Originally created 04/29/00

Government asks court to break up Microsoft



WASHINGTON -- The Justice Department, seeking a remedy last used to dismember AT&T, asked a court today to split Microsoft into two competing companies to shatter its monopoly over the system that runs most personal computers.

The government, joined by 17 states, asked that the giant software company be split into one company to produce the Windows operating system and another to handle other software applications, like spreadsheets and databases. The government asked that the companies be barred from reuniting for 10 years.

The proposal was submitted to U.S. District Judge Thomas Penfield Jackson after the close of financial markets today. Jackson ruled April 3 that Microsoft repeatedly broke federal antitrust laws intended to maintain fair competition by using its monopoly power in computer operating systems to crush rivals.

Two states, Illinois and Ohio, submitted statements about the filing but did not join it.

In advance of today's filing, Microsoft Chairman Bill Gates had said consumers will suffer if his company is broken up by the government. "We wouldn't have Windows today if it hadn't been for the Office group and the Windows group working together," he said.

And Jim Cullinan, Microsoft spokesman, said of the recommendation: "This is like telling McDonald's that it can only sell burgers, not fries, and that it has to give away the recipe for its secret sauce. We are confident that the appeals court will support Microsoft's position."

Connecticut Attorney General Richard Blumenthal, whose state was among 19 and the District of Columbia to join in the suit, said, "The most important thing is, this is a very measured but responsible remedy."

The proposal, if accepted by the judge, would bar Gates, the company's billionaire chairman and co-founder, and officers and directors of the current company from owning stock in more than one of the new companies.

Attorney General Janet Reno said, "This is the right remedy for the right time. Our proposal will stimulate competition, promote innovation, and give consumers new and better choices in the marketplace."

Justice's antitrust chief, Joel I. Klein, said that under the proposed remedy "neither ongoing government regulation nor the self-interest of an entrenched monopolist will decide what is best for consumers. Instead, consumers will be able to choose for themselves the products they want in a free society and competitive marketplace."

But the government still faced a potentially years-long battle.

Microsoft has said it plans to appeal Jackson's ruling and company executives have insisted that no laws were broken.

Gates has powerful allies. House Majority Leader Dick Armey, R-Texas, quickly denounced the government plan: "Punishing success only stifles innovation, guaranteeing fewer products and smaller productivity gains for American consumers and workers."

The government plan also contained restrictions on Microsoft's business practices. Neither new company would be allowed to threaten personal computer manufacturers for using rival products or to withhold licenses and technical support needed to use the former Microsoft products.

The new operating system company would be required to disclose key software codes of Windows to companies that write application programs that must be linked to that computer operating system.

The company also would be barred from designing software for the purpose of interfering with or degrading the operations of rival products. It would be required to treat all hardware and software makers equally with respect to pricing, licensing of Microsoft products and access to required technical codes.

In a move aimed at evidence introduced that Microsoft used the operating system to promote its Internet browser and to smash rival Netscape's browser, the Justice Department asked for a ban on tying future use of Windows to any other Microsoft products.

Despite some disagreements by one or two state attorneys general during the drafting of the proposal, there was no indication in the 17-page brief that any of the 19 states that joined in the historic lawsuit dissented from the proposed remedy.

Under the government's proposal, one company would sell Windows, the operating system that runs most of the world's personal computers. The other would handle applications software, such as the dominant Office suite, which includes the word processor Word and the spreadsheet program Excel.

Microsoft's browser, Internet Explorer, would be owned by the applications company, although the Windows component could license the rights to use the program, said one source who had seen a draft of the plan. Government attorneys felt that the split would spur competition in the Web browser market.

The two companies wouldn't be able to recombine for 10 years. The government's plan also would impose three-year restrictions on the Windows company to give computer makers more flexibility to feature rival products. Microsoft would also be banned from retaliating against business partners who have resisted the company's wishes.

Gates and his board of directors would have to create a proposal for implementing the split. Gates and other officials would receive stock in only one of the new companies, while ordinary shareholders would get stock in both.

Microsoft has until May 10 to respond to the government's filing but has said it would request an extension to respond to a proposal as extreme as a breakup.

Key dates in the antitrust investigation of Microsoft Corp.:

1975 -- Microsoft founded by Paul Allen and Bill Gates, friends from Seattle's Lakeside prep school who co-wrote a programming language for the Altair hobby-kit personal computer a year before.

By 1991, Microsoft's operating systems are used by 93 percent of the world's personal computers.

July 1994 -- Microsoft in a consent decree agrees to change contracts with PC makers and eliminate some restrictions on other software makers, ending a Justice Department investigation begun in 1993.

August 1995 -- Microsoft launches Windows 95 operating system.

December 1995 -- Gates says Microsoft strategy shifting to focus on the Internet.

September 1997 -- Microsoft launches Internet Explorer 4.0 in stepped-up challenge to Netscape Communications Corp., whose share of browser market slips to less than two-thirds of Internet users.

October 1997 -- Justice Department sues Microsoft, alleging it violated the 1994 consent decree by forcing computer makers to sell its Internet browser as a condition of selling its popular Windows software.

December 1997 -- U.S. District Judge Thomas Penfield Jackson issues preliminary injunction forcing Microsoft to stop, at least temporarily, requiring manufacturers who sell Windows 95 "or any successor" to install Microsoft's Internet Explorer. The company appeals.

May 1998 -- Justice Department and 20 state attorneys general sue Microsoft, charging it illegally thwarted competition to protect and extend its monopoly on software. One state later drops from the suit.

June 23 -- A three-judge federal appeals panel removes the restrictions that Jackson imposed on Windows 95 software, saying there was adequate justification to bundle the Internet browser in Windows.

Aug. 27 -- Government lawyers begin questioning Gates for 30 hours over three days in a videotaped deposition. Excerpts are shown in the courtroom during the trial. Separately, America Online begins secret talks to buy Netscape.

Oct. 19 -- The antitrust trial begins, expected to last six weeks.

Nov. 24 -- America Online confirms it will buy Netscape in a deal ultimately worth $10 billion, weeks after testimony in the trial from senior executives at both companies.

Jan. 13, 1999 -- Government rests its case after calling 12 witnesses.

Feb. 26 -- Microsoft rests its case, also after 12 witnesses.

Sept. 21 -- After rebuttal testimony, final oral arguments from each side.

Nov. 5 -- Judge Jackson, in preliminary findings, declares Microsoft a monopoly. He rules that the company's actions are "stifling innovation" and hurting consumers.

Nov. 9 -- A small advertising company in New York files lawsuit against Microsoft, the first in a wave of litigation against the software giant following the judge's ruling.

Nov. 19 -- Jackson appoints Richard Posner, chief judge for the 7th U.S. Circuit Court of Appeals in Chicago, as a mediator to oversee voluntary settlement talks between the government and Microsoft.

Nov. 30 -- Justice Department lawyers, state attorneys general and Microsoft representatives meet with Posner in Chicago.

Jan. 10, 2000 -- Software company Caldera Systems, which had accused Microsoft of killing its competing operating system, settles its antitrust lawsuit for an undisclosed sum.

Jan. 13 -- Gates steps aside as Microsoft chief executive and promotes company president, Steve Ballmer.

Jan. 18 -- Microsoft, in its first formal response to the court's ruling, says its Windows software doesn't represent a monopoly in the high-tech industry because the company doesn't control the price or availability of software to run the world's personal computers.

Feb. 22 -- Judge hears final round of arguments, rejects key legal defense for Microsoft.

March 24 -- Microsoft faxes detailed settlement offer to government lawyers.

March 26 -- Government rejects proposal.

April 1 -- Talks between federal government and Microsoft break down and Posner says he is ending his mediation effort.

April 3 -- Judge finds that Microsoft Corp. violated the Sherman Antitrust Act, "maintained its monopoly power by anticompetitive means" and attempted to monopolize the Web browser market. The judge also rules that Microsoft violated another section of the law by "unlawfully tying its Web browser to its operating system" and could be sued under state anti-competition laws.