The US Court of Appeals for the District of Columbia has rejected Microsoft's request for a rehearing on its decision that the software giant illegally "commingled" operating system and browser code.
In doing so, the court denied the software maker's bid to reverse a ruling handed down last month affirming that the company illegally tied its software code for the Windows operating system to its Internet Explorer web browser.
In a succinct order, the court also denied the request of the US Department of Justice (DOJ) to fast-track the case back to the US District Court in Washington, leaving the remand schedule on the original timetable for a hearing on August 12.
The federal appeals court overturned the lower court's order to break up Microsoft into two separate companies in a June 28 ruling, but upheld the court's opinion that Microsoft was an illegal monopoly in the operating system business, and that it had used its monopoly power to squash competition by bundling Internet Explorer and Windows 98.
The issue of commingling code is central to the DOJ case against Microsoft, and forms the basis for their desire to break the company into two parts -- one for the operating system business and one for everything else.
Subsequent to the June ruling, Microsoft began to change its licensing policies for computer makers planning to install Windows XP -- the next generation of its operating system due for release later this year. Citing the ruling, it said computer makers could choose the icons that will appear on the Windows desktop, and would add an add-remove function to allow consumers to remove Internet Explorer from the computer. The company is still locked in combat with AOL Time Warner over exactly what icons will be allowed on the desktop when Windows XP computers ship, however.
Microsoft had hoped to see the "commingling" ruling reversed in a rehearing, telling the court in a petition for a rehearing that "critical evidence was overlooked -- or misinterpreted -- on the technical question of whether Microsoft 'commingled' software code ..."
The lower court is expected to deal "harshly" with Microsoft, says Rob Enderle, an analyst at Giga Information Group in Cambridge, Massachusetts.
"It just depends on how draconian the remedy is going to be (in the lower court)," he says. "It's only going to get worse off from here."
Bob Schneider, an attorney at the Chapman and Cutler law firm in Chicago, agrees that the lower court is unlikely to treat Microsoft with kid gloves.
"The thrust of the original opinion is that Microsoft is a monopolist ... and I expect that the lower court will agree with the District Court's conclusion and attempt to come up with a remedy to modify their activity in the future," says Schneider.
He adds that the lower court may still decide to break the software mammoth into two companies.
"If they do it, they'd have to do it in the way Jackson was criticized for not doing it," he added, referring to US District Judge Thomas Penfield Jackson, who originally ruled that Microsoft should be broken up into two companies. Jackson was subsequently criticised by the Appeals Court, however, for not allowing an evidentiary hearing on the remedy. Furthermore, Jackson was blasted for publically badmouthing Microsoft and holding secret interviews with journalists in his courtroom.
Beyond the possibility of a breakup, the court's refusal to rehear its decision also puts Microsoft in a weakened position in terms of settlement talks, Enderle notes. "The other side is strengthened in terms of settlement talks."
Schneider predicts that if Microsoft takes the threat of a lower court decision seriously, there is a better than a fifty-fifty change that it will enter into a settlement agreement.
Microsoft is putting on a brave face. Asked whether the court decision was a blow, Microsoft spokesman Jim Desler, said: "Not at all."
"We are committed to move forward .. and resolve any remaining legal issues as quickly as possible," he said.
Desler said that it will be seven days before the lower court process begins, at which time the court will begin to select a new judge for the case. The spokesman added that Microsoft will take that time to consider its options, including if it wants to drag its appeal all the way to the US Supreme Court.