graphic /BUSINESS


Court vacates MSFT ruling

June 28, 2001 Posted: 2205 GMT

NEW YORK (CNNfn) -- A federal appeals court on Thursday overturned a lower court's ruling that Microsoft be broken into two companies as a remedy for anticompetitive practices.

The U.S. Court of Appeals for the District of Columbia vacated in full the lower court's final judgment and remanded the case to a new judge.

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graphicCNNfn's Steve Young takes a look at the history of the Microsoft case.
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The appeals court also devoted 20 pages of its 125-page opinion on the matter to the subject of "judicial misconduct," saying that Judge Thomas Penfield Jackson, the U.S. District Court judge who ruled against Microsoft, violated ethical guidelines requiring judges to avoid public comments on pending cases and avoid the appearance of impropriety.

However, the court affirmed Judge Jackson's conclusions that Microsoft does have a monopoly in the market for computer operating systems and maintained that monopoly power by anticompetitive means which violated U.S. antitrust laws.

"The judgment of the District Court is affirmed in part, reversed in part, and remanded in part," the court wrote in its opinion. "We vacate in full the Final Judgment embodying the remedial order, and remand the case to the District Court for reassignment to a different trial judge for further proceedings consistent with this opinion."

In addition to a breakup of the company as a remedy for its anticompetitive practices, the appeals court ordered the district court to re-examine the specific legal precedents and tests Jackson used to support his conclusion that Microsoft acted illegally when it tied its Internet Explorer Web browser  to the Windows operating system.

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graphicMicrosoft Chairman Bill Gates comments on the ruling
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In a news conference Thursday afternoon, Microsoft Chairman Bill Gates said he was pleased with the ruling, which he claimed "removes the cloud of breakup from the company, reverses the tying claim and says clearly that we did not attempt to monopolize the browser market."

"The legal process can be hard on anyone who goes through it, and the last four years have been challenging for all of us here at Microsoft, and for me personally," Gates said. "But despite the many twists and turns in the case, I've always had faith in our company and our employees and in the magic of the software we're creating."

Appeals court was Microsoft's best chance

Many legal experts believed the appeals court, which ruled for Microsoft in a related matter in 1998, represented the best chance for the company to overturn or substantially weaken the sweeping ruling of Judge Jackson.

After ruling that Microsoft has violated U.S. antitrust laws by abusing its monopoly power in computer operating systems, Judge Jackson last June ordered the company split into two smaller companies to prevent it from violating state and federal antitrust laws in the future.

In February, the appeals court held two full days of oral arguments in the appeal, where typically it allows only about 30 minutes for oral arguments in any given case.

U.S. District Court Judge Thomas Penfield Jackson

During those proceedings, attorneys for Microsoft focused in large part on Judge Jackson, whose ruling, they said, was motivated by a desire to punish the company. They also argued that Jackson's ruling was biased and based on his own personal feelings about the company and its top executives, including Gates.

The appeals court ruled that Judge Jackson improperly conducted himself in the case, leaving himself open to the appearance he was biased against Microsoft.

"We vacate the judgment on remedies, because the trial judge engaged in impermissible ex parte contacts by holding secret interviews with members of the media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom, giving rise to an appearance of partiality," the court wrote in the opinion.

Click here to read the Appeals Court's ruling

Judge Jackson's actions "would give a reasonable, informed observer cause to question his impartiality in ordering the company split in two," the appeals court said.

Microsoft opponents declare victory

The U.S. Justice Department, which in conjunction with 19 states brought the case against Microsoft in 1997, characterized the appeals court decision as a "significant victory," because it upheld the government's position that the company abused its monopoly power.

"Today's decision represents a very significant victory for the antitrust division on the core claim in the Microsoft case that Microsoft engaged in anticompetitive conduct to preserve its monopoly position in computer operating systems," Charles James, the Justice Department's top antitrust enforcer told reporters in a press conference Thursday afternoon.

Ken Wasch, president, Software & Information Industry Association, which had lobbied against Microsoft throughout the antitrust trial, declared the appeals court ruling a victory for his members as well.

Click here for's special report: Microsoft on trial

"The court of appeals has now joined the U.S. Justice Department, the District Court and most of the information technology industry in recognizing that Microsoft's business practices are not just business as usual," he said.

"Microsoft's tactics have illegally cut off competitive technologies and therefore effectively deprived consumers of choice in the information technology products they purchase."

Iowa Attorney General Tom Miller, who earlier this month suggested if the case were remanded to the district court he would use the company's current business and product plans to support the claim that Microsoft is continuing to engage in anticompetitive business practices, said he was pleased with the ruling as well. (458K WAV) or (458K AIFF)

A settlement on the horizon?

Legal experts said the decision increases the likelihood that the two sides will settle the case.

"It puts off the day of reckoning for Microsoft, so on balance, I think Microsoft comes out better in this complex 'good news-bad news' decision," said Harvey Saferstein, an antitrust attorney at Mintz Levin in Los Angeles.

"It looks much more likely that the two sides will settle," Saferstein added.

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graphicCNNfn's Bruce Francis looks at Microsoft's competition
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James Goodale, an attorney specializing in technology issues at Debevoise and Plimpton in New York, said he thinks a settlement is virtually assured.

Before the case was sent to the appeals court, he said the Justice Department had agreed on a settlement under which Microsoft would share certain elements of the source code for its operating system software, but the states involved would not go along.

"Everyone who was in this case knows that the government's position before it went to appeal was a settlement position," Goodale said. "Now they have less bargaining room, and there's no way [Microsoft] is going to be broken up. I promise you."

Analysts see near-term boost in share price

Shares of Microsoft (MSFT: Research, Estimates), which had been up in late-morning Nasdaq trade before the ruling was issued, resumed trading on the Nasdaq at 2:50 p.m. ET and ended the session $1.57 higher at $72.71.

After the appeals court handed down its ruling, some Wall Street analysts weighed in on the potential impact of the value of the software maker's shares, which over the past year have ranged between a high of $82.87 and a low of $40.25.

Merrill Lynch's Henry Blodget said the ruling was far better for Microsoft than he had expected, which could give a lift to its shares in the near term. However, he noted that the next phase of the landmark case is likely to drag on for many months.

"Our preliminary conclusion is that, although Microsoft is not out of the woods, it will be slightly more free to compete on its own terms than we expected it would," Blodget wrote in a note to clients Thursday.

"Thus, we regard the ruling as an incremental positive for the stock," Blodget added.


Arron Scott, software analyst at Tucker Anthony Capital Markets, agreed that the appeals court decision should benefit Microsoft's shares in the near term.

"However, because the case is going back to the lower court, the overhang on Microsoft's shares will continue, as the case may still go to the District Court, Appellate Court and even the Supreme Court," Scott added.

Scott also pointed out that some of the state attorneys general who joined the Justice Department in its case against Microsoft, have shown an interest in leveling new antitrust charges against the company

Just last week, Iowa's Miller and Connecticut Attorney General Richard Blumenthal said they're concerned about Microsoft's plans for its Windows XP operating system as well as its new Internet-centric business strategy, adding that they would bring these matters to the district court's attention should the case be remanded, which it now has.

Among the specific things the attorneys general said they are concerned about are Microsoft's plans to embed Internet features such as instant messaging and streaming media capabilities into Windows XP, due out in October; and its "Hailstorm" product, a set of "identity management" services introduced in March that works closely with its operating system software.

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