January 23, 2002 12:40 PM PST

Netscape pushing for penalties

WASHINGTON--Netscape's civil lawsuit against Microsoft is a vote of no confidence in the government's handling of the case and a competitive attempt to influence the outcome of the larger antitrust trial, say analysts and legal experts.

Read the Netscape lawsuit Netscape, which AOL Time Warner acquired in 1999, filed the civil suit in federal court here Tuesday. The company is seeking unspecified damages, which could be tripled later on, and a jury trial. Netscape also is asking the court to impose a preliminary injunction against Microsoft that could compel the company to sell a version of Windows without some or all of the "middleware" components, such as the Web browser, media player or instant messenger.

The timing of the lawsuit, and that Netscape is trying to recover more than just monetary damages, reveals much about the motivations of parent company AOL Time Warner, say legal experts.

Netscape's seeking business restrictions against Microsoft ahead of trial indicates that the company no longer has faith in the political process or believes that a settlement reached between Microsoft, the Justice Department and nine of 18 involved states would be effective enough to curtail the software titan's anti-competitive behavior.

"The timing is interesting because it shows a lack of confidence on the part of Netscape that the Justice Department and states can really protect them," said Jeff Shohet, a managing partner with Gray Cary's antitrust practice in San Diego.

"Netscape was relying on the government a lot to carry the water on this," Shohet said. "I don't think they have much confidence in the political process. They see a lot of politics in the way the DOJ is handling it; the DOJ is looking for retreat with honor."

Rich Gray, a Silicon Valley-based lawyer closely following the Microsoft trial, sees the request for "injunctive relief" as the linchpin of Netscape's 20-page lawsuit. His reasoning: Netscape already has a strong case for big damages, but seeking business restrictions shows dissatisfaction with the trial's outcome and in part represents a competitive strike against Microsoft.

AOL likely would have attempted to recover monetary damages regardless of the outcome of the antitrust trial, given the legal spadework already done by government lawyers.

The potential for an additional financial judgment against it would likely do little harm, given the company's nearly $38 billion in cash. But a judgment restricting how Microsoft designs and sells its products would be far more damaging to the company.

"Absolutely it's more than just damages," Gray said. "AOL Time Warner would love to use injunctive relief to control Microsoft's marketing, product design and everything else in their wars (over) owning the on-ramp for consumers into the Internet."

AOL spokesman John Buckley dismissed that contention.

"You can (say) this is an attempt of getting a competitive advantage of some kind," Buckley said. "But our response on that would be that this is an attempt at ending an illegal and anti-competitive strategy by Microsoft."


Gartner analyst Rob Batchelder says AOL Time Warner's lawsuit seems to be about Microsoft's competitive practices in the Netscape-Internet Explorer browser wars. But the real fight is over far higher stakes: control of Internet users' online presence.

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Influencing the process
The timing of the lawsuit also indicates that parent company AOL Time Warner would like to influence the case's outcome before U.S. District Judge Colleen Kollar-Kotelly approves the Justice Department settlement or decides on a remedy in ongoing litigation, say legal experts. Nine other states and the District of Columbia are pursuing the case, with a remedy hearing scheduled for March 11.

See special coverage: Microsoft, DOJ reach settlement "They're using this as an attempt to undermine the settlement between Microsoft, the DOJ and the bipartisan group of attorneys general," said Microsoft spokesman Jim Desler. He charged that the Netscape lawsuit "is timed to interfere with the efforts to bring that case to a conclusion."

The settlement agreement is undergoing final review after a period of public comment as required by the Tunney Act. Kollar-Kotelly could decide as early as February whether to approve, amend or reject the settlement proposal.

Buckley rebuffed any contention that AOL Time Warner wants to influence the settlement process. "There's an attempt to ensure that Netscape's case is as strong as it can be," he said.

While the statute of limitations for filing a lawsuit is perhaps years away, "it is believed it is appropriate to file before the final remedy phase, to get these issues on the table before the court makes a determination on elements of remedy," Buckley said.

Emmett Stanton, an antitrust lawyer with Fenwick & West in Palo Alto, Calif., isn't surprised AOL Time Warner wanted to make its concerns known before Kollar-Kotelly approves a settlement on one track of the case or a remedy on the other track.

"The Tunney Act proceeding before Judge Kollar-Kotelly contemplates receiving the information about the fairness of the settlement from anyone who wants to weigh in," Stanton said. "AOL Time Warner has an absolute right to make these arguments in light of the judge approving that settlement."

What the Netscape lawsuit makes resoundingly clear is that the company believes the Justice Department settlement does not go far enough, while the remedy proposal submitted by the nine litigating states in December is more appropriate. In their remedy proposal, the attorneys general for those states asked for severe restrictions against Microsoft, including opening the source code to the Internet Explorer Web browser.

The Netscape lawsuit could give the nine states important cover as they continue litigation, say legal experts and financial analysts.

"There is enormous pressure on the (litigating) states not to put the country through a long, drawn-out process," Shohet said. "So Netscape is trying to send a message out there: 'We're here, we feel we've been really damaged by all of this, and we want you to know that we're not going away.'

"I think it puts a little pressure on the court and the political motives of the DOJ, and it sends a message to Microsoft," Shohet said.

In a Wednesday research note, Prudential Securities analyst James Lucier said he believed the lawsuit's "key goal" is to "support the position (of) attorneys general for the nine non-settling plaintiff states and the District of Columbia" to put in place structural restrictions on Microsoft.

Microsoft's reprieve special report Goldman Sachs analysts Rick Sherlund and Niles Tristan expressed similar conclusions in a separate Wednesday research note.

"AOL/Netscape is likely using the case as a potential lever to influence the outcome of the antitrust case as the nine holdout states argue for more curbs" against Microsoft, Sherlund and Tristan wrote.

Snatching victory away
Just a year ago, it appeared AOL Time Warner could sit back and let the government make the most of its overwhelming victory against Microsoft.

U.S. District Judge Thomas Penfield Jackson delivered the first signs of a government victory when he issued his "findings of fact" in November 1999, characterizing Microsoft as an egregious monopoly that had used anti-competitive means to thwart Netscape in the browser market.

About six months later, Jackson issued a scathing ruling against Microsoft, later ordering the company be broken into separate operating system and software application companies. Though a federal appeals court threw out the breakup order in June 2001, it upheld Jackson's findings against Microsoft and eight separate antitrust violations against the company.

But during the summer, the Justice Department decided not to pursue the breakup or to litigate again over the tying claim, that Microsoft integrated Internet Explorer into Windows 95 and 98 to thwart competition from Netscape. November's surprise settlement stunned some competitors and industry groups.

In another sign that Netscape's parent company is dissatisfied with that outcome, and believes the court's finding supports stronger sanctions against Microsoft, the lawsuit seeks to retry the tying and other claims abandoned by the government or courts.

"Those things were addressed by the government's case," Buckley said. "They were not addressed by the Department of Justice's settlement with Microsoft. There are still open issues that have not been determined. Going to court may be one way of having some of those open issues be determined."

The outcome of a trial is likely many years away, but legal experts and financial analysts agree that Netscape is looking to receive hefty damages from Microsoft.

"There's no question that Netscape has been damaged severely as a direct intended victim of Microsoft's monopoly-maintenance practices and anti-competitive conduct," said Gray Cary's Shohet.

Fenwick & West's Stanton believes "one of the reasons it took them this long to get around to filing suit is they needed some experts working up their damage theory." Developing the correct damage theory is difficult in a case of this complexity, he added. The only difference will be if "it's a really big number or a really, really big number. There's going to be a lot of zeros in it no matter how you slice it."

Gray estimated damages could range from the hundreds of millions to a billion dollars or more.

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