Judge says company's behavior makes its division 'imperative'
WASHINGTON - Microsoft Corp. must break into two companies to remedy its monopoly over computer software, a federal judge ruled Wednesday.
U.S. District Court Judge Thomas Penfield Jackson's decision would separate Microsoft's Windows operating system and applications software into separate companies.
Judge Jackson wrote that he based his final judgment and order to break up the company on its conduct rather than its size.
"A structural remedy has become imperative: Microsoft as it is presently organized and led is unwilling to accept the notion that it broke the law or accede to an order amending its conduct," the judge wrote.
"There is credible evidence in the record to suggest that Microsoft, convinced of its innocence, continues to do business as it has in the past, and may yet do to other markets what it has already done to the PC operating system and browser markets."
Microsoft chairman Bill Gates said the ruling supports the idea that "the government can take away what you've created if it turns out to be too popular."
"We will be exercising our right to appeal this decision and we're confident the judicial system will overturn this ruling," he said. "I believe very strongly that today is the first day of the rest of this case."
Mr. Gates said Judge Jackson's ruling "represents an unwarranted and unjustified intrusion into the software marketplace."
The firm's Windows operating system dominates the personal computer market, which has helped make Microsoft among the wealthiest companies in the world and Mr. Gates the world's richest man.
Assistant Attorney General Joel Klein said the Justice Department would seek to expedite Microsoft's appeal and would ask Judge Jackson to send the case directly to the Supreme Court.
Microsoft senior vice president for legal affairs Bill Neukom said that procedure could further delay a case that may take another 18 months to two years to complete.
The last time the Supreme Court heard a case on such an expedited schedule was in 1982, during the antitrust case that led to the break up of AT&T Corp.
The remedy Judge Jackson applied was the outcome sought by the Justice Department, which joined with 20 states to sue Microsoft on May 18, 1998. Seventeen states joined with the Justice Department in seeking to break up the company.
Attorney General Janet Reno said that Judge Jackson's verdict would have a profound effect, "not only by promoting competition in the software industry but by reaffirming the importance of antitrust laws in the software era."
Iowa Attorney General Tom Miller, who led the states' legal team at trial, said the break-up described in Judge Jackson's ruling would "maintain the highest possible shareholder value and probably increase shareholder value."
Microsoft shares were up 88 cents Wednesday to close at $70.50. Judge Jackson's decision was handed down after the markets closed, but it had been widely anticipated.
Judge Jackson gave Microsoft seven months to split the company in two - four months to draw up a plan, and an additional three months to resolve any objections from the Justice Department. The deadline was put on hold pending the outcome of Microsoft's appeal.
The judge meanwhile ordered Microsoft not to weaken or bleed assets away from either its operating systems or applications divisions. He said the firms could have royalty-free access to each other's existing intellectual property, except for Microsoft Internet browsers, which he said the operating systems business could not license or distribute.
In addition, Judge Jackson set three-year rules of conduct governing the new companies barring them from punishing companies or individuals who testified at the trial or from punishing any computer maker that uses a competing product or service.
In November, Judge Jackson issued findings of fact in the case that said Microsoft had behaved as a monopoly in seeking to use its predominant position with computer operating software to block competition in the Internet browser field.
The findings set off four months of mediation efforts between Microsoft and the Justice Department, but the two sides could not agree. On April 3, Judge Jackson ruled, "Microsoft maintained its monopoly power by anti-competitive means and attempted to monopolize the Web browser market."
Microsoft and Judge Jackson have warred in the past. In December 1997, Judge Jackson ordered Microsoft to stop bundling its Internet Explorer browser with Windows operating systems and enjoined the company from putting on sale its Windows 98 software.
A three-judge U.S. Court of Appeals panel overturned that order and said the company was entitled to bundle its browser and operating systems software packages - if it could show consumers would benefit.
Judge Jackson made an apparent reference to that case in his order Wednesday. "Microsoft has proved untrustworthy in the past," he wrote. "In earlier proceedings in which a preliminary injunction was issued, Microsoft's purported compliance with that injunction while it was on appeal was illusory and its explanation disingenuous."
Mr. Gates took note of the judge's wording and hinted it would form part of the company's appeal.
"It's clear he has some notions from a previous case that was in front of him," Mr. Gates said.
Microsoft executive vice president and chief operating officer Bob Herbold was more blunt: "This isn't the first time we've sat around the table with a fairly nasty verdict from Judge Jackson."
Mr. Gates was in Washington on Tuesday testifying before Congress about the importance of education to the information technology industry. He met with several members of Congress, but canceled other meetings and a Wednesday morning news conference to return to company headquarters once it was announced that Judge Jackson would issue his final judgment.
The government's case against Microsoft rested largely on its behavior in battling for market share against the Netscape Navigator browser. A series of company e-mails and witnesses described efforts by Microsoft to crush Netscape so it would not lead customers to operating systems used by Apple and some other computer manufacturers.
Microsoft argued that Netscape thrived throughout the battle and that its practices did not constitute anything more than legal competition. When Netscape was purchased by America Online, South Carolina decided to drop its complaint against Microsoft, which left the Justice Department partnered with 19 states. Two other states later dropped from the remedy proposal.
Microsoft has scheduled a announcement on June 22 of several new products and a new version of its Windows operating system that may be even more tightly bundled than previous offerings.
Mr. Gates said the judge's decision would not delay the product announcement.
"We will be seeking a stay of this order for 90 days," Mr. Gates said. As for the company's new offerings, "we are continuing full speed ahead."
Richard Whittle of the Washington bureau contributed to this report.