In a long-awaited decision, a federal appeals court handed down a mixed decision in the government's antitrust case against Microsoft. On Judge Jackson's three findings against Microsoft, the score was one for the government, one for Microsoft, and a split decision sending the third back to the trial court for reconsideration. The court deep-sixed Judge Jackson, ordering that a different judge take the case, hear evidence, and reconsider the breakup remedy.
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The U.S. Court of Appeals for the Washington, D.C. Circuit ruled today in the federal and state government antitrust action against Microsoft (Nasdaq: MSFT), giving something to each party. On Judge Thomas Penfield Jackson's three findings of liability against Microsoft, the court upheld one (a win for the government), reversed another (a win for Microsoft), and sent the third back to trial court for a "do over" under a different legal standard. Of greatest interest to investors, the court sent the break-up remedy back for another hearing -- and to a new judge, as it ruled that Jackson engaged in impermissible conduct. Reader's Digest version? The judge went too far, but Microsoft's still got some problems. (You can grab the complete 125-page decision from the court's website, provided that you have Adobe Acrobat.) Here's how the appeals court disposed of each of Judge Jackson's rulings: Issue #1: Did Microsoft illegally maintain a monopoly in the market for Intel (Nasdaq: INTC)-compatible PC operating systems? Issue #2: Did Microsoft illegally attempt to monopolize the market for Internet browsers? Issue #3: Did Microsoft illegally tie its Internet Explorer browser to its Windows operating systems? Worse, the government is going to have to do this with one or both hands tied behind its back. Because the court decided the government failed to make the required arguments in Issue #2 the first time around, it can't make them now with regard to this issue. It's a technical point, but in the end it's not good for the government, better for Microsoft. Remedy: Microsoft should be broken up into two parts -- an operating systems business, and an applications business. And in a stinging rebuke, the court continued: [Jackson] engaged in impermissible [out-of-court] 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. 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. In the rarified world of appeals court, "offensive," "appearance of partiality," "seriously tainted" and "integrity of the judicial process" are just about as mean as it gets. Translation: "Jackson, you loser, you're gone." The appeals court has sent the case back, but to a new judge. What now? Microsoft's battles may be fewer in this case, but they are far from over. To learn more about the case's history from all your favorite Foolish writers, enjoy this compilation: Judge Orders Microsoft Breakup. Tom Jacobs (TMF Tom9) practiced law for 13 years before joining The Motley Fool. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
The appeals court agreed with Jackson, with a minor exception. It took the opportunity to zing Microsoft at least twice. Choice lines: "Microsoft lamely characterizes its threat to Intel as 'advice.' ...Microsoft never overtly retreats from its bold and incorrect position on the law." This opens the door to new, private-party lawsuits against Microsoft by companies such as Sun Microsystems (Nasdaq: SUNW), Apple (Nasdaq: AAPL), and AOL Time Warner (NYSE: AOL) to name a few.
The court reversed Jackson completely, finding that the government did not define the relevant market for Web browsers nor show that the market contains significant barriers to entry. The court faulted the judge for relying on the analysis used in Issue #1, instead of providing separate evidence and analysis in his opinion. This is not a happy result for the government, but it has even worse implications beyond this one issue. Read on.
The appeals court sent this issue back to the trial court, with a twist. Jackson found that Microsoft's tying of the Windows operating system to the Internet Explorer Web browser was illegal without requiring a cost-benefit analysis of its effect on consumers. But the appeals court said the government must show that whatever harm Microsoft's tying caused to the Web browser market outweighed any benefits to consumers in the operating systems market in the form of lower prices. In short, the government must answer the question: "Yeah, they did it, but was anybody hurt?"
The appeals court sent the remedy back to the trial court. It ruled that Jackson failed to gather evidence on factual disputes over the remedies during hearings, and didn't consider evidence Microsoft sought to introduce. Further, it ruled Jackson did not provide sufficient explanation for ordering the breakup. The court also said that since it modified Microsoft's liability -- kept one finding, dropped another, ordered a new standard for determining the third -- the trial judge should reconsider the remedy.
While the media are reporting this as a victory for Microsoft, the decision does not disperse the cloud covering the company's future. Microsoft was found liable on one count of violating antitrust laws, and private parties such as Sun Microsystems, Apple, and AOL Time Warner now have great ammunition for their own private lawsuits. Meanwhile, the court sent several issues back for reconsideration. At the very least, the trial court will determine some remedy for at least one finding of anticompetitive conduct.
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