Court Decision to Reverse the Microsoft Breakup

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• RAY SUAREZ:

  Last year's order to break up one of the nation's leading companies was a blockbuster ruling in what is widely seen as the most important antitrust case of the age. Today, that decision was partly affirmed, partly reversed, fully sent back to a lower court and to a new judge.

  Joining us to explain is Andrew Gavil of Howard University Law School. Also with us are two men deeply involved in the case. Jeffrey Blattner was deputy to antitrust chief Joel Klein in the Clinton Justice Department. He's now in private practice. And C. Boyden Gray filed a brief on behalf of Microsoft during the trial. He's also in private practice in Washington.

  Well, whenever you get both antagonists claiming victory the day after an appeals court announces its ruling, professor, I think we need a guide as to just what that ruling says.

• ANDREW GAVIL:

  Well, clearly there are parts of the ruling that are favorable for both sides. But fundamentally, it's a vindication of the government's theory that Microsoft is a monopolist and that it engaged in a pattern of conduct that abused that monopoly power. Important for Microsoft, however is at least for now the break-up has been taken off the table.

  But important to note, the government… the court does not eliminate, as a matter of law, the breakup What it does is point out that there was an insufficient evidentiary record to support the breakup in this case. That gets remanded, not reversed to never be considered again — same thing on the tying claim. The allegation that Microsoft had integrated the Internet browser, its Internet Explorer product with Windows. That was the tying claim. That's reversed, but again, not completely eliminated but remanded to the district court for consideration under a slightly different legal standard.

  So at the end of the day, it's the monopolization claim I think that stands out as the most significant piece of the court of appeals' decision, and that is a fundamental victory for the government. Point after point, the court agreed with the basic view of the government that Microsoft was a monopolist and that it abused that power.

• RAY SUAREZ:

  But by saying that Microsoft does not have to be broken up, that it found that part of the case insufficient, flawed, was it a process question, or was it a legal question? Did they find that Judge Thomas Penfield Jackson didn't follow the right process to end up with that result, or that what was argued in court was insufficient to have that remedy?

• ANDREW GAVIL:

  It's really a process question at this point. Although the court does make the argument that a breakup is an unusual remedy, it's a very powerful remedy, and very unusual in the case of a unitary company like Microsoft that has not been put together through mergers. On the other hand, it also points out that conduct remedies may not be sufficient in the case of a monopolist. So it really is a process case, it points out that the district court held no special evidentiary hearings on the question of remedy.

  It also points out that he did not really support specifically the remedy. The findings of facts were 212 pages long, and at one point the court of appeals refers to that and says, the district court owed the case the same degree of attention that it paid to the liability question on the remedy phase. So the breakup isn't gone, but clearly it requires a whole lot more consideration when the case is remanded to the district court.

• RAY SUAREZ:

  Boyden Gray, it's a pretty hefty ruling. What do you find when you look through it?

• C. BOYDEN GRAY:

  Well, I think the big winner is the consumer because the court makes clear that companies and industries can add features to platforms, like Windows, without any fear of retribution so long as they don't engage in exclusionary tactics that exclude potential competitors. And that's a big victory for consumers. The court of appeals said that it was drastically, and that's its word, cutting back on the scope of liability found by the district court.

  So while Microsoft doesn't get off scot-free, it does get a drastic reversal of fortune. And going forward, they are free to continue to innovate with Windows, so long as they don't engage in the kind of exclusionary tactics, which the judge found and the court of appeals affirmed, but which Microsoft had abandoned in many cases long before the trial ended.

• RAY SUAREZ:

  Let's take a look at a quote from the court of appeals ruling: "The company behaved anti-competitively, and these actions contributed to the maintenance of its monopoly power." Now, you say that this was a good ruling for the consumer. By finding this, doesn't the court of appeals also say that the consumer's been harmed at the same time?

• C. BOYDEN GRAY:

  No. The district court in fact never made a finding of consumer harm at any part of its ruling, even the parts that were reversed by the court of appeals. And the court of appeals doesn't advert to any consumer — consumer harm. What you have to understand is that a monopoly, by itself, is not illegal. And the judge himself here found that this was a monopoly legally obtained, just potentially illegally maintained.

  And so the exclusionary practices that, in some cases, have been abandoned will go back for a potential remedy. But looking to the future, Microsoft and similar companies are free to continue to add new features, innovative features, to their platforms and the consumer will continue to benefit from innovation. Bear in mind that when this case was first ushered in, the Department of Justice announced that this was going to be a model of how they intended to regulate the new economy.

  Well, I think what the court of appeals is saying is, no, unless a company engages in exclusionary tactics that provoke a response, the department is not to tell companies how and what they can do to innovate.

• RAY SUAREZ:

  Well, Jeffrey Blattner, you're a member of the team that brought this case. What's the feeling today upon seeing this order from the appeals court?

• JEFFREY BLATTNER:

  I think there's a great deal of satisfaction among those who brought the case because the court of appeals affirmed the core of the government's case. Microsoft is a monopoly, and it used its monopoly power to restrict consumers' choice and to perpetuate its monopoly. It did so in ways including hard-wiring the browser to the operating system so that consumers can't remove it, and personal computer manufacturers can't take it out and put another browser in.

  It also… the court of appeals also upheld the district court's findings that Microsoft constrained the choices of Internet service providers and of software developers who wanted to use different technologies that might give consumers more choices. So I agree with Boyden Gray that this is a victory for consumers, but it's a victory because the court of appeals upheld the core of the government's case.

• RAY SUAREZ:

  Do you agree with Professor Gavil's reading that the breakup may have taken a knock, but it hasn't gone away?

• JEFFREY BLATTNER:

  The breakup definitely remains an option to be considered by the district court on remand. And the court of appeals outlined a significant string of violations of law by Microsoft and made it clear that whatever remedy is ordered must right the wrongs that Microsoft committed.

• RAY SUAREZ:

  So in effect, the government will now reargue the penalty phase of the trial?

• JEFFREY BLATTNER:

  Essentially that's correct, that the government, both the Department of Justice and the state attorneys general will look at this opinion and make a determination of what remedies they will seek in the district court on remand.

• RAY SUAREZ:

  Professor Gavil, the court was pretty hard on Judge Thomas Penfield Jackson.

• ANDREW GAVIL:

  It sure was.

• RAY SUAREZ:

  Is this unusual in a ruling of this kind, to take such a hard slap at somebody?

• ANDREW GAVIL:

  It's unusual, but Judge Jackson's conduct was frankly very unusual. The court describes it as flagrant, and I think the most interesting thing about it is at the very least, as we know, Judge Jackson will not be seeing the case again. But Microsoft had asked that his conduct be the basis for a total reversal of everything that he did, findings of fact, conclusions of law and remedy.

  And the court of appeals is very careful in saying that, although they clearly rebuke him and criticize his behavior, find it to be a violation of the code of judicial ethics, nevertheless, they didn't find that it really created a problem, poisoned the well, if you will, for everything that he did. What they do is they point to the remedy phase, they say, that's where the problem was the most serious. It's one of their three reasons why they are reversing and remanding the remedy.

  But it was not deemed sufficient by the court of appeals to vacate all that he did. They go to pains at the very end of the decision to point out that there's still a very strong factual record to support most of the findings of fact, and they particularly say there was no finding of actual bias on the part of the judge.

• RAY SUAREZ:

  Let's take a look a quote regarding the judge from the opinion: "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." Did the Justice Department, in effect, suffer a setback because of the judge?

• JEFFREY BLATTNER:

  Well, I think, as Professor Gavil recognizes, the judge's comments though unfortunate and though in violation of the cannons of judicial conduct, did not end up hurting the case that the government brought. The court of appeals made it clear that Judge Jackson's findings of fact were carefully reviewed and were fully supported by the record below. So, in essence, the trial does not have to be done over. So while Judge Jackson's comments certainly did not help the case, they did not set back the government's position.

• RAY SUAREZ:

  Well, Boyden Gray, one important thing that's happened in the meanwhile is that there's a change at the top of the Justice Department and a change in the White House in the meanwhile. Could a Bush Justice Department see its way forward in a different way now that this case is going to be… have a new life in court?

• C. BOYDEN GRAY:

  It could, but I think less important than the change in administrations is the fairly dramatic cutback in the scope of Microsoft's liability by the court of appeals. That is what will set the ground, if there is any, for a settlement. And I think Microsoft would probably like to get this behind them, and I don't know what the Department of Justice will do. But I think that all the signs are that this case is ripe for some sort of settlement. But I don't think the department's going to walk away from it even though there has been a change of administrations.

• RAY SUAREZ:

  Does Microsoft have to really drastically change gears? During the first trial, they maintained that they weren't even monopolists, and certainly did the consumer no harm. Here comes this ruling upholding many of the arguments that the government made during the trial phase. They can't go into court and say those same things during this phase of the trial, can they?

• C. BOYDEN GRAY:

  No, they certainly cannot. They are clearly now adjudged to be a monopolist, but that doesn't end the inquiry. The question is: What happens then? What can they not do with this power that they have? There is no requirement, and I don't think it will happen that they be broken up. And so what will happen in all likelihood, if it's not settled or even if it is settled, what will happen is a set of remedies that will preclude Microsoft from engaging in some of the tactics that Jeff Blattner was referring to: making it impossible for computer manufacturers to take the browser out, for example.

  That kind of exclusionary tactic I think will be possibly precluded. But many of the things that the court of appeals referred to in its opinion today, many of the exclusionary tactics that Microsoft used, it itself abandoned some years ago. So I just don't know how much Microsoft will suffer going forward, although they will have some headaches in clearing up what looks like the past.

• RAY SUAREZ:

  Well, professor, do you think the possibility of a settlement, rather than an adjudicated result to this case, is now more likely?

• ANDREW GAVIL:

  I do think there's going to be a clear try by both the anti-trust division and Microsoft to settle the case. Microsoft's immediate decision is going to be whether or not to seek an appeal to the United States Supreme Court. Although the government would have that option, as well, it seems less likely that they have reason to seek it. But Microsoft does face a variety of other class actions and private lawsuits pending out there, and being adjudicated a monopolist is going to make it very difficult for them to defend and resolve those cases.

  So they may have a real interest in going to the Supreme Court. On the other hand, they're looking back at the district court, looking at further evidentiary hearings both on tying and on the question of breakup Surely they don't want to take the risk of the breakup any further. And on the tying, the way the court of appeals leaves it, Microsoft is going to have to justify its decisions to integrate products. It is a monopolist, and it cannot willy-nilly integrate products into the operating system in a way that can't be justified in terms of consumer use and consumer interest and even technologically justified.

  So looking at that situation and looking at a new administration, I guess I would disagree mildly with Mr. Gray. I think the new administration is going to make a difference in terms of the possibility of resolving the case. Microsoft will know that they are going back to a Justice Department that may be more receptive to resolving the case and in some way based on limited conduct remedies.

  And even if the states, the 19 states that are still in the case, continue to press for a breakup, if the federal government is not behind the breakup anymore — and that may be one of the most critical changes in administration that will affect the case — if they are no longer behind the breakup, the states will know that the federal district court is far less likely to order it. So that may create the right circumstances for a settlement.

• RAY SUAREZ:

  Gentlemen, thank you all.