June 23, 1998 4:05 PM PDT

Microsoft injunction overturned

A federal appeals court today overturned an injunction that had required Microsoft to offer its Windows 95 operating system without requiring computer makers to carry its Internet Explorer Web browser.

In a broad ruling, the U.S. Court of Appeals for the District of Columbia unanimously decided that a lower court made both procedural and substantive errors in imposing the injunction.

The decision also sided with Microsoft on a side issue, saying that the appointment of a "special master" to sort through evidence and propose a legal outcome in the case overstepped a lower court's authority.

Microsoft immediately hailed the ruling as a victory.

"It's a great day for consumers and it's a great day for everyone who cares about the future of the high tech industry," said Microsoft's chief operating officer, Bob Herbold, at a press conference. See special coverage: Big win for Windows "Today's decision affirms our central principal that every company should be able to improve its products and innovate new features on behalf of consumers."

Microsoft's senior vice president for law and corporate affairs, Bill Neukom, added that the case would have a profound dampening effect on a separate, broader case the government has brought since the preliminary injunction was issued. The most recent case--which is rooted in antitrust law rather than on a consent decree Microsoft signed in 1995 with the Justice Department--focuses on Windows 98, scheduled to hit retail shelves in two days.

"Both of the fed government's law suits are based on core argument that Internet Explorer should be treated as separate from Windows," Neukom said. "This court of appeals ruling rejects the government's argument."

In a statement, the Justice Department said that it was "disappointed" with the decision and that it was reviewing its options going forward.

"We remain confident that the evidence and our legal arguments in our antitrust case on May 18, 1998, will demonstrate that Microsoft's conduct has violated federal antitrust laws," the statement added.

Last October, the Justice Department asked a federal judge to hold Microsoft in contempt and fine it $1 million a day for allegedly breaking a 1995 consent agreement by tying its Web browser to its Windows 95 operating system. Microsoft argued that it had the right under the agreement to integrate the products.

In December, U.S. District Judge Thomas Penfield Jackson issued that while the government had a "substantial likelihood" of proving its case, Microsoft's interpretation that the consent decree permitted it to bundle Internet Explorer with Windows was "plausible." He appointed Harvard Law School professor Lawrence Lessig to collect evidence and propose a legal outcome by the end of May.

In the meantime, Jackson ordered Microsoft not to require computer makers--also called original equipment manufacturers or OEMs--to carry Internet Explorer as a condition of licensing Windows. Microsoft immediately appealed the ruling, arguing that Jackson lacked the authority to issue the injunction.

The appellate court today agreed. "We find that the District Court erred procedurally in entering a preliminary injunction without notice to Microsoft and substantively in its implicit construction of the consent decree on which the preliminary injunction rested," the court said.

The ruling sided with Microsoft on several grounds, including that Jackson failed to give Microsoft adequate notice that such an injunction was under consideration. It also ruled that the jurist misread a key provision of the 1995 consent decree which lies at the heart of the government's case.

"The preliminary injunction was issued without adequate notice and on an erroneous reading of section IV (E)(i) of the consent decree," the opinion states.

In an analysis that may give Microsoft new ammunition in defending itself in its antitrust battle against the Justice Department, today's decision went on to define an "integrated product" as "a product that combines functionalities (which may also be marketed separately and operated together) in a way that offers advantages unavailable if the functionalities are bought separately and combined by the purchaser."

Patricia Wald, one of the jurists on the three-judge panel, disagreed, writing in a dissenting opinion that the integration analysis is inconsistent not only with antitrust law, but also with the intent Microsoft and government officials had when they signed the consent decree.

"The analysis must also consider whether Internet Explorer is a separate product under antitrust law, that is, whether 'consumers differentiate between [Internet Explorer] and [Windows 95]' such that consumers desire to purchase--and hence that manufacturers' desire to supply--a substitute for Internet Explorer from another manufacturer," Wald wrote. She proposed subjecting Microsoft to a balancing test that would allow it to integrate products only when it achieves synergies great enough to justify an extension into new markets.

"Apart from the lack of textual support, we think that a balancing test that requires courts to weigh the 'synergies' of an integrated product against the 'evidence of distinct markets,' is not feasible in any predictable or useful way," the other two judges on the panel, Stephen Williams and Raymond Randolph, wrote in response.

One of the government's key arguments was that Microsoft also sold its Web browser separately and therefore they were separate products.

The decision went on to side with Microsoft on the issue of the special master appointed to the case. "The reference to the special master was in effect the imposition on the parties of a surrogate judge and either a clear abuse of discretion or an exercise of wholly nonexistent discretion." The court did not address Microsoft's allegations that published articles and private email penned by the special master demonstrated that he was biased against the software giant.

In addition to the Justice Department's narrow case over the 1995 consent decree, the DOJ has also brought a broad antitrust case alleging that Microsoft competed unfairly with other software makers. A trial in that case has been set for September 8.

"We remain confident that the evidence and our legal arguments in our antitrust case filed on May 18 will demonstrate that Microsoft's conduct has violated federal antitrust laws," the agency added in its statement.

ProComp, a group that has been lobbying against Microsoft, also focused to the broader antitrust case.

"While we are disappointed with aspects of this decision, today's ruling is like looking in a rear-view mirror, for this was a consent decree case based on facts investigated in the early 1990s," said ProComp executive director Mike Pettit in a statement. "The ongoing and widening investigation continues to bring to light new evidence concerning a whole host of Microsoft's predatory and anticompetitive practices, as well as the company's unyielding, clear intent to illegally leverage its monopoly position."

ProComp members include Netscape, Oracle, and Sun Microsystems, among others.

Separately, Netscape said in a statement that the newer case "will develop a full factual record for the courts to evaluate," allowing antitrust authorities more ammunition in going after Microsoft. "Based on the evidence and the law, we believe the DOJ and the states will prevail against Microsoft."

 

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