InformationWeek

October 9, 2000

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Litigation: The Price Of Doing Business In The New Economy

By Aaron Ricadela

More on the DOJ:

TechWeb: Decision "Makes Microsoft Case Less Important" (9/27/00)

EETimes: Site teaches young Web surfers cyber ethics (9/11/00)

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he Supreme Court's decision two weeks ago to send Microsoft's appeal in its antitrust case to a lower court could mean the company won't see a resolution for as long as two years. Yet as the case unfolds--and other high-profile, high-tech lawsuits and investigations abound--it's becoming clear that government inquiries and private litigation have become part of doing business in the New Economy.

Judging by the flurry of investigations and legal proceedings surrounding computer hardware and software vendors--as well as old-line companies that hope to capitalize on E-commerce--no one appears immune. The U.S. Circuit Court of Appeals in Washington will hear Microsoft's appeal of a breakup order and other remedies imposed in June by U.S. District Court Judge Thomas Penfield Jackson. The lower court is regarded as friendlier to Microsoft, having overturned Jackson in 1998 on a related matter in the Justice Department's case against the software vendor.

Last month, the Federal Trade Commission said it would allow Covisint, the business-to-business online auto-parts marketplace formed by DaimlerChrysler, Ford, General Motors, and others, to begin operations, though the agency said it will closely watch the exchange's evolution. (Covisint recently received approval from Germany's federal cartel office, as well.) In its approval, the FTC noted that it couldn't be certain the exchange won't raise concerns about competition--though how it will define any such violations, and how it will handle them, remains to be seen.

Also last month, the FTC concluded a three-year investigation into anticompetitive practices at Intel. The charges involved claims by Intel customers Compaq, Digital Equipment (later acquired by Compaq), and Intergraph that Intel used threats of withholding information about its chips to extract higher prices or trade secrets from the hardware vendors.

Though the Justice Department took over the Microsoft antitrust investigation from a deadlocked FTC in 1993, that's rare--the agencies almost never split work on a case, says a source close to the Justice Department. Usually, the agencies take cases according to their industry expertise.

According to legal experts, the Microsoft case illustrates at least three areas of private enterprise that tend to spur government investigation and litigation: monopolization, collaboration among competitors, and the ability of companies to favor certain customers and suppliers to the exclusion of others. Among the highest profile cases: AT&T and the Justice Department in 1982 signed a consent decree in which AT&T agreed to divest 22 local phone companies comprising about three-quarters of the company's assets. Also in 1982, the Justice Department dropped its 13-year antitrust case against IBM--after considerable expense to the computer vendor.

Indeed, regardless of their outcome such inquiries almost always have an effect on the parties involved, and it's usually negative. "One of the continuing questions about the use of litigation as a policy-making tool is whether the government can intervene quickly enough to make a difference," says William Kovacic, a professor of law at George Washington University. "One answer would be that the mere fact of intervening makes a difference, regardless of the legal outcome."

The IBM case--along with a spate of related private lawsuits--sapped the vendor's drive and ability to compete. "IBM came to think its main purpose in life was to crush the Department of Justice and the private plaintiffs rather than to outdistance its business rivals," Kovacic says.

There's evidence Microsoft is also being drained by its legal battle. Though executives insist it's business as usual, the company this summer had to postpone a long-awaited strategy event because it feared legal distractions would overshadow its message. Microsoft saw a replay of that dynamic last month, when news media coverage of a product-focused event in San Francisco was pre-empted by the Supreme Court's announcement the same day.

Microsoft has also been hit with a series of high-level executive departures during the past year, which many analysts and industry observers attribute to ebbing morale as a result of the years-long antitrust case. Group VP Paul Maritz, a 14-year Microsoft veteran and one of its most-senior Windows architects, left the company last month. CFO Greg Maffei departed last December, and chief technology officer Nathan Myhrvold left the company in May after an extended leave.

"When you've been through the kind of year we have, a question that gets asked is whether people still have confidence in you," Microsoft chief operating officer Bob Herbold said at a recent meeting of Wall Street analysts.

Most businesses hope they'll never be faced with answering such questions. But given the government's track record, most high-tech companies would be wise to make sure their lawyers have a prominent spot on their speed dials.

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