Sunday, May 24, 1998

Government has strong, classic antitrust case, experts say

By DAN STETS / Knight Ridder Newspapers

Legal experts say the Justice Department, in what is shaping up as its most significant antitrust suit in decades, appears to have a strong case against Microsoft Corp.

The outcome will affect how technology companies market their products and deal with their competitors in the fastest-growing segment of the American economy.

The government is accusing the software maker of anti-competitive conduct and is basing much of its suit on the written words of the company's top executives in documents and e-mail.

Microsoft will find itself hard-pressed to defend some of its behavior, particularly agreements with Internet service and content providers restricting the use of competitive Web browsers, say legal scholars and practicing attorneys from around the country.

The company will be on firmer ground when it tries to defend its right to bundle its Web browser with the new Windows 98 operating system, but it will have to prove that joining the products is a technological advance rather than just an attempt to eliminate competition unfairly, the experts say.

"I think the government has a strong claim on the merits. It has revealed a wealth of smoking guns, indicating anti-competitive intent and conduct," said Hillard Sterling, special litigation counsel in information technology and antitrust at the Chicago law firm of Gordon & Glickson.

Microsoft's legal problems could be just starting with the lawsuits filed Monday in Washington by the Justice Department and attorneys general of 20 states, the experts predict.

Competing software makers, who feel themselves injured by Microsoft's behavior, likely also will file suits, especially if the government wins a preliminary injunction.

"It is virtually a certainty that plaintiffs' lawyers are drafting petitions even as we speak," Sterling said in an interview after the government filed its suit.

"There are a lot of private plaintiffs who are cheering on the government," said Einer Elhauge, a law professor at Harvard University in Cambridge, Mass.

If the government wins the case, the private plaintiffs could use that decision as evidence of Microsoft's wrongdoing, he said.

"Not only can they sue them, they can collect triple damages," said Elhauge, noting Microsoft's liability could run to billions of dollars.

Recalling the government's 13-year, antitrust probe of IBM, William Kovacic, a law professor at George Mason University in Virginia, said that, at one point, IBM found itself battling not just the Justice Department but also 40 private plaintiffs.

Microsoft says it is innocent of any wrongdoing and has said it will prevail, just as IBM did in its battles against the government and the private plaintiffs.

IBM prevailed in part because the computer market became more competitive as the lawsuit dragged on, due, ironically, to a new major player in the field, Microsoft.

The government alleges that Microsoft used its "valuable" monopoly in Windows operating systems against potential competitive threats, acting both to protect that monopoly and extend it into other software markets, particularly that for Internet browsers.

In its complaint, the government said Microsoft's Windows systems are installed on more than 80 percent of personal computers using Intel processors and that they come preinstalled on more than 90 percent of PCs.

The government quotes from documents in which Microsoft Chairman Bill Gates called the Internet "the most important single development to come along since the IBM PC was introduced in 1981."

It also quotes Gates calling Netscape a new competitor whose browser, Netscape Navigator, could loosen Microsoft's monopoly.

Netscape designed its browser to run on any computer platform, not just Windows, and could potentially supplant Windows as a new type of operating system. Netscape designed its browser so that other software could run from it, using Java programming language. The government said Microsoft feared these programs could potentially supplant Microsoft's software.

The Justice Department's suit cites documents in which several Microsoft officials said they had to leverage the Windows operating system so that the company's own browser, Internet Explorer, could gain market share on Netscape. Microsoft executives said in internal memos they were in "a jihad," or holy war, over browsers.

"All of the management comments about leveraging Ôour powers' in Windows, squashing all of those threats to Windows, is exactly the kind of stuff that your antitrust lawyers beg you not to say," said Kovacic of George Mason. "I think a lot of the company's ÔWe are the king of the world' attitude really comes through in the papers."

According to the suit, the company took several actions, including requiring computer makers to install Internet Explorer on their machines as a condition of getting a license to install Windows, that raised Microsoft's share of the browser market from less than 4 percent in 1996 to 50 percent or more today.

Other steps, the government's lawsuit contends, included entering into agreements with Internet service providers, such as America Online, to give their software prominent display within Windows, provided they primarily offered Microsoft's browser to their users. In addition, Internet content providers were given prominent "channels buttons" that would lead users to their Web pages as long as they didn't promote Netscape's Navigator.

"The gist of monopolization cases is that a particular firm both possesses power and has done something anti-competitive to maintain that power," said Beth Farmer, an assistant law professor at Pennsylvania State University.

The arguments against Microsoft are "pretty classic," she said. The company is charged with using its power to force computer makers and others who want access to Windows to do other things that would hurt Netscape and other potential competitors.

"We want to reward good, tough competition, but we also want to make sure the playing field is level," she said.

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Mark Patterson, an associate law professor at Fordham University in New York and a former computer programmer, said he thought the government had filed "a good case" against Microsoft, although he thought it might be pushing legal boundaries a bit to try to stop Microsoft from including its browser with the new Windows 98 operating system.

He said while Microsoft might be able to argue that consumers benefit from the bundling of Explorer with Windows, it would be hard for the company to make the point that the exclusionary agreements with Internet service providers and content providers offered any sort of consumer benefit.

On the other hand, Patterson said that as a former programmer, he was "skeptical" about Microsoft's claim that the Explorer and Windows 98 can't be separated.

Elhauge of Harvard said the case would turn on "the new product rationale" used for judging innovations in noncompetitive markets. Microsoft can't just argue that the combination is a new product.

"To prove that, you are going to have to show that it works better when bundled by Microsoft than it would be if were bundled by the end users," he said.

Carlyn Clause, an antitrust lawyer with the San Francisco firm of Bronson, Bronson & McKinnon, said the part of the government's case seeking to prohibit Microsoft from making Windows licenses contingent on helping it promote Internet Explorer is "one of the strongest elements of the case."

She agreed with other attorneys that the government will have a tougher time stopping Microsoft from bundling Internet Explorer in Windows 98. She said that the government and Microsoft have clashed over similar issues in the past and that she wouldn't want to predict how the courts will come out on that one.

Roger Dennis, a former Justice Department attorney who is now provost at Rutgers University-Camden, said the case presents a "classic problem of American antitrust law" and that it is far from clear how it will be resolved.

"We applaud innovation. We want people to strive to beat the bejesus out of their competition, but then, when they become very successful, we become very nervous about that for economic and social reasons," he said.

(c) 1998, The Philadelphia Inquirer.