How the Microsoft case evolved to hurt the
company
BY JOEL BRINKELY
AND STEVE LOHR
New York Times
THE JUDGE in the Microsoft antitrust case, Thomas Penfield Jackson, is certainly no judicial radical. A
former Navy officer, he was an active Republican when Ronald Reagan appointed him to the federal bench in
1982.
His record before the Microsoft case suggested, if anything, that he was pro-business. In 1987, the federal government sued General Motors, alleging that its cars
had dangerous brake defects. Jackson sided with the car company, dismissing the government's evidence as merely ``anecdotal accounts of skidding events.''
So when news reports emerged in late January that government officials involved in settlement talks in Chicago had proposed a breakup of Microsoft, Jackson
was alarmed.
``I should tell you, I am not at all comfortable with restructuring the company,'' he said in a February interview -- a rare audience given by a sitting judge during the
course of a trial. ``I am not sure I am competent to do that. Microsoft is a large and important company, innovative and admirable in a lot of ways. And it is an
engine for the nation's economy. I just don't think that is something I want to try to do on my own. I wouldn't know how to do it.''
But in another interview in late May, he sounded very different. He said Microsoft's recent behavior had helped change his mind.
``I've been astounded by some of the statements of Gates and Ballmer,'' he said, referring to the continuing protestations of Bill Gates, the company's chairman,
and Steven A. Ballmer, the president, that Microsoft did absolutely nothing wrong. The remarks that so irked him came after his legal ruling in April that Microsoft
had repeatedly violated the nation's antitrust laws with its predatory and anti-competitive behavior.
``I'm in the midst of a growing realization,'' the judge added, ``that with what looks like Microsoft intransigence, a breakup is inevitable.''
And on Wednesday, he ordered just that: a plan to split Microsoft into two separate companies.
Just as Jackson's thinking has evolved, so have the views of many others in government and industry who watched the case. In interviews with the New York
Times over the past several months, dozens of the state and federal officials who have investigated and prosecuted Microsoft for the last four years, as well as
industry executives, described many moves by Microsoft that they think backfired and led to a resounding court defeat.
At the outset, the plaintiffs and defendant seemed evenly matched.
``Microsoft and the government were the perfect opponents,'' observed David Boies, the government's lead trial lawyer. ``The government has some power, but
Microsoft has at least as much. Anyone else facing either one of them would be overmatched.''
But over the months, the balance shifted heavily in favor of the government. In fact, Microsoft's problems began well before the trial opened in October 1998. It
misjudged the legal trouble that its own e-mail messages and other documents could create. It chose not to reach an out-of-court settlement when the sanctions it
faced were a wrist slap compared with the breakup plan it now confronts -- gambling that it would win on appeal.
In court, the Microsoft defense stumbled repeatedly. And with each Microsoft misstep, the government was emboldened.
As the case progressed, the government presented evidence to show that Microsoft had bullied friends and competitors alike, halting innovations that threatened
its Windows monopoly. And as the allegations spilled out in court, Microsoft was increasingly on its heels as it tried to argue that all the government had really
shown was that the company was a rough-and-tumble competitor, not an economic outlaw.
``There is no doubt in my mind that Microsoft is a unique, gifted, efficient and ingenious organism,'' Jackson said in February. By the end, however, he had lost all
patience with Microsoft. On the trial's final day in May, a Microsoft lawyer appealed for another round of hearings on the government's remedy proposal, saying
Microsoft could not possibly defend itself ``in the brief time given.''
``In the brief time given?'' Jackson retorted. ``This case has been pending for two years!''
In the interview the next day, Jackson, observed: ``I am not aware of any case authority that says I have to give them any due process at all. The case is over.
They lost.''
Jackson agreed to be interviewed several times after testimony in the trial had ended, with the understanding that his comments could not be published until the
case had left his courtroom.
Officials from the Justice Department and the states agreed to similar ground rules. Microsoft's cooperation was first requested months ago; the company's general
counsel granted a lengthy interview last week.
Now the case goes to appeal, where Microsoft believes it can overturn everything that happened in Jackson's courtroom. As Microsoft sees it, the government's
case was a grab bag of accusations based mainly on the selective use of its e-mail messages. Some of it may look bad but, Microsoft insists, none of it should add
up to an antitrust violation.
``It's the kind of evidence that a skilled trial lawyer can use to make the public wonder about how tough Microsoft plays this game,'' said William H. Neukom, a
senior vice president and general counsel of Microsoft. ``But that is not the way the law is supposed to work.''
Past as prologue
Joel I. Klein, a prominent Washington appellate lawyer, joined the Justice Department in April 1995, becoming antitrust chief the next year. His first task was to
seek final court approval of a consent decree reached with Microsoft the previous year to settle a Justice Department antitrust suit. Microsoft had agreed to stop
tying the sale of one software product to the sale of another.
Microsoft had begun flouting at least the spirit of the consent decree it had just signed. ``This antitrust thing will blow over,'' Gates told a group of Intel executives
in July 1995, according to one Intel executive's notes of the meeting, obtained by the government. ``We haven't changed our business practices at all.''
In 1995, Klein heard from America Online. The company complained that Microsoft was violating antitrust law by bundling MSN, its new online service, with
Windows. But the department decided not to act.
In June 1996, however, Microsoft took the step that led to Jackson's courtroom. For months, James L. Barksdale, the president of Netscape Communications,
the commercial pioneer in software used to browse the Web, had been growing increasingly irritated by what he regarded as the bare-knuckle tactics that
Microsoft deployed against his company.
But then Microsoft did something more: It threatened to cancel Compaq Computer's license to Windows -- Microsoft's industry-standard operating system,
which Compaq could not survive without -- because Compaq planned to feature the Netscape browser, not Microsoft's Internet Explorer.
Barksdale calls Microsoft's threat to cancel Compaq's Windows license ``the singular act'' that prompted him to take his grievances to the Justice Department. He
asked Netscape's lawyer, Gary L. Reback, to write a 222-page ``white paper,'' which, among other things, accused Microsoft of using its dominance in operating
systems to force PC makers to take Microsoft's browser.
Klein said the paper got his immediate attention. ``To me, conditioning one product on another was clearly a violation of the consent decree,'' he said.
Government lawyers in San Francisco began demanding documents from Microsoft related to the Netscape charges and Microsoft's Internet strategy.
Microsoft's lawyers examined all the documents before they were sent off, and several government officials said these lawyers should instantly have realized those
documents meant trouble.
But Neukom said Microsoft had been under investigation for so long, and e-mail was so essential to the operations of the company, that managers simply could
not edit every thought and continue to manage effectively. ``E-mail is a big part of how we run this company,'' he said. ``And candid, frank, open e-mail
communication is a big part of our efficiency.''
A growing case
While Microsoft dealt with the growing federal investigation, a new group took up the chase: state attorneys general. In time, the company would face not just the
Justice Department but 20 independent prosecutors from the states as well.
``I didn't know much about technology, or about the industry,'' recalled Richard Blumenthal, attorney general of Connecticut. But as he read the Microsoft
documents, ``I was really struck by the brutal, overt tactics. You rarely see things like this written down.''
In the minds of almost every federal and state official interviewed, three documents stood out.
The first was a white paper that Gates wrote in May 1995, titled ``The Internet Tidal Wave.''
``A new competitor born on the Internet is Netscape,'' Gates wrote. As the leader in Web browsing software, Netscape could set the technical rules for Internet
computing and thus ``commoditize the underlying operating system'' -- Microsoft Windows, on 85 percent of all personal computers.
In other words, Gates was saying, Netscape threatened to make Windows irrelevant.
The other two documents were e-mails written by James E. Allchin, a senior Microsoft executive in charge of the Windows group.
Allchin was worried that Microsoft's browser, Internet Explorer, which was being given away free and bundled with Windows, still wasn't catching on. In
messages to another senior executive written Dec. 20, 1996, and Jan. 2, 1997 -- more than three months after the federal government had begun obtaining
documents relating to Microsoft's Internet strategy -- Allchin wrote: ``I do not believe we can win on our current path. Even if we get Internet Explorer totally
competitive with Navigator, why would we be chosen? They have 80 percent market share. . . We need something more: Windows integration.''
To the prosecutors, this was the smoking gun. Allchin seemed to be clearly saying that unless Microsoft deeply embedded its browser into its monopoly product
-- and thus made users go out of their way to use Netscape -- Internet Explorer would surely lose.
An interim suit
By the summer of 1997, the Justice Department had not only gathered hundreds of documents from Microsoft, but had also interviewed dozens of industry
executives, including the crucial officers at Netscape. The government's inquiry had gathered evidence that Microsoft had threatened Compaq, IBM and Intel,
essentially bribed America Online and tried to hobble Sun Microsystems -- all to protect the Windows monopoly.
On Oct. 20, 1997, Klein filed what proved to be an interim suit against Microsoft, accusing the company of violating the earlier consent decree by forcing
computer makers to take Internet Explorer along with Windows.
Jackson was assigned that case, and in mid-December, he ordered Microsoft to offer computer makers a version of Windows that did not include Internet
Explorer -- even though Microsoft had argued that Windows and Internet Explorer were the same product. Microsoft responded that the company would offer
manufacturers a choice: one version of Windows that was obsolete, or another that did not work properly.
Jackson was irritated. ``It seemed absolutely clear to you that I entered an order that required that you distribute a product that would not work?'' the judge
asked a Microsoft executive, David Cole, in January 1998.
``In plain English, yes,'' Cole replied. ``We followed that order. It wasn't my place to consider the consequences of that.''
In the end, Microsoft agreed to offer a version of Windows with Internet Explorer hidden and partially disabled, and an appeals court was due to consider the
case in the spring. But it hardly mattered any longer. Windows 98 was due out in just a few months, and Microsoft was saying Internet Explorer would be even
more tightly entwined.
A draft suit
By mid-April 1998, the Justice Department had produced a draft of its suit and got permission to file it from Attorney General Janet Reno. Right away, Klein
asked David Boies to sign a contract as a special government employee so he could serve as the lead courtroom lawyer.
In several phone calls in mid-May, including some between Gates and Klein, Microsoft appeared to be making a last offer to settle the case: Microsoft would
allow computer makers to alter the opening screen of the Windows operating system.
Klein agreed to meet with Microsoft and hold ``last rites'' talks. On May 16, 1998, the talks opened. As the two sides sat on opposite sides of a glossy walnut
conference table, Boies leaned forward and looked directly at Neukom.
Everyone at the table knew his deep experience in antitrust cases; he had been the lead lawyer for IBM during that company's long antitrust battle with the
government. ``You know, once the United States government files suit against you, everything changes,'' Boies recalls saying. ``People are more willing to come
forward and testify against you. Others are more willing to question you, resist you. The whole world changes.''
As Boies recalled the moment, Neukom and the company's others lawyers looked back at him with blank, unwavering expressions.
In Microsoft's view, it was the government that had no intention of settling the case. Neukom recalled the two days of talks ending with a senior Justice
Department official telling him: ``I guess we're in litigation. You have no idea how difficult we can make your lives.''
Today, many government officials and industry executives regard Microsoft's refusal to settle the case that day, before the suits were even filed, as the biggest
mistake the company has ever made.
The judge
As the state and federal governments were preparing to file their suits, Jackson watched with ``a fair amount of trepidation.'' Because he had tried the earlier case,
this new one would come to his courtroom. It was certain to be big, complex and possibly precedent-setting.
But in truth, Jackson had tried only two antitrust cases in his 16-year judicial career. And to say he knew little about technology was at best an understatement.
His abiding concern: ``Please don't let me screw this up!''
A week after the suits were filed, the judge called the litigants to his courtroom to set a schedule and tell them he wanted a fast-track trial. Later, he said he was
determined to ``stay away from disasters like the IBM and AT&T cases,'' each of which had dragged on for a decade.
The trial
As the trial proceeded and the testimony grew ever more technical and obscure, the government legal team left the courtroom wondering if the judge understood it
all.
Jackson chuckled at the question but in February said: ``By and large, I was able to follow what they were saying.'' Still, when Jackson left the courtroom many
days, he would corner his law clerks and ask them to explain the technology issues he did not understand.
Toward the end of the trial, with Microsoft's defense in disarray, the judge grew ever more abrupt. ``There were times when I became impatient with Microsoft
witnesses who were giving speeches,'' he said. In addition, ``they were telling me things I just flatly could not credit.''
When the main part of the trial ended on Feb. 25, 1999, the two sides held settlement discussions at the judge's urging. By now, Microsoft could have little doubt
that the government held a strong hand. But the company was not ready to concede a thing.
During several meetings that opened on March 29 and ended in early June, Klein told Microsoft for the first time that the government wanted to break up the
company. The Microsoft team said they were unwilling even to discuss the idea. In an interview later, Neukom said he was not particularly surprised, but regarded
it mainly as an opening maneuver in negotiations. But once again, that was a grave misreading; the government was utterly serious.
Nonetheless, during the last meeting, Klein laid out a proposal not for a breakup but for conduct remedies similar to the ones the judge approved on Wednesday
in addition to the breakup. When Klein was finished, the Microsoft lawyers said they wanted to think about it. But they never came back with a response.
The ruling
By fall, the trial was over.
Jackson said he was separating the findings of fact in his verdict from the final ruling, the conclusions of law, because ``I want to encourage a settlement.'' A few
weeks later, the idea to ask Richard A. Posner, chief judge for the U.S. Court of Appeals in Chicago, to serve as mediator hit Jackson like ``a bolt out of the
blue.''
``I knew,'' he explained in February, ``that the egos were sufficiently high on both sides that, with any ordinary person, they would just say, `So, who are you?'''
After four months, the settlement talks failed; Microsoft once again rejected a package of conduct remedies prepared by the state and federal governments --
certainly knowing, given the history, that a breakup proposal might well follow.
As the time for a final ruling loomed early this year, Jackson was obviously troubled. ``I have been in splendid isolation on this case long enough,'' he said. ``I
would welcome another mind studying my work product to see if I am correct or wrongheaded. I want to move this case upstairs as quickly as possible.''
That, as much as anything else, prompted him to speed through the remedy phase. ``The sooner this gets definitively resolved, the better it is for the country --
including the defendant.''
Last Wednesday, Jackson accepted the government breakup proposal without alteration.
``Assuming, as I think they are, that the Justice Department and the states are genuinely concerned about the public interest,'' he said, ``I know they have carefully
studied all the possible options. This isn't a bunch of amateurs. They have consulted with some of the best minds in America over a long period of time.''
``There's no way I can equip myself to do a better job than they have done,'' he added. ``I think this is the best possible proposal.''
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