June 25, 1999

Now, Microsoft Will Get Its Day Outside the Courtroom

By STEVE LOHR

ASHINGTON -- The heated accusations of monopoly, the lively e-mail flavored with capitalist aggression and the spirited testimony alleging and denying misconduct came to a close Thursday as the last witness stepped off the stand in the Microsoft antitrust trial, eight months after proceedings began.

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The trial is by no means over, but it will sharply shift gears as the daily theater in the courtroom gives way to a more sober weighing of facts and law. "Now the showmanship ends and the legal maneuvering really begins," said Andrew I. Gavil, a Howard University law professor.

Most of the points in the courtroom drama went to the Justice Department and 19 states suing the Microsoft Corporation, alleging that it illegally used its dominance to thwart competition. Led by its lead trial lawyer, David Boies, the Government team caught Microsoft's witnesses off guard again and again, presenting embarrassing e-mails or previous statements that appeared to undermine their testimony.

Today was no exception, as the Government introduced an e-mail from William H. Gates, Microsoft's chairman, that appeared to contradict a central defense contention: that America Online was in a position to challenge Microsoft's dominance of operating systems for personal computers.

Even William H. Neukom, Microsoft's general counsel, has found the Government performance impressive, if not convincing. Since the start of the trial, Neukom notes he has fielded expressions of concern that things are going badly for the company from many of his colleagues, even his wife.

"The Government has put on a great performance," he said, "but it does not add up to a solid antitrust case. It's all fluff legally."

Don't stay up late waiting for a decision. It will take a while.

Joel I. Klein, Assistant Attorney General in charge of the Justice Department's antitrust division, counters that the evidence and testimony presented in court has been occasionally entertaining but consistently incriminating. It adds up to a detailed and convincing portrait, Klein said, of "Microsoft's ability and willingness to do whatever is necessary in using its market power to protect its monopoly."

The legal reckoning that matters, however, will be made by Judge Thomas Penfield Jackson, who will rule in this trial without a jury. Both Microsoft and the Government will make further written and oral arguments over the summer and fall.

Judge Jackson must then comb through the mountains of evidence to try to answer one essential question: What are the appropriate legal restraints on the behavior of a powerful company in a dynamic high-technology industry?

The issue extends well beyond the Microsoft case, and the stakes are high. The ruling could set ground rules for competition in the modern economy, affecting companies and consumers alike for decades.

The legal guideposts to help Judge Jackson reach his decision, antitrust experts say, are not clear-cut. The major antitrust rulings over the last two decades are few, and they mostly involve mundane businesses including ski resorts in Colorado, a rural Ohio newspaper, a bowling alley in New Jersey and an egg processor in Indiana.

In some ways, the plaintiffs brought a very traditional antitrust suit. The Government says Microsoft repeatedly and illegally used its market power to block new competition represented by the rise of the Internet, especially software for browsing the World Wide Web.

Microsoft, according to the Government, used exclusionary contracts and threats to defend its monopoly product -- the Windows operating system, the software that serves as the central nervous system of 90 percent of the personal computers sold today.

"It is mainly an old-fashioned contract case," said Herbert Hovenkamp, a professor at the University of Iowa law school and leading antitrust scholar, who is advising the Government. "There is nothing novel about the practices. The one thing that is novel is that the case is in the software industry."

Yet the industry context is a crucial consideration. The software business is regarded as the forerunner of what has been called "the new economy" -- a fluid environment in which market leadership can be fleeting, but technology can also hasten the concentration of market power and the creation of monopolies. In short, new-economy theories can cut both ways in antitrust cases. There has been plenty of talk of "network effects" and "winner-take-all markets" from both sides in the Microsoft trial.

The fact that the Microsoft case focuses on a fast-moving, technically complex industry complicates the legal judgment the court must make. "It makes the toughest issues that courts have to deal with in antitrust cases -- determining market power, evaluating the significance of conduct and designing remedies -- far more difficult," said William Kovacic, a professor at the George Washington University law school.

Still, many antitrust experts who have followed the trial expect that Judge Jackson will side with the Government on some of its many charges against Microsoft. They base that view partly on a reading of Judge Jackson's behavior -- openly questioning the testimony of some Microsoft witnesses, and showing impatience with Microsoft's lawyers -- and partly on a reading of the law, that some Microsoft contracts with online services and personal computer manufacturers did inhibit competition from software rivals.

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If the judge rules against Microsoft, the court will then focus on remedies. The Government says it is too early to discuss sanctions publicly. But among the proposals being studied are limiting the contract restraints Microsoft can place on PC makers, forcing Microsoft to publish the price it charges PC makers for Windows, and requiring broad disclosure of the interfaces in Windows used by software developers to write programs. The goal, Government officials say, would be to change the balance of power in the computer industry and limit Microsoft's leverage over partners and rivals.

Microsoft is by no means conceding defeat in Judge Jackson's Federal district court. But Neukom suggests that its legal strategy is to prevail on appeal. "The thing to remember is that we're engaged in a legal decathlon, and we're still at an early stage," he explained.

Unless the two sides reach a settlement, Judge Jackson's ruling, expected by the end of the year, will certainly be reviewed by a Federal appeals court and possibly by the Supreme Court as well. If it goes to the Supreme Court, the Microsoft case may well not be finally determined until 2002, legal experts say.

A crucial decision by Judge Jackson a month before the trial began last October determined what the courtroom proceedings became: a sweeping portrayal of Microsoft by the Government as a bullying monopolist, supported by a parade of industry witnesses making a litany of allegations.

The Government's original complaint, filed in May 1998, charged that Microsoft was "engaged in a series of anticompetitive activities." But it focused largely on the company's tactics in the browser market against the Netscape Communications Corporation, and specifically on Microsoft's decision to fold its browser into its industry-standard Windows operating system. Microsoft, the Government contended, had illegally tied a second product to its monopoly product in a predatory effort to stifle competition and reduce consumer choice.

But a month later, the Government's tying theory suffered a severe blow when a Federal appeals court ruled in a related case that Microsoft should be free to blend its browser into Windows as long as it can make a "plausible claim" of business efficiency or consumer benefit from doing so.

Over the summer, the Justice Department and states continued investigating Microsoft's dealings with other companies and came up with new evidence involving Intel, Apple Computer and others -- all of it, the Government said, fit into Microsoft's "pattern of behavior" intended to stifle competition.

Over Microsoft's objections, Judge Jackson permitted the new evidence. Suddenly, the focus of the case widened well beyond the "browser wars" to a broad, multifaceted scheme by Microsoft to protect its monopoly.

With the retooling, the Government case also acquired a broad narrative theme that rose above the arcane details that are an inevitable part of a high-tech antitrust trial. Whatever the legal merits, the approach made the Government's case a much more compelling story to tell in court. So when an Intel executive testified to a "credible and fairly terrifying" threat from Microsoft or when an America Online executive testified that it had no choice but to adopt Microsoft's browser in return for a coveted place on the Windows desktop, it all added detail to the Government's picture of Microsoft as an arm-twisting monopolist, stifling competition and innovation.

The Government and states believe that they have shown not only that Microsoft crossed the legal line repeatedly, but also that its monopoly is fairly durable, a crucial consideration for the courts.

"If you think that Microsoft's operating system monopoly is going to go away in two or three years, then we shouldn't have brought this case," said Klein of the Justice Department.

"But I obviously don't believe that. What this case is about is protecting innovation to make a dynamic industry even more dynamic and innovative."

Microsoft agrees that innovation is the goal, but counters that heavy-handed antitrust enforcement is the real threat. Microsoft's legal team insists that the law is on its side in this case, despite the evidence presented by the Government. They point to a general drift of pro-defendant rulings in antitrust cases over the last two decades, which speak approvingly of "fierce, no-holds-barred competition" and "the great race of competition."

"A lot of what's in the Government's case doesn't sound good, but it doesn't rise to the level of an antitrust violation," said Steven Holley, a Microsoft lawyer.

In its defense, Microsoft has leaned on two key themes. The first, in essence, is: Our actions may have hurt some rival, but where is the harm to competition in general and to consumers? And the second theme, linked to the first, is: This is a vibrant industry.

The harm, the Government and states reply, is that Microsoft's actions would be fine if it were still a scrappy entrepreneurial upstart rather than an industry-dominating force. "What Microsoft did not recognize is that it had crossed the line to become a monopolist, so its behavior had to change," said Thomas Miller, the Iowa Attorney General.

Microsoft disputes the monopolist label, but argues that the rules for dominant firms are not much different. "We should be competing as hard as we can for the next customer because that behavior is good for consumers," Neukom of Microsoft said.

In the end, clarifying the rules of legal behavior for powerful companies in the modern economy could well be the lasting legacy of the Microsoft case. "This case can really determine the boundaries on the conduct of dominant firms for decades," observed Kovacic of George Washington University.