The Microsoft Decision — Part 1 of 2: The Appeal Ends, The Trial Resumes,

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Judge Thomas Penfield Jackson and consumers are the big losersin the Microsoft case. There were no winners. Seven judges on theU.S. Court of Appeals for the D.C. Circuit held unanimously thatJackson's appearance of bias "seriously tainted the proceedings… and called into question the integrity of the judicialprocess." Jackson's rubber-stamp acceptance of the JusticeDepartment's proposal to dismember Microsoft - without either anevidentiary hearing or an adequate explanation - is history. Goodriddance.

Now the case goes back to the trial court where a new judge -selected randomly, before mid-August, from among 10 Clintonappointees and one Reagan appointee - will decide how to remedyMicrosoft's transgressions. Because of the "drastically alteredscope of liability" - about which more below - the appellate judgesintimate that divestiture cannot be justified. Moreover, Microsoftis a "unitary" company, not one formed by merging or acquiringseparate entities. Thus, dissolution would pose logisticaldifficulties, said the court. Absent a "significant causalconnection" between Microsoft's behavior and its maintenance ofmarket power, conduct remedies would be more appropriate. In short,breaking up Microsoft is a dead issue.

That's good news. So too is the reversal of Jackson's holdingthat Microsoft attempted to monopolize the browser market. Thegovernment did not properly define the browser market and couldnot, therefore, show that Microsoft had a dominant share. Nor didthe government demonstrate that the browser market is characterizedby barriers to entry. Without those proofs, the JusticeDepartment's attempted monopolization charge evaporates.

On the tying question, the Court of Appeals ordered the newtrial judge to reconsider Jackson's conclusion that Microsoft brokethe law. The court said that requiring customers to takeMicrosoft's Internet Explorer browser if they want to acquire theWindows operating system is not unlawful, in and of itself. Onremand, the lower court will have to apply a "rule of reason"standard - weighing the costs and benefits to consumers of thetie-in. The Justice Department will have to show an actualanti-competitive effect - not just intent - in the browser market.Then Microsoft can proffer a pro-competitive justification, whichthe government can rebut by proving that the anti-competitiveeffect is greater.

If the Justice Department renews its claim that Microsoftillegally engaged in "price bundling," it will have to demonstratethat Windows alone - without the browser - would have sold for alower price. But Microsoft can still prevail by showing that otheroperating system vendors also bundle an Internet browser, and don'tsell the operating system separately for a reduced price. Best bet:Under a "rule of reason" standard, the government will abandon itslosing argument that Microsoft's tying arrangement is unlawful.

So far, so good. But the waters get muddier for Microsoft. Theappellate court affirmed Jackson's holding that Microsoft is liablefor engaging in anti-competitive conduct to maintain its monopolyin operating systems. That anti-competitive conduct purportedlyinvolved the following: preventing PC makers from removing theInternet Explorer browser; crafting exclusionary contracts withInternet service providers and major online providers like AOL;commingling the browser and operating system program code;threatening Apple with removal of Microsoft's Office Suite if Applecontinued to deal with Netscape; extending preferred treatment toselected PC makers in return for restrictive licensingarrangements; pressuring Intel to back Microsoft's version of Sun'sJava program; and, favoring software vendors who agreed not tosupport rival platforms. According to Jackson, Microsoft did notdemonstrate any efficiency justification for those anti-competitiveacts. The Court of Appeals found no basis to overturn thatfinding.

Those are the charges that will have to be remedied by the trialjudge. Meanwhile, the government and Microsoft have until the endof September to ask the U.S. Supreme Court to review facets of theappellate decision with which they disagree. But the likelihoodthat the high court will accept the case is slim. The record isvoluminous, the case would be enormously time-consuming, at leasttwo of the appellate judges are renowned for their antitrustexpertise, the entire appellate court - not just a three-judgepanel - ruled on the case, the ruling was unanimous, and it was theunsigned product of multiple judges. Moreover, the Supreme Courtmight be reluctant to enter the fray if, as expected, the JusticeDepartment and Microsoft open settlement negotiations.

[Part 2, upcoming: Prospects for thecompany; implications for antitrust.]