No Breakup For Microsoft But Troubles May Not Be Over

Appeals court overturns breakup decision; both sides leave door open for new talks



Microsoft chairman Bill Gates says last week's federal court decision to overturn a breakup order against the company lifted the clouds hanging over Redmond, Wash. The decision by the U.S. Court of Appeals for the District of Columbia to send the case back to a lower court for remedy decisions under a new judge--and with a new set of legal standards--brightens Microsoft's business outlook. But state attorneys general vow to press ahead with their case, taking aim at new products the company is developing.

In their sights: Windows XP, the desktop operating system Microsoft plans to release Oct. 25. Microsoft said last week it will remove from the software a controversial feature called Smart Tags, which adds unauthorized links from Web sites to Microsoft-approved Web pages. But the states say other hooks between XP and Microsoft's new Web-services software could harm consumers, and they may seek further litigation against the company. "The XP approach looks like more of the same," says Richard Blumenthal, Connecticut's attorney general.

Either side may appeal last week's ruling to the Supreme Court. In the unanimous 7-0 vote, the appeals court ruled that U.S. District Court Judge Thomas Penfield Jackson's June 2000 breakup order against Microsoft wasn't commensurate with the company's wrongdoing. "Divestiture is a remedy that is imposed only with great caution," the appellate judges wrote.

Gates says the decision "sets a high bar for any ruling against the inclusion of new features in any software product." He also says Microsoft will try to settle the case without further litigation. Attorney General John Ashcroft left the door open to negotiations, but he says the court's ruling that Microsoft illegally maintained its Windows monopoly is a "significant victory."

The appeals court judges upheld Jackson's decision that Microsoft improperly maintained its Windows monopoly through restrictive contracts with PC makers, but overturned his finding that it attempted to monopolize the market for Web browsers. They applied a tougher standard to the issue of whether Microsoft illegally tied its Internet Explorer browser to Windows.

The judges also rejected Microsoft's claim that monopolies in high tech occur more naturally than in other industries. Still, says Nicholas Economides, an economics professor at New York University, Microsoft can now "put whatever it wants into the operating system. They fought the whole case for that."

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