AT LAW
Court Ruling
Was No Victory
For Microsoft
King Pyrrhus, meet Bill Gates.
While trumpeting last week's "victory" in the Court of Appeals, Microsoft executives would do well to recall the words of King Pyrrhus after his famous battle with the Romans: "One more such victory and we are lost." The truth behind the spin is that Microsoft's victory was not even pyrrhic. A quotation from George Armstrong Custer would be more appropriate, if only he'd been available for a press conference after Little Big Horn. The government won on the central issue in the case: Microsoft was held to have monopolized the operating-system market in violation of the Sherman Act.
On no count, moreover, was Microsoft's behavior found lawful. The charge of attempted monopolization of the browser market failed only because the government did not offer readily available evidence that browsers constituted a relevant market and that barriers to entry existed. Microsoft won not because it was innocent but because the government did not carry its burden.
Much the same is true of the court's reversal and remand for trial on the issue of whether Microsoft's bolting of its operating system and browser into a single package was an illegal tying arrangement. Noting that the integration of products often benefits consumers, the court rejected a rule of per se illegality and remanded for trial under the rule of reason. The government will have to prove that the anticompetitive effect in the browser market outweighs any enhanced efficiency. Since Microsoft has never been able to articulate a plausible efficiency from the bolting, the government seems likely to prevail.
For no discernible reason, much of the press has unquestioningly accepted Microsoft's jubilation that the Court of Appeals vacated the trial court's order that Microsoft be broken into two independent companies. Nobody, including the government's lawyers, expected that order to stand up. Microsoft was denied even the most rudimentary hearing on the appropriate remedy. Now there is to be a hearing, and there are compelling reasons to take divestiture seriously.
But when the court addressed the charge of monopolization of the operating-system market, which was the core of the case, the news was all bad for Microsoft. The company was found to have destroyed the nascent threats to its operating system monopoly posed by Netscape's browser, Navigator, and Sun Microsystems' Java, a technology designed to work with any operating system. Singly or in combination, these could accept applications and thus threaten Microsoft's monopoly by making users and application writers indifferent to the operating system used. The attacks on Navigator and Java were exclusionary tactics without benefit, and promising ultimate harm, to consumers. This was a violation of the Sherman Act.
The latter question may be greatly influenced by evidence that Microsoft is continuing the same pattern of behavior with respect to new products that was found illegal on this appeal. The company is, for instance, bolting products and services--for example, tying video and audio streaming to one or more of its three monopolies (Windows XP, Office EXP and Internet Explorer 6.0). Microsoft appears impervious to law. It seems an unrepentant recidivist. That is a major reason to consider a breakup seriously.
Microsoft will continue to argue that any serious remedy would damage innovation. But Microsoft suppressed the innovation of Netscape, Sun and Intel. In any case, Microsoft is hardly a leading innovator. It bought the technologies for its major products. Its genius has been in business and predation, not innovation.
Microsoft's response to the legal threat it continues to face is to unleash a swarm of lobbyists and lawyers upon the administration and Congress to urge a quick settlement. Judging from its past negotiations with the Department of Justice, the company will not accept any settlement that seriously inhibits its ability to engage in predation.
If the administration is gulled with the argument that a quick and easy settlement would help the economy, it will make a serious mistake. The economy's problems, including poor corporate earnings, have nothing to do with Microsoft's legal troubles. Such a settlement would be bad economics and bad law. Particularly after a 7-0 government win from judges of very diverse views, an easy settlement would be seen as blatantly political, a capitulation to a money-heavy lawbreaker left free to continue its monopolizing rampages.
Even a settlement favorable to Microsoft would not end the company's peril. The state plaintiffs would remain, and an even greater danger lurks: private triple-damage actions by injured companies that, as the court said, will "deter those firms inclined to test the limits of the law." Those plaintiffs can rely upon the appeals court's ruling and need do little more than prove they were injured and by how much to collect damages running well into the billions of dollars. Such companies would have to answer to their shareholders if they do not reach for what one lawyer has described as "low-hanging fruit." That may be Microsoft's final punishment for its egregious misconduct.
Messrs. Bork and Starr are former U.S. solicitors general and federal appeals court judges. They are counsel to ProComp, an industry association that includes Microsoft competitors and supported the government case against Microsoft.
