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In abandoning the breakup of Microsoft Corp., the U.S. Department of Justice has opted for the formidable challenge of finding enforceable limits on the software giant’s future behavior in the marketplace, antitrust experts say. “It was certainly a principled stand that either administration could have taken,” says antitrust litigator Steven Newborn of the Washington, D.C., office of New York’s Clifford Chance Rogers & Wells. “However, it seems to me that when you’re negotiating with a company like Microsoft, it’s counterproductive to take the hammer off the table and just start negotiating over the nails.” The “hammer” is antitrust law’s structural — and extraordinary — remedy of breaking up the monopolist. The “nails” are the so-called conduct remedies, whose effectiveness is viewed with skepticism by many in the antitrust community. “There has been a worry in this case from day one that conduct remedies will be ineffective,” says Roy Englert of Washington, D.C.’s Robbins, Russell, Englert, Orseck & Untereiner. “Trying to write a code of conduct is virtually impossible. Human ingenuity always comes up with ways to get around them. It’s not revealed truth that conduct remedies are ineffective, just a nagging concern that won’t go away.” The Justice Department’s Sept. 6 announcement was twofold: The department will not seek a breakup of the company into separate operating systems and applications businesses in remand proceedings before a federal district court here; and it will not pursue the “tying” count — that Microsoft had tied its Web browser, Internet Explorer, to its Windows operating system in violation of Section 1 of the Sherman Act. In June, a unanimous U.S. Court of Appeals for the D.C. Circuit held that Microsoft had acted illegally to maintain its monopoly of the market for Intel-compatible PC operating systems. The appeals court, however, vacated the trial court’s breakup order and the finding of illegal tying and ordered that a new judge hear evidence on remedies. (This did not affect Judge Thomas Penfield Jackson’s finding, however, that Microsoft had illegally bundled under another section of the Sherman Act.) SIGNALS On Sept. 6 the Justice Department said it was “seeking to streamline the case with the goal of securing an effective remedy as quickly as possible.” The department’s decision did not surprise many experts who had followed the case. They say the appellate court had sent strong signals in its opinion that it disfavored breakup and the tying charge. “What’s left is the very, very good chance they will settle for conduct remedies,” antitrust scholar Eleanor Fox of New York University School of Law says, referring to the two sides. Those remedies, she says, ought to be clear and self-enforcing. “The most obvious but least helpful are the Band-Aids that say, ‘Look, here’s what you did. Don’t do it again,’ ” she says. “ Ninety-five percent of our remedies are conduct remedies. There are some problems with them, but there are almost never breakup orders.” But Englert says the perceived ineffectiveness of conduct remedies is based on two realities. “One is that sometimes companies are so large and powerful they can overwhelm the resources of those trying to oversee them,” he says. “AT&T was a regulated industry, but the [Federal Trade Commission] took the position that AT&T so outflanked it with resources that conduct remedies wouldn’t work. You don’t have a similar regulating body for Microsoft. The antitrust court will have to become that body.” History has shown that such an approach in large cases can fail, says David Balto, an antitrust expert in the D.C. office of New York’s White & Case. He points to the 1953 decision by the federal government in its antitrust case against United Shoe Machinery Corp. initially to seek a conduct remedy instead of a breakup of the company. In trying to break the company’s monopoly on the shoe machine manufacturing market, the government imposed certain business practice restrictions, including preventing United Shoe from having long-term leases with manufacturers in an attempt to open up the market to other companies that made shoe manufacturing machines. After years of monitoring the practice, Balto says, ultimately, the restrictions failed to reduce United Shoe’s market share significantly, requiring the U.S. Supreme Court to order the company’s breakup in 1968. NO CRYSTAL BALL A second major concern for conduct remedies is that overseers or enforcers are always responding to the last anti-competitive act and don’t see future ones, Englert says. “In this case, everyone is concerned about Windows XP now, but they’ll frame a remedy for Internet Explorer,” explains Englert. “So you have a problem in the future as new products come out. The drafters of the conduct remedies will try to foresee it, but they’re trying to draft so broadly as to predict the future, yet so definitively to put in a judicial decree. It’s a real challenge.” Most people on the “fighting line” frown on conduct remedies because they require so much oversight, says Newborn. “Antitrust was never meant to do that. It was meant to create a level playing field, and the way to do that is to make sure people compete fairly. This one is going to require a whole slew of Justice Department lawyers making sure Microsoft doesn’t violate the conduct part of this remedy.” In its Sept. 6 briefing, Justice said it would pursue conduct remedies similar to those approved by the trial court. But it also said it would not accept remedies that demanded constant monitoring of the software industry for violations. WATCHDOG In describing a potential way to monitor Microsoft’s conduct, Jackson’s decision contemplated a compliance officer who would have access to the company’s executives, employees and documents and report back to government authorities, says Stephen D. Houck, a former New York assistant attorney general and a lead prosecutor for the states in the trial. Houck says it’s well-known that Microsoft’s position during a failed mediation of the case was that it was willing to live with such an arrangement. Houck, who is now a partner at New York’s Reboul, MacMurray, Hewitt, Maynard & Kristol, believes that a conduct remedy could work if the plan is extremely detailed. Yet, that was precisely what the Justice Department believed it had achieved in July 1994, when it reached an agreement with the company that was formalized in a consent decree. And it was the widely perceived failure of the “conduct” relief spelled out in that settlement that eventually led to the current litigation. Why should an approach that failed then work now? “That was very poorly worded,” Houck says. “It was very general. Essential terms were not defined. I think one thing the government has learned with Microsoft is that the language has to be clear, it has to be detailed and it has to apply to a wide variety of practices.” The best example of the vagueness of the agreement, he says, was the failure to define “integration.” The Justice Department was concerned about the company’s bundling of application software, such as its Web browser, in the Windows operating system, and Microsoft countered that the two were integrated, and thus inseparable. This issue became a major point of contention during the trial. The government, says Donald Falk of the Palo Alto, Calif., office of Chicago’s Mayer, Brown & Platt, has the D.C. Circuit opinion setting out the legal standards for terminating the monopoly and denying Microsoft the fruits of the monopoly. TRADE SECRETS? The most important conduct remedy, and a difficult one to achieve, many antitrust experts agree, would be to require Microsoft to provide source codes — technical information about its operating systems — so other companies can design products compatible with Windows. “Microsoft may have to disclose some trade secrets and that may be an area of contention,” says Fox. “Microsoft has to be concerned about incompatibilities and make its system so as to minimize those incompatibilities. That requires some surveillance.” While Fox and others predict Microsoft will take the “Band-Aid” remedies, Balto, a former senior official with the Federal Trade Commission’s Bureau of Competition, goes further, foreseeing unworkable legal and bureaucratic snags. “What if Microsoft seeks to bundle certain products and exclude others?” Balto wrote in a column published in The National Law Journal in July, in which he examined conduct remedies. “Each decision could lead to a new dispute and, thus, another trial. Further, how would a remedy on discrimination or product improvement work? How would R&D decisions or product improvements be effectively supervised? What would the court do — create a czar of software and operating systems? The spectre of Judge Harold Greene’s intrusive role in AT&T will return as the court becomes a super-regulator of software.”

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