Slap on the wrist?

Is the Justice Department's decision not to pursue a breakup of Microsoft a big wet kiss from Bush, or just smart strategy? The experts weigh in.

Published September 6, 2001 6:04PM (EDT)

Is history repeating itself? In 1981, an incoming Reagan administration dismissed an antitrust case against IBM that had been in the works for 13 years. On Thursday, the Bush Department of Justice announced that it would not pursue a breakup of Microsoft, and, perhaps more important, was dropping its attempt to prove that Microsoft had illegally "tied" its Web browser to its Windows operating system, thereby giving the company an unfair advantage over competitors.

At first glance, Microsoft's foes could be excused for throwing up their hands in exasperation. In come the Republicans, out goes the antitrust enforcement. After years of testimony, evidence, cross-examination and countless appeals to higher courts, a simple change in administration could be seen as the most significant determination of legal strategy and outcome. An administration that has rapidly established itself as one of the most corporate-friendly in recent memory is backing away from the fight, pledging to end the whole unseemly mess "as quickly as possible."

But the initial appraisal from lawyers, antitrust specialists and Microsoft observers has been more cautious. Although the D.C. Circuit Court of Appeals threw out Judge Thomas Penfield Jackson's order to break up Microsoft on the grounds that the judge had been unprofessional in admitting anti-Microsoft bias to reporters, there is every reason to believe the appellate court would have found some other excuse to dismiss the order even without the cover of Jackson's behavior. And even though the appellate court ruled that Microsoft had indeed broken the law by abusing its monopoly power, it also ruled that the Department of Justice had not proved its charge that Microsoft was guilty of illegal "tying."

So one could easily argue that the DOJ is making the best of what it has, focusing its case on the specific points in which the appellate court ruled in its favor -- such as Microsoft's penchant for illegally using its power to force computer vendors to accept exclusive deals that put other software companies in disadvantageous positions. The issue is particularly relevant to the upcoming rollout of Windows XP, which has put the spotlight on Microsoft's ongoing attempts to control icon placement on the new desktop.

Certainly, the first stock market reaction, which saw Microsoft shares falling on fears that Windows XP would be delayed, suggests that investors see a real chance that there might still be some iron in the government backbone.

But for many critics, icon placement, while important, is not as crucial as the advantages Microsoft gains from bundling new software applications with its operating system. If the Department of Justice is not going to pursue the tying charges, then Microsoft is free to blend into XP whatever it wants -- including such popular (and hotly contested in the marketplace) applications as its sound and video MediaPlayer technology and its instant messaging software. The question of whether bundling à la Microsoft is illegal has long been at the heart of the antitrust case -- now the Department of Justice is essentially saying to the public, "Never mind."

For those with a historical perspective, the parallels to IBM are all too obvious. A Bush administration would have been unlikely to initiate antitrust proceedings against Microsoft, and it's not difficult to imagine that it would like to wash its hands of this Clintonian legacy "as quickly as possible." The federal appellate court, by vacating the remedy order and refusing to uphold the finding that Microsoft had engaged in illegal tying, has given the Bush DOJ ample cover for staging an orderly retreat.

Over the course of the antitrust trial, Salon has regularly turned to a stable of experts to gauge each new twist and turn in the saga. Here are their reactions to the latest news.

John Heilemann, author of "Pride Before the Fall: The Trials of Bill Gates and the End of the Microsoft Era"

I think it's a shame that they didn't decide to pursue the tying remedy. It's very complicated because antitrust law was easier to interpret when the products were physical products. In this case, it was a very novel question for antitrust law -- how you figured out the tying in the context of a product made of intellectual property, the commingling of code.

It was an open legal question. What the appeals court said was not that Microsoft was innocent. What it said was that Judge Jackson had used the wrong standard. It asked the lower court to apply a different standard. The fact that the Bush administration is not going to pursue this claim means essentially that it's still an open question.

To the extent that this case matters in the long term, it sets rules for how antitrust applies to the software industry. This was a really important issue to resolve, because it would tell a lot of companies -- software companies, chip design, all platform companies -- what is legal and what is not legal. By not pursuing that claim, the Bush administration has essentially abandoned the pursuit of a clear legal ruling on that subject.

All of this has happened now, and in the end we still don't know what is legal and what is not legal. We're in the dark. If Microsoft is innocent then great, I'd like to know why they're innocent and then people can go forward. I really do believe that if you're principled and pro-Microsoft you would want for this issue of integration to get resolved.

I think that a lot of people will assume that because the Bush administration is not pursuing the tying issue that this is legal. And that's not right. We're going to keep having this argument now forever, until the courts come out and say one way or the other. We're going to keep having this battle forever.

Bob Levy, senior fellow, constitutional studies, Cato Insitute

It's a nonevent really. The breakup remedy was not in the cards. The court of appeals indicated that the radically altered scope of liability made a structural remedy unlikely. The DOJ saw the writing on the wall and decided not to waste the time and resources to pursue a lost cause. This should not be read as a concession to Microsoft; it's a concession to reality.

As for the tying claim, it's similar. The court of appeals imposed a much higher burden of proof and as a result the DOJ would have had to take lots of time, energy and resources to show that claim was valid. And once they did that, they wouldn't have seen a major change in the remedies. Because the tying claim is part of the "monopoly maintenance" claim, it's already part of the case, and to pursue a claim specifically for tying would waste a lot of time and not get Justice very much in terms of remedies.

So this is a statement that the DOJ wants to move quickly . They don't want to get bogged down in the breakup, where they'd lose, or in the tying -- which they could win but don't earn much of a benefit for victory. I don't see this as a win or loss for Microsoft; and I think the market is treating Microsoft's stock accordingly. But the $64,000 question that gets ever more interesting remains: What in the hell is the Bush administration doing in pursuing this pathetic lawsuit? It should never have been brought in the first place, and now, it should be dropped. There are no consumers screaming for the kinds of remedies the DOJ wants.

Eugene Crew, lead counsel for plaintiffs in 30 consolidated class actions, who are suing Microsoft for violations of California's antitrust laws

Because the DOJ's announcement affects the remedy part of the case, it doesn't really have any impact on our cases. But I'm personally disappointed -- though not surprised -- that the Justice Department would drop the call for a breakup. That's what the industry needs to restore competition.

I was surprised that they gave up on the tying claim. It would have been easy for the judge to apply the new standard, per the court of appeals request. The judge could have simply seen that Microsoft made the tie, and applying the rule of reason [which holds that tying can't be treated as automatically harmful, but must be judged on whether the tying was "unreasonable"] could have found that it's still illegal. It would have been an easy case, but Justice dropped it because they wanted to move the case along.

So it leaves the question open. We certainly are free to present the evidence and we will present evidence and other evidence to show that the tying was illegal. We'll argue in our case that Microsoft did impose a tie to monopolize the browser market, and we'll argue that it's unlawful. It will be part of our case; we don't have the benefit of federal litigation that might have come from the Justice Department's litigation of this issue. But we've got all the evidence. The conduct of tying was condemned under the decision, so today's move is an apparent victory for Microsoft, but they've been condemned as a monopoly, so what else would we need? It should be pretty easy to litigate the tying issue. We're not letting it drop.

Eben Moglen, Columbia University law professor, counsel to the Free Software Foundation

The government's decision to refrain from wasting resources on turning Microsoft into a duopoly might be a wise one, if it is coupled with a real effort to create competition through the best of all routes: Use free software.

Long before today's decision, Microsoft and many of its sharpest critics were in agreement that the breakup was the wrong solution: They just disagreed on the problem. The United States government proved that Microsoft was maintaining a monopoly by illegal means, harming competition in ways the Sherman Act obliges it to prevent. Breaking up Microsoft into two dominant firms was not the way to increase competition.

In the period since the filing of the government's action, it has become clear that restoring competition to the software industry means supporting Microsoft's only viable competitor, free software. The single most important measure the government can take toward that end is to stop subsidizing Microsoft.

When the U.S. government buys pencils or paper clips, it does so by competitive bids and avoids sole-source contracts. In a sweetheart deal worth billions of dollars to Microsoft, the U.S. government buys the operating system for personal computers by noncompetitive sole-source acquisition, from a company which the government believes, and has proven, is an illegal monopoly. The government should acquire P.C. operating systems by competitive bid: The free software movement can provide better products than Microsoft, and at a somewhat competitive price -- zero.

Mr. Gates has announced that he plans to spend $1 billion promoting his new, slow, bloated, user-disempowering operating system, Windows XP. Every dollar of his promotion expenses will be paid by the government's ill-chosen subsidy to his illegal enterprise.

Richard McKenzie, professor in the Graduate School of Management at the University of California at Irvine, and the author of "Trust on Trial: How the Microsoft Case Is Reframing the Rules of Competition"

Consider this: Dropping the proposed breakup was the only sensible thing the Justice Department could do, given that the threat of a breakup would have only prolonged the case. Microsoft's competitors might have benefited from the proposed breakup -- neither "Micro" nor "Soft" would have been nearly as competitive as Microsoft is today -- but consumers would have only been harmed. Besides, the appeals court gave strong signals that it would not look favorably on a breakup.

By setting aside the bundling issue, the Justice Department was not really giving up much. Microsoft must still confront a legal fact of life: The appeals court found that the company's "commingling" of the browser code with the Windows code was anti-competitive. The introduction of Windows XP, and that operating system's future development, remains at risk. Moreover, the government is not likely to get out of this case without getting into the business of deciding how Microsoft's operating system will be developed for years into the future. That is a sad commentary on modern antitrust enforcement, since the Justice Department is hardly well known for its expertise in software development.

Luke Froeb, associate professor of management at the Owen Graduate School of Management at Vanderbilt University, former antitrust lawyer at the Department of Justice antitrust division

I think it's an indication that Microsoft's delay strategy is working.

When you reach an out-of-court settlement, your bargaining position is determined by the alternatives. I think that Microsoft's strategy is clear -- delay, delay, delay -- until the case becomes moot, or mooter than it already is.

I think that the Justice Department, by taking the breakup off the table, is trying to get Microsoft to hurry up. It's an olive branch to Microsoft to try to get them to settle the case and stop their delay tactics. They're still arguing about Windows 95.

As for the tying issue, I think that this is an admission that there is no good solution to that issue, and if there is no good solution then it is not a problem. If you're not going to break them up, then there's only going to be a behavioral remedy. When they resolve this case there's going to be a consent decree that says this is what Microsoft gives up, to agree to resolve the case. To make sure that they follow through on the agreement, a judge will oversee the remedy.

So, every time Microsoft wants to add a new functionality to its software, there's going to be a judge overseeing the consent decree. Every time they want to include something into the operating system they have to go before a judge and have a hearing -- everyone agrees that would be very costly. The Justice Department does not want to put itself in the position of having to go into court every time Microsoft wants to make a design modification to its operating system.

One thing for sure: It will dramatically slow down the pace of innovation, and particularly in the case of tying and integrating new products into the operating system that seems difficult to resolve. So, the remedy there is probably worse than the problem. There is no good solution to the problem of tying; there's not a solution that's not worse than the problem.

Albert Foer, president of the American Antitrust Institute, a pro-antitrust think tank

We're disappointed that they're throwing in the towel on the structural remedy. This is understandable politically, but the breakup would probably have been the best antitrust solution to the monopoly problems. There are still opportunities for strong creative remedies that can go a long way toward controlling Microsoft's arrogance, but these run the risk of having a regulatory nature, meaning that you'll be stuck with a court overseeing a very detailed program for quite a while into the future.

In terms of tying, I think they could have won that issue. The question is whether it would have added anything to their panoply of remedies. The actual tying issue with the browser is ancient history. [Microsoft] won, and you can't re-create a vigorous Netscape. In terms of the larger question of future significance, the Court of Appeals left open the possibility of prosecuting tying arrangements in the future.

It will come up in other contexts, and tying is still clearly illegal. But it's a fact-intensive inquiry, so applying the law of tying to the field of technology will have to wait until another day. But no one is suggesting that you can't try a tying case. Really, [the DOJ decision] is an attempt to streamline the case.

Jamie Love, director, Consumer Project on Technology

We were not too surprised about the breakup issue, but somewhat disappointed on the tying comments. In our view, the key remedies now on the table are interoperability remedies, modeled after the 1984 European IBM case [which regulated how IBM could do business], and compulsory licenses to OEMs [original equipment manufacturers] -- to reduce MS coercion.

We'd like to see Microsoft be forced to open up Windows and really resolve the compatibility issues as IBM did after its 1984 case. Right now you'd have to be crazy to try to write a program for Windows; we'd like that to change.

Second, we'd like to see compulsory licensing. We'd like to see it mandated that Microsoft give out compulsory licenses; that forces them to provide nondiscriminatory terms, so anyone could get Windows for the same price, the same terms. It would mean that if you're Dell or Compaq, you can moon Bill Gates and still get the same deal as the next guy. You can feature competitors' products without worrying that the decision will affect what you pay for Microsoft's software.

These two ideas go to the heart of what the case is about. The breakup was just a macho remedy; it was about the power of the government to split up a massive company. A lot of people thought that was right because it was a moral representation of the government's power. But I was never convinced it was essential. The regulatory approach could deal with the problems identified in the case. There are other problems, like tying, that may still need to be addressed, but Bush has been better than people expected. Microsoft hasn't gotten a free ride.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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