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APPEALS court reverses breakup of Microsoft

Updated:

WASHINGTON (AP) _ A federal appeals court unanimously reversed the breakup of Microsoft on Thursday, ruling that the software giant violated antitrust laws but the trial judge engaged in ``serious judicial misconduct'' by making derogatory comments about the company.

The U.S. Court of Appeals for the District of Columbia Circuit ordered that a new judge decide what penalty the company should face. It also struck down and altered some of the lower court's findings of antitrust violations by Microsoft.

Overall, the appeals judges said they agreed ``with the District Court that the company behaved anti-competitively ... and that these actions contributed to the maintenance of its monopoly power.''

But the judges, by a 7-0 vote, concluded U.S. District Judge Thomas Penfield Jackson made inappropriate comments to the news media and outside courtroom that gave the appearance he was biased against Microsoft.

Among his comments, Jackson compared Microsoft founder Bill Gates to Napoleon and the company to a murderous street gang.

The judge's actions ``would give a reasonable, informed observer cause to question his impartiality in ordering the company split in two,'' the appeals court said.

``Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process,'' the court added.

Though winning a major victory, Microsoft officials in Redmond, Wash., were mum on the decision. Investors, however, reacted with glee.

After the news broke, Microsoft shares that had been down 89 cents to $70.25 suddenly surged $3.82 to $74.96 before they were halted in late morning trading on the Nasdaq.

The Justice Department and 19 states sued Microsoft, alleging it tried to thwart competitors illegally. They now face several options, including considering settlement talks, appealing to the Supreme Court or seeking penalties against Microsoft from the new judge.

On Thursday, the Justice Department said: ``We are pleased that the Court of Appeals found that Microsoft had engaged in illegal conduct to maintain its operating system monopoly. We are reviewing the court's opinion and considering our options.''

President Bush was informed of the ruling, but White House spokesman Ari Fleischer said he was withholding comment so the Justice Department could ``review a very complicated legal decision.''

Several in Congress suggested it was time to settle the case. ``I think this really opens the door for this administration to now negotiate a settlement,'' said Democratic Sen. Patty Murray of Washington, where Microsoft is located.

The appeals court made several changes in Jackson's three primary conclusions about which company actions violated law.

The judges reversed the finding that Microsoft's packaging of its Windows operating system with its Internet Explorer browser violated antitrust laws, saying the government, in the new phase of the case, would have to show that Microsoft ``unreasonably restrained competition'' with that action in order for it to seek a penalty. It upheld the finding that Microsoft improperly monopolized its share of the computer operating system market, and it altered the standard to be used in considering a third violation cited by the lower court.

``Of the three antitrust violations originally identified by the District Court, one is no longer viable: attempted monopolization of the browser market. ... One will be remanded for liability proceedings under a different legal standard: unlawful tying. ... Only liability for the monopoly-maintenance violation has been affirmed _ and even that we have revised,'' the judges said.

The appeals court said there were instances of anticompetitive conduct by Microsoft _ including its dealings with Apple Computer and its exclusive contracts with Internet access providers.

In a rare rebuke of a colleague, the appeals judges said Jackson ``engaged in impermissible ex parte contacts by holding secret interviews with members of the media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom, giving rise to an appearance of partiality,'' the court said.

``The public cannot be expected to maintain confidence in the integrity and impartiality of the federal judiciary in the face of such conduct,'' the appeals court said.

The appellate decision that Microsoft may be able to package the products together was reached, the judges said, because they feared that such a prohibition on packaging software ``may impede operating system innovation.''

The decision likely will embolden Microsoft to bundle its operating system with its new Internet services initiative called ''.NET,'' said an analyst at a high-tech consulting firm.

``Microsoft had been deliberately vague about whether (.NET) would only work on its operating system, or whether it would open it up to other operating systems,'' said Gartner analyst Neil McDonald. ``Now with this ruling, we believe that Microsoft will tie .NET to Microsoft's operating system.''

The U.S. Court of Appeals decision is the most significant antitrust ruling since the court-ordered breakup of the AT&T telephone monopoly almost two decades ago.

The breakup Jackson had ordered _ and the appeals court reversed _ was recommended by the Justice Department and 17 of the 19 states that sued Microsoft under antitrust laws, accusing it of using anticompetitive practices to maintain a monopoly over its competitors in operating systems.

The government argued against Microsoft's bundling of its Internet Explorer browser with Windows, alleging it pushed Netscape's competing browser out of the marketplace. Also, the government said Microsoft bullied computer makers into ceding control of the computer's desktop.

Microsoft argued that consumers appreciate having the browser and operating system in one package, and simply acted in its own interests in a competitive market. They said recent innovations in personal computers are a testament to their practices.

Both Microsoft and government lawyers were grilled by appeals judges during the first day of the February appeals hearings, as the techno-savvy judges asked pointed questions about whether the software company used anticompetitive practices to quash the ``nascent seedlings of competition.''

But on the second and final day, the mood turned sharply in Microsoft's favor as the judges were outraged at Jackson's statements to reporters before and after his order.
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