlement)."

Government regulators applauded the decision. "By antitrust standards this is quite extraordinary," Assistant U.S. Attorney General Joel Klein said in a press conference this afternoon.

Although Klein would not specifically address what remedies the government might seek against Microsoft, he said, "We will look at all our options in the days ahead." He emphasized that the government's main concern is protecting consumers and ensuring "the violations are not repeated."

"The real thing we want is a competitive marketplace where all kinds of innovation can thrive," Iowa Attorney General Tom Miller said during a separate briefing. "We feel we've been vindicated today," Miller said.

Eliot Spitzer, New York's attorney general, said: "This puts Microsoft in a bind. Though they're trying to spin it to the contrary, the opinion leaves them with a very slim chance of success on appeal."

Third parties also weighed in with their reactions to the historic verdict.

"Judge Jackson issued a sweeping and decisive condemnation of Microsoft's business practices," said Ed Black, president of the Computer and Communications Industry Association. "The guilty verdict today leaves no question that the only appropriate remedy in this case is structural."

U.S. Rep. Jennifer Dunn, a Republican from Microsoft's home state of Washington, said she was "deeply disappointed" with Judge Jackson's ruling. "I am confident that ultimately Microsoft will win this case on appeal, as they have in the past...In reality, everybody--from the high-tech industry to consumers--is harmed by this expensive process initiated by the U.S. Department of Justice."

As proof of Microsoft's monopoly power, Jackson cited the company's dominance in PC operating systems.

"There are currently no products--and there are not likely to be any in the near future--that a significant percentage of computer users worldwide could substitute for Intel-compatible PC operating systems without incurring substantial costs," Jackson wrote. "Neither Microsoft nor its (original equipment manufacturing) customers believe that the latter will have--or will anytime soon--even a single, commercially viable alternative to licensing Windows for pre-installation on their PCs."

Jackson also wrote that Microsoft uses its control of the market for software applications, such as word processors, spreadsheets and other programs, to protect its monopoly position in the operating system market. Jackson referred to Microsoft's "applications barrier to entry" as ensuring that "no Intel-compatible PC operating system other than Windows can attract significant consumer demand, and the barrier would operate to the same effect even if Microsoft held its prices substantially above the competitive level."

Many legal experts had predicted Jackson might throw out the claim that Microsoft attempted to divide the browser market with Netscape.

"The attempted monopolization count is notable," said Dana Hayter, an intellectual property attorney with Fenwick & West in Palo Alto, Calif. "It's a good barometer of how much the court sees the world through the government's eyes--the government's way."

Although both sides battled through 76 days of testimony and thousands of court documents, the real drama only now may be unfolding.

While awaiting Jackson's ruling on remedies, Microsoft faces other legal problems resulting from related class-action suits. In addition, the uncertainty swirling around Microsoft hammered the company's shares today, and they may continue to show weakness as the giant's prospects remain uncertain.

The ruling comes two days after Richard Posner, the federal judge mediating settlement talks, said negotiations had collapsed.

Sources close to the settlement talks suggest that 19 states, which filed the antitrust case along with the Justice Department, made demands that doomed the negotiations. One renewed an earlier request that Microsoft be compelled to develop a version of Microsoft Office for Linux. Another would have given each of the 19 states the power to independently enforce any consent decree coming out of the negotiations. A third would have limited what technologies Microsoft could add to Windows.

News.com's Scott Ard, Wylie Wong and John Borland contributed to this report.