Microsoft says Win95 appeals ruling sets precedent

Microsoft says it is confident it will succeed in a antitrust lawsuit involving integration of its browser with Windows 98 now that a US appeals court has ruled in its favor on a prior case involving Windows 95. The court ruled that a lower court erred in imposing a preliminary injunction in December prohibiting Microsoft from requiring computer manufacturers licensing Windows 95 to also license Internet Explorer. 'We are inclined to conclude that the Windows 95/IE package is a genuine integration.'

Microsoft says it is confident it will succeed in a antitrust lawsuit involving integration of its browser with Windows 98 now that a US appeals court has ruled in its favor on a prior case involving Windows 95.

The US Court of Appeals for the District of Columbia has ruled that a lower court erred in imposing a preliminary injunction in December prohibiting Microsoft from requiring computer manufacturers licensing Windows 95 to also license Internet Explorer. The US Department of Justice (DOJ) had argued that a 1994 consent decree prohibited Microsoft from tying together the operating system and browser. Microsoft had argued that it was allowed to add features to products through integration.

"We are inclined to conclude that the Windows 95/IE package is a genuine integration" and the consent decree doesn't bar Microsoft from offering it as one product, the court said in its ruling. The court also said integration is not anti-competitive if it results in products that benefit consumers, even if they threaten competitors to the dominant company, and said courts should be restrained from dictating product design.

"Antitrust scholars have long recognised the undesirability of having courts oversee product design, and any dampening of technological innovation would be at cross-purposes with antitrust law," the court said.

The appeals court also ruled that a lower court order assigning an adviser, or special master, to the case should be revoked or revised. The DOJ didn't prove that the case was so technologically complex as to merit an adviser who would in effect serve as a "surrogate judge," the court said in a unanimous decision.

Microsoft executives gloated during conference calls with analysts and reporters, insinuating that the core argument of the US DOJ's case against it involving Windows 98 is gutted.

The ruling "provides important guidance for the Windows 98 litigation and is a decision that has far-reaching implications," said Bob Herbold, Microsoft executive vice president and chief operating officer. "[The] decisions affirm our central principle of every company being able to improve its products and integrating new features on behalf of consumers."

The former assistant attorney general at the DOJ between 1986 and 1989 said the ruling reflects not just an application of antitrust law, but serves as a precedent for antitrust cases involving high-tech companies.

"The DC Circuit (court) has indicated that the scope of antitrust scrutiny is very narrow and doesn't interfere with Microsoft's ability to improve its products," said Charles "Rick" Rule, now a partner at the DC lawfirm of Covington & Burling. "This case affirmed what I believe have been antitrust principles that have evolved over the last 25 years. This Circuit is not about to change the law and expand it dramatically, which is what I think they (the DOJ) hoped for all along."

When asked if Microsoft will ask the courts to dismiss both cases in light of the ruling, Bill Neukom, Microsoft senior vice president for law and corporate affairs, said the company would "certainly consider a range of possible alternatives to our strategy based on this decision."

Companies that were removing the Internet Explorer icon from the desktop or start menu, such as NEC, as permitted under an agreement to settle a DOJ contempt of court complaint in the Windows 95 case, will be able to do so for 90 more days, Neukom said. Microsoft doesn't know what it's strategy will be regarding Windows 95 and Internet Explorer thereafter, he said. "There are so few PCs today that have that strange mutation on Windows 95 we're aware of," he added.

The DOJ said it was disappointed with the appellate court decision and was reviewing its options. "We remain confident that the evidence and our legal arguments in our antitrust case filed on May 18, 1998, will demonstrate that Microsoft's conduct has violated federal antitrust laws," the agency said in a statement.

The May lawsuit, filed in tandem with lawsuits by attorney generals in 20 states, argues that Microsoft is using its dominance in the operating system market to unfairly gain advantage in the browser and Internet market by bundling its Internet Explorer browser with Windows 98. Trial in that case is scheduled for Sept. 8.

The DOJ argued in the Windows 95 case that Microsoft's tying the licensing of Windows 95 with Internet Explorer was a violation of a 1995 consent decree the two sides had reached that prohibited Microsoft from tying the licensing of its operating system with another, separate product. Microsoft argued that its browser added functionality to its operating system and therefore was not a separate product but an integrated product. The consent decree specifically allowed Microsoft to add features to its operating system through integration of products, Microsoft said.

The broader Windows 98 case alleges that Microsoft's browser-operating system integration, among other practices, violates the Sherman Antitrust Act. The appellate court considered both the wording of the consent decree and the Sherman Act in its analysis, according to Neukom.

The appeals court in its decision defined an integrated product as one combines functionalities -- which can be marketed separately -- "in a way that offers advantages unavailable if the functionalities are bought separately and combined by the purchaser."

All three of the judges on the appellate panel said the court erred procedurally by not giving Microsoft notice before imposing the preliminary injunction. But one judge dissented from the other two in their majority opinion that concluded the lower court judge also erred substantively.

Two of the judges said Microsoft's Windows 95-Internet Explorer integration benefited consumers and therefore was not anticompetitive. The dissenting judge said that antitrust test was too narrow in scope and that the court should instead weigh integration of two market-viable products and the potential threats to competition against the benefits to the consumer of that integration.

"The courts must consider whether the resulting (integrated) product confers benefits on the consumer that justify a product's bridging of two formerly separate markets," Judge Patricia Wald wrote in her dissenting opinion. The majority opinion's reading of the consent decree "does not impose nearly enough scrutiny on 'integration' and renders" the consent decree "largely useless," she concluded.

Meanwhile, an organisation composed of numerous Microsoft rivals, including Netscape Communications, Sun Microsystems and Oracle, issued a statement saying that the broader Windows 98 case still stands strong.

"It is clear that the real battle will occur in the compelling and historically significant Sherman Act antitrust case that will be tried in September," said the Project to Promote Competition and Innovation in the Digital Age (ProComp). "That case is based on antitrust law, which is broader than the consent decree language in this ruling, and goes to the heart of Microsoft's anti-competitive and predatory practices that span the computer industry."

However, an industry analyst disagreed.

"Today's ruling makes it really difficult for the DOJ to proceed on that second Windows 98 lawsuit because it provides a clear indication that the appellate court is focusing on areas the DOJ was not prepared to defend," said Rob Enderle, desktop analyst at Giga Information Group Inc. "The focus is more on the benefits to consumers and less on the detriments to competitors, which was the foundation of the DOJ case."

Microsoft stock jumped US$4.94 to $100.75 after the ruling was released.

The appeals court opinion is on the court's web site at http://www.cadc.uscourts.gov/.

TheUS Department of Justice, in Washington, D.C., can be reached on the Web at http://www.usdoj.gov/.

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