Retracing the Missteps in  Microsoft's Defense at Its Antitrust Trial
       By JOEL BRINKLEY and STEVE LOHR  New York Times, June 9, 2000
    The judge in the    Microsoft antitrust case, Thomas Penfield Jackson, is certainly no judicial radical. A former Naval officer, he was an active Republican when Ronald Reagan appointed him to the federal bench in 1982.

His record before the Microsoft case suggested, if anything, that he was pro-business. In 1987, the federal government sued General Motors, contending that its cars had dangerous brake defects. Judge Jackson sided with the car company, dismissing the government's evidence as merely "anecdotal accounts of skidding events."

So when news reports emerged in late January that government officials involved in settlement talks in Chicago had proposed a breakup of Microsoft, Judge Jackson was alarmed.

"I should tell you, I am not at all comfortable with restructuring the company," he said in February, in a rare audience with a sitting judge during the course of a trial. "I am not sure I am competent to do that. Microsoft is a large and important company, innovative and admirable
in a lot of ways. And it is an engine for the nation's economy. I just don't think that is something I want to try to do on my own. I wouldn't know how to do it."

But in another interview late last month, he sounded very different. He said Microsoft's recent behavior had helped change his mind.

"I've been astounded by some of the statements of Gates and Ballmer," he said, referring to the continuing protestations of William H. Gates, the company's chairman, and Steven A. Ballmer, the president, that Microsoft did absolutely nothing wrong. The remarks that so irked him came after his legal ruling in April that Microsoft had repeatedly violated the nation's antitrust laws with its predatory and anticompetitive behavior.

"I'm in the midst of a growing realization," the judge added, "that with what looks like Microsoft intransigence, a breakup is inevitable."

And on Wednesday, he ordered just that: a plan to split Microsoft into two separate companies.

Just as Judge Jackson's thinking has evolved, so have the views of many others in government and industry who watched the case. In interviews with The New York Times over the last several months, dozens of the state and federal officials who have investigated and prosecuted Microsoft for the last four years, as well as industry executives, described many moves by Microsoft that they think backfired and led to a resounding court defeat.

At the outset, the plaintiffs and defendant seemed evenly matched.

"Microsoft and the government were the perfect opponents," observed David Boies, the government's lead trial lawyer. "The government has some power, but Microsoft has at least as much. Anyone else facing either one of them would be overmatched."

       And watching from the bench early on, the silver-haired, 63-year-old Judge Jackson said he was awed by the legal prowess on display in his courtroom.

"It's exhilarating to watch," he said. "You'll never see better."

But over the months, the balance shifted heavily in favor of the government. In fact, Microsoft's problems began well before the trial opened in October 1998. It misjudged the legal trouble that its own e-mail and other documents could create. It chose not to reach an out-of-court settlement when the sanctions it faced were a wrist-slap compared with the breakup plan it now confronts -- though those decisions, given the company's conviction that it would win on appeal, were a calculated gamble. Whether that gamble pays off will not be known for months, or years.

In court, however, the Microsoft defense stumbled repeatedly. And with each misstep, the government was emboldened.

The prosecutors assembled and then presented their case with ever greater confidence, continually broadening it to embrace a far richer array of charges than the one that started it all: Microsoft's decision to tie a Web browser to the Windows operating system.

As the case progressed, the government presented evidence to show that Microsoft had bullied friends and competitors alike, halting innovations that threatened its Windows monopoly. And as the allegations spilled out in court, Microsoft was increasingly on its heels as it tried to argue that all the government had really shown was that the company was a rough-and-tumble competitor, not an economic outlaw.

Still, Judge Jackson remained strikingly respectful of the defendant. "There is no doubt in my mind that Microsoft is a unique, gifted, efficient and ingenious organism," he said in February.

In the end, however, the judge lost all patience with Microsoft. On the trial's final day last month, a Microsoft lawyer appealed for another round of hearings on the government's remedy proposal, saying Microsoft could not possibly defend itself "in the brief time given."

"In the brief time given?" Judge Jackson retorted with a sharp tone. "This case has been pending for two years!"

In the interview the next day, Judge Jackson, observed: "I am not aware of any case authority that says I have to give them any due process at all. The case is over. They lost." Besides, he added, "I'm suspicious that they are just playing for time, hoping they will get to deal with a new administration" that might approach the company with a softer hand.

Judge Jackson agreed to be interviewed several times after testimony in the trial had ended, with the understanding that his comments could not be published until the case had left his courtroom. The discussions, beginning last September, were friendly, informal and unstructured.

Officials from the Justice Department and the states agreed to similar ground rules. Microsoft's cooperation was first requested months ago; the company's general counsel granted a lengthy interview last week.

The goal in all of the interviews was to understand how the case started, how it grew from a technical fight over Internet browsers into a broader battle over Microsoft's dealings with its competitors and partners, how the government won so handily, and why, to everyone's surprise, Microsoft fared so poorly.

Now the case goes to appeal, where Microsoft believes it can overturn everything that happened in Judge Jackson's courtroom.

As Microsoft sees it, the government's case was a grab bag of accusations based mainly on the selective use of its e-mail messages. Some of it may look bad but, Microsoft insists, none of it should add up to an antitrust violation.

"It's the kind of evidence that a skilled trial lawyer can use to make the public wonder about how tough Microsoft plays this game," William H. Neukom, a senior vice president and general counsel of Microsoft, said in an interview at its corporate campus in suburban Seattle. "But that is not the way the law is supposed to work."

Microsoft will also argue on appeal that evidence Judge Jackson relied on should have been deemed inadmissible -- newspaper articles, e-mail messages from low-level employees and the like. More broadly, Microsoft believes that its view of the computer industry -- for reasons that still puzzle the company's executives -- was never appreciated by the government or the judge. "It's clear that the whole story of Microsoft, the whole story of the PC was missed here," William H. Gates, the chairman, said during a news conference on Wednesday.

Judge Jackson, in the February interview, said simply, "I think Microsoft didn't take this seriously enough."

Joel I. Klein, a prominent Washington appellate lawyer, joined the Justice Department in April 1995 as principal deputy to Anne K. Bingaman, chief of the antitrust division. The next year, he succeeded her.

His first task was to seek final court approval of a consent decree reached with Microsoft the previous year to settle a Justice Department antitrust suit. Microsoft had agreed to stop tying the sale of one software product to the sale of another.

But what Mr. Klein did not know then was that Microsoft began flouting at least the spirit of the consent decree it had just signed.

"This antitrust thing will blow over," Mr. Gates told a group of Intel executives in July 1995, according to one Intel executive's notes of the meeting, obtained by the government. "We haven't changed our business practices at all."

In 1995, Mr. Klein heard from America Online. The company complained that Microsoft was violating antitrust law by bundling MSN, its new online service, with Windows. But the department decided not to act.

In June 1996, however, Microsoft took the step that led to Judge Jackson's courtroom. For months, James L. Barksdale, the president of Netscape Communications, the commercial pioneer in software used to browse the Web, had been growing increasingly irritated by what he regarded as the bare-knuckle tactics Microsoft deployed against his company.

But then Microsoft did something more: it threatened to cancel Compaq Computer's license to Windows -- Microsoft's industry-standard operating system, which Compaq could not survive without -- because the PC maker planned to feature the Netscape browser, not Microsoft's Internet Explorer.

"I'm not a lawyer, but I have more than 30 years experience in business," Mr. Barksdale recalled recently. "I just knew that that was something wrong."

He calls Microsoft's threat to cancel Compaq's Windows license "the singular act" that prompted him to take his grievances to the Justice Department. To accomplish that, he asked the company's lawyer, Gary L. Reback, to write a "white paper" detailing the problem.

The 222-page paper accused Microsoft, among other things, of using its dominance in operating systems to force PC makers to take Microsoft's browser.

And in August Mr. Barksdale sent a copy to Mr. Klein.

Mr. Klein said the paper got his immediate attention. "There was a big difference in my mind between MSN and this," he said. "To me, conditioning one product on another was clearly a violation of the consent decree. I authorized San Francisco to investigate."

Right away, the Justice Department's San Francisco office asked Phillip R. Malone, an up-and-coming young lawyer, to head the Microsoft team. And the next month, he and four other lawyers began faxing civil investigative demands to Microsoft for documents related to the Netscape charges and Microsoft's Internet strategy. Such demands are the civil equivalent of a subpoena.

As each new request spilled out of a fax machine in Microsoft's legal department, a Microsoft lawyer would discuss the request with Mr. Malone. Then the investigators simply waited. "The documents just arrived in the mail," Mr. Malone said.

Never once, he added, did an investigator have to visit Microsoft and look in file cabinets or hard drives for overlooked documents or e-mail messages.

Microsoft's lawyers examined all the documents before they were sent off. Several government officials said these lawyers should instantly have realized those documents meant trouble.

"You can't be a lawyer and not know these documents are lethal," Mr. Klein observed.

Microsoft lawyers say they understood that some of the e-mail messages could quicken a prosecutor's pulse. But they saw it as a tactical problem -- the fiery communications of business aggression, which might seem incriminating at first glance -- but not evidence of an antitrust violation. "No smoking gun," in the view of one company lawyer.

Yet as the boxes of papers went out the door, Microsoft's legal troubles mounted.

More remarkably, the most damaging documents -- the ones that galvanized the resolve of state and federal prosecutors nationwide -- were written months after that first government request arrived, months after Microsoft's leaders knew that everything they wrote was likely to wind up in prosecutors' hands.

Judge Jackson likened the phenomenon to the federal prosecution of drug traffickers, who are repeatedly caught as a result of telephone wiretaps. And yet, he said, "they never figure out that they shouldn't be saying certain things on the phone."

But Mr. Neukom said Microsoft had been under investigation for so long, and e-mail was so essential to the operations of the company, that managers simply could not edit every thought and continue to manage effectively. "E-mail is a big part of how we run this company," he said. "And candid, frank, open e-mail communication is a big part of our efficiency."

..........paragraphs deleted here, available on the Times page..........

"I didn't know much about technology, or about the industry," recalled Richard Blumenthal, attorney general of Connecticut. But as he read the documents: "I was really struck by the brutal, overt tactics. You rarely see things like this written down."

In the minds of almost every federal and state official interviewed, three documents stood out as the most influential. The first was a white paper that Mr. Gates wrote in May 1995, titled "The Internet Tidal Wave."

"A new competitor born on the Internet is Netscape," Mr. Gates wrote. As the leader in Web browsing software, Netscape, he added, could set the technical rules for Internet computing and thus "commoditize the underlying operating system" -- Microsoft Windows, on 85 percent of all personal computers. In other words, Mr. Gates was saying, Netscape threatened to make Windows irrelevant.

The Gates memo, though not legally damaging on its own, pinned a motivation to what followed.

Two more documents that arrived during the fall of 1997 got all of the prosecutors excited. They were e-mail messages by James E. Allchin, a senior Microsoft executive in charge of the Windows group. He was worried about the company's Internet strategy. Microsoft's browser, Internet Explorer, was being given away and bundled with Windows. Still, it was not catching on.

In e-mail messages to another senior executive written Dec. 20, 1996, and Jan. 2, 1997 -- more than three months after the federal government had begun obtaining documents relating to Microsoft's Internet strategy -- Mr. Allchin wrote: "I do not believe we can win on our current path. Even if we get Internet Explorer totally competitive with Navigator, why would we be chosen? They have 80 percent market share. My conclusion is we have to leverage Windows more." He added, "We need something more: Windows integration."

To the prosecutors, this was the smoking gun. Mr. Allchin seemed to be clearly saying that unless Microsoft deeply embedded its browser into its monopoly product -- and thus made users go out of their way to use Netscape -- Internet Explorer would surely lose. When these documents arrived at the Justice Department office in San Francisco, Mr. Malone knew he had something special. He took them to Washington and discussed them with Mr. Klein and others.

"Everybody saw it; they really captured the essence of what we believed," Mr. Malone said. "They had that power."

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