Microsoft's Reversal of Misfortune?

Gates & Co. has a shot at getting its antitrust ruling overturned

For the first time since the government filed its sweeping antitrust case against Microsoft Corp. (MSFT ) in May, 1998, it had a bad day in court. Make that two bad days. On Feb. 26 and 27, a panel of federal appeals court judges pummeled the trustbusters--treating their lawyers just as harshly, in fact, as Judge Thomas Penfield Jackson treated Microsoft's legal team during the trial.

Conventional wisdom has it that the District of Columbia Circuit Court of Appeals will uphold at least part of the government's case against Microsoft and impose restrictions on the company's conduct. But for the first time, many antitrust experts are starting to wonder whether Justice and the state attorneys general, notwithstanding their sensational trial performance, could see the entire case crumble. "I think there is now a reasonable prospect that the court will reverse [Jackson's decision]," said George Mason University antitrust expert Ernest Gellhorn on Feb. 28, the day after the hearings concluded. "I sort of changed my mind last night, the more I thought about it and the more I reviewed the transcript."

Immediately after the hearing, the government's Achilles' heel appeared to be Judge Jackson, whose out-of-school remarks to reporters infuriated the appellate judges and could give them ammunition for striking down his findings of fact. That's rarely done, but it has many in the anti-Microsoft camp worried. "I wouldn't say [a reversal] is impossible," says Stephen D. Houck, a Manhattan litigator who was the lead trial attorney for the states during the trial. If it happens, "the reason would be ...because of Jackson's comments."

Once analysts had a chance to review transcripts of the hearing closely, though, it became clear that Judge Jackson isn't the government's only worry. To prevail, Justice is going to have to get a majority of the seven judges to buy one of its three main legal theories: that Microsoft illegally tied the Internet browser to the Windows operating system; that the company attempted to monopolize the browser market; or that it engaged in a series of predatory practices designed to protect the Windows monopoly. There's a limit to how much meaning can be gleaned from a judge's questions, but after listening to oral arguments, most experts think the feds don't have a chance on the first two counts.

That leaves the government's so-called monopoly main- tenance theory under Section Two of the Sherman Act. Two of the judges on the D.C. Circuit, Stephen F. Williams and Douglas H. Ginsburg, are known antitrust skeptics who both sharply questioned the logic of this argument. At least three others, Harry T. Edwards, A. Raymond Randolph, and David B. Sentelle, also seemed doubtful. There may be enough votes in this group to give Microsoft a total victory.

TELLTALE QUESTION? Of particular concern to the government is a comment by Edwards, a Democratic appointee whom the trustbusters can ill afford to lose. During discussion of the monopoly maintenance theory on Feb. 26, he and others seemed troubled that Netscape Communications Corp. never appeared to have any intent to compete directly with Microsoft in the operating systems market. "If we're looking at an institution that is not reasonably going to compete with Microsoft in this middleware area, then we don't worry about it, right?" he asked a government lawyer. Just asking the question, of course, hardly dooms Justice's cause.

But it does indicate that the judges harbor some fundamental questions over whether Microsoft's allegedly predatory practices really harm consumers.

To be sure, the government established a rich factual record of Microsoft's bullying tactics during the trial. And appellate judges normally give great deference to trial judges' findings of fact. But this deference is predicated on their confidence in the trial judge. And with Jackson, that confidence level seems to be ebbing. Victory for Microsoft may not be likely, but all of a sudden, it's not out of the question.

By Dan Carney in Washington, D.C., Jay Greene in Seattle, and Mike France in New York

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