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Court Upholds U.S., Microsoft Antitrust Pact : Computers: Settlement agreement requires the software giant to make some modest changes in the way it licenses its main products.


WASHINGTON — Microsoft Corp. and the U.S. Justice Department, which have for several years been engaged in a running battle over a range of antitrust issues, shared an unusual victory Friday when a federal appeals court upheld a controversial negotiated settlement agreed to by the software giant and the government last year.

The settlement had been rejected by U.S. District Judge Stanley Sporkin on the grounds that it was too easy on Microsoft--an unprecedented action that infuriated Microsoft and its headstrong chairman, Bill Gates, and deeply embarrassed the Justice Department.

But the appellate panel found that the iconoclastic Sporkin had overstepped his authority and disqualified him from the case--a measure specifically requested by Microsoft. A new judge will now be assigned and directed to approve the settlement agreement, which requires Microsoft to make changes in the way it licenses its computer operating software, MS-DOS and Windows, but is regarded by most in the industry as a slap on the wrist.

Microsoft's antitrust troubles are far from over, however, and in some respects the consent agreement that was upheld Friday has already been overtaken by events. Microsoft confirmed last week that the Justice Department is investigating the way in which it plans to enter the electronic information services business--an issue that did not exist at the time of the Justice Department's previous investigation, which led to the negotiated settlement.

Last month, the Justice Department succeeded in blocking Microsoft's proposed $2.4-billion acquisition of personal finance software maker Intuit Inc. Criticism that last year's settlement was too easy on Microsoft, in fact, may have led the Justice Department to be particularly vigilant in its dealings with the software-maker, analysts said.

For the moment, though, Microsoft is celebrating.

"I--we--feel vindicated," said Microsoft general counsel William Neukom. "This consent decree was entirely appropriate and should have been approved last October. After five years of tight scrutiny, the government brought forth the only allegation they could prove and the decree addressed that issue."


Although many legal experts had believed there was a good chance Sporkin's ruling would be overturned, the Microsoft antitrust situation has been anything but predictable. The Federal Trade Commission first began looking into Microsoft's business practices in 1990, and after more than two years of review, the commission deadlocked on whether to take action.

But political pressure revived what many had considered a dead issue, and the investigation was reopened by Justice Department antitrust chief Anne K. Bingaman, who was appointed by President Clinton to bring new vigor to antitrust enforcement following a period of low activity during the Ronald Reagan and George Bush administrations.

In July, 1994, Bingaman and Gates signed the settlement, with Microsoft agreeing to abandon licensing practices that effectively made it impossible for computer manufacturers to offer consumers a choice of different operating systems.

The appellate court decision, which came in a unanimous ruling by a three-judge panel, was a personal triumph for Bingaman, who had been sharply criticized by Sporkin in hearings leading up to his decision. Sporkin, informed in part by his reading of a book--"Hard Drive: Bill Gates and the Making of the Microsoft Empire"--that is critical of Microsoft, chastised the government lawyers for ignoring issues such as whether Microsoft had blocked competitors by announcing products before they were available, and giving its own applications software writers advanced information about new operating systems.

In a 32-page opinion, the appeals court was highly critical of Sporkin, saying it was "deeply troubled" by his handling of the case and ruling that he had exceeded his authority. Although federal law requires judicial review of such antitrust settlements, that "cannot be interpreted as an authorization for a district judge to assume the role of attorney general," the appellate panel found.

"The district judge's reliance on that book contaminated the entire . . . review," the panel wrote. It also found that Sporkin erred in allowing attorney Gary Reback, a partner with Wilson, Sonsini, Goodrich & Rosati, to testify against Microsoft on behalf of three unnamed clients.

"We are not aware of any case in which a plaintiff was allowed to sue a defendant and still remain anonymous," the court said. Reback had argued that his clients feared retribution by Microsoft. The court also criticized Sporkin's evident "distrust of Microsoft's lawyers."

Sporkin declined to comment except to say: "I feel I conducted myself in an appropriate manner in this case."

U.S. Atty. Gen. Janet Reno said in a statement: "We are gratified by the court's decision. It confirms our own understanding of the appropriate role of the courts and the Department of Justice in enforcement of the antitrust laws."

With this chapter in their legal odyssey seemingly closed, Microsoft's lawyers are focusing their efforts on the probe of the upcoming Microsoft Network on-line service. Microsoft will offer access to the network via Windows 95, the newest version of its popular operating system software, and competitors such as America Online and Prodigy say that will give Microsoft an unfair advantage.

Analysts have predicted that as many as 35 million copies of Windows 95 will be delivered to customers in the first year of its availability. The Justice Department could potentially sue to force Microsoft to separate the Network software from Windows 95.

Neukom said Friday that the company was "well within our legal right." He said Justice Department lawyers were going beyond enforcement of the law.

Shiver reported from Washington and Pitta from San Francisco.

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