Judge Issues Findings of Fact in Microsoft Trial

At 6:30pm on Friday November 5, after the stock markets closed, US District Judge Thomas Penfield Jackson issued a finding of fact in the suit against Microsoft brought by the Justice Department and 19 state attorneys general--a suit that alleges violations of the Sherman Antitrust Act. In his findings, Jackson declared that Microsoft is a monopoly and, through its actions, had harmed its competitors and US consumers. The case centers on Microsoft’s efforts to establish an alternative to the Netscape Navigator Web browser and blunt Netscape's challenge to Microsoft in the race for dominance on the Internet. Jackson’s 150-page opinion goes far beyond this narrow context to consider the effect that Microsoft has had on other OSs, OEMs, independent software vendors (ISVs), and the computer industry as a whole. Jackson ends his findings with the following paragraph:

“Most harmful of all is the message that Microsoft’s actions have conveyed to every enterprise with the potential to innovate in the computer industry. Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft’s core products. Microsoft’s past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft’s self-interest.”

A finding of fact typically informs parties in a lawsuit of the presiding judge’s leanings, often suggesting a remedy that the court might impose. This findings of fact is unusual in that it offers no remedy and separates the resulting actions from the initial opinion. Judges can modify their opinions based on the counter arguments that the two sides in a case present, but Jackson’s opinion sides very strongly with the Department of Justice in this case, accepting few of the defense arguments. The court has instructed Microsoft to present counter arguments before January 24, 2000, and will then render a decision.

Many observers have long expected Jackson to rule against Microsoft. Microsoft made many strategic blunders during the trial, including botching product demonstrations, granting access to its internal email, and letting government prosecutors embarrass Bill Gates in cross-examination. But the findings make clear that the judge was predisposed toward the government’s case. The strongly anti-Microsoft wording of the findings provides a strong incentive to force Microsoft to the bargaining table. Assistant Attorney General Joel Klein said, “We have always said we are prepared to discuss settlement, so long as the important competition issues are fully addressed.” For Microsoft, Robert Herbold said, “As we’ve stated right from the beginning, there’s nothing that we would like more than to settle this case and get on with things.”

There’s little chance that Microsoft and the Justice Department will arrive at a settlement soon. The two sides are far apart. The findings and the severe penalty many expect from Jackson will likely force Microsoft to pursue the case to the US Court of Appeals, and possibly to the Supreme Court. To do otherwise would invite lawsuits by many of the companies that Microsoft allegedly damaged--not a pretty prospect. Already Microsoft is engaged in lawsuits with Sun over Microsoft’s implementation of Java and with Caldera Systems over Microsoft’s alleged role in the demise of DR DOS. Ray Noorda, former CEO of Novell and longtime Microsoft antagonist, bought DR DOS from Novell specifically to pursue that antitrust case.

In the latter days of the trial, most analysts sensed that Microsoft had determined it was likely to lose this first round and that it was preparing for the next round. Microsoft’s prospects on appeal are much brighter. One key argument Microsoft made in the case was that the company had the right to include Internet browsing capabilities as part of its OS. The Federal Appellate Court accepted this argument after Microsoft was held in contempt last year for violating an early dissent decree. Time is on Microsoft’s side should it appeal. In the next 2 to 3 years, we’ll see a new US president and attorney general, and turnover among many of the case’s participants. The next attorney general, particularly if Republican, might approach the case differently from Attorney General Janet Reno, who, in response to Jackson’s findings, said, “This is a great day for American consumers.” In Microsoft, the Department of Justice faces a determined and powerful adversary: the founding members of the best-capitalized company in the US--people who have an emotional stake in winning this case. With that situation in mind, the plaintiffs will attempt to broaden the scope of the case on appeal, something Jackson’s findings set the scene for.

Netscape Navigator was the dominant browser in the marketplace when Microsoft began giving away its less powerful Internet Explorer (IE). Netscape needed the revenue from its Navigator, and the software offered consumers an alternate paradigm for network computing--one that Microsoft embraced and extended. Microsoft’s entry into Internet computing was a boon to the industry, but integrating its browser into Windows significantly impaired Netscape’s ability to compete. Depending on your perspective, browser integration was either a reasonable addition or monopolistic abuse. Pointing out that all OSs now have Internet browsing capabilities doesn't help because you have to look at this situation in historical context.

Browser integration isn’t at the heart of the government’s case. The charges against Microsoft go beyond the theoretical fairness of giving away a browser with an OS and extend to charges of significant acts of sabotage against Netscape. These alleged acts include attempting to keep the latest version of Navigator out of the Windows marketplace and threatening reprisals to OEMs that put Navigator on the Windows desktop. Jackson extended the case to consider accusations relating to the sale and licensing its Microsoft Windows over the years. Clearly, Microsoft management made some significant errors of judgment in this case. We’ll never know what Netscape might have become had interventions taken place. Were US consumers harmed? That’s unclear.

The Sherman Act of 1890 seeks “to protect trade and commerce against unlawful restraints and monopolies.” The Clayton Antitrust Act of 1914 extends the Sherman Act “to prohibit certain monopolistic practices that were then common in finance, industry, and trade.” The government first applied the Sherman Act to John D. Rockefeller’s Standard Oil, eventually splitting the company into several companies in 1911. These Standard Oil companies are the great names in the American Oil industry: Exxon, Mobil, Texaco, and others. The law was also applied to the American Tobacco Company early in the 20th century resulting in its breakup, and most recently in 1984 to AT&T, which resulted in the creation of the seven Baby Bells. Certainly the Baby Bells have performed well since the breakup.

A company can hold a dominant industry position without facing antitrust litigation. In the 1920s, the Supreme Court determined that US Steel was a monopoly, but that because it hadn’t abused its position, it hadn’t violated the statutes. In 1945, the US Supreme Court reversed its stance on monopolies when it ruled the Aluminum Company of America was a monopoly and, thus, in violation of antitrust laws. However, the court left Alcoa intact. Over the years, plaintiffs have filed suits against IBM, General Mills, and General Foods, none resulting in breakups. In the case of IBM, the government established an oversight committee and reorganized the company into several independent business groups.

In view of the history of antitrust legislation, Microsoft faces range of possibilities. I believe it’s unlikely that Microsoft will probably not get off with a simple fine and be permitted to proceed with business as usual. The ultimate outcome will likely fall along the lines of the IBM result, with an oversight committee and some reorganization of the company. Microsoft's moves over the past year to reorganize and diversify its holdings into new areas mean that in 2 to 3 years, Microsoft will be in a much better business position, whatever the outcome of this case.

In the computer industry, all monopolies are fleeting. Windows is software, and software has a shelf life. Here in Massachusetts, the buildings that once housed Wang, Digital Equipment, and many other high-tech companies bear witness to that fact. Somewhere down the road, and not in the distant future, something will replace Windows as a standard; in fact, a hundred different technologies wait in the wings.

You can find Microsoft’s response to the findings of fact here. To download a copy of the findings of fact in Word format, click here.