Microsoft Vs. The Feds: Oddsmakers Bet On Bill

Why Justice may not win more than a token Gates victory

It is a Herculean legal challenge. The target of the most important antitrust suit in two decades, Microsoft Corp., has been given just 16 weeks to prepare its defense, less than it would probably get if someone slipped on a banana peel in the headquarter's parking lot. That means that instead of burying opposing lawyers in paperwork--a typical tactic of big companies under attack by the Justice Dept.--Bill Gates's troops are going to have trouble just keeping up.

In spite of that tremendous pressure, antitrust experts like Microsoft's chances. Now that legal tea-leaf readers have had a chance to analyze the government's suit, observe both sides' trial tactics, and study the jurists who will be reviewing the case, they are beginning to conclude that Justice and the coalition of 20 state attorneys general suing the software giant will have a hard time winning anything more than a token victory.

The easy part for the trustbusters will be outlawing Microsoft's exclusive deals with business partners. But it will be much harder to stem the company's most controversial practice: bundling important new software products, such as Internet browsers, into the ubiquitous Windows operating system. On that point, the government team may be on shaky legal ground. "The big issue here is whether Microsoft is obliged either to take its Internet Explorer out of its Windows operating system or to carry Netscape's product. Those, I believe, would both be radical moves that courts are unlikely to accept," says antitrust professor Ernest Gellhorn of George Mason University School of Law.

The biggest obstacle for Justice lawyers will be the jurists who have the last word: the members of the District of Columbia appeals court and the U.S. Supreme Court. Dominated by economic conservatives, these courts are likely to be skeptical of claims that it's illegal for Microsoft to improve its operating system by enhancing it with Internet-browsing capability. In several recent cases, federal appeals courts have said that "where high-tech issues are concerned, `we should not be determining good innovations and bad innovations,"' says antitrust lawyer Stephen M. Axinn of New York's Axinn, Veltrop & Harkrider.

HELPFUL HINTS. An early bombshell from the District of Columbia appeals court is possible sometime in the next few weeks. Judges A. Raymond Randolph, Patricia M. Wald, and Stephen F. Williams are reviewing U.S. District Judge Thomas P. Jackson's December injunction prohibiting Microsoft from requiring computer makers that sell Windows 95 to install Internet Explorer. The company has high hopes that Randolph, Wald, and Williams will not only overturn the injunction but also give Jackson clear instructions to reject some of the government's untested legal theories in the Windows 98 lawsuit.

With good reason. In a little-noticed ruling on May 12, Randolph, Wald, and Williams strongly signaled that they're against government meddling in computers' innards. Granting a technical motion sought by Microsoft, the trio warned that judges should not put themselves in "the unwelcome position of designing computers." According to antitrust scholars, this was clearly intended to warn Judge Jackson not to second-guess the company's decision to embed Internet Explorer in Windows.

Of course, Randolph, Wald, and Williams won't necessarily have the final say. It's likely that, if the parties don't settle first, the suit could be pursued all the way to the Supreme Court. Counting up the votes, court watchers figure the government would probably have a rough time with the high tribunal, too. At least five of the nine Justices--William H. Rehnquist, Antonin Scalia, Clarence Thomas, Stephen G. Breyer, and Ruth Bader Ginsburg--have demonstrated a consistent free-market tilt in their antitrust rulings, says Stephen Calkins, an antitrust expert at Wayne State University.

Despite its strong long-range legal prospects, Microsoft's attorneys still face a grueling couple of months leading up to the trial. Judge Jackson denied the company's request for seven months to prepare its case and is doing everything in his power to ensure that trial begins on the scheduled date of Sept. 8. In a public hearing on June 9, he commanded the two sides to limit themselves to no more than 12 trial witnesses--an extraordinarly low number for a case of such complexity.

Already, the software maker's legal team is complaining that the feds and state AGs have been slow to turn over critical documents. (They deny the charges.) Although the company is publicly saying it can meet the September trial date, most legal experts expect its lawyers to try to delay the case, both in order to buy time for its legal team and to sell as many copies of Windows 98 as possible. "Their strategy has to be to keep [the lawsuit] going as long as possible," says Brookings Institution's Robert E. Litan.

The accelerated trial has one benefit for Microsoft. State attorneys general are likely to drop charges that it used predatory tactics to promote its Office software suite. Because the legal issues surrounding Office don't appear in the Justice case, "it just may not be possible to fit [the Office allegations] in," says New York State Assistant Attorney General Stephen D. Houck.

Once the trial is under way, a key challenge for both sides will be persuading Judge Jackson to accept their interpretation of what legal test applies to Microsoft's behavior. The company will argue that the feds first must prove that Microsoft's only reason for putting Internet Explorer into the operating system was to cripple rival Netscape Communications Corp. and then show that there was no technological justification for this move. Justice's antitrust chief, Joel I. Klein, and his team will seek a more relaxed standard. They'll say they only have to demonstrate that hurting Netscape was one of the company's primary goals and that Internet browsers should logically be viewed as stand-alone software.

"IN THE BAG." Whichever legal test the judge applies, the case will ultimately turn on two key factual issues: whether Microsoft integrated Internet browsing into Windows 98 for anticompetitive reasons and whether consumers will benefit by the move. After having spent nearly two years investigating the matter, the feds already have plenty of evidence on both issues, much of which has appeared in the department's legal filings against Microsoft. "Their case is already in the bag," says Samuel Miller, a San Francisco antitrust attorney who was part of the Justice team that investigated Microsoft in the early 1990s.

The side that has to put in some all-nighters is Microsoft. To disprove the government's claim that its main goal was to drive Netscape out of business, Microsoft is likely to dig up internal documents such as consumer surveys, focus-group reports, and memorandums from its sales force showing that customers wanted the products integrated. Microsoft employees will probably be enlisted to testify that the company planned to bundle Internet functions into the operating system long before Netscape was even founded in 1994.

Because much of Justice's argument is built on internal E-mail, Microsoft is also likely to contend that most of the damaging electronic missives were just idle words of low-level employees that are being taken out of context. Additionally, Gates's team will challenge charges that Microsoft proposed splitting up the browser market with Netscape in a controversial June, 1995, meeting. Expect defense lawyers to try to skewer Netscape's Marc Andreessen, whose notes are prime evidence of Microsoft's misbehavior.

To fight government claims that its Internet browser shouldn't be bundled with Windows, Microsoft is likely to argue that integration makes technological sense. It will do this by telling the familiar story of how memory management, printer drivers, graphical user interfaces, and other once independent software features have been integrated into the operating system over the years. Thus, lawyers will say, Internet Explorer is simply an incremental improvement to Windows, not a distinct technology to be marketed separately.

Leading the Microsoft trial team are General Counsel William H. Neukom and John Warden, a veteran trial lawyer and partner in New York's Sullivan & Cromwell. Warden will square off against celebrated courtroom warrior David Boies, who runs a small litigation boutique in Armonk, N.Y., and is working for Justice at a discounted salary of $101,000 per year. One New York litigator who knows Boies and Warden says they'll bring two sharply contrasting styles to trial. Warden is a predictable "straight-ahead litigator," he says, whereas Boies is more likely to use offbeat legal theories and "comes at you from all sides."

PRECEDENT. Although settlement talks between the two sides broke down last month, they're likely to make at least one more stab at a deal. Certainly, Microsoft has a strong incentive to do so. Any findings made against the company in the current case--that it has a monopoly, say, or engages in predatory tactics--could be binding on future courts considering the same issues. That could spur private companies that believe Microsoft has mistreated them to sue.

Right now, no deal is in sight. While Microsoft is making small moves to end its controversial contractual practices, it's unlikely to give up what it considers its right to determine what software should go into Windows. And given how difficult it will be for the government to prevail on that point, the company has little incentive to surrender on the issue. Meanwhile, both sides continue to prepare for war.

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