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The U.S. Court of Appeals for the D.C. Circuit was all business Monday as it took hold of the most important antitrust case in a generation. The seven judges reviewing a lower court’s order to break up the Microsoft Corp. dug deep into antitrust law and economic theory as they pondered the fate of Bill Gates’ software empire. From the outset, the first of two days of arguments cut to the heart of the question facing the D.C. Circuit. There’s little question that Microsoft dominates the market for personal computer operating systems. The real question is whether the company used that clout improperly to maintain and extend its dominance. “What is Microsoft supposed to do? They are supposed to compete, aren’t they?” Chief Judge Harry Edwards asked at one point during the morning session. After 78 days of trial, U.S. District Court Judge Thomas Penfield Jackson held last year that Microsoft violated federal antitrust laws. Among other things, Jackson ruled that Microsoft misused its monopoly in operating systems to force computer makers to prefer its browser, Internet Explorer, and to disfavor Netscape Navigator, the competing Internet browser. Microsoft’s integration of Internet Explorer into Windows 98 broke antitrust laws against “tying,” Jackson held. To prevent this from happening again, Jackson last June accepted the Department of Justice’s proposal to split Microsoft into two parts, one solely dedicated to its operating system and the other devoted to other software applications. Microsoft appealed, leading to a rare two-day circuit court marathon: four hours of arguments Monday and another three scheduled for today. Monday’s arguments addressed the bread-and-butter issues of the antitrust finding: whether Microsoft illegally maintained a monopoly by attempting to prevent computer makers from installing software made by Netscape and other rivals, and whether its Windows 98 program violated anti-tying rules. Today, the court will hear whether Jackson’s breakup order was appropriate and, in what many expect to be the highlight of the arguments, whether Jackson’s frank post-trial comments to news media tainted the fairness of the trial. The new Bush administration has said little about the Microsoft case, but it could have a tough decision to make if the court sends the case back to the District Court, either to hold a remedy hearing or to conduct a new trial before a judge other than Jackson. It’s possible that Attorney General John Ashcroft could open settlement talks with Microsoft and end the case quietly by agreeing on some remedy short of divestiture. The arguments’ importance was underscored by the court’s decision to allow live audio coverage of the proceedings. But that didn’t prevent a crowd from appearing at the E. Barrett Prettyman Courthouse. A small line formed as early as 5 a.m., and the courtroom was packed an hour before arguments began at 9:30 a.m. Among the observers were former D.C. Circuit judges Robert Bork (who represents Netscape) and Kenneth Starr (who represents a consortium of Microsoft rivals including AOL Time Warner and Sun Microsystems), and former White House Counsel C. Boyden Gray (who represents a computer industry coalition that filed an amicus brief on Microsoft’s side). Sullivan & Cromwell partner Richard Urowsky opened the argument for Microsoft. He spoke deliberately, sometimes emphasizing every syllable in a word. Possibly realizing they had several hours in which to interrogate Urowsky, the judges let him lay out Microsoft’s main argument for several minutes uninterrupted. “Nothing Microsoft did foreclosed Netscape from any portion of the marketplace,” Urowsky said. He emphasized that by the end of 1997, four-year-old Netscape had distributed about 160 million copies of its Navigator program. Urowsky’s attention to the facts, however, caused trouble with Judges David Sentelle and David Tatel. Tatel reminded Urowsky that the appeals court cannot overturn the facts found by a lower court unless it finds them “clearly erroneous.” He continued, “I don’t see how you can get a reversal in this respect.” He added a few minutes later: “I don’t want to beat a dead horse, but we’re not a trial court.” Sentelle went on, “When I read your discussion in your trial brief, I got the impression you thought we were a jury.” Edwards fulfilled his reputation as the court’s most intimidating inquisitor by pressing Urowsky to explain why Microsoft eliminated an icon on Windows that would have allowed users to add or remove an Internet browser. Jackson and the government argued that the company removed the icon to make it harder for computer makers to include two Internet browsers — those by Microsoft and Netscape — forcing the consumer to pick one. The resulting confusion, and pressure from Microsoft, prompted the manufacturers to include only Microsoft’s browser. Urowsky replied that users could still remove another browser even without the “add/remove” function, by simply dragging the icon of the program to the “trash” bin. Edwards wasn’t impressed. “I’m not buying that one for a minute,” he snapped. Edwards was equally hard on the government’s lawyer — Jeffrey Minear, senior litigation counsel in the solicitor general’s office. Along with Judges Stephen Williams, Douglas Ginsburg, and A. Raymond Randolph, Edwards homed in on the idea that Netscape Navigator and other programs could have made Microsoft’s Windows program irrelevant. That would happen because Navigator could be considered so-called “middleware,” laid over Windows as a platform for other applications not based on Microsoft’s software. If that happened, Edwards suggested, “it looks to me like one monopoly is replacing another. Are we fighting for the newest and latest monopoly?” Minear resisted acknowledging this theory, finally saying he could not predict what would happen if Microsoft lost its operating system monopoly to middleware. Monday afternoon’s session, focusing on the tying issue, pitted Urowsky against John Roberts Jr. of Hogan & Hartson, representing 19 states that have sued Microsoft. At one point, Edwards bluntly criticized Jackson for failing to provide data to back up some of his findings of fact on tying. “There are some findings that are merely conclusions,” Edwards told Roberts. “When I see findings that don’t have any data behind them, I don’t think that as an appellate court I have to defer to them.”

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