The Wind Shifts For Microsoft

Why Gates's courtroom prospects are improving

During Microsoft Corp.'s (MSFT) landmark antitrust trial, the company often seemed seriously out of touch with reality. When its witnesses were torn to shreds by government lawyers, chief counsel Bill Neukom dismissed the embarrassing spectacle as mere "courtroom theatrics." When Judge Thomas Penfield Jackson ordered Microsoft split in two, Chairman William H. Gates III just shrugged and said he would win the next round. Was the software giant living in a parallel universe where forecasts were always rosy?

Maybe not. Microsoft's optimism no longer seems quite so far-fetched. In the past few weeks, its legal prospects have markedly improved. On Jan. 12, U.S. District Judge J. Frederick Motz dismissed 20 consumer class actions against Microsoft. A week later, George W. Bush, who probably never would have sued the company in the first place, was sworn in as President. And on Jan. 23, Microsoft settled its long legal battle with Sun Microsystems Inc. for a paltry $20 million.

"LOOKING UP." The next big event on Microsoft's legal calendar is a showdown with the government before the District of Columbia Court of Appeals on Feb. 26. And some tea-leaf readers think the appeals court may have already revealed a pro-Microsoft bias. In dealing with friend-of-the-court briefs, filed by parties that aren't directly involved in the suit, the D.C. Circuit ordered the entire anti-Microsoft chorus--AOL Time Warner Inc. and three trade groups representing much of the high-tech world--to collaborate on a single brief. Meanwhile, just about anybody with a pro-Microsoft view filed individually, including the Association for Competitive Technology and the Center for the Moral Defense of Capitalism, a fringe organization that considers antitrust law unconstitutional.

Add it all up, and Microsoft's legal picture is sunnier than it has been in years. "No question about it, things are definitely looking up for them," says Brookings Institution antitrust expert Robert E. Litan.

To be sure, there are some dark clouds on the horizon. Even if the Bush Administration decides to take it easy on Microsoft, there are still 19 state attorneys general pushing the government's antitrust case. And while many consumer class actions against the company have been dismissed, Microsoft faces the prospect of private lawsuits filed by the companies it allegedly injured, including AOL Time Warner, IBM, Gateway, and many others.

BLUSTER. But even these threats may not be as menacing as they originally seemed. Consider state attorneys general. In public, they have made a show of hawkishness, vowing to seek a breakup no matter what stance the Justice Dept. takes towards Microsoft. "It makes little difference to us what the Bush Administration does," says Connecticut Attorney General Richard Blumenthal. "We'll do whatever needs to be done."

But behind the bluster, the attorneys general are not the unified force they claim to be. Of the 19 original AGs, the two from Ohio and Illinois oppose the plan to divide Microsoft in half. Two others, from North Carolina and Utah, relinquished their posts to newcomers who have been noncommittal about the case. Of the remaining 15, the AGs representing California, Connecticut, Iowa, Maryland, Massachusetts, New York, and Wisconsin are thought to be most devoted to breakup. One source familiar with the state camp says if Bush wants to settle for less than that, there would probably be more defections. "There are eight or ten [who] seem to be committed to this case," says this lawyer. "The others might peel off."

After Judge Jackson issued his damning legal ruling, Microsoft was expected to be slammed with a wave of private antitrust litigation. It hasn't turned out that way. A key reason: Many of the companies Jackson said were injured by Microsoft's actions have refrained from filing suits. The most important one is AOL Time Warner (AOL). Having bought Netscape Communications Corp., the company could sue Microsoft for potentially billions of dollars in lost profits, since Netscape was the software maker's prime victim. Under antitrust law, that sum could then be tripled with a finding of guilt.

AOL Time Warner refuses to discuss its intentions. But notwithstanding the potentially immense recovery, many in the industry doubt it will ever file suit. Among other things, AOL Time Warner is itself a new media giant. Some speculate it may be unwilling to establish antitrust precedents that could later be used to thwart its own growth plans. By arguing that Microsoft should share data about its copyrighted software with competitors, for example, AOL Time Warner might be helping to create broad legal precedents that would require it to share access to its cables, set-top boxes, and proprietary software.

IMAGINARY WORLD. Industry sources say PC makers and Microsoft's software rivals are also holding their fire until they know how much of Jackson's ruling will stand, since their cases depend on the outcome. The companies need the strongest possible legal foundation because "they're still scared stiff of Microsoft," says one high-tech executive.

While the companies Microsoft did business with largely haven't sued, lawyers representing consumers have. But many of these suits suffer from a fatal flaw: Most people don't directly purchase Windows. That means they have no grounds for suing Microsoft in federal court, according to Judge Motz, under the 1977 Supreme Court case Illinois Brick Co. v. Illinois. And this precedent will also kill many of the remaining state class actions.

Even so, a few states have passed laws that repeal Illinois Brick. Lawyers are taking cases to those jurisdictions. But even there, the plaintiffs are likely to have a hard time. To win, the lawyers must persuade a jury that Microsoft's predatory practices resulted in artificially high prices. "You essentially have to reconstruct a world that never existed," says Eugene Crew, the San Francisco attorney leading a California class action against Microsoft. He admits this is a difficult task. And Microsoft has a strong defense: It will be able to argue that its opponents are the ones in a parallel universe.

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