November 14, 2001

Microsoft's monopoly: Was the settlement rigged?

Author: JT Smith

- by Jack Bryar -
Was the fix in during the Microsoft negotiations?
The more I
look at Assistant Attorney General Charles A. James
and the methods he used
to generate the settlement the uglier and uglier it
looks.

Stockholders may be celebrating the Department
of Justice's proposed
settlement with Microsoft: since the settlement was
proposed, Microsoft's
share price has risen better than 18%. But everyone
else has been annoyed
and amazed at the proposed settlement.

The San Francisco Chronicle called it a
"cave-in." Toronto's Globe
and Mail described it as "tilted," noting that the
agreement avoids even
antitrust basics such as mandatory standard pricing
guarantees. The Berliner
Morgenpost suggested that "clear re-work of the
agreement was necessary."
The Economist wondered about a settlement where,
"Microsoft will once again
get away with a slap on the wrist," and said "The
agreement would, in effect,
turn the company's defeat in court into victory --
an astounding turn of
events." The Electronic Engineering Times declared,
"Microsoft
has gotten away with murder. The murder of
innovation
."

Legal experts have been particularly tough. The
president of the Antitrust
Institute, Albert A. Foer denounced
the deal
, saying, "It is shocking that the
Department of Justice, after
having its victory upheld... would agree to terms
that are not only weaker
than the interim relief ordered by Judge Jackson
pending an anticipated
break-up of the company, but weaker still than the
terms agreed to by Microsoft
in the mediation conducted by Judge Posner a year
and a half ago when the
issue of whether Microsoft had even violated the law
was an open question."

Even the most generous interpretation heard
outside of Redmond was that
Charles
A. James
, the assistant attorney general for antitrust had
made a bad deal, distracted
by an atmosphere poisoned by security concerns and
under severe time pressure
to come up with a settlement. There are less
generous interpretations.
They involve ideological bias, political influence
and the buddy system
that makes so many people hate lawyers in general
and Washington lawyers
in particular.

Originally from Newark, New Jersey, James is one
of a number of black
conservatives recruited by both Bush administrations
and by Attorney General
John Ashcroft. Like so many Bush appointees, James
was a retread. He had
served as Deputy Assistant Attorney General for
Antitrust in 1991-2 and
was acting head of the unit for the last few months
of Bush I. During that
tenure, James had conspicuously avoided so-called
vertical cases, where
companies used their strengths in one end of a
market to squeeze out competition
in another. During the twelve years of Reagan and
Bush the Justice Department
had never prosecuted a single case of that type.
Instead, James had focused exclusively
on those antitrust cases which involved direct price
fixing, or so-called
"horizontal mergers" -- situations where the
partners were merging to
effectively eliminate competition. James had
personally overseen the revision
of Justice's Horizontal Merger Guidelines. Those
guidelines were cited
by the Clinton administration when it blocked a
proposed merger between
Staples Corp, the biggest office supply chain
retailer, and Office Depot,
its largest competitor.

Prior to getting the appointment back to Justice,
James spent a significant
amount of time burnishing his conservative
credentials and signaling that
he'd effectively kill the Microsoft litigation. He
told the Washington
Post in 1998 that his reading of Netscape's
documents undermined the government's
case. He began describing himself as a "bedrock
conservative" -- albeit one
with a taste for sports cars and rap
music. He repeatedly expressed
concern about applying antitrust law to "vertical
cases." And according
to colleagues at his former law firm of Arent Fox,
he had let it be known
that he considered the proposed restructuring of
Microsoft into two companies
as a particularly extreme case of unwarranted
judicial intervention. James
had also suggested that antitrust laws should not
apply in intellectual
property cases. His comments had won the praise of
conservative activists
such as Dominick T. Armentano, who said, "The new
Bush antitrust nominees
are appropriately skeptical of government planning
-- especially the proposed
dismemberment of Microsoft currently on appeal. If
we can't abolish
the absurd and archaic antitrust
laws, the best we can
do is leave their administration to those who
understand their sad history
and their own regulatory limitations."

Following his appointment James has proposed law severely
limiting the scope of future antitrust
investigations and involving
the proposed target at an early stage. He has even
backed away from his
moderately interventionist position on horizontal
mergers. Once in office
he supported a proposed merger between GE and Honewell, two giants that
dominate the military electronics business, and he
denounced European intervention that finally killed
the deal
.

Still, Microsoft opponents had some reason for
hope. The James nomination
had been championed by the likes of Kenneth W. Starr,
the former special
prosecutor and noted movement conservative who
was also working with Procom
, a public
policy group funded by
the likes of Corel, AOL Time Warner, Oracle and Sun
specifically to battle
Microsoft. Starr had said, "The facts here point
...strongly to a consistent
pattern of exclusionary conduct and the abuse of
monopoly power," and
he was sure James would "stay the course and respect
the very overwhelming
set of facts." The Progress & Freedom
Foundation
, another
libertarian-but-Anti-Microsoft policy organization,
publicly predicted that James would fully prosecute
the case, suggesting
that a restructuring of the company rather than a
regulatory "conduct"
settlement would be superior "from a conservative's
perspective."

There was some reason for optimism. After June
28, when the D.C. Circuit
Court confirmed that Microsoft was both a monopoly
and was acting in violation
of applicable antitrust law, James put together a
team that looked thorough
and professional. It included both Philip S. Beck
and Phillip R. Malone,
the career government attorney who had been a key
member of the original
team prosecuting the case during the Clinton era.
However, he also signaled
that he had his own doubts about the case. In an interview
with Businessweek
he suggested that "the
standard formulation on remedy
is that it ought to cure past violations and prevent
their recurrence.
That's what antitrust is all about. And to the
extent this is an
antitrust case
-- that's what the remedy will be
about."

Justice officials claim that the decision to
abandon any strict remedy
was made by James himself, and that he was given
full discretionary authority
by Attorney General John Ashcroft. This may be true,
but it is also true
that a number of prominent Republicans had been
lobbying on behalf of Microsoft. The company's political donations in recent years
had jumped nearly fifty-fold,
with two-thirds of it going to Republican
candidates. In addition the company
retained such political operatives as Ralph Reed, a
senior advisor to the
Bush Campaign, and Haley Barbour, former chair of
the Republican Party.
While James himself has claimed to be relatively
apolitical, many of his
colleagues have been overtly partisan. His former mentor
(and current FTC Chair),
Tim Muris, was part of President Bush's legal team
during the Florida election
dispute. It would have been difficult for James not
to know the type of
deal the administration wanted.

On Halloween, lawyers representing Justice,
Microsoft, and the states
were holed up in the Washington law offices of Fried
Frank Harris Shriver & Jacobson, Microsoft's D.C. legal team. They were
going to attempt,
one last time, to come up with a settlement prior to
a penalty ruling by
Judge Colleen Kollar-Kotelly. The state attorneys general were
represented by staff
lawyers from Ohio and New York. The Microsoft team
included Steven Holley
of Sullivan & Cromwell, a
veteran of the case
who had been retained by
Microsoft despite Holley's
recent censure for leaking court documents in a
separate case, in-house
attorney David Heiner, and Rick Rule -- another
James mentor and his predecessor as assistant attorney general for antitrust under
the Reagan and Bush
administrations.
The Justice Department
negotiators usually included
Beck, Malone, and Debbie Majoris -- a Bush appointee
but also an experienced
antitrust negotiator, but as the negotiations wore
on, James opted to
conduct negotiations on his own and without the
distractions of the rest
of his team. According to James, these private
sessions helped move the
process along. The negotiations were primarily with
Rule.

It was James who personally approved Microsoft's
proposed "settlement"
language. It was James who approved language that
declared that "the software
code that comprises a Windows Operating System
Product shall be determined
by Microsoft in its sole discretion." It was James
who approved language
requiring third-party developers to license their
intellectual property back
to Microsoft. It was James who overrode staff
objections concerning a proposed
exemption that would allow Microsoft to withhold
source code from other
ISVs at their discretion on security grounds. James,
who apparently considers
himself a bit of a techie, said that he considered
this a "duh" issue.
He said that "Microsoft has security protocols . Are
we going to tell everyone
how they work?" Apparently unaware that Linux has
published security protocols
which work just fine, he suggested that such
disclosure would mean that
people could "get access to your credit-card
information when you shop."
James also declared that the core of the case, involving the
right of third party
vendors to substitute browsers no longer mattered.
"The market has changed,"
he declared.

Some have questioned the degree to which James
understood the impact
of his technical decisions or even what the language
of the agreement meant.
For example, in the middle of his press conference
announcing the agreement
James declared that "It is absolutely clear in our
decrees that computer
manufacturers can delete Microsoft middleware
products." After a
stage whisper by an aide he amended his statement
saying, "well not the
program itself, the program will be there."

So will Microsoft's monopoly, apparently.

Perhaps the market will provide a remedy. The
Linux movement continues
to grow, particularly in Europe and Asia. At Comdex,
Sony President Kunitake
Ando announced deals with Nokia and AOL to develop
"microbrowsers" to runn
on a variety of electronic devices and declared that
Sony would redesign
most of its electronics products to support Internet
connectivity.

But if you are counting on government
intervention to protect you from
aggressive monopolists, you're going to have to
wait until 2004.

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